Trex Company, Inc. (NYSE:TREX) Q2 2023 Earnings Conference Call July 31, 2023 5:00 PM ET Company Participants Viktoriia Nakhla - IR Amy Fernandez - Vice President, General Counsel Bryan Fairbanks - President & CEO Brad McDonald - Chief Accounting Officer Conference Call Participants Keith Hughes - Truist Securities Tim Wojs - Baird John Lovallo - UBS Rafe Jadrosich - Bank of America Alexander Rygiel - B. Riley Ryan Merkel - William Blair Stanley Elliott - Stifel Joseph Ahlersmeyer - Deutsche Bank Michael Re ...

[PART I FINANCIAL INFORMATION](index=3&type=section&id=PART%20I%20FINANCIAL%20INFORMATION) This section provides the unaudited condensed consolidated financial statements, management's discussion and analysis, market risk disclosures, and controls and procedures for the period [Item 1. Condensed Consolidated Financial Statements](index=3&type=section&id=Item%201.%20Condensed%20Consolidated%20Financial%20Statements) This section presents the unaudited condensed consolidated financial statements, including statements of comprehensive income, balance sheets, changes in stockholders' equity, and cash flows, along with detailed notes explaining business operations, accounting policies, segment information, and commitments [Condensed Consolidated Statements of Comprehensive Income](index=3&type=section&id=Condensed%20Consolidated%20Statements%20of%20Comprehensive%20Income) This statement details the company's financial performance, including net sales, gross profit, income from operations, net income, and earnings per share for the specified periods | Metric (in thousands) | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :-------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net sales | $356,538 | $386,249 | $595,256 | $725,477 | | Gross profit | $156,448 | $157,377 | $250,876 | $292,289 | | Income from operations| $104,767 | $117,809 | $161,714 | $212,760 | | Net income | $77,036 | $88,916 | $118,167 | $160,127 | | Basic EPS | $0.71 | $0.79 | $1.09 | $1.41 | | Diluted EPS | $0.71 | $0.79 | $1.09 | $1.40 | [Condensed Consolidated Balance Sheets](index=4&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) This statement presents the company's financial position, including total assets, liabilities, and stockholders' equity at specific reporting dates | Metric (in thousands) | June 30, 2023 (Unaudited) | December 31, 2022 | | :-------------------- | :------------------------ | :---------------- | | Total current assets | $369,444 | $286,842 | | Total assets | $1,069,815 | $933,705 | | Total current liabilities | $322,797 | $290,599 | | Total liabilities | $446,290 | $415,356 | | Total stockholders' equity | $623,525 | $518,349 | [Condensed Consolidated Statements of Changes in Stockholders' Equity](index=5&type=section&id=Condensed%20Consolidated%20Statements%20of%20Changes%20in%20Stockholders'%20Equity) This statement outlines changes in total stockholders' equity, including net income and stock repurchases, between reporting periods | Metric (in thousands) | Balance, December 31, 2022 | Balance, June 30, 2023 | | :-------------------- | :------------------------- | :--------------------- | | Total Stockholders' Equity | $518,349 | $623,525 | | Net income (6 months) | $41,131 (Q1) + $77,036 (Q2) | $118,167 | | Repurchases of common stock | N/A | $(15,746) | [Condensed Consolidated Statements of Cash Flows](index=6&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) This statement reports cash inflows and outflows from operating, investing, and financing activities for the specified periods | Metric (in thousands) | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :-------------------- | :----------------------------- | :----------------------------- | | Net cash provided by operating activities | $107,781 | $189,992 | | Net cash used in investing activities | $(82,357) | $(66,561) | | Net cash used in financing activities | $(33,523) | $(247,836) | | Net decrease in cash and cash equivalents | $(8,099) | $(124,405) | | Cash and cash equivalents, end of period | $4,226 | $16,648 | [Notes to Condensed Consolidated Financial Statements](index=7&type=section&id=Notes%20to%20Condensed%20Consolidated%20Financial%20Statements) This section provides detailed explanations and disclosures for the condensed consolidated financial statements, covering business operations, accounting policies, segment information, debt, leases, equity, revenue recognition, stock-based compensation, income taxes, seasonality, and commitments and contingencies [1. BUSINESS AND ORGANIZATION](index=7&type=section&id=1.%20BUSINESS%20AND%20ORGANIZATION) Trex Company, Inc. operates primarily in one reportable segment, Trex Residential Products, which is the world's largest manufacturer of high-performance, low-maintenance wood-alternative decking and residential railing products. The company divested its Trex Commercial Products segment on December 30, 2022, to focus on its outdoor living strategy - Trex Company, Inc. operates in one reportable segment, **Trex Residential Products**, after divesting Trex Commercial Products on December 30, 2022[22](index=22&type=chunk)[27](index=27&type=chunk) - Trex Residential is the world's largest manufacturer of high-performance, low-maintenance wood-alternative decking and residential railing and outdoor living products[23](index=23&type=chunk) [2. BASIS OF PRESENTATION](index=7&type=section&id=2.%20BASIS%20OF%20PRESENTATION) The unaudited condensed consolidated financial statements are prepared in accordance with GAAP for interim financial information, including normal and recurring adjustments. Results for the three and six months ended June 30, 2023, are not necessarily indicative of the full fiscal year due to factors like manufacturing costs, raw material costs, inflation, consumer spending, interest rates, supply chain disruptions, and economic conditions - Interim financial statements are unaudited and include normal and recurring adjustments[24](index=24&type=chunk) - Results are affected by manufacturing costs, raw materials, inflation, consumer spending, interest rates, supply chain, and economic conditions, with a noted reduction in demand in Q3 2022 leading to inventory recalibration by year-end[25](index=25&type=chunk) [3. SALE OF TREX COMMERCIAL PRODUCTS, INC.](index=7&type=section&id=3.%20SALE%20OF%20TREX%20COMMERCIAL%20PRODUCTS,%20INC.) On December 30, 2022, Trex completed the sale of its Trex Commercial segment to focus on its outdoor living strategy and accelerate conversion to composites from wood. This divestiture did not represent a major strategic shift - Trex completed the sale of Trex Commercial Products on **December 30, 2022**[27](index=27&type=chunk) - The divestiture aims to focus on profitable growth through the outdoor living strategy and accelerate conversion to composites from wood[27](index=27&type=chunk) [4. RECENTLY ADOPTED ACCOUNTING STANDARDS](index=8&type=section&id=4.%20RECENTLY%20ADOPTED%20ACCOUNTING%20STANDARDS) The company adopted ASU No. 2022-06, deferring the sunset date of Topic 848 (Reference Rate Reform) to December 31, 2024. This amendment did not have a material effect on the consolidated financial statements - Adopted ASU No. 2022-06, deferring the sunset date of Topic 848 (Reference Rate Reform) to **December 31, 2024**[29](index=29&type=chunk) - The amendments did not have a material effect on the Company's consolidated financial statements[29](index=29&type=chunk) [5. INVENTORIES](index=8&type=section&id=5.%20INVENTORIES) Inventories are valued using the LIFO method. Total LIFO inventories decreased from $141.4 million at December 31, 2022, to $74.0 million at June 30, 2023. A reduction in inventory in the first six months of 2023 is not expected to materially impact cost of sales for the full year | Inventory Type (in thousands) | June 30, 2023 | December 31, 2022 | | :---------------------------- | :------------ | :---------------- | | Finished goods | $52,660 | $107,114 | | Raw materials | $56,398 | $69,292 | | Total FIFO inventories | $109,058 | $176,406 | | Reserve to adjust to LIFO | $(35,051) | $(35,051) | | Total LIFO inventories | $74,007 | $141,355 | - A reduction in inventory during the six months ended June 30, 2023, is not expected to have a material impact on cost of sales for the year[31](index=31&type=chunk) [6. PREPAID EXPENSES AND OTHER ASSETS](index=8&type=section&id=6.%20PREPAID%20EXPENSES%20AND%20OTHER%20ASSETS) Prepaid expenses and other assets decreased from $35.1 million at December 31, 2022, to $24.4 million at June 30, 2023, primarily due to a reduction in income tax receivable | Asset Type (in thousands) | June 30, 2023 | December 31, 2022 | | :------------------------ | :------------ | :---------------- | | Prepaid expenses | $9,314 | $10,787 | | Income tax receivable | $14,810 | $23,979 | | Other | $279 | $339 | | Total | $24,403 | $35,105 | [7. GOODWILL AND OTHER INTANGIBLE ASSETS, NET](index=8&type=section&id=7.%20GOODWILL%20AND%20OTHER%20INTANGIBLE%20ASSETS,%20NET) Goodwill remained at $14.2 million for Trex Residential. Intangible assets, primarily domain names, had a carrying amount of $6.3 million with accumulated amortization of $2.1 million at June 30, 2023. Amortization expense for the six months ended June 30, 2023, was $0.2 million - Goodwill for Trex Residential was **$14.2 million** at June 30, 2023, and December 31, 2022[33](index=33&type=chunk) | Metric (in thousands) | June 30, 2023 | December 31, 2022 | | :-------------------- | :------------ | :---------------- | | Intangible assets | $6,300 | $6,300 | | Accumulated amortization | $2,100 | $1,900 | - Intangible asset amortization expense was **$0.2 million** for both six-month periods ended June 30, 2023, and June 30, 2022[33](index=33&type=chunk) [8. ACCRUED EXPENSES AND OTHER LIABILITIES](index=9&type=section&id=8.%20ACCRUED%20EXPENSES%20AND%20OTHER%20LIABILITIES) Accrued expenses and other liabilities increased significantly from $44.1 million at December 31, 2022, to $79.8 million at June 30, 2023, driven primarily by increases in sales and marketing accruals and compensation and benefits | Liability Type (in thousands) | June 30, 2023 | December 31, 2022 | | :---------------------------- | :------------ | :---------------- | | Sales and marketing | $31,230 | $19,194 | | Compensation and benefits | $15,576 | $8,646 | | Income taxes | $15,848 | $0 | | Other | $5,849 | $5,311 | | Total | $79,803 | $44,064 | [9. DEBT](index=9&type=section&id=9.%20DEBT) The company has a revolving credit facility with a maximum principal amount of $400 million (Revolving A Loan) and an additional Revolving B Loan of $150 million, with terms ending May 18, 2027, and December 22, 2024, respectively. As of June 30, 2023, $206 million was outstanding with a weighted average interest rate of 6.15%, and the company was in compliance with all debt covenants - Revolving A Loan has a maximum principal amount of **$400 million**, with its term ending **May 18, 2027**[39](index=39&type=chunk) - Revolving B Loan has a maximum principal amount of **$150 million**, with its term ending **December 22, 2024**[45](index=45&type=chunk) | Metric (in millions) | June 30, 2023 | | :---------------------------- | :------------ | | Borrowings outstanding | $206 | | Available borrowing capacity | $344 | | Weighted average interest rate| 6.15% | - The Company was in compliance with all loan covenants as of June 30, 2023[50](index=50&type=chunk) [10. LEASES](index=11&type=section&id=10.%20LEASES) The company leases various facilities and equipment under operating leases with terms ranging from 1 to 6 years. Total operating lease expense for the six months ended June 30, 2023, was $4.2 million, with a weighted average remaining lease term of 4.8 years and a discount rate of 2.27% - Total operating lease expense for the six months ended June 30, 2023, was **$4.2 million**[52](index=52&type=chunk) | Metric (in thousands) | June 30, 2023 | December 31, 2022 | | :---------------------------- | :------------ | :---------------- | | Weighted average remaining lease term | 4.8 years | 5.2 years | | Weighted average discount rate| 2.27% | 2.10% | | Operating lease ROU assets | $29,099 | $30,991 | | Total operating lease liabilities | $29,414 | $31,462 | [11. FINANCIAL INSTRUMENTS](index=12&type=section&id=11.%20FINANCIAL%20INSTRUMENTS) The recorded value of financial assets and liabilities, including cash, accounts receivable, accounts payable, accrued expenses, and debt, approximates their fair value as of June 30, 2023, and December 31, 2022 - Recorded value of financial assets and liabilities approximates fair value[54](index=54&type=chunk) [12. STOCKHOLDERS' EQUITY](index=12&type=section&id=12.%20STOCKHOLDERS'%20EQUITY) This section details the computation of basic and diluted earnings per share and outlines the company's stock repurchase program. A new 2023 Stock Repurchase Program was adopted on May 4, 2023, authorizing the repurchase of up to 10.8 million shares, replacing the previous program | Metric (in shares, except per share data) | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :------------------------------------ | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Basic weighted average shares outstanding | 108,770,204 | 113,099,561 | 108,771,077 | 113,864,741 | | Diluted weighted average shares outstanding | 108,871,440 | 113,259,514 | 108,893,848 | 114,052,447 | | Basic earnings per share | $0.71 | $0.79 | $1.09 | $1.41 | | Diluted earnings per share | $0.71 | $0.79 | $1.09 | $1.40 | - A new 2023 Stock Repurchase Program was adopted on **May 4, 2023**, authorizing the repurchase of up to **10.8 million shares**, replacing the previous program[56](index=56&type=chunk) - From May 4, 2023, through June 30, 2023, Trex repurchased **264,896 shares** under the 2023 Stock Repurchase Program[56](index=56&type=chunk) [13. REVENUE FROM CONTRACTS WITH CUSTOMERS](index=12&type=section&id=13.%20REVENUE%20FROM%20CONTRACTS%20WITH%20CUSTOMERS) Trex Residential generates revenue from the manufacture and sale of wood-alternative composite decking and railing products, with performance obligations satisfied at the point of shipment. Following the sale of Trex Commercial, all revenues are from products transferred at a point in time with variable consideration contracts - Trex Residential's revenue is primarily from high-performance, low-maintenance, eco-friendly wood-alternative composite decking and residential railing products and accessories[57](index=57&type=chunk) - All revenues for the three and six months ended June 30, 2023, are from products transferred at a point in time and variable consideration contracts, following the divestiture of Trex Commercial[60](index=60&type=chunk)[61](index=61&type=chunk) | Metric (in thousands) | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :-------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Trex Residential Net Sales | $356,538 | $373,922 | $595,256 | $701,117 | | Trex Commercial Net Sales | N/A | $12,327 | N/A | $24,360 | | Consolidated Net Sales | $356,538 | $386,249 | $595,256 | $725,477 | [14. STOCK-BASED COMPENSATION](index=14&type=section&id=14.%20STOCK-BASED%20COMPENSATION) The 2023 Stock Incentive Plan was approved, providing for various awards to officers, directors, and employees, with 3,999,023 shares available for future grants as of June 30, 2023. Total stock-based compensation expense for the six months ended June 30, 2023, was $4.6 million, up from $3.3 million in the prior year - The 2023 Stock Incentive Plan was approved, replacing the 2014 Plan, with **4,000,000 shares** permitted for grant at adoption and **3,999,023 shares** available for future grants as of June 30, 2023[63](index=63&type=chunk) | Stock-Based Compensation (in thousands) | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :-------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Stock appreciation rights | $198 | $196 | $412 | $350 | | Time-based restricted stock and restricted stock units | $871 | $959 | $1,806 | $1,806 | | Performance-based restricted stock and restricted stock units| $1,320 | $(151) | $2,044 | $1,007 | | Employee stock purchase plan | $201 | $53 | $300 | $119 | | Total stock-based compensation | $2,590 | $1,057 | $4,562 | $3,282 | - Total unrecognized compensation cost related to unvested awards as of June 30, 2023, was **$14.4 million**[67](index=67&type=chunk) [15. INCOME TAXES](index=15&type=section&id=15.%20INCOME%20TAXES) The effective tax rate for the six months ended June 30, 2023, was 25.4%, comparable to 24.8% in the prior year. The company maintains a $3.0 million valuation allowance against deferred tax assets, primarily for state tax credits | Metric | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :-------------------- | :----------------------------- | :----------------------------- | | Effective tax rate | 25.4% | 24.8% | | Income tax expense (in millions) | $40.3 | $52.7 | - The Company maintains a valuation allowance of **$3.0 million** against deferred tax assets, primarily related to state tax credits[70](index=70&type=chunk) [16. SEGMENT INFORMATION](index=15&type=section&id=16.%20SEGMENT%20INFORMATION) Following the sale of Trex Commercial on December 30, 2022, the company now operates in one reportable segment: Trex Residential, which manufactures wood-alternative decking and residential railing products. Segment performance is evaluated based on net sales and EBITDA - As of December 30, 2022, the Company operates in one reportable segment, **Trex Residential**, after selling Trex Commercial[72](index=72&type=chunk) - Trex Residential manufactures wood-alternative decking and residential railing and related products, sold to distributors and home centers for the residential market[72](index=72&type=chunk) | Metric (in thousands) | Three Months Ended June 30, 2023 (Trex Residential & Consolidated) | Three Months Ended June 30, 2022 (Trex Residential) | Three Months Ended June 30, 2022 (Trex Commercial) | Three Months Ended June 30, 2022 (Consolidated) | | :-------------------- | :--------------------------------------------------------------- | :-------------------------------------------------- | :------------------------------------------------- | :---------------------------------------------- | | Net sales | $356,538 | $373,922 | $12,327 | $386,249 | | Net Income (loss) | $77,036 | $89,437 | $(521) | $88,916 | | EBITDA | $117,050 | $129,550 | $(410) | $129,140 | | Capital expenditures | $43,165 | $44,251 | $67 | $44,318 | | Total assets | $1,069,815 | $846,112 | $41,182 | $887,294 | | Metric (in thousands) | Six Months Ended June 30, 2023 (Trex Residential & Consolidated) | Six Months Ended June 30, 2022 (Trex Residential) | Six Months Ended June 30, 2022 (Trex Commercial) | Six Months Ended June 30, 2022 (Consolidated) | | :-------------------- | :--------------------------------------------------------------- | :-------------------------------------------------- | :------------------------------------------------- | :---------------------------------------------- | | Net sales | $595,256 | $701,117 | $24,360 | $725,477 | | Net Income (loss) | $118,167 | $161,652 | $(1,525) | $160,127 | | EBITDA | $185,912 | $236,031 | $(1,466) | $234,565 | | Depreciation and amortization | $24,198 | $21,240 | $565 | $21,805 | | Income tax expense (benefit) | $40,258 | $53,243 | $(506) | $52,737 | | Capital expenditures | $82,357 | $66,534 | $72 | $66,606 | | Total assets | $1,069,815 | $846,112 | $41,182 | $887,294 | [17. SEASONALITY](index=17&type=section&id=17.%20SEASONALITY) Trex Residential's operating results have historically varied from quarter to quarter. Seasonal, erratic or prolonged adverse weather conditions in certain geographic regions reduce the level of home improvement and construction activity and can shift demand for its products to a later period. As part of its normal business practice and consistent with industry practice, Trex Residential has historically offered incentive programs to its distributors and dealers to build inventory levels before the start of the prime deck-building season in order to ensure adequate availability of its product to meet anticipated seasonal consumer demand. The seasonal effects are often offset by the positive effect of the incentive programs - Operating results for Trex Residential vary quarter to quarter due to seasonal weather conditions impacting home improvement and construction[79](index=79&type=chunk) - Incentive programs are offered to distributors and dealers to build inventory before the prime deck-building season, which often offsets seasonal effects[79](index=79&type=chunk) [18. COMMITMENTS AND CONTINGENCIES](index=17&type=section&id=18.%20COMMITMENTS%20AND%20CONTINGENCIES) The company provides product warranties for its Trex Residential products, with varying periods (25-50 years for residential, 10-25 years for commercial) depending on the product. A warranty reserve is maintained for surface flaking claims from pre-2007 products, with incoming claims and average costs per claim being lower in the first six months of 2023 compared to 2022 - Trex Residential products sold on or after January 1, 2023, have warranty periods of **25-50 years** for residential use and **10-25 years** for commercial use, depending on the product[81](index=81&type=chunk) - The number of incoming surface flaking claims and the average cost per claim were lower in the six months ended June 30, 2023, compared to the same period in 2022 and company expectations[87](index=87&type=chunk) | Warranty Reserve (in thousands) | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :------------------------------ | :----------------------------- | :----------------------------- | | Beginning balance, January 1 | $25,599 | $28,595 | | Provisions and changes in estimates | $3,008 | $2,369 | | Settlements made during the period | $(2,048) | $(2,434) | | Ending balance, June 30 | $26,559 | $28,530 | [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=19&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section provides management's perspective on the company's financial condition and operational results, highlighting key performance indicators, discussing factors affecting operations, and analyzing consolidated results for the three and six months ended June 30, 2023, compared to the prior year. It also covers liquidity, capital resources, and future outlook [NOTE ON FORWARD-LOOKING STATEMENTS](index=19&type=section&id=NOTE%20ON%20FORWARD-LOOKING%20STATEMENTS) This section cautions readers that the report contains forward-looking statements subject to various risks and uncertainties, including market acceptance of products, raw material costs, inflation, economic conditions, and supply chain disruptions, which could cause actual results to differ materially from expectations - Forward-looking statements are subject to risks and uncertainties, including market acceptance, product costs, raw material availability and cost, inflation, economic conditions, and supply chain disruptions[95](index=95&type=chunk) [OVERVIEW (MD&A Section)](index=19&type=section&id=OVERVIEW_MD%26A_Section) This overview section within the MD&A describes Trex's business operations, product offerings, and summarizes key financial and operational highlights for the period, including new product introductions, industry recognition, and ESG efforts - Trex Residential is the world's largest manufacturer of high-performance composite decking and residential railing products, utilizing recycled and reclaimed materials[98](index=98&type=chunk) - Key product offerings include Trex Transcend® Lineage™, Trex Transcend®, Trex Signature®, Trex Select®, and Trex Enhance® decking, along with various railing systems and licensed outdoor living accessories[99](index=99&type=chunk)[100](index=100&type=chunk) - Trex introduced the new Trex Select T-Rail composite railing system and updated its online deck design tool[103](index=103&type=chunk) - Trex was ranked the brand of choice for composite decking and deck railing by Builder Magazine for the **16th consecutive year**[103](index=103&type=chunk) - The company published its 2022 ESG report, highlighting focus on circularity, energy efficiency, employee safety, diversity in leadership, governance, and community support[103](index=103&type=chunk) | Metric (in thousands, except per share data) | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | $ Change | % Change | | :----------------------------------------- | :------------------------------- | :------------------------------- | :------- | :------- | | Net sales | $356,538 | $386,249 | $(29,711) | (7.7)% | | Gross profit | $156,448 | $157,377 | $(929) | (0.6)% | | Net income | $77,036 | $88,916 | $(11,880) | (13.4)% | | EBITDA | $117,050 | $129,140 | $(12,090) | (9.4)% | | Diluted earnings per share | $0.71 | $0.79 | $(0.08) | (10.1)% | | Metric (in thousands, except per share data) | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | $ Change | % Change | | :----------------------------------------- | :----------------------------- | :----------------------------- | :------- | :------- | | Net sales | $595,256 | $725,477 | $(130,221) | (17.9)% | | Gross profit | $250,876 | $292,289 | $(41,413) | (14.2)% | | Net income | $118,167 | $160,127 | $(41,960) | (26.2)% | | EBITDA | $185,912 | $234,565 | $(48,653) | (20.7)% | | Diluted earnings per share | $1.09 | $1.40 | $(0.31) | (22.1)% | - Capital expenditures for the six months ended June 30, 2023, were **$82.4 million**, primarily for the Arkansas manufacturing facility (**$45.5 million**), cost reduction initiatives (**$10.6 million**), and new corporate headquarters (**$9.6 million**)[104](index=104&type=chunk) - Repurchased **264,896 shares** of common stock under the new 2023 Stock Repurchase Program during the six months ended June 30, 2023[105](index=105&type=chunk) [RESULTS OF OPERATIONS](index=23&type=section&id=RESULTS%20OF%20OPERATIONS_MD%26A) This section analyzes the company's operating results, noting a decrease in net sales for both the three and six months ended June 30, 2023, primarily due to the non-recurrence of prior year channel inventory build and cautious purchase patterns. Gross margin improved due to production optimization and cost savings, while SG&A expenses increased due to personnel costs and expenses related to exiting the prior corporate headquarters - Total net sales decreased by **7.7%** for the three months and **17.9%** for the six months ended June 30, 2023, primarily due to the non-recurrence of the 2022 channel inventory build and cautious consumer purchasing[113](index=113&type=chunk)[119](index=119&type=chunk) - Gross margin increased to **43.9%** (from 40.7%) for the three months and **42.1%** (from 40.3%) for the six months ended June 30, 2023, driven by production optimization and cost savings, despite lower absorption from decreased production[114](index=114&type=chunk)[120](index=120&type=chunk) - Selling, general and administrative expenses increased by **$12.1 million (30.6%)** for the three months and **$9.6 million (12.1%)** for the six months ended June 30, 2023, mainly due to higher personnel-related expenses, R&D, and costs associated with exiting the prior corporate headquarters[115](index=115&type=chunk)[121](index=121&type=chunk) - Effective tax rates remained comparable at **25.5%** for the three months and **25.4%** for the six months ended June 30, 2023[117](index=117&type=chunk)[122](index=122&type=chunk) - Total EBITDA decreased by **9.4%** for the three months and **20.7%** for the six months ended June 30, 2023, primarily due to decreased net sales and gross profit[118](index=118&type=chunk)[125](index=125&type=chunk) [LIQUIDITY AND CAPITAL RESOURCES](index=27&type=section&id=LIQUIDITY%20AND%20CAPITAL%20RESOURCES_MD%26A) The company finances operations through cash flows, revolving credit facilities, and trade credit. Cash and cash equivalents were $4.2 million at June 30, 2023. Net cash provided by operating activities decreased due to increased accounts receivable and reduced profitability, partially offset by decreased inventories. Capital expenditures were primarily for the new Arkansas facility. The company maintains a revolving credit facility with $206 million outstanding and $344 million available capacity, and is in compliance with all debt covenants - Cash and cash equivalents were **$4.2 million** at June 30, 2023[126](index=126&type=chunk) | Cash Flow Activity (in thousands) | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :-------------------------------- | :----------------------------- | :----------------------------- | | Net cash provided by operating activities | $107,781 | $189,992 | | Net cash used in investing activities | $(82,357) | $(66,561) | | Net cash used in financing activities | $(33,523) | $(247,836) | | Net decrease in cash and cash equivalents | $(8,099) | $(124,405) | - Decrease in operating cash flow primarily due to increased accounts receivable and reduced profitability, partially offset by decreased inventories[128](index=128&type=chunk) - Capital expenditures of **$82.4 million** were mainly for the Arkansas manufacturing facility (**$45.5 million**), cost reduction initiatives (**$10.6 million**), and new corporate headquarters (**$9.6 million**)[129](index=129&type=chunk) - At June 30, 2023, the company had **$206 million** in outstanding borrowings and **$344 million** in available borrowing capacity under its revolving credit facility, and was in compliance with all debt covenants[146](index=146&type=chunk)[147](index=147&type=chunk) [Capital Requirements](index=30&type=section&id=Capital%20Requirements) The company plans to spend approximately $400 million on a new Arkansas manufacturing facility, with 2023 capital expenditure guidance set at $145 million to $155 million. Funding will come from cash generation and the line of credit, prioritizing internal growth, cost reductions, equipment upgrades, and strategic acquisitions - The company anticipates spending approximately **$400 million** on the new Arkansas manufacturing facility, to be funded primarily through ongoing cash generation or its line of credit[150](index=150&type=chunk) - Capital expenditure guidance for 2023 is **$145 million to $155 million**, prioritizing internal growth, cost reductions, equipment upgrades, and acquisitions[151](index=151&type=chunk) [Inventory in Distribution Channels](index=30&type=section&id=Inventory%20in%20Distribution%20Channels) Trex sells its residential decking and railing products through a tiered distribution system. Significant increases in channel inventory without corresponding end-use demand could negatively impact future sales - Trex sells residential decking and railing products through a tiered distribution system with over **50 distributors** and two national retail merchandisers[152](index=152&type=chunk) - Significant increases in distribution channel inventory without corresponding end-use demand could adversely affect future sales[152](index=152&type=chunk) [Product Warranty](index=30&type=section&id=Product%20Warranty_MD%26A) Trex provides warranties for its residential products, with periods ranging from 10 to 50 years. The company maintains a warranty reserve for surface flaking claims from pre-2007 products, noting lower incoming claims and average costs per claim in the first six months of 2023 compared to 2022 - Trex Residential products have warranty periods of **25-50 years** for residential use and **10-25 years** for commercial use, depending on the product[154](index=154&type=chunk)[155](index=155&type=chunk) - The number of incoming surface flaking claims and the average cost per claim were lower in the six months ended June 30, 2023, compared to the same period in 2022 and company expectations[158](index=158&type=chunk) | Surface Flaking Claims Activity | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :------------------------------ | :----------------------------- | :----------------------------- | | Claims open, beginning of period (number) | 1,729 | 1,759 | | Claims received (number) | 236 | 292 | | Claims resolved (number) | (212) | (304) | | Claims open, end of period (number) | 1,753 | 1,747 | | Average cost per claim ($) | $4,160 | $5,233 | [Seasonality](index=31&type=section&id=Seasonality_MD%26A) Trex Residential's operating results are subject to quarterly variations due to seasonal weather impacting home improvement and construction. Incentive programs are used to manage inventory levels and demand fluctuations - Operating results for Trex Residential vary quarter to quarter due to seasonal weather conditions impacting home improvement and construction[161](index=161&type=chunk) - Incentive programs are offered to distributors and dealers to build inventory before the prime deck-building season, which often offsets seasonal effects[161](index=161&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=31&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) This section states that there were no material changes to the company's market risk exposure during the six months ended June 30, 2023, and refers to the Annual Report on Form 10-K for detailed information - No material changes to the Company's market risk exposure during the six months ended June 30, 2023[162](index=162&type=chunk) [Item 4. Controls and Procedures](index=31&type=section&id=Item%204.%20Controls%20and%20Procedures) Management, including the CEO and Acting CFO, evaluated the effectiveness of the company's disclosure controls and procedures as of June 30, 2023, and concluded they are effective. No material changes to internal control over financial reporting occurred during the period - Disclosure controls and procedures were evaluated and deemed effective as of **June 30, 2023**[163](index=163&type=chunk) - No material changes to internal control over financial reporting occurred during the six-month period ended June 30, 2023[163](index=163&type=chunk) [PART II OTHER INFORMATION](index=32&type=section&id=PART%20II%20OTHER%20INFORMATION) This section covers legal proceedings, equity security sales, use of proceeds, other information, and a comprehensive list of exhibits filed with the report [Item 1. Legal Proceedings](index=32&type=section&id=Item%201.%20Legal%20Proceedings) The company is involved in routine litigation and claims, but management believes their ultimate resolution will not materially affect the company's financial condition, results of operations, liquidity, or competitive position - Management believes the ultimate resolution of pending lawsuits and claims will not materially affect the Company's financial condition, results of operations, liquidity, or competitive position[166](index=166&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=32&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) During the three months ended June 30, 2023, the company repurchased 264,896 shares of common stock under its new 2023 Stock Repurchase Program, which authorizes up to 10.8 million shares and has no set expiration date | Period | Total Number of Shares Purchased (1) (number) | Average Price Paid per Share ($) | Shares Purchased as Part of Publicly Announced Plans or Programs (2) (number) | Maximum Number of Shares that May Yet Be Purchased Under the Plan or Program (number) | | :----------------------------- | :----------------------------------- | :------------------------------- | :--------------------------------------------------- | :--------------------------------------------------------------------------- | | April 1, 2023 – April 30, 2023 | — | $— | — | 10,800,000 | | May 1, 2023 – May 31, 2023 | 15,663 | $54.56 | — | 10,800,000 | | June 1, 2023 – June 30, 2023 | 264,896 | $59.44 | 264,896 | 10,535,104 | | Quarterly period ended June 30, 2023 | 280,559 | N/A | 264,896 | N/A | - A new 2023 Stock Repurchase Program was adopted on **May 4, 2023**, authorizing the repurchase of up to **10.8 million shares**, replacing the previous program[167](index=167&type=chunk) [Item 5. Other Information](index=32&type=section&id=Item%205.%20Other%20Information) This section details recent amendments to the company's By-Laws, including provisions for remote stockholder meetings and enhanced advance notice requirements for stockholder proposals and director nominations. It also outlines changes to various stock incentive plans and severance agreements to align with the 2023 Stock Incentive Plan and update terms - Amended and Restated By-Laws of the Company dated **July 26, 2023**, allow for remote stockholder meetings and require additional information for stockholder proposals and director nominations[168](index=168&type=chunk)[170](index=170&type=chunk) - Amendments to the 1999 Incentive Plan for Outside Directors and various 2023 Stock Incentive Plan agreements (SAR, Time-Based RSU, Performance-Based RSU) were approved to align with the 2023 Plan, including changes to vesting and shareholder rights[174](index=174&type=chunk)[175](index=175&type=chunk)[176](index=176&type=chunk)[178](index=178&type=chunk)[179](index=179&type=chunk) - Amended and Restated Severance Agreements for the CEO and other officers were updated to include auto-renewal terms, clarify bonus payouts, and specify earned salary in case of termination for cause[180](index=180&type=chunk)[181](index=181&type=chunk) [Item 6. Exhibits](index=33&type=section&id=Item%206.%20Exhibits) This section lists all exhibits filed with the Quarterly Report on Form 10-Q, including corporate governance documents, stock incentive plans, severance agreements, and certifications - The exhibit index includes corporate governance documents (Restated Certificate of Incorporation, Amended and Restated By-Laws), stock incentive plans (2023 Stock Incentive Plan, 1999 Incentive Plan for Outside Directors), various stock appreciation rights and restricted stock unit agreements, and severance agreements[188](index=188&type=chunk) - Certifications from the CEO and CFO pursuant to Rule 13a-14(a) and Section 906 of the Sarbanes-Oxley Act are also filed[188](index=188&type=chunk)

Financial Data and Key Metrics Changes - Net sales for Q1 2023 were $239 million, reflecting cautious purchase patterns due to softening economic conditions, compared to a channel inventory build in the prior year [12] - Gross margin increased by 350 basis points sequentially to 39.6%, driven by process efficiencies and raw material optimization, while the previous year's gross margin was 40.9% [12][13] - Net income for Q1 2023 was $41 million or $0.38 per diluted share, down from $72 million or $0.63 per diluted share in the prior year [13] - EBITDA for Q1 2023 was $69 million, representing 28.8% of net sales, with a full-year EBITDA margin guidance of 26% to 27% [13][15] Business Line Data and Key Metrics Changes - The company maintained production at a $1 billion level, with the ability to flex production based on demand [6] - Selling, general and administrative expenses were $37 million, or 15.7% of net sales, compared to 11.4% in the prior year, reflecting a return to normalized branding spending and increased R&D [13] Market Data and Key Metrics Changes - Channel partners reported strong backlogs entering the busy season, indicating continued demand for outdoor living projects despite economic uncertainty [5] - The conversion from wood to composite materials is accelerating, with Trex's market leadership position reinforced by the decline in wood prices [5][6] Company Strategy and Development Direction - The company aims to increase composite penetration from 25% to 50% of the decking market, equating to an incremental $2 billion in composite sales [17] - Trex continues to invest in brand and marketing programs to drive consumer demand and strengthen relationships with channel partners [7][10] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the company's long-term growth prospects despite economic uncertainties, emphasizing the importance of consumer behavior in the back half of the year [35][76] - The company anticipates Q2 2023 net sales to be in the range of $310 million to $320 million, with expectations of a slight decline compared to the prior year when excluding inventory build [15] Other Important Information - The company announced a new stock repurchase program of up to 10.8 million shares, reflecting confidence in its financial strength [15] - Trex was recognized as the most sustainable decking brand for the 13th consecutive year, highlighting its commitment to sustainability [8][9] Q&A Session Summary Question: How should gross margin be expected to trend moving forward? - Management indicated that gross margins are expected to be slightly above 40% in Q2, with a commitment to maintaining EBITDA margins of 26% to 27% for the full year [19] Question: What impact did weather have on sell-through demand? - Management reported that sell-through demand remained flattish, with some impact from wet weather on the West Coast, offset by good weather in other regions [21] Question: What are the expectations for inventory levels throughout the year? - Management expects inventory levels to decrease significantly in Q2 and Q3, aiming for around six to eight weeks of inventory by year-end [32] Question: What would be needed to ramp up production above the current $1 billion run rate? - Management stated that growth in Q2 and continued demand into the early part of Q3 would be necessary to consider increasing production [68] Question: How does the company view potential M&A opportunities? - Management acknowledged the potential for M&A to expand into adjacent product categories, emphasizing the importance of leveraging Trex's expertise [67]

[PART I FINANCIAL INFORMATION](index=3&type=section&id=PART%20I%20FINANCIAL%20INFORMATION) [Condensed Consolidated Financial Statements](index=3&type=section&id=Item%201.%20Condensed%20Consolidated%20Financial%20Statements) This section presents the unaudited condensed consolidated financial statements for the three months ended March 31, 2023, and 2022, including key financial statements and notes, highlighting the company's transition to a single-segment entity Condensed Consolidated Statements of Comprehensive Income (Unaudited) | | Three Months Ended March 31, | | | | :--- | :--- | :--- | :--- | | (In thousands, except per share data) | 2023 | 2022 | | | Net sales | $ 238,718 | $ 339,228 | | | Cost of sales | 144,290 | 204,316 | | | Gross profit | 94,428 | 134,912 | | | Selling, general and administrative expenses | 37,480 | 39,960 | | | Income from operations | 56,948 | 94,952 | | | Net income | $ 41,131 | $ 71,211 | | | Diluted earnings per common share | $ 0.38 | $ 0.62 | Condensed Consolidated Balance Sheets Highlights (Unaudited) | (In thousands) | March 31, 2023 | December 31, 2022 | | :--- | :--- | :--- | | **ASSETS** | | | | Total current assets | $ 459,483 | $ 286,842 | | Total assets | $ 1,133,121 | $ 933,705 | | **LIABILITIES AND STOCKHOLDERS' EQUITY** | | | | Total current liabilities | $ 447,765 | $ 290,599 | | Total liabilities | $ 572,944 | $ 415,356 | | Total stockholders' equity | $ 560,177 | $ 518,349 | Condensed Consolidated Statements of Cash Flows (Unaudited) | (In thousands) | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :--- | :--- | :--- | | Net cash (used in) provided by operating activities | $ (115,471) | $ 73,879 | | Net cash used in investing activities | $ (39,192) | $ (22,288) | | Net cash provided by (used in) financing activities | $ 146,254 | $ (77,456) | | Net decrease in cash and cash equivalents | $ (8,409) | $ (25,865) | - On December 30, 2022, the Company completed the sale of its Trex Commercial segment to focus on its core outdoor living strategy, resulting in the company now operating in a **single reportable segment**, Trex Residential[22](index=22&type=chunk)[27](index=27&type=chunk)[69](index=69&type=chunk) - On May 4, 2023, the Board of Directors adopted a new stock repurchase program for up to **10.8 million shares** of its common stock, terminating the existing program[56](index=56&type=chunk) Residential Product Warranty Reserve Reconciliation (in thousands) | | Surface Flaking | Other Residential | Total | | :--- | :--- | :--- | :--- | | **Three Months Ended March 31, 2023** | | | | | Beginning balance, January 1 | $ 15,905 | $ 9,694 | $ 25,599 | | Provisions and changes in estimates | — | 1,945 | 1,945 | | Settlements made during the period | (316) | (551) | (867) | | Ending balance, March 31 | $ 15,589 | $ 11,088 | $ 26,677 | [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=18&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses a significant **29.6% decrease in net sales** for Q1 2023 due to channel inventory reduction, with a slight gross margin decline and increased revolving credit facility borrowings Q1 Financial Performance Highlights | ($ 000s omitted, except per share data) | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | % Change | | :--- | :--- | :--- | :--- | | Net sales | $ 238,718 | $ 339,228 | (29.6)% | | Gross profit | $ 94,428 | $ 134,912 | (30.0)% | | Net income | $ 41,131 | $ 71,211 | (42.2)% | | EBITDA | $ 68,862 | $ 105,425 | (34.7)% | | Diluted earnings per share | $ 0.38 | $ 0.62 | (38.7)% | - The decrease in net sales was substantially due to a decrease in volume, resulting from more cautious purchasing by channel partners due to softening economic conditions[99](index=99&type=chunk)[106](index=106&type=chunk) - Gross margin decreased slightly to **39.6%** from 39.8% in the prior-year quarter, primarily due to lower absorption from decreased production levels[108](index=108&type=chunk) - Capital expenditures in Q1 2023 were **$39.2 million**, with **$22.6 million** allocated to the new Arkansas manufacturing facility, and full-year 2023 capital expenditure guidance is **$130 million to $140 million**[117](index=117&type=chunk)[138](index=138&type=chunk) - Cash used in operations was **$115.5 million**, a **$189.4 million decrease** from the prior year, primarily due to an increase in accounts receivable resulting from different payment terms on the early buy program[114](index=114&type=chunk)[115](index=115&type=chunk) - As of March 31, 2023, the company had **$369.5 million** in outstanding borrowings under its revolving credit facility, with an available capacity of **$180.5 million**[48](index=48&type=chunk)[133](index=133&type=chunk) [Quantitative and Qualitative Disclosures About Market Risk](index=28&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company reports no material changes to its market risk exposure during the three months ended March 31, 2023, referring to prior annual report disclosures - There were no material changes to the Company's market risk exposure during the three months ended March 31, 2023[149](index=149&type=chunk) [Controls and Procedures](index=28&type=section&id=Item%204.%20Controls%20and%20Procedures) Management, including the CEO and CFO, concluded that disclosure controls and procedures were effective as of March 31, 2023, with no material changes in internal control over financial reporting - The Company's management, including the CEO and CFO, concluded that the Company's disclosure controls and procedures are effective as of March 31, 2023[150](index=150&type=chunk) - No changes in the Company's internal control over financial reporting occurred during the quarter that have materially affected, or are reasonably likely to materially affect, these controls[150](index=150&type=chunk) [PART II OTHER INFORMATION](index=29&type=section&id=PART%20II%20OTHER%20INFORMATION) [Legal Proceedings](index=29&type=section&id=Item%201.%20Legal%20Proceedings) The company is subject to routine litigation and claims, which management believes will not materially affect its financial condition or operations - The Company has pending lawsuits and claims that are considered ordinary routine litigation incidental to the business and are not expected to have a material effect on its financial condition or operations[152](index=152&type=chunk) [Unregistered Sales of Equity Securities and Use of Proceeds](index=29&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) No shares were repurchased in Q1 2023 under the existing program, which was terminated and replaced by a new **10.8 million share** repurchase program on May 4, 2023 - The Company did not purchase any shares of its common stock under its publicly announced stock repurchase program during the three months ended March 31, 2023[154](index=154&type=chunk) - On May 4, 2023, the Board of Directors approved a new stock repurchase program for up to **10.8 million shares** and terminated the prior program from 2018[154](index=154&type=chunk) [Other Information](index=29&type=section&id=Item%205.%20Other%20Information) Stockholders approved the Trex Company, Inc. 2023 Stock Incentive Plan and ratified all five proposals at the Annual Meeting on May 4, 2023 - At the annual meeting on May 4, 2023, stockholders approved the Trex Company, Inc. 2023 Stock Incentive Plan, which amends and restates the 2014 Plan and makes **4,000,000 shares** of common stock available for future grants[155](index=155&type=chunk) - Stockholders elected three directors, approved executive compensation on an advisory basis, recommended an annual frequency for future say-on-pay votes, and ratified the selection of Ernst & Young LLP as the independent auditor for 2023[158](index=158&type=chunk)[159](index=159&type=chunk)[160](index=160&type=chunk) [Exhibits](index=31&type=section&id=Item%206.%20Exhibits) This section provides an index of all exhibits filed with or furnished as part of the Quarterly Report on Form 10-Q, including certifications and XBRL data files - An index of exhibits filed with the Form 10-Q is provided, including the 2023 Stock Incentive Plan, CEO/CFO certifications, and Inline XBRL documents[161](index=161&type=chunk)[168](index=168&type=chunk)

Company Overview & Strategy - Trex has over 30 years of leadership in the outdoor living industry, focusing on sustainable product innovation and driving conversion from wood [3] - The company's strategic growth drivers include leveraging the Trex brand, consumer engagement, channel support, licensing, and wood conversion [5] - Trex is expanding its reach through unparalleled distribution networks, targeting contractors, DIY enthusiasts, and international markets [5] - The company optimizes operations through a unique recycling business model, vertical integration, cost reduction, and consistent improvement in manufacturing throughput [5] - Trex is expanding with a 3rd production site in Arkansas, providing proximity to raw materials, a strong labor market, and key growth regions for wood conversion [7] Market & Product - The decking & railing market is valued at $8 billion, with composite share for 2021 at approximately 25%, up over 300 bps compared to 2020 [6] - A 1% gain in wood market share is worth $80 million in annual composite sales [6, 8] - Trex's new product introductions include Trex Lineage, setting a new standard for style in outdoor living [11, 15] Financial Performance & Capital Allocation - Trex has attractive long-term financial performance with a 14% CAGR in consolidated adjusted sales [28] - The company's capital allocation strategy involves reinvesting in the business, capacity expansion, and share repurchases, with over $630 million in capital expenditures since 2016 [5, 25] - Trex anticipates $400 million in plant expenditures for the Arkansas site through a modular building approach, with spending occurring into 2026 [25] - The company spent $395 million in FY 2022 on share repurchases [26]

Financial Data and Key Metrics Changes - Consolidated net sales for Q4 2022 were $192 million, exceeding expectations, with Trex Residential and Trex Commercial net sales at $181 million and $11 million respectively [14][18] - Q4 2022 consolidated gross margin increased to 34.1% from 38.9% in the previous year, while Trex Residential gross margin rose to 36.1% from 39.7% [15][18] - Full year 2022 net income was $185 million or $1.65 per diluted share, down from $209 million or $1.80 per diluted share in 2021 [19] Business Line Data and Key Metrics Changes - Trex Residential net sales for 2022 were $1.1 billion, while Trex Commercial contributed $47 million [18] - The sale of Trex Commercial resulted in a $15.4 million loss in Q4 2022, reflecting a strategic focus on the more profitable residential segment [16][18] Market Data and Key Metrics Changes - The company reported steady consumer demand for Trex decking and railing, with a broad-based appeal in the outdoor living category [5][9] - The pro channel inventory correction was completed by year-end 2022, allowing for better alignment with market expectations [14][15] Company Strategy and Development Direction - The company is focusing on accelerating the conversion from wood to composite materials, emphasizing innovation as a key competitive advantage [7][62] - Trex plans to invest in brand development and new product commercialization while maintaining a conservative approach to full-year planning [12][21] Management's Comments on Operating Environment and Future Outlook - Management expressed cautious optimism regarding the economic backdrop, noting that homeowners are likely to invest in renovations rather than moving [9][10] - The company anticipates first quarter 2023 net sales to be in the range of $230 million to $240 million, with a full-year EBITDA margin expected to be between 26% and 27% [21] Other Important Information - The company completed a significant share buyback program, returning approximately $395 million to shareholders in 2022 [20] - The build-out of the new manufacturing facility in Arkansas is expected to extend beyond the originally planned 2024 timeline, with production estimated to start in early 2026 [12][20] Q&A Session Summary Question: Clarification on channel inventory and revenue guidance - Management clarified that the decline in revenue guidance is more about channel conservatism rather than a significant decline in sell-through [22] Question: Details on the $1 billion revenue guide - The $1 billion figure is a production rate assumption, not a full-year revenue guide, reflecting a conservative approach to market conditions [28][29] Question: Expectations for sell-through and contractor confidence - Sell-through in Q4 was flat year-over-year, with contractor backlogs normalizing to 4-6 weeks, indicating confidence heading into the selling season [26][36] Question: Impact of pricing on revenue - Pricing contributed approximately 10.7% in Q4, with expectations for continued pricing opportunities in the first half of 2023 [44][45] Question: Insights on distribution expansion - The company is focusing on expanding retail outlets rather than adding new distributors, particularly in high-growth markets like Texas [50]

Part I [Business](index=4&type=section&id=Item%201.%20Business) Trex is the world's largest manufacturer of eco-friendly composite decking, focusing on its residential segment after divesting commercial operations, and expanding manufacturing capacity - Trex is the **world's largest manufacturer** of composite decking and railing products, marketed under the Trex® brand[12](index=12&type=chunk) - The company sold its Trex Commercial segment on December 30, 2022, to focus on its core residential business[13](index=13&type=chunk) - Trex Residential products are made from **95% reclaimed wood fibers and recycled polyethylene film**, making the company a major recycler of waste polyethylene[14](index=14&type=chunk)[16](index=16&type=chunk) - A new manufacturing facility in Little Rock, Arkansas, is under construction with an anticipated spend of approximately **$400 million**[30](index=30&type=chunk) - Key growth strategies include product innovation, brand expansion, and increasing distribution channels, alongside cost reduction and customer service[37](index=37&type=chunk)[41](index=41&type=chunk) - Primary competition comes from traditional wood decking, with The Azek Company Inc. and Fiberon as key wood-alternative competitors[39](index=39&type=chunk)[40](index=40&type=chunk) - As of December 31, 2022, Trex Residential employed **1,636 full-time employees**, none under collective bargaining agreements[54](index=54&type=chunk) [Risk Factors](index=16&type=section&id=Item%201A.%20Risk%20Factors) The company faces risks from intense competition, cyclical home improvement market dependency, customer concentration, raw material supply, warranty claims, and global disruptions - Growth relies on increasing market acceptance and effective competition against traditional wood products, which dominate decking sales[75](index=75&type=chunk) - Product demand is heavily influenced by the cyclical home improvement market, sensitive to economic conditions and consumer confidence[78](index=78&type=chunk) - Significant customer concentration means the loss of a major customer could adversely impact the business[78](index=78&type=chunk) - Risks exist in obtaining raw materials like wood fiber and scrap polyethylene, potentially leading to supply disruptions or price increases[90](index=90&type=chunk) - Financial exposure exists from warranty claims for surface flaking on pre-2007 decking products manufactured at the Nevada facility[86](index=86&type=chunk) - Global public health pandemics, geopolitical conflicts, climate change, and cyberattacks pose risks to business operations and data security[97](index=97&type=chunk)[104](index=104&type=chunk) [Unresolved Staff Comments](index=25&type=section&id=Item%201B.%20Unresolved%20Staff%20Comments) There are no unresolved staff comments to report - None[106](index=106&type=chunk) [Properties](index=25&type=section&id=Item%202.%20Properties) The company owns and leases properties for headquarters and manufacturing, with **$176.2 million** in 2022 capital expenditures, largely for a new Arkansas facility Owned and Leased Properties | Purpose | Square Footage/Acres | Status | Location(s) | | :--- | :--- | :--- | :--- | | Corporate Headquarters | 39,250 SF / 8 Acres | Leased / Owned | Virginia | | Trex Residential Facilities | 1,734,589 SF | Leased | VA / NV / AR | | Trex Residential Facilities | 1,202,660 SF / 455 Acres | Owned | VA / NV / AR | - Capital expenditures in 2022 totaled **$176.2 million**, including **$85.7 million** for the new Arkansas facility and **$39.2 million** for cost reduction initiatives[107](index=107&type=chunk) [Legal Proceedings](index=25&type=section&id=Item%203.%20Legal%20Proceedings) The company is involved in routine litigation, which management believes will not materially affect its financial condition or operations - Pending lawsuits and claims are ordinary and incidental, with management expecting no material financial impact[110](index=110&type=chunk) [Mine Safety Disclosures](index=25&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This item is not applicable to the company's operations - Not applicable[111](index=111&type=chunk) Part II [Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities](index=26&type=section&id=Item%205.%20Market%20for%20Registrant%27s%20Common%20Equity%2C%20Related%20Stockholder%20Matters%20and%20Issuer%20Purchases%20of%20Equity%20Securities) Trex common stock is listed on NYSE, has never paid dividends, repurchased **1.15 million** shares in Q4 2022, and outperformed key indices over five years - The company has never paid cash dividends and plans to retain earnings for expansion or share repurchases[115](index=115&type=chunk) Issuer Purchases of Equity Securities (Q4 2022) | Period | Total Shares Purchased | Average Price Paid ($) | Shares Purchased Under Program | | :--- | :--- | :--- | :--- | | Oct 2022 | 578,753 | 44.45 | 578,753 | | Nov 2022 | 581,103 | 42.33 | 573,600 | | Dec 2022 | 2,418 | 42.33 | — | | **Q4 Total** | **1,162,274** | | **1,152,353** | Five-Year Cumulative Total Stockholder Return (assuming $100 invested on 12/31/2017) | | 12/31/2017 | 12/31/2018 | 12/31/2019 | 12/31/2020 | 12/31/2021 | 12/31/2022 | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | **Trex Company, Inc.** | $100.00 | $109.52 | $165.83 | $308.93 | $498.27 | $156.20 | | Russell 2000 Index | $100.00 | $88.99 | $111.71 | $134.01 | $154.09 | $122.60 | | S&P 600 Building Products | $100.00 | $79.21 | $112.63 | $141.98 | $176.33 | $146.09 | [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=28&type=section&id=Item%207.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) In 2022, net sales decreased **7.6%** to **$1.11 billion** and net income fell **11.6%** to **$184.6 million**, driven by reduced demand and inventory drawdowns, while cash from operations remained strong [Results of Operations](index=35&type=section&id=Results%20of%20Operations) In 2022, net sales decreased **7.6%** to **$1.11 billion** due to volume reduction, gross margin fell to **36.5%**, and net income decreased **11.6%** to **$184.6 million** Financial Performance Summary (2022 vs. 2021) | Metric | 2022 (in millions) | 2021 (in millions) | $ Change (in millions) | % Change | | :--- | :--- | :--- | :--- | :--- | | Net Sales | $1,106.0 | $1,197.0 | $(90.9) | (7.6)% | | Gross Profit | $404.0 | $460.5 | $(56.5) | (12.3)% | | Gross Margin | 36.5% | 38.5% | | | | Net Income | $184.6 | $208.7 | $(24.1) | (11.6)% | | Diluted EPS | $1.65 | $1.80 | $(0.15) | (8.3)% | | EBITDA | $291.0 | $311.3 | $(20.3) | (6.5)% | - Trex Residential net sales decreased due to an **18.2% volume reduction** from channel partner inventory drawdowns, partially offset by a **13.6% price increase**[174](index=174&type=chunk) - A **$15.4 million loss** was recorded from the divestiture of the Trex Commercial segment on December 30, 2022[178](index=178&type=chunk) [Liquidity and Capital Resources](index=40&type=section&id=Liquidity%20and%20Capital%20Resources) In 2022, cash from operations was **$216.2 million**, with **$176.2 million** in capital expenditures and **$398.4 million** in share repurchases, funded partly by **$222 million** in net borrowings Summary of Cash Flows | | 2022 (in thousands) | 2021 (in thousands) | 2020 (in thousands) | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | $216,220 | $258,064 | $187,294 | | Net cash used in investing activities | $(168,884) | $(158,039) | $(170,658) | | Net cash used in financing activities | $(176,064) | $(80,673) | $(43,768) | - In 2022, the company repurchased **6.5 million shares** of common stock for **$398.4 million**[191](index=191&type=chunk)[192](index=192&type=chunk) - The revolving loan capacity was increased to **$400 million** in May 2022, with **$222 million** outstanding and **$328 million** available borrowing capacity at year-end[200](index=200&type=chunk)[201](index=201&type=chunk)[211](index=211&type=chunk) - Capital expenditure guidance for 2023 is projected to be between **$130 million** and **$140 million**[219](index=219&type=chunk) [Critical Accounting Policies and Estimates](index=31&type=section&id=Critical%20Accounting%20Policies%20and%20Estimates) Critical accounting policies involve significant judgment for product warranty reserves, especially for pre-2007 surface flaking claims, and annual goodwill impairment testing - A significant warranty reserve is maintained for surface flaking claims on pre-2007 products, requiring complex judgments for future claims and settlement costs[149](index=149&type=chunk)[150](index=150&type=chunk) Surface Flaking Claims Activity | | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Claims received | 592 | 894 | 1,441 | | Claims resolved | (622) | (934) | (1,366) | | Average cost per claim ($) | 4,987 | 3,519 | 3,390 | - Goodwill is annually evaluated for impairment using qualitative factors and, if needed, a quantitative test comparing fair value to carrying value[157](index=157&type=chunk)[159](index=159&type=chunk)[160](index=160&type=chunk) [Quantitative and Qualitative Disclosures About Market Risk](index=44&type=section&id=Item%207A.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company faces market risk from variable interest rates on its **$222 million** revolving credit line, but a **1%** rate increase is not expected to be material - Primary market risk stems from interest rate changes on **$222 million** outstanding variable-rate revolving credit at December 31, 2022[222](index=222&type=chunk) - A hypothetical **1%** increase in interest rates is not expected to materially impact the company's financial position, operations, or liquidity[222](index=222&type=chunk) [Financial Statements and Supplementary Data](index=44&type=section&id=Item%208.%20Financial%20Statements%20and%20Supplementary%20Data) This section includes audited consolidated financial statements and Ernst & Young LLP's unqualified opinion, noting the surface flaking warranty reserve as a critical audit matter - Ernst & Young LLP issued an **unqualified opinion** on the consolidated financial statements and internal control effectiveness as of December 31, 2022[262](index=262&type=chunk)[263](index=263&type=chunk) - The Surface Flaking Warranty Reserve was identified as a **Critical Audit Matter** due to complex and subjective estimation judgments[266](index=266&type=chunk)[268](index=268&type=chunk) [Changes in and Disagreements With Accountants on Accounting and Financial Disclosure](index=44&type=section&id=Item%209.%20Changes%20in%20and%20Disagreements%20With%20Accountants%20on%20Accounting%20and%20Financial%20Disclosure) There were no changes in or disagreements with accountants regarding accounting and financial disclosure - None[225](index=225&type=chunk) [Controls and Procedures](index=44&type=section&id=Item%209A.%20Controls%20and%20Procedures) Management concluded disclosure controls and internal control over financial reporting were effective as of December 31, 2022, a finding concurred by Ernst & Young LLP - Management concluded that disclosure controls and procedures were **effective** as of December 31, 2022[226](index=226&type=chunk) - Internal control over financial reporting, based on the COSO framework, was assessed as **effective** by management and confirmed by Ernst & Young LLP as of December 31, 2022[231](index=231&type=chunk)[232](index=232&type=chunk) - No material changes to internal control over financial reporting occurred during the fourth fiscal quarter[233](index=233&type=chunk) [Other Information](index=48&type=section&id=Item%209B.%20Other%20Information) Significant events include the **$400 million** new Arkansas manufacturing facility construction and the sale of the Trex Commercial segment for **$7.3 million** to focus on residential business - A third U.S.-based manufacturing facility is under construction in Little Rock, Arkansas, with an anticipated budget of approximately **$400 million**[245](index=245&type=chunk) - The Trex Commercial segment was sold on December 30, 2022, for net proceeds of **$7.3 million**, to focus on the core residential outdoor living business[246](index=246&type=chunk) Part III [Items 10-14](index=49&type=section&id=Items%2010-14) Information for Items 10-14, covering governance, compensation, and ownership, is incorporated by reference from the 2023 proxy statement - Information for Items 10-14, including Directors, Executive Officers, Corporate Governance, Executive Compensation, Security Ownership, Certain Relationships, and Principal Accounting Fees, is incorporated by reference from the 2023 proxy statement[248](index=248&type=chunk)[250](index=250&type=chunk)[251](index=251&type=chunk)[252](index=252&type=chunk)[253](index=253&type=chunk) Part IV [Exhibits and Financial Statement Schedules](index=50&type=section&id=Item%2015.%20Exhibits%20and%20Financial%20Statement%20Schedules) This section lists consolidated financial statements and exhibits, with financial statements incorporated by reference in Item 8, and a detailed index of all exhibits provided - Consolidated Financial Statements are listed here and incorporated by reference in Part II, Item 8[255](index=255&type=chunk) - A comprehensive index of all filed exhibits, including governance documents, material contracts, and certifications, is provided[256](index=256&type=chunk)[428](index=428&type=chunk)

INVESTOR PRESENTATION NYSE : TREX NYSE:TREX November 2022 SAFE HARBOR / NON-GAAP MEASURES This presentation contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements are subject to risks and uncertainties that could cause the Company's actual operating results to differ materially from those contemplated by the forward-looking statements. For further information on risk factors affecting the ...

INVESTOR PRESENTATION NYSE : TREX NYSE:TREX November 2022 SAFE HARBOR / NON-GAAP MEASURES This presentation contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements are subject to risks and uncertainties that could cause the Company's actual operating results to differ materially from those contemplated by the forward-looking statements. For further information on risk factors affecting the ...

Trex Company, Inc. (NYSE:TREX) Q3 2022 Earnings Conference Call October 31, 2022 5:00 PM ET Company Participants Viktoriia Nakhla - Investor Relations Bryan Fairbanks - President and CEO Dennis Schemm - Senior Vice President and CFO Amy Fernandez - Vice President, General Counsel Conference Call Participants Ryan Merkel - William Blair Joe Ahlersmeyer - Deutsche Bank Stanley Elliott - Stifel Spencer Kaufman - UBS Tim Wojs - Baird Jeff Stevenson - Loop Capital Trey Grooms - Stephens Reuben Garner - The Bench ...