Trex Company, Inc. Stock

Good afternoon, everyone. I'm Sue Maklari. I'm the housing analyst here at Goldman Sachs. And I'm joined this afternoon by Prith Gandhi, the CFO of Trex; and Zach Lauer, the Chief Operating Officer. Thank you both for joining us.

Thanks for having us.

Of course. So let's start with the near term and just talking about conditions a bit. Can you talk about how you would characterize the state of the industry today? And anything you're seeing in terms of just overall projects, anything in terms of sizes, sophistication and any bifurcation between higher and lower end consumers?

Yes. So when the year started and when we were looking at, kind of, setting up what we thought 2026 was going to be like, at the start of the year, we thought it was going to be another slow year with some potential recovery in the back half. And so that was the underpinning of our overall guidance at the start of the year. I mean as we went through the first quarter and then the second quarter, in particular, we did start to see a shift in some of the demand.

Some of this is deliberate kind of strategic moves made by us. One of the things that we sort of haven't focused on over the last 3 years is really that wood conversion part of our strategy, which is really core to our growth and our ability to move composite decking into wood. We really focused our efforts there. And we started to see, sort of, some good encouraging green shoots around that in Q2, which we talked about during earnings.

And so that led to us overall, kind of, increasing our guidance for the full year. We started the year with, sort of, low single-digit type net sales growth for the full year. We're now kind of guiding to more of a mid-single-digit type full year. And that's -- some of it is driven by that. The other piece is, I think we do -- we've been talking to all of you about there's pent-up demand in our markets, we've been saying it for 3 years. We're actually starting to, I think, see some of that come through finally.

And I think what's driving that is essentially the persistence of high interest rates, persistence of inflation, persistence of high home prices. It's really causing people's ability to move to really, sort of, be very constrained. And a number of homeowners are, sort of, making the decisions now to just say, look, we're just going to stay put in our home. And so then they look at, okay, if I'm going to be here for another 5, 10 years, but where are the areas of the home where I want to make some investment either to improve the quality of my life or make investments in the projects that I've been deferring for these last 2, 3 years because I thought I would move.

And what's interesting is, and we did a survey about this about a month ago, we published the results in one of our press releases, so you can have a look at that. We've surveyed about 2,000 homeowners across the country, different price points of homes and so forth. And one of the things that came out from that is, yes, as they've decided to stay put, one of the first places that rises up for investment is the kind of the outdoor living space because that allows them to enjoy their existing home more, like they spend time outside with their family, friends, barbecues, all that stuff.

So that's -- and the size and the dollar value of those projects is also lower than like doing a full kitchen remodeling and what have you. So some of these things came out in that survey. And then also, I think what's unique about the Trex brand is it pays back in kind of the value. And so homeowners, when they're selling their homes, they list the appliances they have, if they have the high-end appliances. If they have a Trex deck, you can be sure they list that in the listing as well. So I think some of that is starting to happen. It's only been a quarter. So we're not calling a trend as yet, but we just remain cautiously optimistic for the rest of the...

Yes. One of the other things that you talked about in the second quarter is that you saw some traction in the, sort of, lower-end price points on a relative basis. Can you talk about that a little?

Yes. So this was deliberate, we had CEO change earlier in the year. And Adam is someone who's been, sort of, focused on this. Over the last few years, our low-end price point, which -- our low-end products, which are Enhance and Basics, which typically sell against wood, we've really seen no growth in those categories. And so we really focused on driving growth there, and a lot of that was through promotional activity and the sort of the marketing efforts that we've also been talking about that we started ramping up about a year ago with focused campaigns around why composite versus wood, et cetera.

And so we started to see those things actually kind of come into play in the second quarter early. April was a tough month. I mean I hate to blame the weather, but it really was about that. And starting in May, we really started to see good traction from those investments in that activity.

Yes. The other thing that has come up in the last couple of months is obviously the shift in distribution that you've announced. Can you talk a little bit about what drove that decision? And maybe also how it aligns with the broader operating and strategic goals that you've outlined?

Yes. Good question. So just for those who are less familiar with Trex, so we made a decision -- we've had a long-term partnership with Boise Cascade, and we made the decision to shift away from them and have an exclusive national relationship with SBP, Specialty Building Products, which, again, for those of you who don't know them, they're a large -- within specialty building products distribution, they're one of the largest players. They're private equity owned, very -- growing very aggressively, both through acquisition as well as through greenfields and the likes.

So they're very well aligned with us in terms of their ambition for growth, their willingness to invest in leading brands and move them forward. And so from those perspectives, that's very aligned with our vision. And then the other thing we did with this change was we used to have a model where we had a strong national player or used to be Boise Cascade. And then we had a handful of really strong regional players. Then we kind of shifted to have even third players in some markets and kind of the things got a little more complex.

With this move, we also made the decision to go back to that model where we had one strong national distributor, that's SBP and then several strong regional players. So we added some new names like BlueLinx and Coastal and the others that we were already with. And so that's been the reason for making the change.

Strategically, we think this will enable us to grow faster, will enable us to kind of drive more of the contractor pull-through that we see and are in alignment with SBP. And then with the change comes an opportunity to -- there's probably about $100 million of business from smaller brands that will be up for grabs over the next couple of years because of these moves. And we think we are very well placed to get that.

Yes. Okay. One of the other parts of the growth story is Little Rock. And you have announced that you're going to get that to 50% capacity by year-end. You sort of have pulled forward, I think, the ramp of that facility. Can you talk a little bit about that, Zach and how that aligns with what's going on?

Yes. Certainly, we're excited about that. We've had -- with the market changes and the destocking, right? Originally, we had planned to launch decking in Little Rock back in 2025. With that slowdown, we pushed it out to 2027. But with what we've seen so far, we're excited that now we're pulling it in and we're ramping up that facility, and we have started to ramp up the decking capability there. We have been producing there for over a year on the recycling side.

So to kind of -- we dipped our toe in there, started with the upstream processes and now are into decking. But as a business, we've all kind of felt that heavy depreciation.

We built big shell there for the future. And so scaling growth now is not going to be as capitally intensive for us because we bit off and built those shells there, and we'll continue to benefit.

I mean Little Rock has allowed us also to make sure that it gets the best innovation. It gets the latest technology that we have at Trex. And then we also gain efficiencies in Little Rock. There was many reasons we chose Little Rock, and we've talked about this in the past, but the nearness of raw materials for us.

Also, it lowers our operating costs from the standpoint that when we only had bi-nodal manufacturing, we are pulling recycling and recycled materials from across the country. Now those don't have to travel as far to get to manufacturing. So we're excited about that, and we're excited about what that facility gives us for the future.

Yes. And one of the targets that you've set out there is getting to $2 billion by 2030 -- of revenue, $2 billion of revenue by 2030. Can you talk about the role of both new products and maybe also how production and Little Rock and your capacity there fits in with all of this as well?

Yes. I think as we look out to 2030 and to $2 billion, we see that not only coming from organic growth, but also mergers and acquisitions coming in the future that will help us get to there. But with it -- when Little Rock is at full capacity, we have enough capacity to do about $1.8 billion to $2 billion of core product. So it's a big step for us in that space, too. I was going to say, Prith, I don't know if you want to talk a little bit more about how like the $2 billion...

Yes. So I mean what we -- so round numbers, if you use our guidance, we say we'll end the year at like over $1.25 billion or thereabouts. So roughly $750 million of growth over the next 4 years, we'd say about $500 million will come from organic growth, $250 million from M&A. And just one thing on Zach's point. So Little Rock is a really big facility.

Again, for those who aren't as familiar with Trex here, our manufacturing process is a very modular process. So it's line by line. And so the building we have really doesn't -- isn't filled with lines today. To get to $2 billion, we would add lines over time, but that is not a very massive capital-intensive exercise. Each line is in the order of $10 million to $15 million. So just to clarify that point.

In terms of the growth, look, we see -- again, generally, our algorithm works as repair and remodel does whatever it does, typically decking grows 300 to 400 basis points above that. And then on top of that, we layer in the wood conversion story and some market share growth, and that's how you get to the mid- to high single digits growth organically. So that's sort of the algorithm.

In terms of the M&A, we're generally focused on things that are close to core because, again, we want to drive value if we're going to use capital for acquisitions versus I could -- we're doing a lot of share buybacks. We think that's a really good use of capital right now. For the M&A to win in that game, we have to drive real value. And the way we could do that is either we're buying things where we can use our assets to make those products, so think things like pergolas, sheds, furniture, et cetera, that uses extrusion technology and uses the types of materials we use today in our manufacturing or -- and/or there's channel synergies.

So we're selling through the same distribution, same dealers. Those things drive value. And so kind of when we're looking at M&A, that we really have that lens and then we look at it against, okay, if I look at this versus a buyback, what's going to win. The only other nuance here is that with M&A, we get growth. The share buybacks are great to drive the share price, but you don't get growth in new capabilities that give you future options. So that's the one sort of qualitative nuance that we always look at when we're looking at M&A.

Yes. And the other thing that you've talked about is composite decking overall getting to about half of the industry. In this kind of a housing environment in a macro, is that still a realistic goal? And what drives that expectation?

Yes. So again, this is getting to 50% over time. Today, we're at 25%. About 10 years ago, we were 16%, 17%. So over time, I think, number one, it's the performance characteristics of the product. You get a lot more for spending a little bit more money. Like if you look at the cost of putting up a deck, and we have these things in our investor materials, again, for those who aren't as familiar.

The cost of materials in a decking job is about 1/3 of the cost, and the rest is labor and everything else.

And so for really not so much more money if you -- you get a lot more performance. You don't have to maintain things as much. You don't have the rotting and things that you have with wood. So that's really the big value proposition there around the performance characteristics of the product and its longevity.

And I think over time, the things we're working on and Zach can talk about this, we work on productivity. We work on things to drive the cost down, so we can keep that -- our goal is to try to bring the differential between pressure-treated wood and the lower end side of our products to as narrow as possible so that you can actually then convert the customer. And I don't know, Zach, if you want to add anything.

Yes. I mean, certainly, at Trex, we've had a strong history of driving productivity. It's part of our DNA. Our operating model hasn't changed, and that's been based on kind of 7 key pillars that we focus on. And within there, we're just using industry-proven methodologies and tools within those pillars. And for us, we're a heavy manufacturer, right? Over 90% about what we sell is made in our own factories. And so safety is a big pillar for us; quality; maintenance, certainly, as a heavy industrial manufacturer, but people leadership is one of those pillars; initiative management; continuous improvement and workforce empowerment.

And that's kind of -- when you go into Trex facilities, everybody kind of bleeds green because of our focus on our people from that perspective. But we've also done a very good job within there of driving a lot of automation. And when we think of automation in manufacturing, most people want to think about just what we're doing to take away like steps that maybe a human had done before, right, as labor gets more and more competitive. But we've spent a lot of time over the last 7 years, really, in that machine learning, generative AI space for us, which we think is going to continue to drive dividends for us as we move forward.

And so, we continue to modernize our manufacturing. And when we think of innovation, only one part of that is product innovation, the other is process and material innovation as well. And so...

Yes. So it's really the reason we think we'll get to that 50% is the product performance and then bringing it to the consumer at a value that makes the conversion decision easy for them.

Yes. No, absolutely. Can you also, within that, maybe talk a bit about the digital initiative that you also have going on? You've been really focused on digital and the marketing side of things.

Yes. So a couple of things there. I think where we've -- I mean we're doing things on manufacturing that I'll let Zach speak to. But in terms of the customer-facing side of things, what we're trying to do is make it easy for end users, easier for end users to make the Trex choice. So we've created a new AI-enabled app on our website where so far, we've just introduced it in a couple of areas, just we're still in the testing mode.

But it's really for someone to build a deck visually and virtually using AI. And then with the click of a button, they can, sort of, get connected to the local dealer or Home Depot or whatever and, sort of, look at the list of products they would need and then find the contractors in the area that, that they could work with.

So we're doing things like that. We're also looking at doing things for the contractors themselves with apps and so forth that makes it, again, easy for them to do business with us, right? So they got a job and there's a bill of materials that they need, they can easily send the order to the dealer, get their rebate from Trex, like all those kinds of things, that matters because that saves them time, that allows them to kind of do jobs faster and gain more productivity. And so those are some of the things that we're looking at in terms of like improving the digital experience, both for the end user, but then also for our installers.

Yes. And then maybe with all this, too, thinking a little bit about what it means for the path for margins, right? You've talked about $100 million of incremental revenue equating to 100 basis points of gross margin. Can you just talk a bit about the ability to deliver on that, the expected ramp and the timing?

Yes. So again, that -- there are some assumptions in all that, right? One of it is kind of that's at the current product mix with the current manufacturing footprint and so forth. But again, I think under those circumstances, as our utilization increases, it's really about that. With -- as our sort of capacity utilization increases with every $100 million of revenue, we're able to generate about 100 basis points of margins.

We haven't given guidance for '27, '28, et cetera. So we'll see kind of when that comes. But this year, we have headwinds because of the depreciation from Little Rock, from the start-up of Little Rock. And then we still have railing growing faster than decking and railing is -- has margins that are lower than our consolidated margin. So those are some of the things that have near-term headwinds. But over time, as we utilize the assets harder and drive more volume, we'll be able to deliver on that.

Yes. And railing is something that we've seen has really been part of the story recently in the last couple of years. Can you talk about the growth that you're seeing there? And when does that perhaps get to a point where it's a more meaningful addition to the total business?

Yes. So look, it's -- I think what we've said, we're about 7% market share in a category that's $3.5 billion to $4 billion in size. So that's roughly where it is today. It's growing double digits, and we see that growth in the years to come. I think when we did -- the last time we did an Investor Day, I think it was in 2023, I think we said we wanted to double the business by 2028 at that time. So we're on track to do that. And we continue to see growth there because I think what not everyone appreciates is we have the -- at 7% market share, we're the biggest player in this space.

It's very fragmented. And we have a very broad portfolio in composite-based railing, in metals and what have you. And that allows us, our railing products to be on lots of other people's decking boards. And so that's the thing that drives attachment and that continues to increase. And so that's where we -- why we see that area to continue to grow in the foreseeable future.

Yes. And I guess, Prith -- I'm sorry, Zach, that also sort of lends us to how you think about the products or the processes that you can take internally over time? And what is the optimal sort of mix there? How do you think about that?

So I mean for us, they're both extrusion technologies. They're just different types of extrusion material sets that we use in. But because railing is a faster-growing part of our portfolio, it's a high focus for us to continue to improve the margin structure in that business. And what we've done well at Trex in that space, and we'll continue to do as we talk about mergers and acquisitions is to vertically integrate. And at Trex, when I first came there, we didn't make our own shell for decking. We vertically integrated in that space.

We didn't make our own railing material. We vertically integrated into that space, into that compounding. And we've recently made another acquisition in the railing space to take in another portion of that. And so we see the opportunities in railing there, both through vertical integration. But now that we own the components of making the materials sets that go into our railing, it pays dividends because now we control the recipe, we can innovate on the recipe. We can change the recipe based on different material costs of the commodities coming in, and we can continue to innovate off that, much like we've done in our history in decking and coming up with new materials in that space. So that's -- we see that stream continuing to build, and that's how we see us getting there in the railing space.

Yes. One of the other things that you've been known for is integrating dirtier, more industrial sort of, I guess, I would say, plastics and waste materials into your process. Can you talk about that and where you are in that process -- in that...?

Sure. I mean certainly, when we see more and more people wanting to enter into the recycling space to not be as susceptible to changes in pricing and markets and those types of things, we've continued to innovate in the ability to clean those material streams and use dirtier and dirtier streams. And when we say that, there's all sorts of contamination that can come in with recycled materials, other plastics, paper, metals. Well, we can't process metals. So those got to come out.

But other plastics and other materials can be used in our feed stream, and we have the capability to do that. But we're also -- we've always looked at the next generation of materials, and we're already using the next generation of materials in our decking of a waste stream that people aren't using today, and that's continuing to where we look so that we can always have that cost position opportunity...

Yes. And at Little Rock, I think you've also really kind of focused on the recycling part and the raw materials. Can you talk about how that fits into it?

Yes. So the nice thing that Little Rock has allowed us to do is to bring our latest and greatest technology on the recycling piece there and at rates that are really excellent for us. But those new processes have allowed us to enter into bringing into new materials into our deckboards that we haven't used in the past.

So the technology that we've layered into Little Rock allows us to bring in not only more, I would say, more contaminated streams of polyethylene that are contaminated with other types of plastics, but it also allows us to bring in our next-gen material at higher rates than we've ever been able to at our older sites. So that helps us from that perspective there.

The other thing is it's one thing to build a site and bring in your latest technology, but the value stream we're allowed to create on Little Rock because we have over 300 contiguous acres, there's no material handling like we have amongst our other sites. So we can transfer materials pneumatically or convey them, where in the past at our other sites because they're modular and they're spread all over as we've grown, we're trucking those materials in between sites. And in Little Rock, we don't have to do that. We've been able to create the value stream. So the recycling plant -- the polyethylene stream is attached to the recycling plant and the recycling plant pumps directly over to the decking plant with no intervention.

Yes. And then just one other, I mean the location of Little Rock for -- the filler in our products is waste wood. So a very good location to have access to waste wood. So the freighting, et cetera, for all those materials is a lot lower in the Little Rock facility. So that, again, back to the cost position is very helpful.

Yes, it's impressive because I've seen your Virginia facilities, and they're very efficient. So this is very, very exciting. How over time, do you think about balancing productions between the 3 locations that you have?

Yes. I think one of the things that we've always tried to do and why we've kind of started and stopped on the Little Rock is we've always wanted to bring up Little Rock as the capacity was there, right, meaning that as our business grew, we would bring that capacity on with little impact to both the West Coast and the East Coast site. And so we plan to fill the growth in our business through the Little Rock site.

What it will change over time is where our customers get their product from. And certainly, through our productivity over the years, we've turned off and turned on lines and sites based on the volume because we know exactly how much it costs us to run each one of our production lines or our facilities.

But over time, what you'll see as the business continues to build and grow organically, the places that get shipped to will change for our customer, which is a benefit to them, too, because they pay the outbound freight from that perspective. So it's good for them. But for us, we're just going to fill that site with our growth and then shift to the center part of the country.

Yes. How do you also think about the implications of all of these initiatives going on across the business in terms of the working capital and your ability to be any more efficient there?

Yes. Good question, Sue. So we -- overall, we've been sort of working with a level-loaded production sort of way of working. What we've seen over the last 2, 3 years with sort of first, the big surge in demand at COVID, then the destocking and all that, what we've seen is the channel has been sort of carrying less inventory. We've been carrying more. As a result, that's had some impact on working capital, but it's not significant.

I think going forward, what we see is potentially, if they stay lean in inventory and demand picks up, they're going to have to either do 1 of 2 things, either turns are going to increase, which will help our working capital efficiency or they're going to go back, I used to be at Beacon, they go back to sort of the 90 to 120 days of inventory heading into the kind of busy season so that they don't miss sales.

So both those things would help us with working capital. The other thing, I mean, we're looking at stuff. It's early days in finance around sort of technologies and AI and stuff to improve our payables and those types of things. On the receivables side, it's hard to move, especially the retail centers in terms of terms and so forth. So it's not a great amount of opportunity on the receivables side, but certainly on the payables, we'll look at opportunities to kind of improve there and drive more cash flow...

Yes. And maybe sticking with cash flow, can you talk also a bit about CapEx, right? We're coming off of sort of a big CapEx investment. Where -- what is normalized in there?

Yes, great question. So just again, for those who aren't as familiar with us. So last -- we took the last 5 years roughly to build out the Arkansas facility, total cost of capital around $500 million. Last 2 years is when we did the bulk of that spending, '24 or '25, we spent about $250 million in CapEx. This year, that's down to, call it, $100 million to $120 million.

And then next year, we think and going forward, kind of our maintenance and productivity CapEx is about 5% to 6% of sales. So that's what you should expect going forward. So at our current sales, I think $50 million to $60 million a year in terms of where CapEx would be. So structurally, the significant increase -- should be a significant increase in free cash flow.

Yes. Okay. We've got a couple of minutes. Let's see if there's any questions from the audience. I have more, if not. Does anyone have a question? No. Okay. Well, one of the things that you mentioned is M&A. Can you talk about what an ideal M&A candidate looks like for Trex and how we should think about the upstream versus downstream opportunities?

Yes. So I think we touched on some of these. There's 3 areas we're focused on. So one, bigger picture, we're looking at more sort of bolt-on, smaller tuck-in types of acquisitions. So from a size perspective, think that. In terms of areas, we've talked about 3 areas. One being vertical integration, that doesn't drive the top line, but that drives cost improvements and margin enhancement and so forth. So that's one area. Those are generally very small deals, I think less than $50 million, typically, in terms of transaction size.

The next place is really sort of the outdoor living area, right? So everything from our backdoor to our fence, I think all of that is in scope because the Trex brand plays very well in that whole area. But then as I said, the thing that I look at, I got a choice with the capital. I can either invest it in the business. That's always number one. Number two is I could buy back shares. Number three is doing M&A.

And so for the M&A to drive -- it has to drive value relative to the share buybacks because right now, relative to our long-term EBITDA multiple, we're trading at a significant discount. So it's a really high bar for the M&A to make it through. And so in order for that to happen back to the ideal profile, it's going to be something that we can either use our existing assets to make and/or we can sell through our existing channels because that's how you'll drive the most value.

If we're going to go into something like totally different, then at least one of those things is not going to be true. And then, okay, depending on what you pay, then you're probably not going to deliver the kind of right amount of ROI, that especially when you look at it against share buybacks. So it's kind of that's how we're thinking about it. So those are really the ways we're looking at M&A. And certainly, the third piece is the sort of building envelope, and that's trim, siding and so forth. But that's further afield.

Yes. How do you think about the optimal leverage for the business in all this?

Yes, good question. So we generally -- I like to run the business kind of between 1x and 2x. At our size, I think, and given the seasonality and cyclicality of the business, I think that's a very safe and comfortable level. Now for a really strategic acquisition, could we stretch a little bit beyond that? Sure. But then the first priority would be to deleverage and come back between the 1x to 2x. So that's generally where I'm comfortable running the business in terms of leverage.

Okay. Well, we're right at time. So we'll end it there perfect.

Okay. Thanks, everyone.

Thank you.

Good day, and welcome to the Trex Company Second Quarter 2026 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the conference over to Lee Coker, Vice President, Corporate Development and Investor Relations. Please go ahead.

Good morning, everyone, and thank you for joining us today to discuss our second quarter results and outlook. With us on the call are Adam Zambanini, President and Chief Executive Officer; and Prith Gandhi, Senior Vice President and Chief Financial Officer.

The company issued a press release earlier this morning containing financial results for the second quarter 2026, a copy of which is available on the company's website. This conference call is also being webcast and will be available on the Investor Relations page of the company's website for 30 days. Before we begin, let me remind everyone that statements on this call regarding the company's expected future performance and conditions constitute forward-looking statements within the meaning of federal securities laws. These statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those expressed in the forward-looking statements.

For a discussion of such risks and uncertainties, please see our most recent Form 10-K and Form 10-Q as well as our other filings with the SEC. Additionally, non-GAAP financial measures will be referenced in this call. A reconciliation of these measures to the comparable GAAP financial measure can be found in our earnings press release at trex.com. The company expressly disclaims any obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

I will now turn the call over to Adam. Adam?

Thank you, Lee, and good morning, everyone. As Lee mentioned, we pre-released our second quarter net sales and adjusted EBITDA results earlier this month, so I won't spend much time recapping the numbers. The key takeaway is straightforward. We delivered an excellent quarter with net sales well above expectations, driven by strong execution and strengthening of end market demand. Importantly, that growth was broad-based across our product portfolio, channels and price points.

We are particularly encouraged by the momentum we saw as the quarter progressed. Demand accelerated through May and June, supported by strong sell-through activity across the portfolio, and those trends have continued into the third quarter. That performance, combined with our strong execution and improved visibility gave us the confidence to raise our full year guidance and increase our planned share repurchases for the remainder of the year. We also generated strong free cash flow during the quarter, allowing us to reduce debt and return capital to shareholders through share repurchases.

Reflecting our confidence in both the business and our long-term outlook, we plan to repurchase up to an additional $150 million of shares during the balance of the year. While our sales performance was exceptionally strong, profitability reflected the pace at which demand accelerated during the quarter, along with several strategic choices that supported our long-term growth objectives. First, growth was particularly strong in railing and our entry-level decking products. We view this as a positive development, underscoring the growing consumer engagement across the product portfolio and successful execution of our wood conversion strategy.

Although the mix moderated consolidated gross margin, it meaningfully accelerated revenue growth and enhances the scale of our long-term value creation opportunity. Second, we continued investing in branding, talent and organizational capabilities consistent with our strategy and our expectation to spend approximately 18% of sales on SG&A this year. These investments are intended to strengthen our competitive position and support sustained growth over time. Finally, demand strengthened significantly as the quarter progressed.

To support that growth and ensure excellent customer service, we increased production levels throughout the quarter. That created some short-term manufacturing inefficiencies, but utilization improved steadily and production performance returned to expected levels by the end of June. Taken together, we are very encouraged by these dynamics and what they tell us about our business. Stronger demand, continued gains in key growth categories and disciplined investment in our strategic priorities reinforce our confidence in both our near-term outlook and our long-term growth potential.

Overall, we are pleased with our first half performance and increasingly confident in the opportunities ahead. Our strong results, improving demand trends and progress against our strategic priorities reinforce our belief that we are well positioned to achieve our long-term objective of $2 billion in annual sales by 2030. One of the priorities is to optimize our channels for growth. As we recently announced, we have taken decisive steps to further strengthen what we believe is the industry's leading distribution network in North America, ensuring that our products remain readily available to both pro contractors and homeowners.

While we discussed these changes during our July call, I want to spend a few minutes reiterating some key points. This is not simply a response to tremendous changes in the broader building products industry. It was a proactive decision designed to position Trex where the industry and the market are headed and to support our long-term growth objectives. I have full confidence in our distribution network we have assembled, built on relationships with companies that share our commitment to growth, innovation and customer service.

Importantly, these actions create a meaningful incremental growth opportunity. Across our distribution network, we estimate there is more than $100 million of decking and railing currently represented by small tertiary brands, representing a substantial conversion opportunity as we continue to win, share and transition customers to our brand. While this opportunity will take time to develop, we believe the strength of the Trex brand, our product portfolio and our channel partnerships position us well to capture a meaningful share of that business over time.

Ultimately, these actions are about building a distribution network that is simpler, faster and more effective, enabling us to execute our strategy and achieve our long-term financial goals. Another decisive step we are taking, which I'm pleased to announce, is the acceleration of the decking production at our Little Rock manufacturing facility. Little Rock is strategically located near key raw material sources, large residential markets like Texas, a strong pool of skilled labor and a major transportation hub, which will help optimize freight costs for the customers in the Central U.S. who are currently being serviced by our existing facilities in Virginia and Nevada.

Equally important, this location positions us closer to several key growth markets for wood conversion, particularly in the Southern Sunbelt. The Sunbelt region remains heavily weighted towards wood decking, specifically pressure-treated Southern Yellow Pine, representing a significant conversion opportunity for Trex. Given these factors, Little Rock is poised to become our wood conversion growth engine. Together with this decking capacity expansion, we have been actively investing in our wood conversion strategy through refreshed branding and marketing initiatives.

These efforts are already gaining traction with our Trex enhanced basic decking products our primary driver towards wood conversion, also delivering strong sales during the quarter. The opportunity remains substantial. Wood continues to represent almost 75% of the decking category with Southern Yellow Pine accounting for the majority of the wood decking sales. As a reminder, every 1% share we take from wood represents about $80 million of incremental sales opportunity for Trex.

With the performance attributes of Trex Enhanced product line, we believe that we have one of the best solutions in the market to accelerate this conversion opportunity, and we will not stop there. We will continue leveraging our world-class material science capabilities to develop innovative, high-performing and more cost-effective products that further expand the opportunity ahead.

I'll now turn it over to Prith, who will provide you more detail on the quarter and our outlook. Prith?

Thank you, Adam, and good morning, everyone. Unless otherwise noted, all comparisons are on a year-over-year basis. Second quarter net sales of $418 million came in well above our expectations, growing 8%. Importantly, Q2 sell-out was slightly ahead of sell-in, reflecting strong underlying demand and healthy consumer engagement across our channels. On a rolling 12-month basis, sell-in and sell-out grew 9% and 7%, respectively, compared with 7% and 6% in the first quarter.

The difference primarily reflects timing effects within the trailing 12-month period rather than any meaningful divergence in underlying demand trends. As Adam mentioned, our sales growth this quarter was broad-based as we experienced strength across product lines, distributors and price points. Railing sales returned to double-digit growth, while we also saw a nice increase in Trex enhanced basic sales, the first meaningful sales increase we've seen at this price point in a few years. As Adam mentioned, the basics product line is our primary vehicle for wood conversion.

Our growth was also largely driven by volume with minimal impact from pricing actions. Importantly, the increase in sales was supported by underlying end market demand with strong sell-through across the portfolio. As I will discuss in more detail, we also saw a meaningful acceleration in demand in the latter part of the quarter, a trend that has continued into the current period. This momentum, combined with our strong execution, give us the confidence to recently raise our 2026 guidance.

Gross profit was $158 million, with gross margin of 37.9%, down from the levels seen in the first quarter and prior year. As expected, gross margin was impacted by product mix and incremental depreciation associated with our Little Rock facility. Gross margin was also affected by short-term manufacturing inefficiencies as we responded to strengthening demand during the quarter.

As demand accelerated through May and June, we increased production levels to support customer needs and maintain channel inventories at appropriate levels. The pace of that ramp resulted in higher overtime costs, additional line changeovers and other temporary operating inefficiencies, which we estimate reduced gross margin by more than 100 basis points during the quarter. Importantly, these impacts moderated as utilization improved.

We exited June operating at significantly higher efficiency levels and with gross margins well above the overall second quarter average. We expect those improvements to continue as we move through the remainder of the year. GAAP SG&A expenses were $67 million, representing 16.1% of net sales, in line with our expectations and tracking to our annual target of 18% of sales. Excluding the impact of digital transformation and Little Rock start-up costs, SG&A was $66 million.

We continue to invest in capabilities and marketing programs to accelerate consumer demand and drive long-term growth, and we believe we are already seeing the benefits through higher sales. I also want to call out that the company took a $5 million noncash write-down for obsolete equipment during the quarter that you will see on the P&L. We removed this expense from our adjusted EBITDA, which was $112 million, but did not remove it from our adjusted diluted EPS of $0.62, which had a negative impact of $0.03. We had a very strong quarter of free cash flow, reflecting the seasonal benefit of working capital and lower capital expenditures as the construction of the Little Rock facility approaches completion.

We used the $182 million generated to repurchase approximately $51 million of shares and repaid $130 million outstanding under our revolving credit facility. And we will continue to generate significant free cash flow with the completion of our multiyear capital expansion program, including the Little Rock facility. This will give us the flexibility to pursue capital allocation priorities, including additional share repurchases and selective M&A opportunities. As part of this strategy, we plan to repurchase up to an additional $150 million of shares during the remainder of 2026, underscoring the company's confidence in its outlook and commitment to creating long-term shareholder value.

Turning to our outlook. We recently increased our full year 2026 net sales and adjusted EBITDA guidance given our strong year-to-date performance and through confidence in our disciplined execution and strengthening consumer demand. We now expect full year adjusted gross margin to come in at approximately 38%, up from the 37.5% we previously expected, primarily driven by higher capacity utilization with Little Rock starting production in Q3.

We are also providing third quarter net sales guidance of $305 million to $320 million, as shown in the press release. Before turning the call back to Adam, I want to discuss our decision to accelerate the ramp-up of the Little Rock facility by over 6 months. This decision is backed by the increased demand that we are seeing because of the successful execution of our strategic plan. As we have discussed in the past, Little Rock will be our most efficient and lowest production cost plant. Once these lines are fully ramped and operating at higher utilization levels, we expect them to become accretive to margins. We anticipate bringing half of the Little Rock lines into production by the end of the year.

Because we are bringing on individual lines in a phased manner, most of the margin benefit will be realized in 2027 and beyond as we continue to scale capacity to support demand and our long-term goal of achieving $2 billion in annual sales by 2030. This accelerated rollout is not expected to have a material impact on our expected depreciation as we already began depreciating our lines when we made them production ready. We will provide additional details on the financial impact of Little Rock as we progress through the ramp-up period.

I will now turn the call back to Adam for his closing remarks. Adam?

Thank you, Prith. We believe we are already seeing the early benefits of the decisive strategic actions we have begun to take, and we expect this momentum to continue building as we execute on our upgraded distribution program, ramp-up of our best-in-class Little Rock manufacturing facility and accelerate new product introductions by leveraging our industry-leading material science capabilities. The Trex organization is energized, aligned and focused on achieving our long-term goal of $2 billion in annual sales by 2030.

Before we close, I want to take a moment to recognize our people. Their commitment, discipline and relentless focus on our customers remain the foundation of our success. The progress we discussed today is a direct result of their efforts, and they remain committed to executing our strategy and delivering long-term value. We believe when our people succeed, our shareholders succeed.

Operator, we would like to open the call for questions.

[Operator Instructions] The first question today comes from John Lovallo with UBS.

The first one is, what do you attribute the pickup in demand to throughout the quarter, particularly at the lower price points, given ongoing geopolitical uncertainty and challenged consumer confidence?

Yes. When we laid out with this new management team, what we were going to do, it was going to be no excuses. So we weren't going to look back and worry about where the repair and remodeling market was at. So when we laid out our strategic plan, we've heavily invested back again in marketing, targeting all segments. I don't think Trex is any longer participating in a K-shaped economy.

We actually did see that entry-level consumer come back to Trex because now we are focused on the wood conversion, which we haven't focused on since prior to the COVID. We've also beefened up and strengthened up our sales programming over time, and that has also won us some share back. So the great thing what I'm seeing at Trex right now is every level consumer good, better, best is participating in all categories.

And Trex hasn't seen that in almost 4 years where we've been kind of missing that entry level. And the #1 opportunity for Trex is that conversion from what as we've said, that 1% share away from what is $80 million of revenue for us. So we're pretty laser-focused on that right now.

Okay. That's encouraging. And then the 2030 revenue target of $2 billion implies about an 11% CAGR. Can you just help us with the building blocks of this target and what your level of confidence in achieving it is?

Yes. So there's still a high level of organic growth there. What I've been telling people is as you're looking at about at least at a minimum 2/3 organic growth and then about 1/3 M&A as we look out on that longer term.

Now that we've got the wood market share in terms of that's moving in the right direction, I feel very comfortable with where we're at there because it's not just bringing that entry-level consumer in, but it's also getting them to trade up into the other categories. And I think it has a halo effect, not just on decking, but on railing, on fasteners and a multitude of categories that Trex sales.

The next question comes from Susan Maklari with Goldman Sachs.

My first question is on balancing between the sales growth relative to the profitability of the business. As you target that $2 billion of sales, but you think about some of the benefits that you've talked about in terms of the margins as Little Rock ramps and utilization rates come up, how should we think about the puts and takes between those 2? And what it will mean for the path for margins?

Yes. So, as we've said in the past, for like every $100 million of revenue roughly generates about an additional 100 basis points in gross margin. So like that's the way to think about it overall when you're looking kind of longer term like that.

Yes. So I mean, when you look at, there's a pretty heavy investment. We're a capital-intensive business. We need to fill these assets, fill the plants, and that's been my #1 goal from day 1. And then as we start to think about M&A longer term, we're focused on EBITDA dollars and return on invested capital. So I think there has been a little bit of a strategic shift from where Trex is headed in terms of how we're going to grow and how we're going to expand.

Okay. All right. That's helpful. And then you called out the investments that you're making in branding and talent there. I guess as you think about the marketing initiatives that you implemented in the first half of this year, how did you think that compared to your expectations? Are there tweaks that we should expect going forward? And can you talk about how that all comes in with the digital initiatives that you're also focused on?

Yes. So this is really the second year into us making a heavier investment in marketing. But when it comes to our campaign performance engineered for your Life Outdoors, I think it's definitely exceeded our expectations in terms of where we were heading and what we are doing. We've seen Trex now has a stake when it comes to fire applications, when it comes to marine applications, when it comes to suncomfortable heat mitigation technology. We're pretty much one of the leading brands there.

So when I look at what's happening at all different tiers in all segments, we're winning that consumer over. But not just the consumer, there's also been a heavier investment at Trex on the contractor piece. And I think we've needed to strengthen that over the last several years, and we're seeing a bunch of contractors move towards Trex as well. So I feel really good about the campaign, and we're only in year # 2. Generally, when you start to look at marketing and marketing spend, that builds over time. And so we haven't even got to the point where I think we're at the optimal levels of where marketing can go. And I think that would be in year 3, which is next year.

The next question comes from Ryan Merkel with William Blair.

First topic is cadence. And it looks like 3Q, the revenue growth year-over-year is pretty strong and then it decelerates a bit year-over-year in 4Q. Just talk about what some of the drivers are? And are there any stocking and fill-in benefits in 3Q?

Yes. Ryan, it's Prith. Thanks for the question. So look, as I mentioned in my prepared remarks, we had really solid growth in Q2, and that's largely driven by improving end market demand, some new retail store placements and then sell-through from distribution that was a bit ahead of our sell-in. Those trends continued into July.

So on the distribution upgrades that you asked about load-ins and all that, yes, there is some initial new ordering from some of the new partners like Coastal, BlueLinx, et cetera. But I'd frame that as a modest tailwind, not the primary driver. The bigger picture is that demand is still being supported by underlying consumption. And many of those orders that are coming from the new distributors are just replacing what Boise would have carried. So overall, I expect a small benefit in Q3 from the transition, but not something that fully explains the year-over-year growth.

Got it. All right. That's helpful. And then just back to the enhanced, it's great to see the entry level is doing better. What exactly is working in the marketing spend there? And I assume you expect that will continue in the next couple of quarters?

Ryan, I'm not going to give you everything. Our competition is listening in on this call. But what I will tell you is that on the marketing side, we've done some really neat things in terms of advertising for the conversion from wood, and we've been testing different variables as well in that product portfolio. So I think it's very encouraging. We're in the infancy stage of where we can be and how we can grow from the wood conversion perspective, and it makes me feel really comfortable and confident as we move forward with our strategy.

The next question comes from Trevor Allinson with Wolfe Research.

You guys mentioned when you announced the distribution changes that you now have a pricing group setting when it makes sense to take price and a lot of value-added more consolidated industries tend to take annual price increases. Is that something that's contemplated in your 2030 $2 billion revenue guidance, some annual price increases to go along with some of the market growth?

I think there will be some pricing along the way. We don't look at it like siding and trim companies do, which is annual price increases. We look at it from a consumer demand perspective and where we can take targeted price increases along the way.

Trex has a lot of operating leverage. The more we fill those plants, the more absorption we get, the lower our cost of goods get, the more we expand margin over time. So from that perspective, there will be some mix of pricing through 2030, but we don't look at it as it has to absolutely be an annual price increase every single year up to that.

Yes. Trevor, this is like from a long-term planning perspective, yes, we expect a little bit of benefit from pricing, but largely pricing is to offset inflation. So that's kind of how we look at it long term.

Okay. Makes sense. And then second question is just a follow-up on the full year revenue guide, specifically the implied 4Q revenue guide. It seems like if I'm doing the math correctly, the midpoint would imply flat to down revenue year-over-year in 4Q, but you talked pretty clearly here about demand accelerating. You're bringing Arkansas on, which would suggest that you expect demand to continue to be strong.

Can you square what seems to be implied in that 4Q number versus what you're actually seeing in the market? Is that just conservatism? Or what's driving that?

Yes. Look, I'd say there is conservatism. We still have the geopolitical uncertainties out there. And so we do want to take that into account. Things can change on a dime as we see every day in the headlines. So certainly, that is part of our thinking. But yes, overall, if the demand trends continue, it's possible that we have some upside.

The next question comes from Trey Grooms with Stephens.

I guess the first thing is if you're looking at the -- in the slide deck, and I think you've talked about some of this before, you've talked about or you kind of highlight $100 million in revenue that we talked about earlier that there's going to be some margin expansion associated with that and some leverage on SG&A.

Can you talk about how you see kind of SG&A trending over as you're looking at that path to 2030? I know we're running at that 18% kind of range, but any way to think about leverage there as we look over the next few years?

Yes, Trey, thanks for the question. So I think we've said this before, yes, this year, we're targeting about 18% SG&A on a GAAP basis and 17.5% adjusted. But over time, we do -- we will continue to invest in marketing, sales and innovation in line with the top line growth. But we do expect the other parts of SG&A to leverage. And so we'd say over time, anywhere from 10 to 50 basis points is sort of the leverage you would expect from SG&A.

Got it. Okay. Perfect. And then kind of sticking with margins, railing, you've targeted 500 basis points of gross margin improvement there over the next 3 years or so. Can you talk about how that -- what that -- is that pretty linear? Is there step functions there? Or just any way for us to kind of think about how that railing margin improvement kind of rolls through over the next few years?

Yes. It would be nice if it was linear, but I do think there are step functions on some of the things that we want to do from a vertical integration perspective. And so there are some things that we have on track right now today, but those will hit over the next 2 or 3 years over time, and then you'll start to see some step function changes as those are executed over time. So we do have that over the 5 years and what those changes look like internal to Trex, but we've not provided those.

Next question comes from Tim Wojs with Baird.

Nice job. Maybe just thinking about bringing on the Little Rock lines. It sounds like -- I mean, obviously, the D&A is already in the margin numbers. Are there any other kind of costs that are coming through the P&L? Or as you start running revenue over that line out of those lines, would you expect those to become pretty profitable pretty quickly?

Yes, it's more of the latter. Look, we are going to have some start-up costs and so forth that we will adjust out. We adjusted a little bit out here in Q2 as well. But yes, once we start producing and kind of delivering revenue from the plant, yes, it will start to offset both the depreciation and noncash costs, but also the ongoing operating costs in the plant.

Okay. And then is there any way, Prith, you could put a finer point on kind of the gross margin expectations for the third quarter, just given some of the higher costs in Q2 and the exit rate you talked about?

Yes. So maybe if we kind of look at -- let's look at gross margin sequentially from Q2 to Q3, okay? And so if you go back to 2025, we saw like our gross margin declined about 30 basis points from Q2 to Q3 and 2025 on sales that declined about $103 million quarter-to-quarter.

If we look at this year, what we're seeing is that at the midpoint of our guidance, revenue will be down about $105 million Q2 to Q3. And so we would expect gross margins to decline similar about 30 to 40 basis points Q2 to Q3.

Sequentially?

Yes, sequentially.

So kind of mid- kind of 37% is what you would think about for the third quarter?

Yes.

The next question comes from Matthew Bouley with Barclays.

I think you said at the top that there was a $100 million opportunity with some of these tertiary players in decking and railing. So question is, if you sort of look back kind of where would that number have been, let's say, a year or 2 ago? Kind of how much of the top line growth this year, would you say is due to that kind of gain from tertiary players and these retail placements and so forth? Obviously, with the question being kind of what's sort of the further runway to really getting after that number going forward?

Yes. A very small amount has come away from tertiary players to date, but that will have a decent amount of magnitude over the next 2 years. So when we look at the distribution changes and those distributors and who they've moved away from, in many cases, those are tertiary brands on decking and railing. And I can tell you, within 3 weeks, just distributor without even having the inventory on the ground converted 6 dealers immediately over from a tertiary brand over to Trex.

So when we think about the opportunity, we think it's -- there's a lot of upside there over the next 2 years in the $100 million that's out there in the tertiary brand. So that's something that's going to definitely help fuel the growth.

Okay. Got it. And then on the new capacity, I think you had mentioned a couple of quarters ago, maybe around sort of the size of the market opportunity, a little bit different than what you thought it was when you initially invested in it. So the question is, is sort of where is your overall capacity utilization today?

And would it be making sense to be rationalizing other capacity across the network if you are going to be shifting capacity towards Arkansas or not? And so just how does that kind of overall utilization then play out into how you think about the gross margins going forward?

Yes. It's Prith. So listen, in terms of turning on the lines in Little Rock this year, it's all incremental. It's based on the outlook that we're seeing and the end market demand that we're seeing. And it's -- so that's sort of how we think about it for the balance of this year.

Now going forward, look, we always look at what we think the macro and demand outlook is for the year. And certainly, these will be our best cost lines. And so yes, we'll absolutely always look at do we need to optimize capacity in the lines in Winchester or Nevada. So that's something that we always look at on an ongoing basis.

Remember, when it comes to Little Rock, we also have the infrastructure already built in the building. So when we want to expand over time, we just have to drop the lines in there. So expansion is much easier moving forward over time in Little Rock.

The next question comes from Phil Ng with Jefferies.

With Little Rock coming up, I mean, obviously puts you in a better spot from a cost standpoint. Adam, you highlighted filling that capacity, potentially taking some share from some of these tertiary brands. Like how should we think about that impact over time in terms of margins, right? Is there enough on the productivity side where your margins should continue to power higher?

I think Prith talked about $100 million translates to 100 basis points of gross margin. So I just want to kind of tease out as you kind of fill Little Rock and picking up some of these tertiary brand share gains, does that have any meaningful impact when we think about margins going forward?

Yes. So margins over time will expand as we continue filling up those assets. So as we look at Little Rock and the depreciation there and what we're going to gain over time, converting wood, converting tertiary brands. And once again, operating leverage at Trex gets, this is what we had to get back to, right, filling these plants.

And so you will see leverage over time on SG&A, and you will see leverage over time in gross margin. Now it's not going to be to the point of every single year, you're going to see hundreds of basis points expansion over time. You're going to see modest growth in margins and modest decreases in SG&A over time.

Yes. And then you -- Phil, listen, the manufacturing team and our engineering team is always working on productivity, and that's really to offset things like raw material inflation and so forth. So that's sort of work that always occurs and will continue going forward.

Yes. And my focus this year and you're one of my administration Phil, just to build a very solid foundation for Trex moving forward that we can grow off of and allow us to go into some of these other areas for growth.

Super. Could we see leverage, operating leverage, whether it's EBITDA margin, gross margins as soon as '27 or it's going to take a little more time?

It should start beginning. You'll start to see it in '27 and then, yes, it gets better over time. Remember, as Adam just talked about the railing initiatives, that's 2 to 3 years out to get the full 500 basis points. So those things will start to build up in the, let's say, '28 and beyond time frame.

Remember, moving up Little Rock 6 months really does have a nice effect on 2027 versus where our target was through 2027. You wouldn't have got as much leverage in '27. So now that we're starting up earlier, you will see some of those benefits in '27.

Okay. Super. And then your 2030 target, Adam, you kind of talked about perhaps 1/3 of that is M&A. And then under your watch, the pivot perhaps is more EBITDA growth, ROIC. Can you talk about some of the areas where you're excited about in terms of M&A?

Certainly, in terms of product voice, at least on the decking side, you kind of alluded to fire resistance, submersible water products. Are there any assets out there that could fill that void potentially sooner? And what are areas that you find attractive, I guess, that might be adjacent to what you do currently?

Sure. So on M&A, I've been very consistent on this. First area of growth is anything we can do on vertical integration on decking and railing that would expand margins over time. That's number one.

Number two is immediately going to the backyard. So I think anywhere from the threshold of the door to the fence, there's a lot of opportunities in terms of smaller companies that would add value with the Trex brand name, and we could help them in terms of the operations of those facilities. So that's kind of the second area. And then the third area, which would be longer term would be the envelope of the house.

The next question comes from Ketan Mamtora with BMO Capital.

Maybe to start with, just curious, what are you embedding in your guidance for inflation, either on the freight side or on the resin side?

So Ketan, I mean, in general, productivity and price for us offsets inflation that we see from raw materials or freight, et cetera. So that's how I would think about it, and it's all embedded in the guidance.

And have you seen any sort of pickup here in inflation from a raw material standpoint?

Not -- again, remember, 95% of our raw material is waste plastics and so forth, which are in abundant supply. And in fact, we've been able to push back and get some productivity from that group. On the virgin resin, we don't use that much.

And yes, there has been some effect, but it's not -- again, it's embedded in the guidance. And similar with diesel, yes, on our inbound freight and so forth, we've seen some increases there. But again, we're able to offset that through productivity and other things that we work on.

Got you. Okay. And then as you look to your full year EBITDA guidance of $335 million to $350 million, I'm curious what is the biggest sort of swing factors as you guys look at it, which gets you either to the low end or to be the high end? Is it sort of how demand holds up? Is it sort of how the ramp-up at Little Rock goes? Can you just talk about sort of the biggest factors?

Yes. At a high level, Ketan, it's really about the end market demand and mix, right? So both those things can affect overall both the level of top line, but then also what ends up happening in margin.

So those are the main drivers on the low end, yes, we sort of have -- go back a little bit relative to the guidance we just gave because, again, it's probably going to be driven by geopolitical uncertainty if that were to happen, something happens in the war. And so that's kind of what we're taking into account when we look at the kind of the low end of the range. And the high end is, look, if things continue as we're seeing in July and continue to strengthen from there, certainly, we would hit the high end of the guidance.

The next question comes from Keith Hughes with Truist.

With the lines ramping up in Little Rock, what does that bring your total capacity to?

Keith, what we've said in the past, like again, our competitors listen to these calls. So what we said in the past is with Little Rock fully up and running, we could service up to $1.8 billion to $2 billion in revenue. So that's kind of -- let's just leave it there.

Okay. And you're -- are you bringing up all the lines in Little Rock or just a portion of them that 6 months?

No. We have actually run through all the lines just to make sure that they're all capable. But no, we're -- as we've stated in our press release, we'll be about 50% capacity by the end of this year.

And final question, are those lines fungible between Transcend enhance all the decking products?

Yes. You can do any product line that we have in decking on all those lines.

The next question comes from Kurt Yinger with D.A. Davidson.

Great. Adam or Prith, can you guys just maybe provide an update on refuge, kind of what you've seen in terms of sales progression and kind of market placement with that new product? And then maybe bigger picture, just talk about how much of a focus area the PVC decking market is at this stage?

Yes. Thanks for the question. As I've told my team, whether it's decking or railing, we are going to compete in every single category. This is what we do. This is who we are. So when I look at Trex Refuse, that's our PVC product line, we've kind of stepped in with a couple of colors. I think what you'll see, by the way, it's pretty much in line with our expectations, but you're going to see us expand into the PVC arena over time.

Today, we have Square profiles. In the future, you'll have Square and groove profiles and really make an entire product line longer term out of the PVC. So when we look at that market share, we do see that people have been growing in that segment and Trex has not participated, and we must participate in that segment. So you'll see more from us longer term as we look at that PVC category.

Okay. That's helpful. And then just given the distribution changes, I think that's a source of concern for some folks not only on the inventory side, but downstream, is there anything you're focused on during this transition period just to ensure that you're maintaining dealer relationships, maintaining shelf space, things like that, that's maybe unique given some of the changes that are going on?

I think the thing to note is Trex kind of drove the bus on the market changes. So we started this whole thing when you look at this back on July 13. So this has been in the planning stages for a while now. And so we've pretty much aligned our distribution, what we need to do longer term, whether it's servicing the pro channel, servicing the home center arena. So we feel pretty comfortable in terms of where we are with these changes and how we're going to grow moving forward.

Next question comes from Collin Verron with Deutsche Bank.

I just want to follow up on the PVC side. I believe you're currently sourcing all your products there. Can you just talk about your appetite to get into manufacturing on the PVC side and maybe the time line of that and how that might look? Is that going to be something organic that you can do maybe in the Little Rock facility? Or is it something that you would have to do M&A around?

Yes. I won't get into like what the long-term future is today of that. I would just tell you that in our plans over time, we do expect to expand margins over time in the PVC arena as we look at our 5-year strategic plan.

Understood. Okay. And then the Board announced that additional $150 million share purchase. Can you just talk about cash flow generation in the back half of the year? How you think about the timing of those repurchases? And then maybe looking out to '27, sort of the priority of share repurchases in 2027 and beyond?

Yes. So Collin, in terms of cash flow, as typical in prior years, most of the cash flow generation in the second half of the year comes through in Q3. And so again, we -- but we have ample capacity on the revolver as well. So from a -- how we buy back the stock, it's going to happen over the remaining months of the year, and we'll figure that out in terms of both cash availability as well as where the stock price is in terms of deciding where and how much to buy.

In terms of '27 and beyond, look, share buybacks will always be an important source of capital allocation for the company. And so we don't expect a big change in that going forward. But of course, valuation and those things also matter when we look at the overall sort of capital allocation between share buybacks, between M&A, between investing in the business, we always take into account, as Adam said, what's the ROIC of each option and what's -- share buybacks don't give you growth, right, which is something that the M&A and investing in the business does. So those are the trade-offs that we're always looking at when we look at capital allocation.

[Operator Instructions] The next question comes from Rafe Jadrosich with Bank of America.

Prith, can you just clarify the comments on the third quarter gross margin was around mid 37%. Is that adjusted or GAAP?

Adjustments.

Adjust. Okay. And then when we look at the -- you sort of called out some onetime headwinds for the second quarter gross margin and the exit rate has improved. And then you raised the gross margin outlook for the full year by 50 basis points, which with the third quarter coming in at 37.5%, it sort of implies a really significant year-over-year expansion in gross margin in the fourth quarter maybe better than normal seasonality.

Can you talk about what the drivers are there versus what we would expect in normal seasonality? Is there something happening from a production standpoint?

Yes, sure. Yes. Thanks, Rafe. So listen, so one thing I just want to remind everyone, in Q4 of 2025, we changed our warranty reserve calculation methodology, right? And that resulted in a onetime $6 million step-up in COGS in Q4 2025. So if you took that out of Q4 2025 and looked at what the gross margin would have been, it's going to be very comparable to what we're seeing for Q4.

And then in terms of operationally, right, the biggest driver here is being able to turn on Little Rock and have it running in the network. That increased overall capacity utilization allows us to cover the incremental year-over-year depreciation in COGS and all of those things. So that's really what's driving the gross margin change.

Great. And then just one more, just on the -- can you talk about the mix that you would expect from -- in the back half of the year compared to the first half, especially from railing?

Especially, I'm sorry, from railing, did you say?

Yes. I think railing was a headwind to gross margin in the first half of the year. What's the expectation on mix for the second half?

Yes. The second half of the year, you'll start to see that start to ramp down and it kind of levels out. I don't think there's going to be significant changes in mix as we move into the back half of the year.

Yes. So overall, Rafe, for the full year, as we said before, we expect double-digit growth in railing, and that's all embedded in this -- the guidance that we gave for a 38% gross margin for the full year.

This concludes our question-and-answer session. I would like to turn the conference back over for any closing remarks.

Thank you, everyone. Prith and I look forward to speaking to you and seeing you at the upcoming conferences in the coming weeks.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Good evening, and welcome to the Trex Company Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Lee Coker, Vice President, Corporate Development and Investor Relations. Please go ahead.

Good evening, everyone, and thank you for joining us on short notice to discuss today's exciting announcement. A press release concerning this news was issued earlier today and is available on the company's website.

With me on the call are Adam Zambanini, President and Chief Executive Officer; and Prithvi Gandhi, Senior Vice President and Chief Financial Officer.

This conference call is being webcast and will be available on the Investor Relations page of the company's website for 30 days.

Before we begin, let me remind everyone that statements on this call regarding the company's expected future performance and conditions constitute forward-looking statements within the meaning of federal securities laws. These statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those expressed in the forward-looking statements. For a discussion of such risks and uncertainties, please see our most recent Form 10-K and Form 10-Q as well as other filings with the SEC. These forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.

Additionally, non-GAAP financial measures will be referenced in this call. A reconciliation of these measures to the comparable GAAP financial measure can be found at the end of today's press release, which can be found at trex.com.

The company expressly disclaims any obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

Finally, the purpose of today's call is to discuss the strategic changes to our distribution network. We are also sharing preliminary second quarter results and updated guidance to provide context around the announcement. We look forward to discussing our second quarter performance and full year outlook in detail on our August 4 earnings call. In the interest of keeping today's discussion focused, we respectfully ask that the questions during Q&A relate to the announced distribution network changes.

I will now turn the call over to Adam.

Thank you, and good evening, everyone. Thank you for joining today's call to discuss our decision to upgrade our distribution network. Given the timing of this announcement, we are also providing a preliminary look at unaudited second quarter results. Prith will provide more details, but I am pleased to report that sales came in well above our guidance range given strong execution and end market demand. We're also raising our full year revenue guidance given our strong start to the year and our confidence in our ability to execute our distribution upgrade, which I will discuss in more detail.

Today, we announced several important actions that will enhance our distribution network, including the appointment of our long-standing distribution partner, Specialty Building Products, SBP, as our sole national distributor as of year-end. As part of this upgrade, we will be expanding our network of regional distributors to include Coastal Forest Products, BlueLinx, and broadening our existing footprint with WS Building Materials. These actions reflect our ongoing commitment to take decisive steps to keep Trex at the forefront of the market, strengthen execution across our world-class value chain and position Trex to deliver sustainable growth and long-term value for our stakeholders.

I'd like to take a few minutes to discuss these actions in more detail and provide you with some insight into the strategic thinking behind it. Before discussing the strategic rationale, let me be clear on 3 points. First, we do not expect any material disruption to customer service. Second, we do not expect any material impact on margins or profitability. Third, the increase in our guidance primarily reflects stronger underlying demand and execution, not temporary channel inventory movements associated with this transition.

At Trex, our vision is to shape the future of outdoor living through purposeful innovation that enriches people's lives. That vision extends beyond the products that we design to how we go to market, how we serve our customers, and how we deliver the full Trex experience.

On our Q1 earnings call, I laid out a strategic framework to drive Trex's growth. Today's announcement is a meaningful step to advance that strategy. One of the core priorities has been optimizing our channels for growth by ensuring we are aligned with the right distribution partners within the right structure to strengthen and scale our leadership. This move to grow with SBP and the expanded regional distributor network represents a deliberate step forward in that strategy and also provides the market with clarity around the Trex distribution model.

Our objective is clear. Trex must be the preeminent brand with each of our distributors. By sharpening our alignment and reinforcing our value proposition, we are ensuring Trex occupies a position of clear strategic importance within each distribution partner's portfolio. At the same time, we are intentionally aligning the distributor partners whose portfolios complement rather than compete with our brand.

Stepping back, the distribution landscape has evolved meaningfully. We are seeing consolidation across distributors, the rise of scaled national accounts like Builders FirstSource, U.S. LBM and QXO, increased influence from the home centers and higher expectations around speed, service and availability of the right inventory. This transition creates a more streamlined and effective distribution model anchored by fewer but significantly stronger distribution partners with scale, capabilities and a national footprint needed to help accelerate our growth.

Against that backdrop, we made a deliberate decision to evolve our approach. Boise Cascade and SBP have both been important distributor partners over the years. However, with SBP's acquisition of OrePac, SBP now has the genuine national scale and is uniquely positioned to serve both the U.S. and Canada for Trex. That fundamentally changed the equation for us.

Following the extensive analysis and evaluation, we made a clear decision, move to a single national distributor partner while strengthening the model with high-performing regional distributors. As part of this transition, we are exiting Boise Cascade as a national distributor for decking and railing. I personally want to thank them for their years of trusted distribution partnership with Trex. This isn't about the past. It's about where the market is going and how we best position Trex for the future.

Going forward, our structure is simpler and more focused. SBP is our sole national distributor and a select group of strong regional distributors in target markets, including WS Building Materials, Coastal Forest Products and International Wood Products, Weyerhaeuser, BlueLinx, Taiga, Nicholson Cates, Stella-Jones and Manufacturers Reserve Supply. Both Trex and SBP share a common vision of growth through continuous innovation and bold decision-making. SBP is exactly the right distribution partner to help Trex execute our strategy and accelerate our return to rapid growth and market share gains.

Similarly, we chose regional distribution partners very intentionally for their service, local market strength and willingness to invest in growing the Trex category. Together, this network of distributors fully replaces Boise's footprint with no loss of coverage and maintains coast-to-coast availability. At its core, this move is about building a distribution network that's simpler, faster and more effective. We have approached this transition with a high level of rigor to ensure a smooth and seamless execution.

In preparation, we have coordinated so that our new distributor partners will begin receiving material within the coming week. At the same time, onboarding and training with these new distributor partners is now underway, supported by dedicated teams specifically assigned to manage and oversee execution. With these measures in place, we expect the transition to be largely complete within 30 days with no material disruption to supply.

This positions us more strongly to capture incremental share in an evolving channel and to outperform the broader repair and remodel market over time. It also creates an opportunity to realize near-term volume upside as demand transitions to Trex.

With that, I'll turn it over to Prith to walk through the financial implications.

Thank you, Adam. I'll cover 3 areas. First, our preliminary Q2 results, which are subject to change upon completion of review by our auditing firm. Second, the financial impact of the distribution transition; and third, our outlook for the full year. Please note that the preliminary second quarter results and our revised 2026 guidance are provided in the financial section of today's press release.

Starting with our performance in the second quarter. As Adam mentioned, we are very pleased to report that we had a strong quarter with preliminary net sales of approximately $418 million, coming in well above our expected range of $388 million to $403 million and adjusted EBITDA of approximately $112 million. This performance was driven by strong customer demand even in a continued challenging macroeconomic environment. Importantly, this demand was also broad-based across both our distribution channels and product lines with no benefit from load-in purchases by new or expanded distribution partners. We will provide further details when we report Q2 results on August 4, 2026.

Turning to the distribution transition. At a high level, we view the financial impact as limited, manageable and primarily timing related. In the near term, we may see modest shipment timing shifts. However, the fundamentals remain intact, no impact to underlying demand, no expected margin impact and no major restructuring or termination costs associated with this transition.

From an SG&A standpoint, we will incur costs related to training, merchandising and distribution partner onboarding, but these are fully contemplated within our full year guidance.

From an inventory perspective, channel inventory remains at low levels and any short-term adjustments as Boise sells through inventory are expected to be temporary and minimal.

Moving to outlook. Given our strong start to the year and the continued excellent execution by the Trex team, we are raising our full year 2026 guidance. We now anticipate revenue ranging from $1.215 billion to $1.25 billion. We are also increasing our adjusted EBITDA range from $330 million to $345 million, up from our previous range of $315 million to $340 million.

Importantly, we are also confident that our distribution realignment will not materially impact our results as we and our distribution partners are well prepared to manage the short-term channel inventory movements. We'll continue to monitor progress closely and we'll provide additional detail when we report Q2 results.

In summary, the near-term financial impact is minimal, the operational execution plan is underway, and the long-term value creation opportunity is compelling. I'll now turn it back to Adam.

Thank you, Prith. Let me close with 3 takeaways. First, this proactive distributor upgrade is rooted in our strategic priority to align with the right long-term partners to optimize our channels for growth. Second, Trex has strengthened our go-to-market model with this new network of distributor partners, improving execution, alignment and customer service. And third, Trex is positioned to drive sustained profitable growth and share gains over time, resulting in increased shareholder value. Ultimately, this is about ensuring Trex is not just adapting to a changing channel but leading that change.

Operator, we are now ready to take questions.

Our first question today is from Susan Maklari with Goldman Sachs.

I want to start with better understanding perhaps the national versus the regional dynamics across these different partnerships that you've announced today. Can you help us understand how that will work and how it aligns versus the existing structure that you had?

Sure, absolutely. I think this really decision goes back a couple of years when we've been talking to you about going exclusive on railing over time. We've actually went in more cases from a dual distribution model to, in many cases, triple distribution. So when I look at it, upwards of 50% of our network was triple distribution. Now what we're doing is we're realigning our business back to dual distribution with this move. That alignment on railing allowed us to be very flexible in this transition. So we were kind of seeing how the market was consolidating over time, and we wanted to be prepared in terms of being proactive with the move. And this gave us a lot of flexibility, especially as we look at, like, Specialty Building Products as they've made some acquisitions recently. And then we've had some other regional partners that have expanded over time. So we're really going back to a model that we had not too long ago, the dual distribution model. But what we've decided longer term is as the market dynamics change, it makes a lot more sense to have a national distributor with really strong targeted regional distributors in each and every single region. And that's kind of how we've lined the footprint here in North America.

Okay. That's helpful. And one of the other things that you've talked about is deepening the brand loyalty and obviously, growing the overall brand recognition in there. I guess, can you talk about how this helps you in terms of that, right? What does it do in terms of getting the brand out there and getting everybody sort of aligned and helping to get consumers more aware of the products?

Yes. I think sometimes people forget that Trex is a top 5, if not top 3 brand in all of building products. And so it's one of those ones that people want. And we want people underneath our distributor network that lead with the Trex brand, and it's the #1 brand in their portfolio. And so for us, that is really important as we look forward into how we are marketing our products, pull through with the consumer, pull through with the contractor, pull through with the retailers. We need to have distributor partners that the #1 brand in each and every single one of their portfolios is Trex.

And moving forward for us, each one of our distributor partners, by far, Trex is #1 in that portfolio. And Trex also drives opportunities for -- if people get into bundling and they want to do it, Trex is what drives the traffic into the doors. And so there's a lot more flexibility that we have moving forward, leading with the strength of this brand, and it also helps those distributor partners as they want to build out their businesses and they want to bring in other product lines. A lot of the times, other building products manufacturers look at the distributor and the products they're carrying. And the #1 product that they're really looking at many times is Trex, and that's why they want to join that distributor partner. So I think it helps not just Trex, but it also helps our partners moving forward.

The next question is from Ryan Merkel with William Blair.

Adam, you mentioned aligning with the right partners in the script. Can you just talk about why SBP is the right partner and maybe what they bring you versus what Boise -- what is bringing you?

Yes. I think what I'm going to do, I'm going to focus on Specialty Building Products. Back in 2016, Boise -- our Specialty Building Products was a $500 million company back in 2016. In 2025, Specialty Building Products is $4.5 billion. So Specialty Building Products has a compounded annual growth rate well over 20%. They've been aggressive. They were our #1 distributor when it comes to national accounts, and they're our fastest-growing distributor when it comes to home centers. So when we think about the future and who is really the largest in Specialty Building Products, which is where our products sell and where we have success, we think we're aligning with the right partner for the future.

Got it. And you mentioned simpler, faster, more effective distribution channel. Can you maybe just unpack that a little bit more, why this change brings you that?

Yes. So as we look at the consolidation over time, there's going to be -- there's -- you have to be pretty creative in terms of what the market needs are as you got to be more agile. And when we look at not just Specialty Building Products, but our regional distributors that we have in our portfolio, they're highly creative. And so we've really thought about this move over the last year and where Trex has to be, to be positioned in terms of how we can grow the business. And part of that has to do with creating market clarity. We've had a lot of questions from people as to the distribution and alignment where it fits, picking the right partners that are going to lead with the right brand and how we move forward. So there's a lot of -- when we look at it, we're very compelled in terms of where we think we can take this portfolio moving forward.

The next question is from Phil Ng with Jefferies.

You kind of led with the fact that the distribution channel is consolidating and you're going to adapt. And then you highlighted a few big one steppers. I think you called out QXO, a couple of U.S. LBM, BLDR. So is the focus going forward, I want to lock down my #1 guy for a national guy, regional will be a little more selective, but ultimately, you're going to have less exposure to 2 steppers and more to 1 steppers. Is that how I should think about it? And then does that have any impact in terms of margins and programming costs?

Yes. No, I wouldn't read into too much on that. 2-step is very important for us, but I think we also need to have flexibility into the future as to -- as there is more and more consolidation, how we can service the needs of people in national accounts. We have proactively been building out our national accounts team in tandem while we've been doing the 2-step distribution changes. So I just think we're just putting ourselves in the right position here. As we look out 3 to 5 years, right, Phil, I'm very focused on the long term and where Trex needs to be. Having the right people in the right seats moving forward is really important to us with the right partners in place.

Okay. On that note, I mean, no doubt, Specialty Building Products has been a share winner and they've been very active on the M&A front. Any more color you're comfortable sharing in terms of how their organic growth profile in terms of moving your product versus Boise or some of the regional guys you're building a bigger relationship with have trended? I mean, has there been like a big outgrowth for SBP versus some of those other players?

I won't share specific numbers on this call, but I would tell you, when you start to talk about organic growth and you go back through the old, let's just call it, the U.S. Lumber locations, they've had very strong organic growth over the years. So when you look at some of those companies -- that originally started with Trex over 20 years ago, they've done really well organically in addition to the acquisitions over time, as they've taken hold, we've seen them really invest in branding in terms of Specialty Building Products, and they've really done a good job on a lot of those companies they have acquired.

Remember, they acquired some of the best companies in each and every single market. So they have a really strong base as they move forward within this.

The other thing is don't underestimate the Specialty Building Products area. There's beyond them as a company, a lot of our regional players are excellent at selling Specialty Building Products, and we're very focused on people that want to sell higher-value products moving forward, and that was part of the reason that we wanted to move forward with some of these partners.

Got it. Adam, if you don't mind, if I sneak one more in. You talked about flexibility and then you used the word bundling, and you talked about aspirations of being an outdoor building products company versus just decking historically, we perceived you or railing. Does this open the door for more flexibility towards being a bigger provider across the board in terms of building products as well?

Yes, it does. I'll leave it at that.

The next question is from John Lovallo with UBS.

The first one is, was a prerequisite for each of these distributors that you guys are aligned with now that they had to be exclusive with Trex on both decking and railing?

Absolutely, 100%. Everybody is exclusive with Trex decking and railing moving forward.

Okay. Fantastic. And then I guess, does this new distribution lineup change your view on pricing opportunities and the ability to put more pricing into the market? Or is that philosophy unchanged?

I think it's a mix here. We got to be careful. Pricing is just one of the levers. We also want to fill these plants. And I have that edict to fill the plants, and we want to take market share away from wood. So I think we want to do both in tandem, which is how can we take share by leveraging some of the assets that we have in place, right? I think we have a, what I call a wood conversion machine about in Little Rock. When I start to think about that and how every 1% share away from wood is about $80 million in revenue. And then we also have a pricing group now. So we will be studying price, and we'll be opportunistic when it's time to take price.

The next question is from Keith Hughes with Truist.

In the prepared statement, I think you said something around 30-day transition. Has this already begun? This question is when do you think it'll be completed with it?

Yes. We think within 30 days, all of our new partners on board along with expansion areas will have inventory of Trex will have all been trained and we'll be actively selling Trex within 30 days.

Is that middle of August, end of third quarter? Just any kind of time frame would help.

No later than the middle of August. I would say in many cases, before the end of July. But to be conservative, I would say by middle of August.

Okay. And any changes in terms of how much inventory is typically carried at the first step with the transition here?

So we felt like this was a great time for all people involved on the transition, right, because this is the time of the year when people are looking at their inventory positions. We do feel like, as you saw our number, revenue came in stronger. Trex is selling very strong right now in terms of market dynamics. And we felt like this is a very good time to sell through products and not really have an inventory hangover or an inventory build at this time. So that's why the timing was really critical for us versus if we did this later on in the year as people are trying to build inventory and making that transition, we want to be very clean as we move out through Q3.

And final question. I think historically, the big box business when it was bought special order came from the first step. Does that change at all with this change of the customer base?

Yes. There's no changes in terms of our distribution model whatsoever.

The next question is from Trey Grooms with Stephens.

So Adam, you mentioned with these changes, no loss of coverage. But just curious, geographically, do these changes significantly enhance your presence in any specific markets where maybe you weren't as strong? Or is it more kind of just filling in the legacy Boise markets, if you could?

No, I would -- I don't want to give the complete road map here because, of course, competition will be listening. But I would tell you, in some cases, it strengthens our pro channel 2-step distribution model. In other cases, it strengthens our retail footprint, our home center footprint. So yes, it was strategic in nature in terms of when we looked at the partners and expansion, we think this is once again going to fuel more growth for Trex moving forward, and that's why we did this.

Got it. Yes. And then you were mentioning your kind of this 30-day transition, all your partners will have inventory and will be actively selling. Clearly, this is the busy time in the year seasonally for you guys. Just also kind of curious about the BlueLinx exiting. You mentioned there may be some short-term adjustments, but any color you can maybe give us on any potential impact from that or timing as far as getting that work through the channel?

Yes. I don't see any financial impact in terms of Q3. Everything that we're going to be giving, and you're going to hear a lot more on the guidance here at the end of the month. We've built it in there. So I don't think in terms of -- if you're asking me if there's any surprises or things that are unknown of through the transition, not at this time, and we don't -- I think Prith had it in his comments that there really is not going to be a financial impact from this transition.

The next question is from Ketan Mamtora with BMO Capital Markets.

Adam, does this change your overall split between sort of the 2-step channel and the big box channel? Or is that pretty much the same as it was before? And if you can remind us kind of where you are?

Yes. No, it doesn't change that in terms of where we are today and our position within the marketplace. If anything, it will just help fuel more growth moving forward.

On the 2-step side?

On both sides, yes, on 2-step distribution and on the home center side. Customer service and how we service these accounts are really important to us. And a lot of this is going to be about logistics moving forward when it comes to distribution, and we think we have great partners moving forward on that.

Understood. And then Prith talked about sort of the incremental SG&A cost is contemplated within the guidance. Is there a way to think about sort of what those costs are? And then if you were to think about what happens next year, should we think about it as that largely going away?

Yes. So on the latter, look, it's a onetime certain costs we have to do additional merchandising, some partner onboarding and training and so forth. So I would think that's sort of happening this year. And then, yes, of course, every year, there's some more training and so forth, but it will be a little bit more elevated this year for making the change and bringing on some new partners. But again, it's contemplated in the guidance.

And is there a sort of order of magnitude, Prith, can you quantify just rough ballpark?

It's small. Like again, we're not going to get into specific numbers. So it's -- again, it's contemplated in the guidance. So that's how I want to leave it for now. We'll give you more details when we report Q2.

The next question is from Robert Schultz with Baird.

Most of mine have been answered, but a couple of quick ones for me. You mentioned the 30 days from the new partners. Maybe on the other side, how is Boise's wind-down being managed from a timing perspective?

Yes. So there were some products that were released that are out there available. Of course, when it comes through anything through dealers that need to be serviced, we want to make sure that, that's not interrupted whatsoever. So we'll work with them on that dealer business moving forward.

Got it. And then on your internal current inventory position, is that sufficient to fill SBP in the regionals while Boise draws down? Or will you have to build any more inventory?

We won't be building inventory. We will have sufficient inventory on the transition. So as I look at this right now, we're in a pretty good situation where we're able to fill the customers, and we also will not be building inventory.

The next question is from Collin Verron with Deutsche Bank.

I just wanted to follow up on the dual distribution versus the triple distribution. I guess can you just dive a little bit more into sort of why the dual distribution is the right path for Trex and maybe the industry as a whole?

Yes. Dual distribution is you want to have competing distributors in each and every single market, right? So that you have some customers like some lumber yards or dealers that want to prefer one entity over another or they like to have options from a competitive quoting perspective. So that's why -- if you look at the market and you look at a lot of the manufacturers in our segment, they have at a minimum dual distribution.

Understood. And then I guess just in terms of managing sort of the relationships with existing dealers and contractors as well as they kind of go through this transition, I guess, kind of support communication strategy you have in place for that? And how do you anticipate that sort of impacting maybe your dealer network and contractors further downstream?

So I think we addressed in some of our comments. We have teams that are out in the field that will be addressing this with retailers and contractors within the network. There's a pretty robust communication plan that is going to be in place as we transition over this next 30, 60, 90 days.

The next question is from Matthew Bouley with Barclays.

So assuming we eventually hear from either Boise or competitors depending on where Boise goes with decking. So maybe just to kind of preempt what we eventually learn. How do you think about how the competitive dynamic going forward would change as Boise's national footprint may now be carrying another brand? How is marketing investment or dealer incentives that are kind of beyond just the onetimes here sort of contemplated and how all that plays out?

So I won't get into Boise's business. That's up to them and their decisions what they want to make. But I will talk at a high level what I think is happening in the market. When you go through these changes like we have just done and what Boise will do, this is going to put more pressure on tertiary brands that are in place today. So if you go through some of our partners, the newer ones that we're picking up, in some cases, they might have had tertiary brands in place. And I think you'll see that there's going to be even more consolidation here in the next 12 months. So you really have Trex in the leading seat, #1 brand, the most market share, and then you have competitor B and C.

But I think as you start to get beyond the top 2 or 3 players within this market, as you start to get to player #4 or 5, it's like moving the deck chairs around on the Titanic. It's not good in terms of where you're at with all this market consolidation. So I think this is just going to fast-forward that move into larger entities moving forward in our categories.

Got it. Okay. And then secondly, obviously, changing the 2-step distribution doesn't necessarily change the sort of sell-through or end demand at the end of the day. But obviously, product availability at 2-step can have effects on near-term dynamics. And so again, just given the large national footprint of Boise, if there is, let's say, kind of a local dealer relationship with the Boise, how do you try to minimize what that dealer is going to go through here given this change in product availability?

Yes. I think there's 2 ways to look at that question. There's the way you're looking at it from a top-down approach, but we look at it from reverse, which is the bottom-up approach for pull-through demand. In my mind, you have consumers and contractors that are walking in the doors every single day that want to buy Trex. And as I think we've shown in these results right now, we have a great opportunity to grow this company. And so when I think about this move or this transition over time from a retailer's perspective, I'm sure they can look at another distributor partner and the products that they offer on there and risk their entire portfolio moving away from Trex.

So we have a very strong commitment to the consumer, to the contractor moving forward. It's all about pull-through demand, and that matters longer term than really worrying about, I think, a competing distributor partner going in and trying to switch out that business. That's really -- I don't think that's how our market works. It's really through pull-through demand.

The next question is from Kurt Yinger with D.A. Davidson.

Just from a customer concentration standpoint, I mean, should we think about this as SBP, I guess, growing as a percentage of sales? And then secondly, as you think about backfilling [ pre ] distributors to, it's just a lot of Boise volume to push through those kind of new or expanded relationships. So just kind of curious what you're focused on there to ensure those channel partners are able to or from a financial or capacity standpoint to satisfy that amount of volume.

Yes. So I think you're looking at it from a national perspective, but I think you got to take a market-by-market view. When you start to compare our top distributor partners, you would realize that in many cases, SBP outsells competing distributors in some of those markets. So when you look at that competing distributor you were just talking about today, you're looking at it on a national footprint versus what wasn't a national footprint until the acquisition of OrePac. So I would say don't underestimate what SBP sales are to Trex, especially when you look at their East Coast footprint and how well that they do versus some of the competing distributor partners. In many cases, they sell at a much higher rate, and it's a much larger business. So that's where I think until the acquisition of OrePac, this made it national, but you have to know that we're also looking at it from a regional perspective as well. And that's why we see a lot of upside in Specialty Building Products.

Okay. And then just secondly, from, I guess, a complexity standpoint, I mean, I get it in terms of simplifying from 3 to 2 in certain markets. But in terms of more distribution partners now being larger, does this impact your ability to kind of manage the system, manage channel inventories, going into the new year or anything like that? Or I guess, does this add complexity in any way in terms of how you operate going forward?

Yes. So when I look at these larger companies that are in place, including, by the way, our regional company, our regional distributor partners are fairly large in their regions. They have a lot more technical capabilities. So from understanding inventory in the channel and we're building it and all that, I think we have more market intelligence today than we did 2 or 3 years ago. So I think it is a benefit over time in terms of we think about streamlining the business.

The next question is from Rafe Jadrosich with Bank of America.

I think in the 10-K, you have it broken out that the top 3 customers, I think, are 73% of sales. Where is just roughly like what percent of your business was Boise? Just trying to quantify like how much of a shift this actually is?

Yes, we're not going to break that out at this time.

I mean we don't break that out again for competitive reasons and so forth. But in general, with this move, the customer concentration will still be around that level with the top 3 being in the 65%, 75% range.

Is it fair to assume they were outside of that top 3?

Let's just leave it there.

Okay. All right. And then just given the transition and obviously, you're raising the full year guidance I think on a full year basis, not having a big impact. Is there any change to the cadence for the back half that we should be thinking about related to, obviously, like the drawdown at Boise and then maybe building inventory at the other distributors? Just should we -- any considerations we should have for the back half cadence?

Not at this time. We will give more flavor behind the quarter and moving forward at the end of the month. So you'll hear -- you get a little bit more color at the end of the month around that.

I mean the next 3, 4 weeks before we report, we'll have a lot more information on how these -- how things are going with the new arrangements, and we'll be able to give you more accurate color all of that.

[Operator Instructions] The next question is from Reuben Garner with Benchmark Company.

Most of my questions have been asked, so I just have one. Is this the last of the moves that we'll see in distribution? I know you mentioned going from 3 back down to dual distributors. Are there others that you pulled away from in conjunction with this besides Boise in various regions? Or is that potentially still on the come? Or did those additions happen to come in markets that Boise was in and specialty wasn't and it just kind of nets all out with these moves?

Yes. It just kind of nets all out. There's no more moves on the radar screen that we have at this time right now. It's just the change that we've made at the top.

This concludes our question-and-answer session, and the conference has also now concluded. Thank you for attending today's presentation. You may now disconnect.

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. 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 into the investor 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 Trex 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 sort of 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 in 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 of 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, a 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 if 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 the 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. Only 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 of 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 one 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 headquarters in Winchester, Virginia. We have a plant out in Fernley, Nevada or a 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 obtaining but also the fastest-growing part of the United States for our category is the 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 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 them are regional players, and there's 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 has actually seen 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 expand in 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 roadmap there, and we think we can capitalize in 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 in about the 1990s. They all need a deck replace. Now realize if you just need the deck boards replaced, you use the same substructure. So 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 in Trex. If you're building it from the ground up, a return on investment on Trex deck is about 7 years.

There's also a lot of rising labor costs that are out there. So everything that we've done, we've 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, balusters, 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 in 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 has lined up with every single trend that's out there. And that's what we're doing, 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 one 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 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 to 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 wraps, your Campbell soup, Kellogg's Corn Flakes and how that gets shrink wrapped onto 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 roadmap that, once again, we have something that's highly differentiated, wrapped in 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 FirstSource, 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 one of the few brands in all the stores that are available at both home centers today. And we're very scalable nationwide, and we have a recycling -- vertically integrated recycling footprint.

So the one 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 take 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 that 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 create unbreakable 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 one 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's 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, fasteners, fencing, that is something that we're working 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've told everybody we're going to start this up in the first half of 2027. We are already manufacturing pallets. Pallets are 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 one 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 for this perspective, we've built this building so that we can run even faster rates. This will, 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 plant. 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 one thing that really differentiates Trex. And then if you think about our historical use of cash, you'll see that it's been really kind of diverse but organic reinvestment, there's been a lot about driving innovation. That's historically where Trex has been in 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, 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 we 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 $388 million to $403 million, about $396 million at the midpoint. The one 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 programs, 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. This 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, 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. An example would be QXO or Builders FirstSource 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 on 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, you'll 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 were coming upon COVID, it was about 18%. And then during COVID, we -- everybody in our industry started becoming 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 is 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 where they're just going to go out and say, I need a deck tomorrow. A 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 that were 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 onetimers that went to the contractors and the retailers that allowed us to kind of level up to where we needed 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 just -- now we have glass, steel, lower-cost aluminum that are out there. One of the things you saw at the IBS show is 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 one 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 pretty 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 #2 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 Trex. If you go back to old school Trex, and this is -- I used to report to one of the founders, it used to be money, slope and water used to be the 3 things when people would look at a Trex deck.

So -- and the reason they would say some of those things is a lot of times when you're 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 the 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 sale. So talk about that.

Yes. So -- and the industry is -- it's evolving. There is really 5 companies now in this wood plastic composites arena that sells any form of volume in this category. And so one was owned by a company by the name of CRH. They were called MoistureShield. They were just bought by one of the other competitors there. So now we're down to 4 competitors in the category from 5. 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 is 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 ceding that segment, your competitor has 75% market share within one segment. And that's really unheard of. And that's also been a faster-growing category over time that we've kind of ceded. So it's just changing the mentality internally at Trex 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 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 in the '28 through 2030 time frame. So going back to it, R&D instead of working on 100 different programs is now working on 20 or less programs, much more focused. There are 3 or 4 that what I think are impactful programs to the organization where I'm 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 in 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 to 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 decks, 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 on what we can do and expand this opportunity. And so when we think about railing longer term, we think that is one of the ones as we grow it really quickly and we expand margins over time is going to be highly impactful to the organization.

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

Thank you.

Good day, and welcome to the Trex Company, Inc. First Quarter 2026 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the conference over to Lee Coker, Vice President of Corporate Development and Investor Relations. Please go ahead.

Thank you for joining us today, and good morning, everyone. With us on the call are Adam Zambanini, President and Chief Executive Officer; and and Prith Gandhi, Senior Vice President and Chief Financial Officer. The company issued a press release earlier this morning containing financial results for the first quarter of 2026. This release is available on the company's website. This conference call is also being webcast and will be available on the Investor Relations page of the company's website for 30 days. Before we begin, let me remind everyone that statements on this call regarding the company's expected future performance and conditions constitute forward-looking statements within the meaning of federal securities laws.

These statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those expressed in the forward-looking statements. For a discussion on such risks and uncertainties, please see our most recent Form 10-K and Form 10-Q as well as our 1933 and other 1934 Act filings with the SEC. Additionally, non-GAAP financial measures will be referenced in this call. A reconciliation of these measures to the comparable GAAP financial measure can be found in our earnings press release at trex.com. The company expressly disclaims any obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise. With that introduction, I will turn the call over to Adam.

Thank you, Lee, and good morning, everyone. Before turning to the quarter, I want to acknowledge my first earnings call as CEO of Trex. Having been with the company for over 20 years, most recently as COO, I approach this role focused on continuity, execution and accelerating the strategy already in place. Our 5-year plan is clear. Our priorities are set and our focus remains on disciplined growth, operational excellence and delivering long-term value for the shareholders. As part of that work, our leadership team has sharpened focus, Trex vision, mission and values to ensure that we remain aligned as we scale.

This evolution, not a reset, and it reflects both where Trex is today and where we are going. Trex vision is to shape the future of outdoor living through purposeful innovation that enriches people's lives. To support our ambitious growth and galvanize the organization, we recently codified 5 long-term strategic priorities. These priorities are designed to sharpen our focus and better leverage our strengths across marketing, innovation and execution. Given their importance to our future growth, profitability and long-term shareholder value creation, I'd like to touch on each priority in detail.

Our 5 long-term strategic priorities are as follows: First, it is to create an unbreakable bond with our end users, meaning the homeowner and pro contractors. Our goal is to deepen the Trex brand preference and loyalty through superior marketing, product experience and service. While Trex remains the undisputed brand leader in the wood alternative market, we are committed to further strengthening that position through a continued investment. We have already increased our investment in the branding and the marketing, highlighted by the launch of the next phase of our consumer and pro-focused campaign centered around Performance-Engineered for Your Life Outdoors brand platform.

This multichannel media campaign will sharpen the focus on wood to composite conversion while also emphasizing many of our key differentiators of Trex products, including our technical innovations like SunComfortable heat-mitigating technology as well as our marine and fire-rated solutions. I'm excited about the momentum that this campaign has produced and expect Trex to become increasingly visible with both the homeowner and pro contractors moving forward.

Meanwhile, we are investing in technology to improve our proactive lead generation among our programs to better support our valued pro contractors. This last quarter, we experienced significant double-digit increase in lead generation. Pointing to the early success of this investment, we are confident that these actions will help drive Trex's future growth. Next is our continued focus on high-performance innovation. As I mentioned on the last quarter's call, driving high-performance innovation remains a central pillar of my leadership mandate. Shortly after joining the company, I led the development of the launch of the game-changing technology that redefined the standards in the decking category, Trex Transcend decking. Transcend was the first cap composite decking product that set a new standard of performance and aesthetics while serving as a catalyst to drive market share expansion over the following decade.

At its heart, Trex is the world leader in material science. We intend to sharpen our focus and leverage our tremendous development capabilities to invent and deliver a continuous stream of next-generation outdoor living solutions designed with what we believe is called separator technology. Trex makes the hardest innovation in the building products category imaginable. Our goal is to move forward, simply competing with our industry by introducing products with highly differentiated performance that effectively place us in a category of one. Building on the legacy of Transcend, our current pipeline focuses on category-defining performance. We are currently on track for a potential game-changing regional launch in 2027, followed by a more impactful national launch in 2028 through 2030.

We are excited about our best-in-class products and our innovation pipeline and look forward to sharing more in the future. Our third priority is to optimize the channels for growth. Distribution remains a key component of the Trex business model, ensuring that our products are readily available with the pro contractors and homeowners. As a reminder, Trex already has the most comprehensive distribution network with not only national coverage by 2-step distributors, but also one of the very few brands in the world that has a meaningful presence at both national home centers. The distribution channel has seen many changes over the last 5 years with significant consolidation with both distributors and dealers in the 2-step channel.

We have seen rapid expansion of the home center retailers into the pro channel segment as we move beyond a purely on-shelf DIY focus. We expect the distribution landscape to continue evolving. Our goal remains clear: to maintain strong channel relationships at both the 2-step channel and the home center retailers so that our products reach both the homeowner and the pro contractors across geographies. Our recent additional shelf space wins at the home center, along with expanded territories with 2 key distributors are proof that Trex's strong distribution network and demand for our comprehensive portfolio of products.

And our recently redefined incentive and marketing programs have been well received by our 2-step partners as we convert business away from the competition, further strengthening these valued relationships. Our fourth priority is more of a specific target, namely lowering the cost of railing. Railing represents a material and rapidly growing part of our revenue mix and with a large target of doubling our railing business in 5 years, its importance will only increase. Due to greater manufacturing complexity and a broader range of raw material components, the railing portfolio currently operates a lower margin than decking, presenting opportunities for operational and cost optimization.

We see a clear path to improvement. We are applying the same continuous improvement initiatives and vertical integration strategies that successfully elevated our decking margins to our rapidly growing railing portfolio. And of course, as the product line continues to grow, we expect a natural margin expansion due to the economies of scale and greater utilization. Over time, we believe railing margins can approach those of the core decking products, contributing to an overall lift in the corporate margin. Our fifth and final priority, growth enablement, underpins all the others. This priority defines our approach in investing in our culture, technology and talent to enable long-term profitable growth. We are strengthening our organization by building capabilities in the digital and commercial excellence and fostering an innovation-driven culture that empowers teams to move with speed and discipline.

We have already enhanced our leadership team, particularly in finance, adding significant capabilities in data analytics and forecasting, creating a new internal pricing group to implement a more nuanced portfolio level pricing strategy that balances share and margin while improving responsiveness. Over the remainder of the year, I plan to add key senior roles, including a newly created Chief Commercial Officer, who will integrate sales, marketing and IT, which will enable technology, data and analytics and customer insights by providing sales and marketing the tools for commercial visibility that create revenue generation.

Finally, we are aligning innovation and advanced manufacturing under a newly appointed Chief Operations Officer, Zach Lauer, to enable better coordination on commercializing initiatives in parallel, our digital transformation is directly linking consumer inspiration to contractor execution, providing our TrexPro network with highly qualified leads and accelerate the wood to composite conversion cycle while optimizing our pricing analytics. As you can see, we are not waiting for repair and remodel demand to recover. Instead, we are taking a proactive disciplined action to accelerate growth, strengthen margins and position Trex for sustained outperformance.

We are confident that these strategic priorities provide a clear road map for Trex's long-term success. Our team is laser-focused on execution, and I look forward to updating you on the tangible progress we are making in these priorities. Turning to the quarter. We started the year with solid results, especially in light of the adverse weather conditions and continued uncertain economic environment, leading many consumers to defer large-scale discretionary repair and remodeling projects. However, we are actively taking advantage of the current market environment to aggressively invest, ensuring that we capture disproportionate share when the demand normalizes. The trends underpinning our industry's long-term growth runway, the ongoing conversion from wood to composite materials, demand for the low maintenance outdoor living and significant long-term repair and remodel tailwinds have not changed. With that context, I'll turn it over to Prith, who will walk you through the quarter in greater detail.

Thank you, Adam, and good morning, everyone. Unless otherwise noted, all comparisons are on a year-over-year basis. As Adam mentioned, we had a solid start to the year with net sales of $343 million, an increase of 1%. First quarter volume is driven by both consumer sales and channel stocking to support the second and third quarter peak buying season. With our level load production strategy implemented in 2025, we elected to reduce channel inventories for the early part of 2026 and rely on our own inventory to support peak channel requirements later in the year, resulting in lower first quarter volume.

From a channel perspective, we saw strong home center-driven do-it-yourself demand early in the quarter, which shifted over the course of the quarter towards greater strength in higher-end pro contractor-driven products. Gross profit was $139 million with gross margin of 40.5%, about 100 basis points better than we expected. A favorable mix of higher-margin premium decking products and lower sales of railing and margin improvements from continued operational excellence helped to offset an increase in depreciation expenses related to decking lines coming into production readiness at our Arkansas facility.

Importantly, we did not experience any noticeable cost pressures related to the increase in oil prices related to the conflict in the Middle East. I'd like to spend a few minutes diving a bit deeper into our raw material exposure as it is the majority of our COGS, especially recycled LDPE. While recycled LDPE is a petrochemical, its pricing dynamic is quite distinct from virgin polyethylene, which is tied directly to the price of oil. Historically, recycled LDPE prices tend to lag virgin polyethylene by several quarters and generally exhibit less volatility. This reflects a substitution dynamic.

Users of virgin polyethylene typically need to see sustained higher prices before adjusting their production processes to incorporate even modest levels of recycled content, which in turn increases demand and prices for recycled LDPE. And supply of this material is not an issue as we are entirely domestically sourced. As a leader in the use of recycled content, this is a significant competitive advantage, particularly during periods of raw material inflation and competitors relying on virgin inputs are more exposed to cost volatility. And while we are seeing increases in certain other input costs such as diesel fuel and aluminum, we have a range of mitigating levers available, including cost-out initiatives, operational efficiencies and product-specific pricing actions. Importantly, these same inflationary pressures also affect our competitors.

Moving on to selling, general and administrative expenses, which were $56 million in Q1, representing 16.2% of net sales. Excluding digital transformation costs of $1 million and Arkansas facility start-up expenses of $0.2 million, SG&A was $54 million. SG&A came in below our expectations despite continued investments in branding and marketing programs to drive future growth. Lower self-insured medical costs and the timing of expenses more than offset higher investments in the quarter. Because we are in the final stages of the Arkansas facility build-out and did not finish as expected in Q1, interest expenses were capitalized on the balance sheet, resulting in no P&L impact.

Our full year guidance for interest expense now reflects completion beginning in Q2. Putting it all together, adjusted EBITDA of $103 million grew 2% in the quarter due to positive pricing and mix, cost control and the timing of expenses. Free cash flow was negative $143 million as we built inventory and accounts receivable ahead of our peak selling season. This was an almost 40% improvement versus prior year as our capital investment needs declined significantly now that we're finishing the Arkansas facility. Our balance sheet remains strong with our net debt leverage of 1x EBITDA, which is at the low end of our target range of 1 to 2x.

We are confident in our long-term free cash flow generation and continue to have balance sheet capacity to pursue our capital allocation agenda, which prioritizes an unwavering commitment to first drive growth, then return cash to shareholders through share repurchases and lastly, to pursue disciplined M&A. During the quarter, the company took advantage of an opportunity in the stock price by executing continued aggressive share repurchases. For the first time in the company's history, we implemented an accelerated share repurchase or ASR to quickly buy back a large amount of stock. This $100 million ASR was part of our larger $150 million share repurchase announcement.

We will be completing the full $150 million repurchase during the second quarter, and I'm pleased to announce that the Board has authorized a $10 million share increase to the company's existing share repurchase program, reflecting their confidence in the long-term intrinsic value of Trex. Turning to outlook. We are maintaining our full year guidance based on our solid start to the year and our continued expectation for the broader repair and remodel market to be flat to down this year. We remain minimally exposed to input cost inflation. Our vertically integrated domestic recycling infrastructure and approximately 95% recycled content drive a highly stable cost profile, which helps protect margins during periods of petrochemical volatility.

We continue to expect fiscal year net sales of $1.185 billion to $1.23 billion, adjusted gross margin of approximately 37.5% and adjusted EBITDA of $315 million to $340 million. For the second quarter, we expect net sales in the range of $388 million to $403 million, and we expect to see a reversal of the gross margin benefit from product mix that we saw in Q1. Before turning the call back to Adam, I want to touch on 2 key metrics. The first is sell-in, sellout. Sell-in represents Trex' sales to its distributors and home centers. Sell-out represents the sales from our distributors and home centers to dealers and end consumers.

As we've discussed in the past, quarterly sell-in and sell-out results can be influenced by timing, seasonality and channel dynamics and as a result, may not always reflect the underlying long-term trends in the business. To provide a clearer view of performance and how we manage the business, we are introducing a rolling 12-month sell-in and sell-out metric, which we will report each quarter going forward. This metric smooth short-term volatility and better captures fundamental demand trends by accounting for seasonality and other factors that are not fully reflected in quarterly movements.

For Q1, growth for our trailing 12-month sell-in was 7% and growth for our trailing 12-month sell-out was 6%. The second metric is one which we believe will experience meaningful improvement not only this year, but for many years to come, free cash flow. As many of you are aware, we plan on ramping up production at our new Arkansas facility beginning next year. But more importantly, the CapEx associated with the plant build-out will end this year with the majority of our Arkansas-related spend finishing in the first half. We anticipate total CapEx this year of $100 million to $120 million, down from $224 million in 2025, a more than $100 million improvement.

And with construction substantially completed at the end of this year, we expect another meaningful decline in CapEx in 2027 to maintenance levels of approximately 5% to 6% of revenue, driving further improvements in free cash flow. We have built Arkansas to effectively more than double our revenue potential with just the purchase of additional lines. So this upfront investment will provide us with years of capacity expansion ability with minimal additional CapEx. This gives us a strong line of sight to continuous robust free cash flow generation regardless of the exact timing of a significant rebound in consumer demand.

With our organic expansion needs met through our Arkansas campus, our capital allocation priorities will next focus on additional share repurchases and then on accretive bolt-on acquisitions. Trex will return to the free cash flow generating machine that it had been before the recent necessary investment in capacity expansion, which started during COVID and will end this year. I will now turn the call back to Adam for his closing remarks.

Thank you, Prith. Hopefully, you can feel the excitement of the Trex team path that we've laid out and the great opportunities we see in front of us. While the current market environment remains challenging, we are investing in our business and aggressively innovating to capture a greater share of the growing addressable market. We remain the undeniable leader in our market, and we are infusing our team with more focused, nimble entrepreneurial culture that we had in the early days of my career at Trex. We are confident this is the right time to evolve our approach while leveraging our great history and brand.

Before we close, I want to recognize our people. Their commitment, discipline and focus on the customer continue to be the foundation of our performance. The progress we discussed today is a direct result of their work, and they remain committed to our long-term success. We believe when our people succeed, our shareholders succeed. Operator, we'd like to open the call to questions.

[Operator Instructions] And the first question comes from Phil Ng with Jefferies.

Congrats on a really strong quarter, really good execution. And Adam, congrats on the new role. And certainly, it was very noticeable in terms of the energy you've laid out in terms of your longer-term strategic plans going forward. Kind of give us a little perspective in terms of some of the things that you're looking to impact, right? We've noticed that there's been new leadership changes. You called out the new COO role and certainly a new Head of Marketing.

There appears to be a bigger focus certainly on innovation and streamlining some of these efforts to kind of put out product quicker. Just kind of help us think through how are you guys approaching things perhaps a little differently and how that could potentially unlock things in terms of the growth engine and getting products to the market a little quicker.

So Phil, thank you for the kind words. We really appreciate it. When I look at the marketplace today, it's a very dynamic and challenging market. You start to look at the consolidation of national accounts and inflation, and you have to ask the things, do we have the right strategy in place, which I believe we do, and we laid it out on the call, do we have the right people? Absolutely. Do we have the right structure? And that is really what I'm focusing on, making sure that we have the right structure to execute the strategy.

Now on top of that, once we have that structure in place, it is how we innovate. And I think that is where I add the most value to Trex is as I talk about the separator technology, what is going to make Trex a category of one. And so that focus right now is to take what Trex used to have is, let's just say, 100 initiatives, and we've boiled that down to 20 underneath 5 imperatives. So we're working on less things that are more impactful to the organization. I want $100 million programs on everything that we work on. So that is what our focus has been as an executive team, and I think that has provided the organization with a tremendous amount of clarity moving forward.

Super. In the uncertain macro backdrop, curious how sell-out trends shaped up intra-quarter in print. I appreciate the LTM number. But just any more color in terms of how that progressed intra-quarter and perhaps how things are looking peak decking season, April, May, how the channel has responded to some of these programs that you've rolled out in the marketing effort as well.

Okay. So a lot to unpack there. Look, overall, in terms of the quarter itself, as we said in my remarks, we managed the sell into the channel based on our level loading strategy. And essentially, overall, demand is progressing as we expected in our overall assumptions for the year. And so we expect as we go through the busy season, the channel is kind of in the lighter end in terms of the inventory they're carrying. So they're more closer to the 30 to 40 days of inventory. And so we expect, assuming kind of normal busy season that we will see more impetus for more sell-in as we progress through the second and third quarter.

Okay. That's helpful. And then the less inventory on the channel side, that is a function of your decision to take out the volatility. And then perhaps any early read in terms of how the channel is kind of progressing, how things are shaping up, just very dynamic macro environment and uncertainty on the consumer side.

Yes. Just to give you some high level as we look at Q1, January and February were fairly challenging. I think most people came out of those 2 months wondering how this year was going to pan out. But we saw a nice rebound in March as we moved into April. So everybody is still projecting to flat to slightly down in the market, but we're expecting to outperform. The one trend that we've seen over the last year or 2 is more and more national accounts have acquired independent lumber yards, they're carrying less inventory.

So in many cases, they would carry 90 or even upwards to 120 days of inventory. And now we see some of them carrying around 30 days of inventory. So what that means is probably less trucks as we go through Q1. But when the in-season demand hits like in Q2, that's where you got to make sure you have the inventory on the ground to make sure you can execute because there's going to be some quick pull-through from that perspective.

And the next question comes from Ryan Merkel with William Blair.

First topic is gross margin. You beat your internal expectation pretty nicely. Can you just unpack what happened? And it sounds like mix might have been favorable.

Yes. So Ryan, it's Prith. Thanks for the question. So yes, in Q1, relative to our forecast, we were ahead by about 100 basis points, and it's largely driven by favorable mix from decking. And so if you recall, we announced a price increase around our aluminum railing in January. And so we did see some pull forward in Q4. And as a result, a lower mix of railing in Q1. So that was the primary driver of why gross margin performed better in Q1.

Got it. Okay. And then SG&A also beat a little bit. I guess the guide still assumes that it's up year-over-year, the rest of the way. Was there some kind of timing issue in 1Q? Just help us there.

Yes. Good question. So in Q1, our SG&A came in about $5 million lower than we had planned, and it's driven by 2 things. One is favorability in medical claims, and that's a hard one to forecast. Again, we feel good about the full year. But in any quarter, things can move around, and that's what we think happened here. And then second, there was timing around certain expenses, again, related to our investments in growth and brand awareness and so forth.

We expect those to come through in the second quarter. So just to level set everyone, we still expect full year SG&A to be around 18% of sales. And in Q2, we expect a significant sequential dollar lift in SG&A. And that spend is based on certain of these expenses that should have been incurred in Q1, they're going to move into Q2. And second, in line with what we've been telling you that's in line with our strategic priorities. We will continue to invest in marketing and innovation that drives our growth and our brand awareness. So with those things, you should see a dollar step up Q1 to Q2.

Yes, Ryan, I think we also were trying to be, from that perspective, responsible in terms of that the Iran war broke out in Q1 and manage the manageables. That was one of the areas that we looked at it from an SG&A perspective. And as things have calmed down on the, of course, we're going to continue through with the execution of our plan.

And the next question is from John Lovallo with UBS.

The first one is the revenue outlook seems to imply a decent decel in the second half. I mean, understanding that there's seasonality in the business, but it does seem to imply roughly 5% year-over-year growth in the second half despite what's a fairly easy comp in the fourth quarter. So is this, I mean, really just conservatism given the conflict in the Middle East and just macroeconomic uncertainty? Or is there anything else you're trying to message here?

Yes. I think you nailed it in terms of the growth. It's around 5%. I think our number is like 4.8%. So from that perspective, you have that correct. When we look at this year, there's still some things that we want to see from how the war and that is going to pan out. If this is still going to keep going on and on over the next several months, then yes, there's some conservative from that perspective.

If we do think this thing is going to settle down, then there is some opportunities for us in terms of the execution. So I think that is one of the things on -- that's a wildcard for us. We still see the high end has been doing really, really well as we look at the decking side. We are definitely focused on converting more of that wood market, 75% of the market is still wood, but we still see those consumers on the lower end are still struggling right now. So we're getting more and more creative as to how we're going to convert that opportunity.

Yes. A couple of other things, John, in terms of just around the second half and the rest of the year. So one of the -- in terms of things that we've been doing, right, we did introduce a Refuge PVC product. Most of those sales will occur in the Q2 to Q4 time frame. So that's one of the drivers that should help in terms of the revenue growth. Second is in line with the rest of the industry. We have announced a mid-quarter price increase, again, around aluminum railing.

So that was not in our forecast before. And so -- and then the third is our continued investments around marketing and innovation. We are seeing the green shoots, and Adam pointed those out in his prepared remarks, lead generation, sample orders, all those things are progressing really well, and we do expect to drive some conversion from all of that.

Okay. That's helpful. And then I'm just trying to get a better understanding of the quarterly cadence in adjusted EBITDA margin. I mean the second quarter revenue is expected to be up sequentially. But is it possible that the EBITDA margin is actually down quarter-over-quarter just given some of the factors you mentioned like the step-up in SG&A spend?

Yes. From '25 to '26 Q2, yes, you should expect some EBITDA margin difference between last year and this year and being lower this year back to -- again, we expect some of the gross margin favorability we saw in Q1. And so we saw about 100 basis points of favorability. Expect a little more than half of that to reverse in Q2. And then again, on SG&A, expect a significant dollar step-up between Q1 and Q2. And once you do those 2 things, I think you'll see a different EBITDA profile than Q2 of last year.

So -- but sequentially, 1Q to 2Q, that it could be down is what you're suggesting?

The -- you're asking Q1 to Q2, yes, I thought you were asking year-over-year. Okay. Yes, Q1 to Q2 as well, you should see some decline in EBITDA margin.

And the next question comes from Michael Rehaut with JPMorgan.

This is Nick Scalora on for Michael. First, I wanted to ask sort of along the previous question on the cadence throughout the year in the back half. How are you -- can we just get an update on how you're looking at the R&R backdrop and how -- connect that to the range that you've given for the full year guidance and how we should be thinking about that and maybe what you're seeing?

Yes. So when you look at it, let's just look at the home center business. There's been a lot on the forecast from negative 1% to 1% growth. We've seen a lot of people on the forecast have it flat to slightly down. We're doing about low to mid-single-digit growth. If you look at the full year, it's about 3% right now when we look at year-over-year in terms of our growth right now in our guidance.

Yes. So nothing has changed, Nick, in terms of our overall macro assumption on repair and remodel. So we're still flat to down with some of the back half being better than the first half. That's sort of the big picture macro assumption in line with kind of all the same things you read like Lyra, et cetera.

Got it. Got it. Makes sense. And then you mentioned the strength -- the relative strength between DIY and pro and how that shifted throughout the quarter. Could you provide like a little more detail on that and how you're thinking about that going forward as well?

Yes. So the one thing I want to focus on for a second is we are a marketing powerhouse, and we had to get back to our roots. So if you look at it, that's really the territory that I've come from, and we had to reinvest in that platform. We've made structural changes in marketing. We filled out that department. And I feel like we're in a really great spot. That's what really helps drive that high end of the marketplace. So that investment is what we've seen is, once again, products like Trex Transcend or even our Select decking are doing really well and even some of our higher-end lines of the railing.

And those are the consumers that are out there buying right now, right? And so we got that part going really well. And then the focus is how do we get that low end, how do we can convert more of those wood users over to Trex. And then also on the high end, there's been focus on the PVC area, not just on the PVC introduction of Trex Refuge, but we have some other products that depending on the range, they compete in that fire segment, and we're going after it with those products as well. So plenty of opportunity here, but that's why I believe a lot of the premium -- mid- to premium end of the market is doing well is because our marketing is working.

And the next question comes from Kurt Yinger with D.A. Davidson.

I was just hoping to talk a little bit more about the retail shelf space commentary. Is there any way you could maybe help us frame the magnitude of that expansion, kind of how you expect that business to ramp over the next couple of quarters? And maybe just some sense on kind of price point?

Yes, I think we basically characterized it as meaningful. We've not really given a number around there, but we have picked up both decking and railing slots here in the recent line reviews. And so you will see that Trex was one of what we believe was 2 winners at retail here as we move forward, and then there are some people that didn't do as well in terms of how that line review unfolded. So we won't give you a specific number, but we will tell you that, that was meaningful in terms of how we look at some of our growth.

And is that something that we'll kind of see phase in over the course of the year? Or already you've have it in Q1?

No. So we would have liked it to. But as we just look at how we started to get off as you're trying to do shelf resets, getting that exact timing is always challenging. We will start to see some of those reset and some of the products in place now as we move into Q2, and then that will pick up momentum as we move from Q2 into Q3 and Q4.

Okay. That's super helpful. I appreciate that. And then just a 2-parter on the railing side. Can you just talk about kind of the pace that you believe you can drive some improvements, at least in those controllable cost areas and how M&A may factor into that? And then second, how does the ability to lower costs there also potentially act as a catalyst in terms of the market share objectives you have and maybe the pace of kind of volume growth going forward?

That's a great question. So once again, going back to my comments, this is really about the growth on decking and railing is about material science. So there are some things that I've seen here even this year that we're going to unlock on the material science part of the portfolio that is going to lower the raw material cost of railing. In many cases, this is going to be margin expansion on the railing side. I do believe Trex is the most aggressively priced in every single one of the segments, whether it's the opening price point that you'll find at the home center that could be anywhere from $20 to $25 a foot all the way up to we offer railing systems that are $250 a foot.

So from that perspective, most of that things in terms of material science and that many of them will drop to the bottom line. On the vertical integration and some of the acquisition side, that's very small companies that we're looking at from an M&A perspective, but a very meaningful impact in terms of what we can do and how we can lower our raw material streams. Now in some cases, we can be strategic, and there could be some markets we could be more aggressive to convert. But I would tell you, we're very satisfied with where railing is sitting at today and the conversions that are already happening. So really, the focus is going to be how we expand margins.

Just to add to what Adam said, I think back in 2023, we said we would double our business. By 2028, we're on track to do that.

And the next question comes from Susan Maklari with Goldman Sachs.

This is Charles Perron in for Susan. I guess the first one I want to talk about some of the 5 priorities that you mentioned earlier. Where do you see the biggest opportunity to drive above-market growth in the near term relative to the ones that are maybe more helpful in the long run?

Can you say that again in terms of the priorities? Go ahead.

Yes. Which one of -- within the 5 that you mentioned, which will provide the biggest upside, I would say, in the near term to drive above-market growth relative to those more beneficial in the longer run?

Yes. So right now, I'd say there's -- the first one would be to create unbreakable bond with end users. So getting back to basics, it's all on the marketing side and having the people in the right spots, right, to convert more downstream with the contractor and more with the consumer. That's going to be the near term in terms of what we do. But not too far out from there, the launching the high-performance innovation, as I mentioned on the remarks there, we will start to have a regional launch as we move into 2027 and then a much more meaningful impact as we move from 2028 through 2030 on some of those national launches. But I would say in the near term, it's the create unbreakable bond with end users.

Got it. Okay. That's very helpful. And I guess my follow-up, you talked about opportunities to optimize the channels for growth. What does it mean in terms of expanding your presence in retail versus making changes to your wholesale? We're seeing some consolidation coming through at the wholesale level. How does it provide more opportunities for you to grow? And where do you see the biggest opportunities between the 2?

Yes. I think when it comes to -- once again, we created this pricing department, how we price our products and the products by channel. So a lot of times, you want to -- what you want to do is you want to avoid any forms of channel conflict that are sold, whether between the home center channel and the pro channel. Sometimes those products cross-pollinate. And so from our perspective is to make sure we have the right products at the right channels at the right price.

And that is one of the things that we need to focus more on is because there's been a very dynamic market today with a lot of consolidation at the dealer, at the distributor. And as there's been consolidation, there's going to be channel changes in the way that we sell here longer term. And from that perspective, we got to make sure we got the right pricing strategy for each one of those channels with the right products. So there's a lot of work that goes into it, but we've been creating that structure in order to once again allow us to take market share, but also maximize margins over time.

And the next question comes from Ketan Mamtora with BMO Capital.

But perhaps is there a way for us to think about when I look at your full year guidance, what is embedded within that in terms of sellout, both decking and railing?

So in total, again, our sell-in growth, what we've said is about 3% growth. Again, in terms of the sellout, we're assuming something close to that in terms of the overall market.

I see. Okay. But that is -- that would imply kind of a meaningful slowdown from kind of the trailing 12 months, which was about 6%. But you're not seeing anything today that seems to suggest that, that slowdown is happening. Is that fair?

Yes. Again, I think as Adam said, the year started off slowly because some of it is driven by weather and so forth. But since March, we've seen good order intake, and that continues as we're moving through April. So yes, overall, we don't see anything that would cause us to think what you said.

Understood. Okay. And then just switching to capital allocation. You talked about CapEx coming down. As we sit here today and you have been active with share repurchases, can you talk a little bit about how the M&A pipeline is today? And kind of how do you rank order the priorities between share repurchases and M&A?

Yes. So good question. So one, as you know, Lee just joined us a couple of months ago. And so we are currently actively doing the work. Adam has talked about before in terms of areas of interest. Number one is looking at opportunities for vertical integration and margin expansion. Two is looking at the whole outdoor living from the fence back to the deck of the house. And then third and more distant is probably things around the building on exterior building envelope. So that's the playing field.

We're doing the strategy work right now to identify targets and areas that we think would be very synergistic. We should have a point of view around all of that here shortly. And then from there, start to build out the pipeline. So we're still early days around the M&A piece. But in terms of capital allocation, and you know this, you know me from Beacon and Owens Corning, I always look at capital allocation for M&A against share buybacks, right? So that's where I always start and look at kind of where is our share price, how much cash flow do we have and what we think is the intrinsic value of the company and look at the return of buying back shares versus, okay, if we instead use that capital to do an M&A transaction, what would be the return on that in that case. The one big difference is the M&A gives you future growth options. Share buybacks don't do that. So that's the sort of the analysis we go through as a key.

The next question comes from Trevor Allinson with Wolfe Research.

A follow-up question on your goal to lower the cost of railing and drive margin improvement there. Are there any numbers you can put around that for us what the opportunity in terms of cost reduction or margin improvement? And I think you talked about eventually pushing margins closer to your decking margins. Is that something that can happen in a 5-year time frame? Or is that something that's going to take longer to play out?

Yes. In our strategic plan that we laid out, that is something that can happen in a 5-year time frame, and we have it broken out by year, but that is not something we've shared at this time.

Okay. Understood. And the second question is on your expectations for inflation here in 2026. You mentioned some reasons why you should be shielded from inflation on LDPE. Can you put some numbers around potential inflationary pressures moving forward across your portfolio? And then relatedly, what are you expecting in terms of price cost relative to that inflation?

Yes. So as we said, Trevor, at the start of the year, in terms of price cost and how that came through in the forecast, it was relatively neutral for the full year. We continue to have that expectation. So back to inflation, there's 3 areas where there is some exposure. But again, we've taken steps to mitigate exposure. So one is around the virgin resins, right? On that front, we've essentially had -- have a fixed cost for the rest of the year. And so that's -- we know what that is, and that's already baked into the forecast.

The second base of exposure is around diesel prices where we pay for our freight for inbound materials and then certainly for transfers between our plants and so forth. Even there, we've -- again, we've taken steps to push back against vendors on kind of the actual cost of raw materials. So we offset some of the diesel price inflation. And then we're managing how we do our internal transfers and so forth to, again, mitigate any impact from diesel costs. And then look, the third place is on PVC, the new product that we've introduced, our costs are fixed for -- again, as you remember, this is a product that we source to a third party. Our cost is fixed through the balance of 2026. So on all these fronts, we're well positioned in terms of managing any inflationary impact.

And the next question comes from Jeffrey Stevenson with Loop Capital.

You mentioned a cold start to the year in January and February. And I wondered if you saw any delays with the start of the spring selling season in seasonal markets such as the Northeast that could benefit 2Q sell-through demand?

Yes. Just to give you a little bit more color around that. If you look at the northern markets, let's just say, New England all the way across to Minnesota and that upper northern belt down double digits as we look to Q1. As you move to the Mid-Atlantic area, the Balt Wash and you just kind of drew a line all the way across the United States, about flat.

And then as we went to the southern part of the United States, we started to see once again double-digit growth. So definitely, we could see the weather influence, and we're just now starting to see some of the northern territories start to wake up. So the promising part about this is where the weather has been good, we've seen some nice numbers across the board.

Very helpful. And, you talked about the mid-quarter railing price increase. Can you talk about any impact from the new Section 232 valuation on your railing products and whether the increase will fully offset inflation pressure you're seeing?

Yes. So in terms of -- we've talked about this before, tariffs in terms of our overall cost position, it's less than a 5% impact. And through our pricing initiatives, yes, we're able to cover most of that cost increase.

And the next question comes from Reuben Garner with Benchmark Company.

Congrats on the strong start to the year. Most of my questions have been asked. I just want to ask a follow-up about inventory in the channel and then your own inventory. Your own inventory looks a little higher than usual in the first quarter. Just wondering if you could talk about that strategy. Is that just an extension of the level loading plan? Was it in part because of the slow start to the year? Is it you're more optimistic than the channel and just being prepared for a bounce back? Any color there would be helpful.

Yes. So we have our level loading strategy in place. We want to make sure we're there to serve the market when the demand is ready. When I look at the channel inventory, I see it about flat to prior year. However, there's some pricing in there. So from a lineal foot perspective, external to Trex, I see the inventory being slightly down. As we had talked earlier in the call, you see like a lot of larger customers like national accounts didn't take as much inventory. So we believe that demand is going to be there in Q2. Therefore, we have a little bit higher inventory right now in Q1 as you look at that because we know that, once again, those customers are going to need product right away as we move into Q2. And that's really the only change as far as I see it.

And the next question comes from Trey Grooms with Stephens.

So Prith, I want to dig into the railing and the impact on margins just a little bit more. You mentioned that lower railing sales helped the margins a bit in the 1Q with that mix. And I think the expectation was for this higher mix of railing sales kind of through this year to have a, call it, ballpark 80 basis point impact to gross margin. And is that -- so is that expected to normalize in the 2Q fully.

And again, with kind of all the movements we've seen in raws and pricing that you've talked about and the initiatives to grow margins, which I understand you're not ready to fully kind of give expectations on that and timing and such. But is that still the best way to think about the margin impact for this year? And then maybe think about the improvement from there more kind of in '27?

Yes. So let's -- again, let me maybe start with just reminding everyone of what we said back in November when we reported Q3 2025 results, right? So at that time, we stated that we expected about 250 basis points of headwinds to adjusted gross margin in 2026 on a full year basis. We continue to have this expectation for 2026. And we finished 2025 with adjusted gross margin of 40% for the full year. Also in November, what we said was, yes, 170 to 180 basis points of that 250 was entirely from the depreciation associated with bringing Arkansas to production readiness.

So yes, the balance 70% to 80% is from railing growth, and we, again, continue to expect that for the full year this year. So now to your question, Trey, around -- so we had some about -- as I said in Q1, about 100 basis points of gross margin favorability from railing being smaller in the mix. In Q2, we expect about a little more than half of that to reverse. So -- and then the rest of it will reverse through the balance of the year. So that's how I would think about it.

Okay. And then, Adam, you mentioned you guys have historically been a marketing powerhouse, clearly, and you're getting back to your roots there. Is the thought going forward, is the thought still that branding and this marketing spend will continue at a similar level as far as to grow with sales, a similar level as a percentage of sales and to grow with sales or with new product rollouts and things like this that you guys -- some of these initiatives you guys have planned, where there'll be need to ramp that up more? Or are we at a level now where you feel that's kind of where we need to be over the long run?

Yes. As long as I'm here, we're going to be investing in marketing. And the 18% is a really good number. I think what happened, especially as we got during COVID, you started seeing that SG&A number plummet. We were out of capacity from that perspective. And so we were delivering very strong numbers. If I go back in time, though, would I invested more during that period, I would have to create more awareness around the Trex brand.

So will there be some leverage over time on SG&A? Sure, but it won't be 100 or 200 basis points. It might be 10, 20 or 30 basis points as we expand or grow over time because I want to make sure that we're still investing in that platform in order to get more contractors and more consumers in the door to buy Trex. So we will continue to do it. When we can leverage, we will, but it's going to be very important to me that we invest in marketing moving forward.

Very good. Last one for me and just a little bit of clarity, and I know it's early in your process, but more -- Adam, this is maybe more for you and just trying to get a better understanding of your appetite here around M&A. You definitely -- this has become more of a focus for the company, I understand that. And you kind of noted on a few areas that you have interest. But just to get an idea, is there potential or is there appetite for larger deals out there? Or are we more kind of thinking more kind of tuck-in kind of complementary stuff, all of the above? Any help on just more into your thinking around M&A?

Yes. So our thoughts right now in our 5-year strategic plan is tuck-in M&A. And I've really been very consistent from this perspective. Number one, vertical integration. When I say vertical integration, the only thing you're going to get out of it from Trex is margin expansion from that perspective. Number two, we have the license to own the backyard. From that back, that threshold from your sliding glass door all the way out to the fence, Trex could be anywhere in that backyard. So that's where we would go after next. And then the last one would be the envelope of the house.

But the way we view this is smaller tuck-in acquisitions that can really add value, and our brand is our #1 asset. So there's a lot of smaller companies out there where the Trex brand makes a lot of sense. And once again, that would help us also potentially grow our TAM. So our -- we reside in a $75 billion outdoor living market. Our TAM is around $14 billion. And if we can expand that over the next 4 to 5 years to $20 billion or $25 billion in terms of TAM, that's nothing but a benefit to Trex in terms of the opportunities that we can go and grow market share.

Got it. That's super helpful. And I want to say congrats on the new role, and congrats on the great quarter. So keep up good work.

And the next question is from Matthew Bouley with Barclays.

[indiscernible] on for Matt today. So first off, I just wanted to touch on some of the capacity dynamics. So I'm curious if you take into account everything you guys have said on demand trends, what you're hearing at the contractor level in terms of overall customer sentiment. I'm curious how this kind of supports your strategy around incremental capacity? And then any details around how you would adjust the capacity network as the Arkansas facility ramps? So is the Arkansas capacity displacing any production elsewhere?

Yes. From the contractor level, we're still seeing the contractors book out there. I'd say on the low end, it's 6 to 8 weeks. And in some areas, it's 8 to 10 weeks. And in some cases, contractors feel slightly better this year than they do than they did last year. So from that perspective, we feel good. Although I think a part of that is the marketing investment. We are seeing significant double-digit growth in the leads that we're giving over to our contractors. So that also could be one of the reasons why we're seeing an extended backlog from that perspective. On the capacity front, we've been very consistent saying that as we look at Little Rock and we start to look at our growth that we would be looking at opening that in the first half of 2027, where we sit at today.

And even if we didn't see as much growth, Little Rock still gives us -- provides us a lot of leverage in terms of that's going to be our lowest cost facility moving forward. And we have one facility, namely here in the Winchester footprint that's over 30 years old. So -- what we would do is maximize in terms of our manufacturing footprint and where that we need to go longer term. But our expectations are we expect to see some good growth in 2027 through 2030, and we're going to need all that capacity from Little Rock to Winchester to Nevada.

Okay. Great. Really helpful. And then last one for me. I guess with the introduction of your PVC product, can you guys talk a little bit about more how it's faring on a regional basis? So in the Northeast, West Coast, how the demand has been trending? And then more broadly, I think you guys had touched on a little bit pro versus DIY. Can you talk a little bit about the higher-end luxury? Is that still really outperforming the opening price point or any details around that?

Yes. So we still see outperformance from that middle to higher-end consumer, which has been consistent the last several years. But Trex is really on the marketing side, putting a lot more efforts on conversion to wood. We have a new marketing campaign called No Regrets. If you ever see it on TV, it shows the dock owner that has to do all the work around maintaining the wood versus the dock owner that has a Trex deck and is just going to go out and go enjoy his boat for the day, which is the boat is called No Regrets. And so it gives you a really good visual. There's a lot going on from that perspective to target wood, and that's a huge focus for Trex.

On the PVC front, we've had a great rollout on the West Coast. We are actually ahead of expectations on the manufacturing front. We actually are getting an increased supply from our supplier. And from that perspective, the largest market for PVC is in New England and the Mid-Atlantic. And we have quickly opened up those 2 regions as we rolled into Q2. So we think that is a good opportunity in terms of growth. That's a $0.5 billion market when you look at the PVC market and Trex has not played in that whatsoever. So we have plans to expand that over time and see that as a great opportunity for growth.

The next question is from Rafe Jadrosich from Bank of America.

Prith, can you talk about how you think about the right level of leverage for the business longer term? And would you continue to open to buying back more stock as the free cash flow frees up next year?

Yes. So, Rafe, thanks for the question. So I think we've said this before. Overall, we want to manage the company leverage between 1 and 2x. And so again, as yes, as we said on the call, next -- this year, free cash flow is going to come down to -- I mean, the free cash flow is going to increase by, call it, about $100 million relative to last year. We already did -- we expect to complete $150 million in buyback by the end of this quarter.

And then we'll look at the rest of the year. We'll look at where free cash flow is, how the business is doing. And certainly, with the Board's new authorization, we have the capacity to do more buybacks. And right now, again, based on how we're -- where the stock price is relative to what we think our intrinsic value is, I think it's still a really compelling opportunity. So we'll look at that. And then, yes, going forward into 2027, we'll have even more free cash flow because we'll essentially be done with all of the capacity expansion. And so again, share buybacks will continue to be a significant part of the capital allocation going forward.

And then, Adam, just on the sort of the investment you're making, can you give us a little bit more color on how you think about like how that will be allocated and what the priorities are between how much of that is hiring more sales versus marketing? Just can you just give us a little more color on how that will be allocated?

Yes. I think a bigger portion of this is going to be marketing related and the investments that we're making moving forward. So from creating awareness on whether it was linear TV to streaming to podcasts to any forms you can think about out there to get the Trex name. And then to drive it to Trex.com, there's investments on the website that we have been making from that perspective to investments on innovation.

Once again, if you want game-changing innovation, you have to invest in some things from the R&D front. So really, when I look at the major buckets, it's going to be marketing and innovation. And then there's some investments here as we look at sales to support the strategy and the things that they have to do to execute the strategy longer term.

And that concludes the question-and-answer session. I would like to turn the floor to management for any closing comments.

Thank you, everyone. Prith and I look forward to speaking to you and seeing you at the upcoming conferences in the coming weeks.

Thank you. This concludes today's teleconference. Thank you for attending today's presentation, and you may now disconnect your lines.

Good day, and welcome to the Trex Company Inc. Fourth Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the conference over to Casey Kotary. Please go ahead.

Thank you, everyone, for joining us today. With us on the call are Bryan Fairbanks, President and Chief Executive Officer; Adam Zambanini, Executive Vice President and Chief Operating Officer; and Prith Gandhi, Senior Vice President and Chief Financial Officer. Also joining the call is Amy Fernandez, Senior Vice President, Chief Legal Officer and Secretary; as well as other members of Trex management.

The company issued a press release today after market close containing financial results for the fourth quarter and full year 2025. This release is available on the company's website. This conference call is also being webcast and will be available on the Investor Relations page of the company's website for 30 days.

I will now turn the call over to Amy Fernandez. Amy?

Thank you, Casey. Before we begin, let me remind everyone that statements on this call regarding the company's expected future performance and conditions constitute forward-looking statements within the meaning of federal securities laws. These statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those expressed in the forward-looking statements. For a discussion of such risks and uncertainties, please see our most recent Form 10-K and Form 10-Q as well as our 1933 and other 1934 Act filings with the SEC.

Additionally, non-GAAP financial measures will be referenced in this call. A reconciliation of these measures to the comparable GAAP financial measure can be found in our earnings press release at trex.com. The company expressly disclaims any obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

With that introduction, I will turn the call over to Bryan Fairbanks.

Thank you, Amy, and thank you all for participating in today's call to discuss our fourth quarter and full year 2025 results and our outlook for 2026. I know you've also seen the exciting news that Adam Zambanini will be named as Trex's next President and CEO, following my retirement in late April. I'll discuss this shortly, and Adam will share a few words.

But first, let's review the quarter and the year. Against the backdrop of a third consecutive down year for the repair and remodel sector, I'm pleased to report that Trex finished the year with strong fourth quarter results and year-over-year sales growth of 2% and mid-single-digit sell-through for the full year 2025.

Over the past few years, as R&R spending has lagged, our focus has been developing on industry-defined product innovation, [indiscernible] in deep understanding of our consumer, expanding the channel partnerships in both the pro and home centers and continuing to drive operational excellence, efficiency and safety. Our team has higher expectations for future growth, and there are several very positive achievements in 2025 that will allow us to maintain and build on our track record of outperforming the broader market in both up and down cycles.

I want to begin by highlighting the market response to Trex's new product releases. Products introduced over the last 36 months continued to show robust growth, representing 24% of our 2025 sales, up from 18% last year. This speaks to the strength of our product design and development programs, which combine new performance features with leading aesthetics that align with consumers' evolving preferences. One clear example of this alignment is our SunComfortable heat mitigating technology, which we extended to new decking products, bringing this very popular feature to a broader consumer audience at an accessible price point.

Perhaps the most exciting highlight of the past year was the success we achieved in the execution of our multiyear railing strategy. Several years ago, we set out to disrupt the railing market as we did with decking over 30 years ago. After engineering a full line of railing products across a broad range of price points and investing in best-in-class distribution and channel partners over the past 2 years. In 2025, we achieved robust double-digit growth in railing.

We're very encouraged by the recent stocking wins and displacement of competitive products in both the pro and home center channels. The momentum built in 2025 has us on track to achieve our longer-term goal of doubling our share of the railing market by the end of 2028.

Next, I want to turn our attention to the development of our Arkansas campus which continues to deliver on its construction and start-up schedule, including on-site production of plastic pellets, reducing our reliance on more expensive external sourcing.

When we made the decision to invest in Little Rock, the industry overall was approaching full capacity. And then through the growth years of COVID, it became clear that capacity to meet consumer demand would be key to long-term growth. While the industry growth curve has moderated in recent years, I'm confident that the capacity we add in Little Rock will fuel Trex's growth and result in cost optimization and margin opportunities for years to come.

And lastly, we further strengthened our positioning in the pro and home center distribution channels in 2025 and into early 2026. With expanded pro channel relationships and a meaningful increase in stocking locations at the home centers covering both decking and railing products. These wins reflect the strength of the Trex brand and the advantages of our expanded product portfolio in terms of both performance and aesthetics. Trex remains the only wood alternative supplier with a significant presence in both of the country's largest home centers both on shelf and special order.

These highlights represent the early results from increased investments we have made and will continue to make in R&D, sales and marketing, digital technologies and utilizing our capacity to drive accelerated growth. Our improved market incentives have resonated well with our pro dealers and contractors and we're seeing increasing commitment to Trex as they're making their early buy stocking and selling decisions.

Additionally, we've seen early positive results from our new marketing campaigns and digital investments. Notably, sample program volumes and website traffic, which are early indicators of purchase intent have increased considerably and our improved digital tools have helped to generate double-digit increases in lead generation for our contractors. We found an increases in our lead generation and website customer engagement over time correlates with revenue growth.

We also made significant progress in strengthening our distribution network, which will ensure unparalleled access to our products from leading national and regional distributors in North America. Midyear, we announced the expansion of our relationship with the international wood products, building on our success with IWP in the Pacific Northwest and California. We expanded our relationship to Salt Lake City and across the Intermountain Lift.

Later in the year, we expanded our relationship with Weekes Forest Products, strengthening our presence in the upper Midwest, including areas in Minnesota, Wisconsin, Iowa and North Dakota. And in November, we announced that we were expanding our relationship with specialty building products in Michigan, which builds on the success of the long-standing Trex SBP collaboration.

As we turn our attention to 2026, innovation and strategic investments will continue to fuel Trex's growth. After rigorous testing, we were pleased to announce the launch of Trex Refuge Decking in January of this year, our code-compliant fire solution combines style and advanced fire performance with the durability and low maintenance benefits that are the hallmarks of the Trex brand. This ignition-resistant PVC decking line enables us to effectively compete in regions of the country with heightened fire safety requirements, and we are now shipping to California, Oregon and Washington State.

When we look historically a period of sustained growth for Trex, those periods saw Trex invest approximately 18% into SG&A. We recognize that branding reductions made during the growth years of the pandemic and subsequent years needed to be revisited to meet the current market conditions and the long-term opportunity. Targeted investments on programs for our customers and investments in consumer branding will provide a financial return and top line growth and market share capture as they have in the past.

Closely working with our pro channel and home center customers, we've identified the most important points of leverage and tailored programs to incentivize incremental growth, maximize product bundling, especially with railing, and further [indiscernible] purchasing within our portfolio to our more premium products. For the longer term, you can expect to see our branding and sales investments grow in line with revenue while other fixed SG&A spending will be leveraged with growth.

We also know where and how customers get their information is evolving. We're deploying solutions that make it easier for consumers to learn about Trex decking and railing. This includes messaging to consumers through new campaigns targeted at high-impact media, enhancing the digital experience through upgrades to our 3D visualization tool and elevating the retail experience through new point-of-sale solutions and product samples. Early marketing metrics are all up double digits and recent stocking position wins by Trex gives us confidence that we have the right plan in place.

As you've seen in our releases today, I've made the decision to retire as CEO of Trex after nearly 23-year career with the company, including 6-year tenure as CEO and 5 years as the CFO. While this is not an easy decision, I am confident it is the right one, and the Board has made an excellent choice in naming Adam Zambanini to take over the role at the end of April. Adam has been a great partner in developing and implementing major strategies over the years as well as leading a substantial portion of the overall organization in his current COO role. Adam is a strong leader and a brand builder with deep knowledge of Trex's business. His passion for Trex is unmatched.

Now I will turn the call to Adam to share his thoughts.

Thank you, Bryan, and good afternoon, everyone. It's been a great experience working alongside a leader of Bryan's caliber. His steady guidance has made a meaningful impact on the team and the organization as a whole. We are grateful for his leadership and collaboration, and we look forward to a smooth and successful transition as we build on a strong foundation he has helped establish.

As I take on the role of CEO of Trix, you can expect us to focus on execution, while building momentum for the next phase of growth. Shortly after joining the company, I led the development of the launch of a game-changing technology that redefine the standards in the decking category, Trex Transcend Decking. The product established a new benchmark for performance, combining scratch, stain, fade and mold resistance with the refined wood like aesthetic. This innovation marked the industry's first generation of high-performance composite decking and served as a catalyst for sustained market share expansion over the following decade.

Moving forward, we will build a disciplined innovation pipeline around Trex Decking that creates a durable defensible moat and raises expectations across composite and PVC decking category while continuing the longer-term conversion from wood. Also, we will continue to capture additional meaningful market share by executing our railing strategy. Trex is the market leader in alternative railing with the broadest portfolio of products available for every residential application. Performance engineered for your life outdoors is more than a tagline. Our decking is evolving to perform across diverse environments with heat mitigation technology, submersible marine capabilities and with the recent launch of Trex Refuge, ignition-resistant solutions for dry fire-prone conditions. We want to continue to push the limits of where our products can go and be at any price point with those features that consumers expect from their project.

Looking ahead, I am committed to developing new standards for innovation at Trex and take full advantage of the substantial growth opportunities we see on the horizon. Stay tuned for more on this as we move through the year. Our brand is a powerful driver of consumer appeal, and we will continue to leverage that through expanded marketing efforts to highlight the unmatched value of the portfolio of products. And as we plan for the future, we will navigate the dynamic industry landscape to build a clear road map for continued success.

As you have seen from our release, and you will hear from Prith in detail in a moment, we are expecting 2026 to be another year of growth. I look forward to participating in upcoming conferences and meetings to keep our investors and analysts updated on our initiatives and to sharing additional insight into our vision of the future.

Now I will turn the call over to Prith for his financial review.

Thank you, Adam, and good afternoon, everyone. I'll now review our fourth quarter and full year 2025 results. Please note that unless otherwise stated, all comparisons discussed today are on a year-over-year basis compared to the fourth quarter and full fiscal year 2024.

In the fourth quarter, net sales were $161 million, a decrease of 4% compared to $168 million in the prior year period. Results came in approximately $17 million above the midpoint of our fourth quarter revenue guidance primarily due to higher-than-anticipated railing sales in the back half of Q4, continuing to demonstrate the strength of our railing product portfolio. Decking shipments for the quarter were also slightly better than we had forecasted. As of the end of the year, we believe channel inventories were at 6 to 8 weeks at the low end of historical levels, but appropriate given our new level loading and inventory management program.

Gross profit was $49 million, down from $71 million and gross margin was 30.2%, down compared to [ 43% ] in the prior year. This decrease is primarily the result of 2 changes in accounting methodology that Trex adopted in Q4 2025. First, we elected to change the company's inventory accounting method from LIFO to FIFO to improve comparability with other companies in our industry, to more accurately reflect the value of the inventory on the consolidated balance sheet at each reporting period and to be consistent with how the company manages its business. While this change had no impact on the 2025 income statement or cash flow statement, it resulted in an upward restatement of our Q4 2024 gross margin, resulting in most of the decline in year-over-year gross margin in Q4 2025. Please refer to the reconciliation tables in footnote 2 of the company's 10-K for further details.

In addition, we changed the methodology to our warranty reserve estimate, which resulted in an expense of $6 million in the fourth quarter. These changes were partially offset by plant efficiencies from higher utilization. Gross profit results included onetime start-up costs related to the Arkansas facility and onetime railing conversion costs totaling $1 million. Excluding these items, adjusted gross profit was $50 million.

Selling, general and administrative expenses were $45 million or 28% of net sales compared to $39 million or 23.4% of net sales in 2024. The majority of the year-over-year increase was related to higher personnel-related costs in the fourth quarter, onetime expenses related to digital transformation activities and the start-up of the Arkansas facility were approximately $1 million. Excluding these onetime expenses, SG&A was $44 million or 27.4% of net sales.

Net income was $2 million or $0.02 per diluted shares versus $22 million or $0.20 per diluted share. Excluding the previously mentioned onetime charges incurred in the fourth quarter, adjusted net income was $4 million, and adjusted diluted earnings per share was $0.04. EBITDA was $20 million or 12.7% of net sales compared to $45 million or 26% -- 0.9% of net sales last year. Adjusted EBITDA was $22 million. Note that the Q4 2025 adjusted EBITDA, adjusted net income and adjusted EPS do not add back the $6 million warranty reserve estimate expense.

Turning to our full year results. Net sales for full year 2025 totaled $1.17 billion, a 2% increase compared to $1.15 billion primarily due to pricing across all product categories and expansion in railing placements during the year. Net income was $190 million or $1.78 per diluted share compared to $238 million or $2.20 per diluted share in 2024. Excluding onetime charges incurred during the year, adjusted net income was $201.7 million or $1.88 per diluted share and adjusted EBITDA was $336 million. For 2025, adjusted EBITDA, adjusted net income and adjusted EPS do not add back the $6 million warranty reserve estimate expense.

I want to comment on inventory levels at year-end. Our inventory level decreased by approximately $18 million year-over-year. As previously mentioned, in 2025, Trex elected to change its inventory accounting method from LIFO to FIFO, which had no impact on the 2025 income statement or cash flow statement. However, because of this change, we restated our 2024 year-end inventory balance from the previously reported $207.3 million to $257 million, which resulted in the reported inventory decline from 2024 to 2025.

2025 operating cash flow was $358 million compared to $144 million in the prior year. The increase was primarily a result of inventory reductions in the current year compared to prior year inventory build and higher collections in 2025.

Consistent with our capital allocation strategy and continued confidence in our long-term outlook, we returned $50 million to our shareholders in 2025 to the repurchase of approximately 1.5 million shares of our outstanding common stock at an average price of $2.75. We also invested $233 million capital expenditures in 2025, primarily related to the build-out of the Arkansas facility. Our Board of Directors has authorized a $150 million share repurchase program to be completed in the first half of 2026, subject to equity market conditions. In addition, we intend to continue opportunistic share repurchases throughout the balance of the year, reflecting current valuation, our conviction in the long-term outlook for Trex and the meaningful reduction in 2026 capital expenditure as the Arkansas facility is now substantially complete.

Before moving to our 2026 outlook, I want to spend a minute on our approach to capital allocation. First and foremost, Trex's priority is always to create shareholder value by funding our long-term organic growth through capacity expansion that meets expected consumer demand. With the completion of the Arkansas facility in 2026, we will have the capacity to service growth for years to come, and therefore, expect to generate meaningful additional free cash flow in the foreseeable future. Consequently, at this time, share buybacks will be a significant use of capital.

That said, Trex is also likely to become more active in executing strategic tuck-in acquisitions to expand our growing portfolio of outdoor living products. We take a very disciplined approach to evaluating acquisitions by comparing their potential risk-adjusted returns, the return from ongoing share repurchases and moving forward only of acquisitions returns outweigh buying back Trex shares.

Now turning to our 2026 guidance. For the full year we expect net sales to be in the range of $1.185 billion to $1.23 billion, representing low single-digit to mid-single-digit percent growth year-over-year in an R&R market that is expected to be slightly down to flat relative to 2025. Adjusted EBITDA is expected to range from $315 million to $340 million and includes approximately $8 million in currently expected adjustments for the full year, mostly related to digital transformation initiatives and railing conversion. These adjustments are evenly split between COGS and SG&A.

SG&A expenses are expected to be approximately 18% of net sales for the full year. Interest expense is expected to be $10 million to $12 million. As a reminder, Trex has consistently been paying cash interest on its line of credit balances for the past several years. However, because of the construction of the Arkansas facility, GAAP accounting rules required us to capitalize interest expense on the balance sheet as a construction and progress item that would otherwise have been recognized on the P&L in both 2024 and 2025. With the completion of construction schedule in 2026, we will once again be recognizing interest expense on Trex's consolidated income statement in 2026.

Depreciation and amortization of approximately $85 million with approximately 45% occurring in the first half of the year and approximately 20% of the full year D&A within Q1 2026. As previously communicated, the additional depreciation is related to bringing our new Arkansas decking lines to production-ready status during 2026. In 2027, annual depreciation will be at an annual run rate similar to D&A exiting Q4 of 2026.

We are projecting an effective tax rate of approximately 25.5% to 27% for the full year and capital expenditures are projected to be approximately $100 million to $120 million for the full year. For the first quarter, we expect net sales to be in the range of $335 million to $345 million.

With that, I will now turn the call back to Bryan for his closing remarks.

Thank you, Prith. While we've been operating in a challenged R&R space for an extended period, Trex has substantial runway to convert the market from [indiscernible] and increased wood alternative decking and railing market share to Trex. We are committed to product innovation and through our marketing investments, we will ensure the continued strength of the Trex brand, making us top of mind with consumers when they're making their outdoor living decisions.

These actions, along with strategic capital allocation decisions including the $150 million share repurchase authorization through the first half of the year and likely additional purchases later this year, will result in a meaningful return of capital to shareholders. We expect share buybacks to remain a key priority with a significant increase in free cash flow in 2026 and the coming years as we drive revenue and earnings growth and build shareholder value.

Operator, please open the call for questions.

[Operator Instructions] The first question today comes from John Lovallo with UBS.

The first one is on the implied growth is 1% to 5% in that ballpark in a flattish to slightly down market. I mean, is it fair to think that you guys are assuming decking will be up sort of low single digits with railing being up double digits?

Yes. We do expect railing to be up double digit, continued driving of those share gains that we've seen this year and we expect to see in 2026 and beyond. I think that's the right way to look at it from a decking perspective as well. We do have some shelf space wins. We are seeing benefits of the new programs that we've put in place. And in the way we've ranged the guidance is at that low end, if we continue to see weak negative type R&R at the low end, if we see R&R starts to improve, especially in the back half of the year, a little bit closer to that higher end of the guidance.

Understood. And typically, you guys will provide sort of a next quarter sales outlook and sometimes an adjusted EBITDA margin view. I mean can you give us an idea of how maybe you're thinking about these metrics or maybe just the shape of the year in general?

Yes, John, so thanks for the question. In terms of the shape of the year, we gave you the full year's EBITDA range for $315 million to $340 million on an adjusted basis. For Q1, I mean, the best way to think about it is in terms of EBITDA, again, as I said in my prepared remarks, D&A is about 20% of the full year, that will be about $17 million to $18 million. The SG&A in the quarter should be about 100 basis points more than it was last year, and that's the continued investment in marketing that we spoke about.

And then in terms of gross margin, if you look at kind of where consensus was before the call here, we're going to be about 100 basis points below that, and that's largely because of, again, the higher growth of railing, the higher depreciation, and that's partially offset by pricing.

And Prith, that's for the full year, that 100 basis points you're speaking of -- for the gross margin?

First quarter, Q1.

The next question comes from Susan Maklari with Goldman Sachs.

Can you hear me now?

Yes.

Yes, sorry about that. Well, first off, congrats to both Bryan and Adam on the announcements there. I'm looking forward to working with you more, Adam. My first question is talking a bit about the outlook as you think to the spring, can you talk to what you're hearing from your contractors as they're starting to perhaps build some of their backlogs and in some of those markets, especially the ones that maybe aren't quite so impacted by weather? And you noted that you're seeing some pretty strong demand out there for samples and web traffic and just what that could imply for revenues as we look to the season?

Yes. So it's definitely a challenging environment because you see the flat home improvement spending. But as we look at it, we're still seeing our top-tier contractors still booked out probably in some cases in the rougher parts in terms of weather, 4 to 6 weeks and then better weather, probably 6 to 8 weeks. So from that perspective, we feel good. And we've actually had 2 Trex Pro events this year to cover our highest end of the network, and they all felt that this was -- this year was going to be better than the previous year that they had, and we did some polling on that across the contractor group. So that was good.

We've also got some placements that we've picked up at retail, incremental placements when we look at the decking and the railing. And so we feel good from the position that we are as we move forward on that front. So there's a lot of signs plus the marketing metrics, as you mentioned, have been very solid this year, more than we saw the previous couple of years in terms of when you start to look at searches from contractor searches to dealer searches, some of those metrics have been a lot better here this year.

Okay. That's helpful. And then turning to SG&A, you talked through those investments that you expect to make in terms of brand and sales. Can you talk to how the efforts around data and the digital transformation will play a role in that? And what that could also mean as you think about leveraging some of those costs?

Yes. We've done a lot of work on the digital transformation side of the business over the -- primarily over the last 12 months, but the planning for that started 18 months ago. We are starting to see some of the benefits now where we're able to better understand what those market drivers are as we're seeing volume come through our website. They're engaging with various parts of it that I consider to be sales drivers that's going to be purchasing of samples, contractor leads, looking for a contract or looking for a dealer and things like that, all of that information together and being able to drive information out of it so we can better target those customers over the long term.

I'm extremely excited about the about the path that we have going forward from a digital transformation perspective, we've got the right people in place from a marketing perspective as well as the IT group and a lot of great things as we move forward.

The next question comes from Phil Ng with Jefferies.

Bryan, thank you for all the help over the years, and Adam looking forward to working with you more as well. I guess to kind of kick things off, John asked a question about your top line revenue guidance, midpoint is about 3%. Can you help us unpack how much of that is via load-in because you've got some wins at home centers? And from that standpoint, any color what price point for decking? How big of a contribution perhaps is railing? And then as well as pricing, I think you got some carryover pricing. Just kind of help us unpack the outlook you've provided.

Remember in the last call, we did talk about higher incentives going into the market. So our net pricing for the year is flat. While there is some pricing going in, that is being offset by incentives in the marketplace. As it relates to the guidance piece of it, from an infill perspective, we will have some benefit early in the year on that. But of course, that product needs to turn. And while it is a meaningful number of shelf spaces out there, the product infills on their own aren't that big of a number. Those products need to turn within those environments. And we have shown historically with the additional shelf space, we will see the turns on that.

We've been extremely happy with the additional shelf space that we've gotten both in decking, but also on the railing side. In many cases, we're seeing our new Trex railing systems being installed on non-Trex-related decks. Big part of that is because of the quality of the product that we have going in, but also because it's readily available. It's right there on the shelf and they have the ability to immediately get everything that they need to be able to build out that rail and complete the project, whether they're a contractor or a DIY consumer.

Okay. Great color. And some of success you've called out bundling railing, any other categories that stand out? I know you talked about potentially more bolt-on [indiscernible] or potentially any JV opportunities with any other partners?

Yes. We definitely talked about the tuck-in. Recently, we got into the fastener category in a much larger way. So that's the first area that every single time you sell [indiscernible] you have to attach it with some sort of fastening systems. So we've seen great growth in that area. And then you've seen some of the license products that we have, which kind of gives us the opportunity to, I will call it, taste test or see what the preferences are in some of these categories, which lead us into maybe there's something along those lines from a tuck-in perspective.

But when I think about the backyard, we want to own the backyard. So we have a fencing product line that I think is probably the best bar now in the industry, I don't think we do enough to market it. I also don't think we do enough in terms of when we look at a broad range of that portfolio, how can we compete in every segment even beyond composites, kind of like what it looks like from a railing perspective. So I think there's a lot of opportunities when I think about outdoor living and where we can go and that can even expand to the envelope of the house as well.

Yes. And so, just to add to, Adam, the other kind of tuck-in types of things that we could look at our -- things that improve our cost position, things in manufacturing, vertical integration and those types of things. So there are opportunities like that as well.

The next question comes from Ketan Mamtora with BMO Capital Markets.

I want to extend my congratulations to both of you all as well and look forward to working with you, Adam. Maybe just starting with -- on the PVC side, you talked about kind of first of several new products. Should we think of it as there are other products along these lines that you are looking to launch or these could be kind of other products, not necessarily on the PVC side?

Yes. So I think when you look at PVC, there's really 2 parts of the PVC the most. You see it in New England and you see it on the West Coast when I see it a lot. When you get to the West Coast, a lot of times that's around fire. And when I think about fire, I don't think we should be locked into some sort of a material set of [indiscernible] PVC. So when we think about that in the future of it, yes, we will be in that PVC category, and there could be other products within that umbrella. But it would be when we look at all the different segments and classifications because there's different levels of fire that are out there today, it is how can we compete aggressively to take that market share away from PVC. And that is going to definitely be on my radar screen.

And the same thing when you look at New England, it's a little bit different. It's not as focused as much around fire. There's just a segment there of contractors that have been into PVC for the last decade or 2. And there's some performance features in terms of some things workability and all that, that I think that from that segment of contractors we're going to target aggressively, and we're going to go after ways that we can convert those contractors over to WPC.

Understood. That's helpful. And when I think about your full year guidance at midpoint, you talked about the 3%, should we assume sort of sell-through also in the similar range, meaning there are no sort of inventory changes that we should be thinking about?

Yes, that's correct.

The next question comes from Keith Hughes with Truist.

It seems like this railing initiatives having substantial success. Is this raising your attachment rate? Is it soon enough to say that had that effect?

Yes. Attachment rate is notoriously difficult to calculate. That's why we are using a market share metric on it. But we are hearing through our contractors that with products that we didn't have in the past, the steel system is the entry-level aluminum system, our new trail system that they are making that conversion over -- from competitive products over to Trex products. So we are pleased from that perspective. We'll continue to work to try to create something that gives a better view of attachment rates, but it varies widely from region to region. And trying to get really good information on that is a challenge. That's why we think market share is a better metric to use from a market perspective.

And is there any holes in your railing portfolio now that you think you need to add [indiscernible] third party or acquisition?

We have an unbeatable railing portfolio. When I look at this right now, this reminds me the decking category over 20 years ago where there used to be 20 some different manufacturers, that's the same issue when you look at railing. When we look at our #2 and #3 competitors on railing, we consider them regional competitors. So we think there's a tremendous opportunity to take market share from a significant amount of regional players that are out there and nobody has the portfolio to contend with Trex from the top to bottom. So could we do tuck-ins? We could. Do we have to? No, we don't have to.

I mean the downside -- not the downside but the gross margins are lower railing than decking, is that correct?

Yes, that is correct. With the tariffs coming through, that was a significant headwind. Last year, we did take some pricing. Now we're giving that back through other incentives in the marketplace. But over time, we will be working on strategies that will close in that gap and expect over time that we can close a completely.

Keith, the thing when you look at this is volume is a great thing for Trex. We manufacture a significant volume in decking and the more volume we can get in railing, the more opportunity for continuous improvement. So we're going to be able to leverage the scale of railing over time. And therefore, the success you saw in the margin expansion on decking, we're going to take the formula that's worked with Trex over the last 15 years, and we're going to apply that to railing moving forward. So you're going to see more vertical integration on railing just like you did on decking over time.

Okay. Congratulations on results, and thank you for all the help over the years, Bryan.

Next question comes from Tim Wojs with Baird.

Maybe just my first question, Bryan, just the tone of your voice is a lot different than maybe it was 3 months ago. And so I'm just kind of curious if you could kind of maybe walk through what's kind of changed in terms of how you kind of assessing the environment as we kind of come in '26?

Well, a couple of things. First, it was a considerable reset that we had in the third quarter. And I always understand how difficult those things are going to be, everybody's model needs to change. I don't take that lightly when we do that. I think on the other part of it, is related to where the marketplace is. Going into that, it assumed that there would be a further deterioration in the R&R sector during the fourth quarter. We did not see that. And as we moved our way through the quarter and now [indiscernible] here at the end of February, we're also starting to see the benefits of some of those actions I talked about in the third quarter call. So I'd say those are really the 2 things that -- the key difference from last call to this call.

Okay. And I guess when you look at SG&A, I think this year it will be somewhere like, call it, $220 million, it's up $40 million from basically '24 levels. I guess, a, what is the split there between field resources and kind of marketing? And then I guess, the second question, just bigger picture, is there any scenario where you would look at investing more than 18% of sales going forward?

Yes, there's carryover of additional head count coming in from the sales team from last year. The largest piece of it is going to be on the marketing side. We're not going to get into exact splits on it. I think at this point, [indiscernible] Adam, mean from my perspective, I'd be surprised if we were to go over that number.

Yes. I don't see us going over that number. We've only done it a couple of times in our history, and if it's an opportunistic point of view in terms of the market is doing really well. As we move forward, and we had the ability to expand revenue, we would look at that. So I think from that perspective, could it happen? Yes, it could happen, but I don't expect us to go over it.

The next question comes from Ryan Merkel with William Blair.

My first question is on gross margin. I think last quarter, you talked about down 200 basis points in 2026. Is that still the right ballpark?

Ryan, thanks for the question. So look, I think again, relative to kind of where consensus was before our announcement here, we think we'll be about 100 basis points lower for the coming year. I'm sorry -- yes. So that's -- I mean -- sorry, one second. Yes, we'll be slightly below where the pre-announcement consensus was. So I think consensus was around [ 37.4, 37.5 ]. So that's kind of the ballpark that we will be for the full year. And the main difference is we gave you guidance today for full year D&A of $85 million. I think the Street is a little bit lower than that.

Okay. Well, just a follow-up there. I thought that gross margin comment was a 1Q comment, but it sounds like [indiscernible].

Similar -- it happens to be the same for Q1 and the full year.

I see. Okay. And then on the marketing spend, it sounds like you're seeing some early progress there. I'm curious what -- if you were to rank, what tactics are working the best? I'd be curious what that is. And then what are the milestones are you watching for through the year to see that you're getting a return on investment there?

Yes. I prefer not to get into the tactics that are specifically working the best for us. But I think the way to best refer to it is that we closely watch where the spending is going. And if we see something isn't working, we will pivot off that quickly. That goes back to your earlier question about digital technologies and understanding the reach that you're having with your consumers, how are they interacting them with our channel partners that are out there. And so if we need to make a change, we make a change pretty quickly. And if we see something that is working well, we doubled down on that. But we're going to try to get into the specifics of what each one of the items right now.

Yes. Fair enough. I guess maybe a follow-up, though. Are contractor conversions, I assume that's a part of the strategy, are you seeing that yet? Or is that maybe something you'll see more through the year?

Yes. No, this is the time of the year, you start to see some of the contractor conversions at the beginning of the year, and those continue throughout the year. So we definitely see some contractor conversions. We've definitely seen some dealer conversions. We leveled up on our program on the contractor program as a dealer program, and that's been positively viewed from customers. And so therefore, we've won some people back into our camp as we move out into 2026.

The next question comes from Collin Verron with Deutsche Bank.

Congratulations, Bryan and Adam. I just want to start with the comment in your prepared remarks, Bryan, that the industry growth curve has moderated. Can you just expand on that comment and how you're thinking about the long-term growth sales algorithm for decking and railing the industry and maybe Trex?

Yes. Specifically, I was referring to it moderated coming out of COVID and we've seen 3 down years in repair and remodel. As I look out over the long term, I'm very bullish on the repair and remodel sector. And that's because we have had 3 years of down spending along the way. There's probably some piece of -- there's some catch-up from COVID, there's general economic weakness out there. But homes are at a record age at this point. We know there is a large population, 40 million, 50 million decks in North America that they're aging, they're going to need a place.

In the past, we would see Repair and Remodel recover after 2 years. So the word unprecedented 3 years is used quite regularly. We're not sure where 2026 ends up. I think we're very similar to many other companies that are reporting right now. But I have no doubt it's going to come back. We're going to make sure we're going to invest in the appropriate products, marketing and our brand that when that's there, we can be driving well above market returns.

Great. That's really helpful color. And then I just wanted to touch on the gross profit margin bridge again. Any color to sort of what level of inflation you're expecting in some of your cost categories? And maybe how you guys are thinking about continuous improvement in 2026? And then lastly, how are you guys baking in any benefit from the lapping of the costs associated with the improvements in the enhanced deck boards and I guess the warranty you expect that you just called out in the fourth quarter here?

So there was a lot there -- a couple of things. In terms of the gross margin bridge, as we said in the last call in Q3 as well, basically, we are going to have products -- we always have productivity projects and they do offset a lot of the decline that we see in gross margin this year. But we -- as we told you in the last call, we aren't -- our productivity and our pricing, we were able to offset some of the -- all of the additional discounting but we also had this big depreciation headwind, and then there was the mix change in the higher growth from railing that we weren't fully able to offset. So that's still continues, and that's why you see overall the -- the 100 basis point decline in gross margin.

The next question comes from Trevor Allinson with Wolfe Research.

I'll echo congratulations to both Bryan and Adam. First one on railing, you guys talked about double-digit growth here, you're expecting double digits again in 2026. Given all this growth, can you size that business here for us as we're exiting 2025?

It is not a separate business segment for the company. So we will provide market share indicators as we move forward as we continue to grow that, but we've not broken that out as a separate business.

Okay. Understood. And then second question, going back to the revenue guide, similar to what you guys have seen in the last couple of years, but you're ramping marketing spend this year. You've also got some wins with the home centers filtering in throughout the year. And just the question would be, how do you expect your growth rate compares to the decking market overall in 2026? And then have you built in the tailwinds from this additional marketing spend into your number? Or would that be potential upside to your expectation should you see some really strong execution with those initiatives?

We've outperformed overall Repair and Remodel considerably over the last couple of years. I would expect our growth to be somewhat ahead of the general overall growth for the decking and railing marketplace because of those account wins as well as the marketing we're doing. Remember, part of that marketing is making sure that our name is in front of everybody for the long-term benefit of the Trex brand as well.

The next question comes from Michael Rehaut with JPMorgan.

Great. And congrats, Bryan, I appreciate working with you all your help and Adam look forward to the future working with you. My first question -- first question just on -- I wanted to get a sense kind of big picture, how you're thinking about where the composite decking share is within the broader decking market? I mean I think last data point we had was maybe around 25%. I wanted to kind of understand if that's still the case as we close out 2025? And how maybe we should be thinking -- what's been the share gains of composite versus the broader decking market over the last couple of years? How maybe we should think about the next couple of years?

Yes. So it's about 25% when you look at wood alternative. It's about 21% in wood plastic composite. It's about another 4%, 4.5% in the PVC. And so that's why we have interest there. There's only really 2 players that are really of any magnitude in that PVC category. So we're definitely going to be looking at targeting that in addition to the Wood segment, which is still the 75% in terms of conversion there. And both the wood plastic composites in the PVC markets are both growing moving forward. In terms of like projections, they're anywhere from -- the latest one, it was 1.7%. Okay. So 1.7% on the growth. We've been outperforming that in the last several years.

Okay. No, I appreciate that, Adam. I guess, secondly, you've highlighted some of the strength in distribution agreements in your press release and then in the prepared comments. We heard from one of your competitors a couple of weeks ago around some of the challenges that they've been having with market share as well. So I wanted to kind of get a better sense of how you anticipate some of those shifts playing out over the next year or 2? And if there's any way to think about how those share shifts might be benefiting Trex from a top line perspective?

I think what you're seeing in the marketplace is your best distributors in specialty building materials. And I think it's important to recognize those are the distributors that we focus on. Those distributors are focusing on the top 2 companies that have composite decking, railing type products that are out there. We're pleased with the footprint that we have today. Some of the announcements we made last year were just some fill-ins that we felt that we needed to address expanding relationships with current business partners that we had in areas that we felt that we could be a little bit stronger. But overall, very comfortable where we are and pleased with those that represent the Trex brand.

Next question comes from Reuben Garner with Benchmark.

Congrats, Bryan and Adam to you both. Let's see -- so any -- are there any costs or were there any costs in the fourth quarter associated with the shelf space wins you had? Or do you foresee any on the way? I know in the past, you've had the kind of buy inventory in some cases. Is there anything like that embedded in either the outlook or in the fourth quarter numbers?

No. There's nothing in the fourth quarter number. There are some costs as we move through this year. That is embedded within the guidance.

Okay. And then a question on the way it works with contractors and some of the adjustments you've made to marketing spend or incentives. Are any of your competitors or are you guys locking in any contractors with like aligned agreements that may be some of the benefits of your changes might kind of take hold more in '27 than '26 necessarily? Is this something we could see longer-term benefits from as well? Just curious on how that works from a contractor standpoint.

We have a mix of contractor agreements in the market. And I would say they're less formal, especially when you start talking about exclusivity. The contractor is working exclusively with the brand, they're doing it out of choice because they are getting the strongest support from that organization. They're getting the best products. There are incentives that come along with it, there's growth incentives and things along that -- along those lines. But a large portion do work with multiple brands. They want to keep some flexibility in the marketplace. We've got a good share of fully exclusive contractors that are in the market as well as contractors that use a variety of different brands, and Trex is their largest driver of their business.

The next question comes from Trey Grooms with Stephens.

And yes, congrats to both of you. Bryan, best of luck on your next chapter. And Adam, congrats on the new role, well deserved. So I guess, first, and I know we've spent some time on the guidance there. But as you kind of look at the puts and takes on the full year guide, specifically around the implied EBITDA margins, I think there's about 100 basis point difference there from the high to the low end. I guess really what gets you to the -- maybe the high end versus the low end, specifically around the EBITDA margin range for the year?

Volume. I mean that's going to be the strongest driver where it's going to be this year. We get that higher volume that absorption is coming through. I think it's an important point to make for everybody on the call. As Trex adds volume to our existing capacity as well as new capacity, that improvement in gross margin and EBITDA margin starts coming through quickly. I think back to the early years 2012 through 2019 time frame. I'd encourage you to go back and look at some of the margin improvement. Now some of that came through some of our own cost improvements we were doing, lower-cost polyethylene. But a big driver of that was filling existing capacity that we have here. And that is a significant opportunity for the company to continue driving that more dollars back to our shareholders.

Yes. Yes. I recall back in the day, a lot of attention around utilization rates, capacity utilization and the powerful influence it can have on your margins. So that's good to hear. And then -- and then Adam, secondly, kind of bigger picture, maybe as you take the reins here, any strategic or operating changes maybe that you see here or that we should be kind of expecting on the horizon as you're entering your new role?

Yes, great question. When you think about it, we've been working together for a long time, Bryan and I, and so we've been pretty unlocks up on the strategy. So there's no hard changes. But when I think about the leadership team, we're going to be focused on the roles that are going to kind of reshape some of the cultural things, the performance standards. I think I bring an innovation angle. Some of my philosophy is some of the hardest experiences are the best experiences. So in my mind, we need to change the game in terms of our products on decking. So a color or a street to a deck board, that to me is table stakes these days. We need to somehow make an impactful or a dent in the market, right?

And so that's what I'm going to be after is what is going to build that, I call it the durable defensible moat that we can compete in and nobody else can. And so you will see me really focus on some of those things on the high-performance innovation, and we've talked about performance engineered for your life outdoors, now you're starting to see some of these applications, right? I believe we're the leader in heat mitigation technology. We're now focused on submersible marine applications and then now fire is a big thing that we're really chasing going after. So I think you're going to see different forms of innovation from Trex moving forward and that will be some of the things that will be evidence, I think, as you look after my first year here at the [indiscernible] Trex.

The next question comes from Adam Baumgarten with Vertical Research.

Just one quick one for me. Just on the gross margin. Prith, can you just give us an actual number just because there's a lot of different consensus numbers out there? I just want to make sure we're thinking about this properly.

Yes. For the full year?

Yes.

Yes. Again, around mid-37% gross margin against the -- our midpoint of our guide on revenue in that ballpark.

The next question comes from Matthew Bouley with Barclays.

Just a question on the revenue cadence. I apologies if I misheard it. I think you guided to roughly flattish revenue in Q1 on a year-over-year basis. And maybe that would suggest the second to fourth quarter would be up 4% to 5% year-over-year. So just anything to that, just timing of channel inventories, et cetera? Just what would be driving that?

Yes, shaping, first from a first quarter perspective, we've talked a lot about inventories in the past. We do not want to have excess inventories in the channel regardless of how the market turns, we will have the ability to supply our customers. We've also gone through some rough weather in the past 30 days or so. So again, part of the reason not to put anything additional into the channel during the early buy period.

When we look at it from a shaping perspective, roughly in line with last year from a first half versus second half, let's call it, slightly lower in the first half than the second half, but otherwise, similar.

Okay. Perfect. And then secondly, back on the gross margin. So I think if I heard you correctly around Q1, you're talking sort of a low maybe 38% gross margin and correct me if I'm wrong, but sort of what you just said around the full year seems to...

Last year, I think we were about 40.5% gross margin, so about 100 basis points below that.

Okay. Got it. I thought you were talking about relative to consensus. Okay. That makes a lot more sense. Well, I guess the question ends up similar. What I was trying to get at was, obviously, given the depreciation comments you gave, certainly the headwind gets fairly larger as you go through the year and it's a lot bigger in Q4. Is there just any other sort of positive offsets to that gross margin Q2, Q3, Q4? Maybe taking kind of your level loading production, et cetera, that might offset some of that kind of mounting D&A headwind?

Yes. There's always going to be the opportunities. We've got a strong group that's always focused on continuous improvement. We have a significant number of projects that will enter into the system and will start generating benefits from that this year. There's always more opportunity as we go forward. That team has overdelivered the past couple of years. So we'll be looking for them to deliver on that. I'm trying to keep the -- not assume that all of that's going to come through, but I can tell you the management team is absolutely focused on driving improvement to those numbers.

Yes. I mean we always look for ways to optimize the use of the line and so forth. So that's always things that we look at to drive improvement.

The next question comes from Steven Ramsey with Thompson Research Group.

Wanted to start with more distributors adopting the full portfolio of railing solutions. Were there certain railing SKUs that were bigger drivers in '25 such as price points or any other ways to parse that out? And do you think the same drivers helped in '26?

I think it's really across the board. Trex competes at the lowest end against vinyl PVC rail. We've offered an opening price point aluminum rail, then we step up into wood plastic composites. And then we go back to, once again, higher end aluminum that has what we call rod rail, cable rail, glass rail. Once again, nobody has this broad portfolio. And so we've seen wins across the board in every single segment because the issue with railing is there's a tremendous amount of working capital tied up to the amount of SKUs there. And if you're carrying 3 or 4 brands of railing, generally, your margins is hard to turn a profit on that. And so by consolidating into one brand, linear counter salespeople to only focus on Trex, makes you highly profitable.

So from there, the consolidation just makes a lot of sense, plus our service levels are bar none the best when it comes to this part of the portfolio. So that's another reason why you want to partner with Trex. You got the brand, the best product portfolio, the best service, why not Trex.

Okay. That's great insight. And then secondly, on incentives, from a bigger picture, with Arkansas set to provide much better margins as volume ramps up, does that give you capacity to further expand incentives in the next couple of years to continue driving volume?

I wouldn't say that the capacity is there to drive incentives. The capacity is going to be there to support volumes along the way. I think we're in the right place from an incentive perspective. We haven't seen escalation from that perspective in the marketplace. So there was some catch-up that we needed to do, we talked about that in the third quarter. And everything that we've heard from the channel is we're in the right place. And a lot of these programs are driven by growth to be able to earn out those incentives.

This concludes our question-and-answer session. I would like to turn the conference back over to Bryan Fairbanks for any closing remarks.

Adam, Chris and I look forward to seeing you at conferences and other meetings in the coming weeks. Thank you to everybody on the call that have supported me both as CEO and the Trex Company as a whole. Have a great evening.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Good day, and welcome to the Trex Company Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded.

I would now like to turn the conference over to Casey Kotary. Please go ahead.

Thank you, everyone, for joining us today. With us on the call are Bryan Fairbanks, President and Chief Executive Officer; and Prith Gandhi, Senior Vice President and Chief Financial Officer. Joining Bryan and Prith is Amy Fernandez, Senior Vice President, Chief Legal Officer and Secretary; as well as other members of Trex management.

The company issued a press release today after market close containing financial results for the third quarter of 2025. This release is available on the company's website. This conference call is also being webcast and will be available on the Investor Relations page of the company's website for 30 days.

I will now turn the call over to Amy Fernandez. Amy?

Thank you, Casey. Before we begin, let me remind everyone that statements on this call regarding the company's expected future performance and conditions constitute forward-looking statements within the meaning of federal securities laws. These statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those expressed in the forward-looking statements. For a discussion of such risks and uncertainties, please see our most recent Form 10-K and Form 10-Q, as well as our 1933 and other 1934 Act filings with the SEC.

Additionally, non-GAAP financial measures will be referenced in this call. A reconciliation of these measures to the comparable GAAP financial measure can be found in our earnings press release at trex.com. The company expressly disclaims any obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

With that introduction, I will turn the call over to Bryan Fairbanks.

Thank you, Amy, and thank you all for participating in today's call to review our third quarter results and discuss our business outlook. We anticipated 2025 would include some recovery in R&R spend based on historical trends. While there were indications of recovery in the second quarter into July, consumer demand eased during the rest of the third quarter, resulting in third quarter revenues coming in 5% below the midpoint of our guidance range.

But there were a number of positive takeaways worth noting. First, our positioning in the Pro and Home Center channels continue to serve us well and remains a long-term advantage for Trex. Second, new products accounted for 25% of our trailing 12-month sales. This compares favorably with last year's third quarter, when new products accounted for 18% of our 2024 9-month sales, demonstrating how well aligned our new product launches are with consumer preferences.

Third, our railing strategy, now in its second full year, continues to yield positive results. In Q3, our sales were robust and in line with our expectations. And lastly, our profitability was strong, with gross profit benefiting from higher sales volumes and efficiencies gained from our continuous improvement projects and adjusted EBITDA increasing by 33%, inclusive of a 15% increase in SG&A spending. These results were achieved under mixed market conditions. As we look ahead, we believe these positive achievements in a challenging market will benefit Trex when the buying season begins in January 2026 in tandem with our Early Buy Program.

Trex continues to benefit from the strength of our channel positioning, being the leading company in our industry that serves the Pro channel and is both on the shelf and available by special order at the leading home centers. We continue to put priority on ensuring that Trex is present wherever the consumer is shopping for decking and railing products. Also, our new products, products we launched over the last 36 months, have shown impressive growth. While it generally takes about 3 years for new products to gain full traction, we are pleased with the early success of our most recent launches.

This includes products we added to our Trex Select decking line. We launched 3 new colors featuring elevated aesthetics and performance, including the industry's first mid-price deck board that includes SunComfortable, our proprietary heat mitigating technology. In addition, Trex Select decking is submersible and rated for wild urban interface, making it ideal for marine applications in areas susceptible to wildfires. We now have the most differentiated mid-priced product on the market.

And we continue to see strong demand across our railing portfolio, which we filled out in 2024 with the addition of our innovative cable and glass railing systems and then added our new enhanced steel system and select aluminum systems in early 2025. Year-to-date, our railing sales are tracking to the double-digit year-on-year growth that was expected, and we are well positioned to continue on this path in 2026.

We continue to elevate branding, marketing and R&D spend in the third quarter to support future growth. Our new Performance-Engineered for Your Life Outdoors campaign launched earlier this year, and it highlights our leadership in delivering outdoor solutions that combine lasting beauty with real-world durability. These investments in branding and a refreshed marketing campaign have produced significant increases in early indicators of purchase intent. Trex's Product Sample Program and website traffic are both up 50% year-on-year, and our improved Cost Calculator is driving higher completion rates and generating double-digit increases in lead generation for our contractors.

Another highlight of the third quarter is the continued progress that we're making on our new state-of-the-art plastic processing and decking facility in Arkansas. Production rates and yields in our plastic processing operations continue to surpass our initial expectations. These results support our expectation that once it's fully built, Arkansas will be our most efficient production hub, enabling us to capitalize on growth opportunities for years to come.

Our production level loading strategy, which is now completing its first full annual cycle, has allowed us to increase our operating efficiency and enabled us to work even more closely with our Pro channel partners, positioning us to respond quickly when repair and remodel spend recovers. As we noted in our earnings release today, we are anticipating a muted fourth quarter and have adjusted our production levels accordingly. Our fourth quarter sales guidance considers similar market sell-through, as seen in the third quarter. Additionally, the fourth quarter is the seasonally lightest period of shipments for decking, railing and accessories, and we expect that our channel partners will manage their year-end inventory to lower levels than in the prior year.

Looking ahead, Trex is moving forward with strategies to design to capture an increasing share of the conversion from wood to composite decking. In addition to including our popular SunComfortable heat mitigating technology and new decking colors to be introduced in 2026, we have new product launches planned for next year that will include features designed to expand our market penetration. We support this increased level of activity and continue to strengthen the advanced consumer awareness of the benefits of Trex decking and railing. We expect that in future periods, our SG&A spending will return to pre-COVID levels of approximately 18% of net sales. Also, we expect the mix impact associated with another year of double-digit growth in railing and additional depreciation related to the expansion of our Arkansas facility to reduce 2026 gross margin by approximately 250 basis points. 2/3 of the 250 basis point impact is related to depreciation, with the remainder related to mix.

In summary, while this year's sales are coming in below our initial expectations of mid-single-digit growth, 2025 to date has been a year of significant accomplishment for Trex despite market headwinds. I'm confident that our strategy for long-term growth positions us to realize significant gains as R&R spending recovers. Demonstrating this confidence, our Board of Directors has authorized a $50 million share repurchase program.

I'm pleased to ask our new Senior Vice President and CFO to handle the third quarter financial review. Prith Gandhi only came on board a month ago, but he's already making a positive difference at Trex. Prith?

Thank you, Bryan, and good evening, everyone. I'm pleased to deliver my first financial review as Chief Financial Officer of Trex. I know many of you already and look forward to reconnecting and getting to know the Trex investors and other analysts who cover Trex.

With that, I'll now review our third quarter 2025 and year-to-date results. Unless otherwise stated, all comparisons are on a year-over-year basis compared to the third quarter and first 9 months of fiscal 2024. In the third quarter, net sales were $285 million, an increase of 22% compared to $234 million in 2024, driven by growth across product range, which was led by strength in railing as well as the lack of channel inventory destocking that we experienced in Q3 of last year. Gross profit was $115 million, a 23.9% increase from $93 million. And gross margin was 40.5%, a 60 basis point expansion from 39.9% in the prior year. This increase is primarily the result of lower labor costs and production efficiencies from our continuous improvement programs.

Our level loading program, which Trex has previously discussed, delivered a positive impact in Q3. Our strategic investments in the third quarter included onetime start-up costs related to the Arkansas facility of $1.4 million and onetime railing conversion costs of $0.3 million. Excluding these items, adjusted gross profit was $117 million.

Selling, general and administrative expenses were $45 million or 15.8% of net sales compared to $39 million or 16.6% of net sales in the prior year. This increase is primarily related to higher spending on branding and IT as we continue to advance on our marketing strategy and new product innovation, two elements essential to our success as the category leader in composite decking and railing. In the third quarter, onetime expenses related to digital transformation activities and the start-up of the Arkansas facility were approximately $2.4 million. Excluding these onetime expenses, SG&A expenses were $43 million or 15% of net sales.

Net income was $52 million in the third quarter or $0.48 per diluted share, an increase of 27.7% from $41 million or $0.37 per diluted share. Excluding the previously mentioned onetime charges incurred in the third quarter, adjusted net income was $55 million or $0.51 per diluted share. Adjusted EBITDA was $90 million, up 33% compared to $68 million in the prior year, led by sales growth across our product lines, expanded gross profit margin and stable year-on-year SG&A expense.

From a year-to-date perspective, net sales for the first 9 months of 2025 totaled $1 billion, a 3% increase compared to $984 million in the first 9 months of 2024. Net income was $188 million or $1.75 per diluted share, a 13% decrease compared to $217 million or $1.99 per diluted share. Excluding onetime charges incurred year-to-date, adjusted net income was $198 million or $1.84 per diluted share, and adjusted EBITDA was $314 million.

Year-to-date, operating cash flow was $293 million compared to $152 million in 2024. The increase was primarily due to the timing of working capital changes related to our level loading and channel inventory strategy. We anticipate ending the year with inventory levels at approximately the same level as the end of year 2024. Given our continued strong cash flow generation, we will look to repurchase up to $50 million in Trex shares through the end of 2025, depending on equity market conditions. We have invested $188 million in capital expenditures year-to-date, primarily related to the building out of the Arkansas facility.

Now turning to our guidance for the remainder of 2025. As noted in today's earnings release, we now expect several factors to impact fourth quarter sales, bringing them well below our original expectations. As Bryan mentioned, we expect consumer demand to remain muted in the fourth quarter, which is also the seasonally slowest time of the year. In addition, we expect our Pro channel partners to lower their inventories through the end of the year.

Due to these factors, we are revising our full year net sales and adjusted EBITDA margin guidance ranges. We now expect full year net sales to range from $1.15 billion to $1.16 billion, approximately flat with our reported sales in 2024. We also expect our full year adjusted EBITDA margin to range from 28% to 28.5%. This net sales guidance implies a Q4 sales range from $140 million to $150 million. The implied low double-digit Q4 adjusted EBITDA margin considers the impact on gross margin of reduced capacity utilization rates and continued spending on branding and marketing to accelerate future growth.

Full year guidance for our other financial metrics include: SG&A expenses to be approximately 16.5% to 17% of net sales on an unadjusted basis; interest expense, less than $2 million; and depreciation in the range of $60 million to $65 million for the full year. We are projecting an effective tax rate of approximately 26%, and capital expenditures are projected to be approximately $210 million to $220 million for the full year as we continue the development of the Arkansas campus. The change is related to the timing of cash flows related to the completion of the project.

With that, I will now turn the call back to Bryan for his closing remarks. Bryan?

Thanks, Prith. Our business landscape is changing. Recent merger and acquisition activity in both the Pro channel and the home center has increased the importance of brand recognition and product differentiation in capturing end market demand. As the market leader with the largest network of contractors, dealers, distributors and home centers, Trex is best positioned and fully committed to gaining the greater share of the industry's long-term growth opportunities.

Operator, I'd now like to open the call to questions.

[Operator Instructions] The first question today comes from Ryan Merkel with William Blair.

Thanks for the question. Bryan, I want to start off with sell-through. What was it in the third quarter? I know you said the fourth quarter, you're assuming the same. But also, what was the surprise in the quarter? Where was the slowdown? Was it the Pro channel? Was it retail? Just any more color there? And also on cadence, it sounds like it slowed after July?

Yes. On a year-to-date basis, we saw a low single-digit sell-through. As we had our last earnings call, we did see that accelerate in June and July, giving us some confidence that, that was going to continue as the year went on. Come August and September, we did not see that go on. And it wasn't channel dependent. It was really across all of the channels. Now we expect on a full year basis from a sell-through perspective to be low single digit on the year. While revenue will be flat with the prior year, we do expect to see some inventory come out of the channel, which will support that growth.

Okay. Got it. And then can you just clarify, why now that you're increasing the marketing spend and the SG&A? Is it the soft market? Is it new products? Is it rising competition? And I just want to clarify if you're guiding SG&A to 18% of sales in '26? It sounds like you are, but I just want to...

Yes. We are guiding to 18%. And we feel that the marketing is extremely important, especially in a softer market to make sure that we are getting the Trex name in front of anybody who may be building a deck. We are also seeing more competitive spending from others out there in the marketplace. So backing away from that in a weaker market, we don't feel is the right thing to do.

We've got some great messaging out there. We are starting to see improvements with the early indicator side of things. We just need a little bit better consumer confidence around that and a better feeling around repair and remodel. And I think we'll start seeing some very attractive growth rates again.

The next question comes from Collin Verron with Deutsche Bank.

I guess just given the lower inventory in the channel in the fourth quarter and the weaker trends that you're seeing, like any kind of handle you can give around how you're thinking about early 2026 and the load-in ahead of decking season for next year, just given the softer demand that you guys are seeing as we exit this year?

I expect that we will see a robust Early Buy. I don't worry as much about Early Buy, per se. It's about getting that product stage for when the season turns on. I'm more concerned about the overall growth for the year. We've got our normal programs put together. We will get product stage out in the marketplace. We haven't laid out those targets as of yet. We'll give more detail in the end of the year call on that. But I expect the program to be similar to what we've seen in prior years.

Okay. That's helpful color. And then on SG&A spend, any -- how quickly does that SG&A spend usually turn into sort of an acceleration in demand in periods past where you might have seen a little bit of a softer R&R and you ramp up that spending? I guess, just curious as to how quickly you think you can see a return on that money.

I think the best way to look at it is from an overall industry perspective. We've got a repair and remodel industry that's going to be down low single digits. We expect our sell-through is going to perform up low single digits. So that spending that we're doing from a branding perspective as well as the industry that we're in, the conversion opportunity against wood does give us a better opportunity for payoff with that additional spending.

And I mentioned to the last question that came up, we are seeing a more competitive market environment from a spending perspective related to others that are out there advertising. We need to make sure that Trex name is in front of buyers as they're looking to make that decision. So more than just about having the product everywhere that consumer is going to be buying, we want to make sure that they're walking in the door to make the purchase or they're sitting with their contractor, they've already made that Trex decision.

The next question comes from Susan Maklari with Goldman Sachs.

My first question is on the pricing side. Bryan, you had talked about realizing some low single-digit pricing in the past. I guess, given the environment that we're in, are you still expecting that to come through? Or can you talk a bit about price cost and how that is coming together?

We did take some pricing coming out of the second quarter. We also talked about not really realizing much of that pricing during the third quarter. We did have people buy ahead, and we went ahead and shipped that, of course, during the quarter itself. We saw a little bit come through in September, and then, of course, with lower revenue in the fourth quarter, you don't see too much impact for that.

Right. Okay. And then maybe turning back to brand. You obviously have a very well-established brand and something that is recognized by a lot of consumers. As you think about spending on the marketing and helping to drive that recognition, are there things that you're changing in your approach to your ad and marketing spend? And how are you able to leverage some of the investments you've made in the last couple of years around digital and data gathering to further that and make sure that, that spend is really effective?

Yes. Jodi Lee, who is our Senior Vice President of Marketing, joined us, I guess, about 5, 6 months ago at this point, and we're already starting to see the benefits of some of the changes that she's making from a messaging perspective, how we're getting in front of those consumers. I expect as she gets a full year under her belt and we move into next year, that we even have more engaging programs related to that marketing message. So I'm pretty excited about the things that are on the plate as we move forward.

The next question comes from Rafe Jadrosich with Bank of America.

Bryan, how do you feel about the conversion rate of wood to composite and your market share trends within the category today versus where it's been historically? Or maybe year-to-date versus where it's been historically?

Yes. Last quarter, we reported that through the end of 2024, there was 170 basis points of conversion from wood to composites. I don't have new data since that time frame. We do have pieces of data that come in from the channel itself, and what we are seeing is that there is continued conversion that's out there. I wouldn't say it's probably fine enough that I could put a basis point of conversion on it. But the data would indicate that consumers are still trending towards those composite products.

Our strategy with our Enhanced Basics, which is really that wood fighter at about 2x the price of wood, and then our Enhanced Naturals product, roughly 3x the price of wood, giving that consumer the opportunity to so they can afford a Trex deck and be able to move up to a higher end [ of static ] with that Enhanced Naturals. That continues to be an effective strategy.

Okay. And then just with the conversion continuing, just kind of understanding the step-up in SG&A, you mentioned in the release that you're going back to sort of the pre-COVID level. I have to go back to 2017 to get to 18 -- around 18% of SG&A as a percent of sales. Your sales base is 2x higher than that point. Is this sort of -- this level of spend like a catch-up where there's been underinvestment, and this is an opportunity? Or do we think about it as this is sort of just an appropriate longer-term run rate?

Recall, during COVID itself, we pulled way back on the marketing side of things. So we're back to a more normalized type marketing. It's really a reaction to 2 things: first, the weaker market condition. We believe that, that sales -- excuse me, that marketing in conjunction with our sales effort can drive better opportunity for us in the marketplace. And longer term, as we move forward and we start getting back to the growth levels that Trex is normally used to, I expect that we'll be able to see some leverage opportunities within SG&A again.

The next question comes from Keith Hughes with Truist.

Sell-through is lower than you've anticipated, as you said, but it seems like a pretty drastic reduction in production and ordering from your customers. Are they anticipating this to continue to deteriorate going into next year?

We are expecting -- we had an original expectation that we were going to be 5% to 7%. And instead, we expect that to be in low single-digit levels. So that difference is really what's coming out. We're seeing the largest piece of that, of course, in the fourth quarter of this year. I'm not expecting anybody to be building any inventories as we move into the end of the year.

I think the other piece that's important to note is the channel has gotten better in managing inventory. We have a lot of different SKUs between the different decking colors that we have, the different railing products that we have. And our channel partners continue to get more efficient each year in the way they're running their supply chains. So that's why we expect the inventory to be down.

As we move out into next year, we're coming off of 3 years of down repair and remodel, more and more pent-up demand out there. And at some point, that's going to break free, and we'll be ready to take advantage of it.

If sell-through stays where it is, will you run back -- go get some normal production in the first quarter?

We will finish our inventory roughly in line with where we were last year. And we'll keep that -- will be a little bit of an increase in the new year. If we see stronger market conditions, we'll be able to bring on a couple of more lines without any issue.

The next question comes from Ketan Mamtora with BMO Capital.

Bryan, can you just remind us, some of the incremental cost that you had in the first half of '25 related to enhanced retooling, should we expect that to sort of reverse in 2026? And how much can you quantify that for us?

We didn't call that specifically out as a one-timer. It was under $5 million in the first half, the majority of it in the first quarter and then a much lesser piece of it in the second quarter. But no, I would not expect that to repeat next year.

Understood. Got it. And then any sort of early read into how CapEx would shake out for 2026, given that you are sort of almost at the end of the big Arkansas plant?

Yes. We still have $40 million, $50 million of Little Rock to go that will be in next year. And the other side of our cap spending will be down considerably as well. So we've talked about maintenance of business CapEx being in the 5% to 6%, but probably even the next few years because of we have a new plant that it could be a little bit lower than that. We're probably looking around the $100 million range or so.

That's all in, Bryan?

Yes, yes.

The next question comes from Tim Wojs with Baird.

Bryan, on the gross margin headwinds in 2026, the 250 basis points that you're talking about with D&A and just railing mix, are there any offsets to that, that we should think about? Because I guess if we have a couple of hundred basis points next year of margin compression, it does seem like it might be hard to actually generate gross profit growth or EBITDA growth. Just trying to kind of understand what might offset that mix to mix headwind.

We've got some other costs that are coming into the business as well. Of course, you've got higher labor cost, just general inflation that comes in. Our continuous improvement program should be offsetting that side of the business right now. We're calling this out specifically because this depreciation is coming in. We don't have an offset for it next year. The following year, as we get into production in Little Rock and we lay out the most optimum footprint for our production levels, then I think there is opportunity to be able to offset that.

And then from a mix perspective, this is related to tariffs on many of the new products that we have coming in. Whether it's aluminum or steel that's being sourced here in the U.S., the prices of those products have gone up because of tariffs or whether we're bringing it in overseas. So we are not able to capture all of the revenue from the -- to offset those tariffs in the general market conditions at this point.

Okay. Understood. And then I guess as you think about the sell-through numbers this year, just to clarify, the low single digits, does that include or exclude the double-digit growth that you're seeing in railing?

Includes.

The next question comes from Michael Rehaut with JPMorgan.

Thanks. Good afternoon, everyone. Just wanted to see if I could get a little more granular if possible, on the 3Q, 4Q, the 3Q miss versus guidance and 4Q reduction. In total, it's about $65 million plus or minus a little, $15 million in the third quarter. Just trying to get a sense when you think about that, how much is just due to the softer market backdrop relative to your prior expectations versus the reduction in inventory? And also just trying to understand maybe by price point, there was some differentiation in the market earlier in the year in terms of low end versus mid- to high end and if you're seeing any differentiation in the second half?

Sure. Through the numbers that we already provided, we assumed a prior guidance, 5% to 7% growth, same thing from a sell-through perspective. Now we're talking about a low single-digit type growth. So let's call it roughly half of it, a little bit more is coming from market weakness side of it, and the remainder is coming out of inventory within the channel.

As it relates to the various product lines, if we look back the past couple of years, excluding 2025, we did see meaningful differences at the high end of the market versus the entry-level products. That has not been nearly as impactful. It's really just been kind of broad-based at this point, where [ there ] is many 1 level of the product line that's overperforming or underperforming.we've just seen it kind of across the entire decking/railing side of the business.

Now we did mention with the new product, railing is growing nicely. But again, from a decking perspective, there's really no major difference from a growth perspective, the high versus the low.

Okay. I appreciate that, Bryan. Also, I just wanted maybe a little clarification, if possible, around the 18% SG&A number for next year, if that's kind of a percentage that you would peg to any top line number? Or is it more of a comment on an absolute basis where you're trying to peg a certain dollar number, and that 18% could be higher or lower based on how revenues actually come out?

With the planning that we're working on at this point, we believe 18% is -- the number will be -- obviously, that could change if we see a considerably stronger market or a considerably weaker market on it. It's this planning number we have for everybody right now.

Okay. So maybe asked another way, would that 18% reflect kind of like a low single-digit type top line growth, which if you're thinking maybe the market is flat and composite outperforms a little bit? Is that a reasonable way to think about it?

We'll provide further guidance on revenue during the end of the year call.

The next question comes from John Lovallo with UBS.

The first one is, any thoughts on your largest competitor gaining some business with Boise [ Cascade ] and if this at all changes your strategy with Boise?

No, it does not change our strategy with Boise. I think what you've seen with various distributor announcements just recently here is just normal end of the year type movements as you see products coming into a location that really hadn't been carrying much, much in the way of ducking. And then in other cases, locations that are moving over to Trex which are moving out of competitive product along the way. So I wouldn't read too much into that.

Okay. And then I know it's tough to tell in a short period of time, but do you get any sense that you're seeing share shifts among you and your largest competitors keeping the wood side out of the equation just on the composite side?

Our sales team were very active in the market, tracking what our contractors are doing, understanding overall market growth of where we are. We're not seeing indications of that at the ground level.

The next question comes from Trey Grooms with Stephens.

And kind of touching again, I know this has been discussed a lot, but the 18% SG&A next year, I think branding costs have historically run about 6% or so of sales, if memory serves me. And -- so is that roughly the way we should be thinking about branding spend as part of the kind of 18% SG&A mix? Or would it be higher here as you ramp?

Absolutely. As we -- this year, you've seen a higher branding spend. Next year, we expect that will be elevated again in a weak market background. We haven't provided a specific percentage on that. We can do that in the next call. But I assume a good portion of that is related to marketing.

Yes. Okay. And then I think it was touched on just a bit here, but -- any way that we could -- you could maybe help us think about how this increase in branding or this ramp could translate into or maybe drive more demand, how quickly this spend could kind of translate into better dollars -- revenue for you guys?

What we have seen is with the increased branding this year, we've seen the purchase indicators increase. We've not seen that turn into the level of sales growth that we're satisfied with. But it definitely shows there's consumer interest in doing decking projects in the marketplace.

So we do need a little bit of a economic tailwind to start breaking some of these projects free. But backing off on marketing and waiting for those tailwinds to start is not going to be an effective strategy, especially when our competitors are out with very, very heavy marketing spend.

The next question comes from Jeffrey Stevenson with Loop Capital.

So Bryan, given the step down that you expect in 2026 CapEx expectation, could that give you some flexibility to increase other capital priorities such as share repurchases, given the higher expected free cash flow generation next year?

I think you're already seeing the first example of that, where we do expect that we will be in the market depending upon market conditions to buy back $50 million of shares. We have been somewhat muted in being into the marketplace because there has been a lot of capital going into the -- going into Little Rock. But over the longer term, we will be generating a significant amount of free cash flow. If you look at the years when we generate that cash flow, in a lot of cases, we use it for buybacks. So there'll still be opportunities for that. So this is the first indicator of usage of that higher free cash flow.

Got it. No, that makes sense. And I was wondering if you could give additional color on the recent expanded partnership with Weekes Forest products, which helps further strengthen your relationship with Snavely? Can you talk about how this strengthens your Midwest distribution footprint? And could there be additional opportunities to further expand partnerships with key distribution partners after the Boise announcement caught some investors by surprise?

We're really pleased with the relations to furthering of our relationship with Weekes. Minneapolis marketplace is a significant marketplace, and we felt that they'd be a great addition. Beyond that, I'm not going to get into any of the other commercial agreements we may be working on.

The next question comes from Trevor Allinson with Wolfe Research.

First question related to your long-term EBITDA margin targets with the increased expectation for SG&A spending. You've called the new level of SG&A spend as being normalized. So should we think of the long-term EBITDA margin target still being around 34%? Or did the prior margin target assume a little less competition in the market and thus, the higher SG&A spend reduces your long-term target from that 34%?

That 34% assumed a much stronger underlying repair and remodel marketplace in a mid-single-digit type level. We haven't seen that in 3 years. Hopefully, we'll see it next year, but I would say the indicators aren't great, I'd be happy if we start to see growth back in repair and remodel as we get into next year. So it would be a real challenge to be able to achieve that level by our original target date. But we do need to see that underlying economic strength to be able to get to those kind of numbers.

Okay. Makes sense. And then second question on year-end inventory. I think we've been at or somewhat below normalized inventory exiting the year in the last few years. Can you talk about where you're expecting days of inventory in the channel to be, exiting 4Q this year versus more normalized levels?

Yes. We've talked in the past about weak supply. Generally, end of the year tends to be a little bit higher just because you've got lower demand in that 6- to 8-week type range, then during the busy part of the season, you're going to be right around that 4-week range or so. So we think that, that, that 6- to 8-week probably is on the lower end of that part of it. I'm not all that worried about it from an inventory perspective because it is a slower part of the season. And I expect our distributors as well as dealer partners will take advantage of the Early Buy opportunities that are presented.

The next question comes from Anthony Pettinari with Citi.

You mentioned the mix in railing and Arkansas depreciation reducing the gross margin next year by 250 bps. I was just wondering if there's any kind of [ pheno ] cadence for that in terms of the year-over-year headwind? Is it pretty weighted pretty evenly over the 4 quarters of the year because they can potentially kind of dissipate into the end of the year? Or is there any kind of cadence we should keep in mind when we model it out?

I mentioned the 2/3, 1/3 split. The 1/3 is going to be pretty consistent by quarter. the 2/3 of it will build over the course of the year as we check out all of the lines that depreciation will turn on. So you'll start to see that late in Q1, building in Q2 and then into Q3.

Okay. Okay. That's helpful. And then I'm just curious, I mean, when you talk to channel partners and contractors, is there any common theme in terms of the consumer, the end buyer in terms of what maybe has created this sort of extra caution? Are there increased concerns around job loss or tariffs or -- obviously, you have a lot of partners and channels, but I'm just curious kind of qualitatively, if there's any theme that kind of came up as you saw this just increased caution from buyers?

Yes. I do hear all of those, more from just a general economic perspective of people stepping back, making sure that they have job security. When I talk to our contractors, the biggest thing that we hear back from their perspective, it is a more competitive marketplace. And when they're out, and they have job opportunities. Generally speak of that consumer, where a couple of years ago, they might be getting 1 or 2 contractors coming in. Now in many cases, they've got 4 coming in to give them bids. So people are really looking for the best deal that they can get on the projects. And I'm sure not all of them are coming to fruition if they don't get to the numbers they're expecting.

The next question comes from Phil Ng with Jefferies.

Bryan, in the past, you guys would give us an early look on EBITDA margins for next year. If I kind of take your framework you've given us for this year, call it, 28%, 28.5% EBITDA margin, you called out a few headwinds, 80 basis points on mix on the gross margin side, 30 basis -- 300 basis points, give or take, on SG&A. Is that the right way to think of it? Just taking the '25, and those would be the drags? Is there any offset we should be mindful of? I mean, certainly, volume leverage will be impactful, and you're obviously taking some downtime in the fourth quarter to work down inventory. But help us think through what EBITDA margins could look like next year, at least directionally?

Yes, I'd love to give you some additional detail on that. And you're right. Normally, we would provide some commentary on that during our third quarter call. Given the difficulty in understanding where the consumer is, what things are going to look like for next year, we're not going to try to do that in this call. We will give definitely more detail as we get into the end of the year call.

I mean, I guess let me ask it differently. Do you have any offsets that we should be mindful that on the continuous improvement side that should kick in that you guys are looking to tackle?

I did mention earlier that we will have continuous improvement activities that will be underway. Those activities will offset other inflation, other costs that are coming into the business. We're calling out this 250 now because we don't have this 250 covered.

That's helpful. Any early rate in terms of the placement with the channel, whether it's on the Pro wholesale side or retail? I know there's been some consolidation. The distribution side in the West Coast, that might be an opportunity for you guys at one of your bigger retail channel partners. But just any early look front? And you talked about the competition being more elevated on the market side. Anything on the rebate side which you might fold as well?

Yes. There's always going to be commercial discussions underway with all of the larger partners that are out there. We do expect that there will be some additional pressures from an incentive perspective in the marketplace as well, especially with some of the larger providers of sales opportunity.

The next question comes from Kurt Yinger with D.A. Davidson.

Great. Just one question for me. On the railing side, I believe there were certain retail shelf space adds this year that have been beneficial. How do you think about the ability to sustain this year's momentum into 2026 as you potentially lap that? And is the Pro channel performance pretty comparable as we look between the two?

Well, we tend to see with new product launches and shelf space wins, whether it's in the Pro channel or within retail, that it continues to build over the first couple of years. So we've been very pleased with what we've seen with the new products this year. We expect that we will see considerable opportunity as we take advantage of that share -- that space on the shelf, as well as working with contractors to be able to convert them away from competitive products. So we're confident that we've got the right strategy as we drive forward on railing.

The next question comes from Matthew Bouley with Barclays.

On the comments that your competitors are out with heavy marketing spend, I'm wondering if that has had an impact on market share at the dealer or contractor level already? Or is it not yet, but you're seeing the marketing out there and you want to prevent the share shifts? Or perhaps your retail partners are asking for more marketing spend? Just kind of help us understand how that lay of the land is playing out.

As I mentioned to an earlier question, we've not seen those share shifts. We do keep a close look at from a ground level perspective. But we also recognize that it is a very competitive marketplace. We've got aggressive competitors in the market. They're spending a lot on marketing and dialing back, and we're starting to see those consumers come through and see the purchase indicators. Improving with it, we think, would be the wrong way to go.

Okay. Understood. And then secondly, I think you said earlier that you're looking for inventory levels to be, I think you said flat year-over-year to end 2025, and correct me if I'm wrong. But is there a scenario where you would look to take down inventory levels, depending on how the market is shaping up?

We saw a really significant shift in the market from a downward perspective. I don't see indicators of that at this point. But again, I don't see anything that would cause that to be the case right now.

This concludes our question-and-answer session. I would like to turn the conference back over to Bryan Fairbanks for any closing remarks.

Thanks for participating in today's call. We look forward to seeing you at upcoming conferences and meetings. Good evening.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.