Trex Company Reports Second Quarter 2020 Results
Trex Company, Inc. (NYSE:TREX), the world’s number-one brand of composite decking and railing and leader in high-performance, low-maintenance outdoor living products, and a leading national provider of custom-engineered commercial railing systems, today reported financial results for the second quarter ended June 30, 2020.
Second Quarter 2020 Results
Consolidated net sales for the second quarter of 2020 were $221 million, 7% ahead of the comparable period in 2019. Trex Residential Products sales increased 8% year-over-year to $209 million, with Trex Commercial Products contributing $12 million. Consolidated gross margin expanded by 150 basis points to 41.9%, representing gross margins of 42.5% and 30.7% for Trex Residential Products and Trex Commercial Products, respectively. SG&A was $29 million, or 13.2% of sales, compared to 17.3% of sales in the year ago quarter. EBITDA increased 32% to $67.5 million, and EBITDA margin expanded to 30.6% from 24.8% in the second quarter of 2019.
Net income for the second quarter of 2020 was $47 million, or $0.81 per diluted share, 32% and 33% respectively, ahead of the $36 million, or $0.61 per diluted share, reported in last year’s second quarter.
“Before commenting on our results, we want to recognize the tremendous efforts of the Trex team in ensuring that we were able to remain fully operational in a safe and effective manner and drive high single-digit sales growth during these challenging times. Our team demonstrated exceptional resilience, and we thank them for their hard work and dedication. We would also like to thank our channel partners, who worked tirelessly to serve their customers and keep their employees safe, and whose extraordinary efforts contributed to our success.
“Strong second quarter results demonstrated continued broad-based demand for Trex decking and railing products reinforcing our leadership position in outdoor living. Trex Enhance® Basics and Naturals decking has significantly expanded the size of our addressable market and has accelerated our ability to take share from wood, while Trex Transcend® and Trex Select® decking continued to gain market share.
“Our gross margin performance reflected improvements in both Trex Residential and Trex Commercial. The 80-basis point expansion in Trex Residential gross margin was primarily due to improved throughput and reduced material costs in our Enhance product line, partially offset by startup costs for the new capacity in Nevada. Trex Commercial gross margin reflected quarter-specific project mix, as well as improvements in overall execution and manufacturing cost savings.
“Production efficiencies, stable raw material costs and disciplined SG&A spending drove strong operating leverage in the quarter, resulting in a 580 basis-point expansion in EBITDA margin and 33% growth in earnings per share in the second quarter,” noted Bryan Fairbanks, President and Chief Executive Officer.
First Half 2020 Results
Net sales for the first half of 2020 were $421 million, 9% above the $386 million reported for the comparable period in 2019. Trex Residential Products sales were up 10% to $396 million, with Trex Commercial Products contributing an additional $25 million. First half 2020 consolidated gross margin was 43.3%, compared to 39.6% in 2019. Trex Residential Products gross margin was 44%, compared to 41% in the first half of 2019. Trex Commercial Products gross margin expanded to 32.3% from 21%. SG&A was $64 million, or 15.1% of net sales, compared to $66 million, or 17.1% of net sales, in the first half of 2019. EBITDA increased 34.9% to $126 million, and EBITDA margin expanded 570 basis points year-over-year to 30%.
Net income was $90 million, or $1.54 per diluted share, for the first half of 2020, compared to net income of $67 million, or $1.14 per diluted share, for the first half of 2019.
Recent Recognitions
For the 13th consecutive year, Trex was ranked No. 1 by trade professionals for “brand familiarity,” “brand used in the past two years,” “brand quality,” and “brand used most” in the Builder Magazine Brand Use Study. In an unprecedented 10-year streak, Green Builder Media Readers’ Choice Awards named Trex as the “greenest” decking brand. Trex is the only composite decking manufacturer to have held this title since the program’s inception in 2009. In addition, Trex brand received the best Brand Index score for the decking category – a new addition to the Green Builder program for 2020.Summary and Outlook
“First half results give us confidence that 2020 will be another year of strong growth for Trex. Additionally, market leadership, brand recognition and strong channel partnerships have enabled Trex to gain share from the large wood market as consumers increasingly recognize the benefits of Trex composite products. This gain has accelerated with the launch of Enhance decking products that have narrowed the price gap between composites and wood.
“Our $200 million capital expansion program is progressing on schedule and will enable us to meet continued demand growth. We started three new production lines in our Nevada facility late in the second quarter and will continue to deploy our strong operating cash flow to build out our new Virginia facility, which is scheduled to start coming online early in the first quarter of 2021.
“For the third quarter of 2020, we expect consolidated net sales of approximately $215 million to $225 million, representing 13% year-over-year growth at the midpoint. With improved clarity in the market, we are again able to provide full year financial guidance. We expect full year 2020 incremental gross margin to be 45% to 50% inclusive of additional COVID-19 related expenses, full year SG&A as a percentage of sales to improve by 80 to 100 basis points compared to the prior year, a full year tax rate of approximately 25% and full year capital spending of $150 million to $170 million.
“Reflecting our continued positive outlook, the Trex Board of Directors has approved a 2-for-1 stock split of the Company’s common shares. The stock split will be in the form of a stock dividend to be distributed on September 14, 2020 to shareholders of record at the close of business on August 19, 2020,” Mr. Fairbanks concluded.
Second Quarter 2020 Conference Call and Webcast Information
Trex will hold a conference call to discuss its second quarter 2020 results and other corporate matters on Monday, August 3, 2020 at 5:00 p.m. EDT. To participate on the day of the call, dial 1-877-270-2148, or internationally 1-412-902-6510, approximately ten minutes before the call and tell the operator you wish to join the Trex Company Conference Call.
A live webcast of the conference call will be available in the Investor Relations section of the Trex Company website at 2Q20 Earnings Webcast. For those who cannot listen to the live broadcast, an audio replay of the conference call will be available on the Trex website for 30 days.
Forward-Looking Statements
The statements in this press release regarding the Company's expected future performance and condition constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements are subject to risks and uncertainties that could cause the Company's actual operating results to differ materially. Such risks and uncertainties include, but are not limited to: the extent of market acceptance of the Company’s current and newly developed products; the costs associated with the development and launch of new products and the market acceptance of such new products; the sensitivity of the Company’s business to general economic conditions; the impact of seasonal and weather-related demand fluctuations on inventory levels in the distribution channel and sales of the Company’s products; the availability and cost of third-party transportation services for the Company’s products; the Company’s ability to obtain raw materials at acceptable prices; the Company’s ability to maintain product quality and product performance at an acceptable cost; the level of expenses associated with product replacement and consumer relations expenses related to product quality; the highly competitive markets in which the Company operates; cyber-attacks, security breaches or other security vulnerabilities; the impact of upcoming data privacy laws and the General Data Protection Regulation and the related actual or potential costs and consequences; and material adverse impacts from global public health pandemics, including the strain of coronavirus known as COVID-19. Documents filed with the Securities and Exchange Commission by the Company, including in particular its latest annual report on Form 10-K and quarterly reports on Form 10-Q, discuss some of the important factors that could cause the Company's actual results to differ materially from those expressed or implied in these forward-looking statements. 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.
Use of Non-GAAP Measures
In addition to the financial measures prepared in accordance with U.S. generally accepted accounting principles (GAAP), we use the non-GAAP financial measure of earnings before interest, income taxes, depreciation and amortization (EBITDA) and EBITDA as a percentage of net sales, EBITDA margin, to assess performance. We consider EBITDA to be an important supplemental indicator of our core operating performance because it eliminates many differences among companies in capitalization and tax structures, capital investment cycles and ages of related assets. EBITDA should not be considered as an alternative to net income, as calculated in accordance with GAAP, and is not meant to be considered superior to or a substitute for our GAAP results. Reconciliation of net income (GAAP) to EBITDA (non-GAAP) is as follows:
Three Months ended
June 30,
Six Months Ended
June 30,
2020
2019
2020
2019
Net income
$ 47,218
$ 35,710
$89,620
$67,265
Interest income, net
(71)
(1)
(593)
(57)
Income tax expense
16,249
12,030
29,504
19,730
Depreciation and amortization
4,063
3,399
7,915
6,793
EBITDA
$ 67,459
$ 51,138
$126,446
$93,731
Net income as a percentage of net sales
21.4%
17.3%
21.3 %
17.4%
EBITDA as a percentage of net sales (EBITDA margin)
30.6%
24.8%
30.0%
24.3%
About Trex Company
Trex Company is the world’s largest manufacturer of high-performance wood-alternative decking and railing with more than 25 years of product experience. Stocked in more than 6,700 retail locations worldwide, Trex outdoor living products offer a wide range of style options with fewer ongoing maintenance requirements than wood, as well as a truly environmentally responsible choice. Also, Trex is a leading national provider of custom-engineered railing and staging systems for the commercial and multi-family market, including performing arts venues and sports stadiums. For more information, visit trex.com.
June 30, Six Months Ended
June 30,
2020
2019
2020
2019
(Unaudited) (Unaudited) Net sales
$
220,648
$
206,453
$
421,043
$
386,024
Cost of sales
128,243
123,009
238,941
233,214
Gross profit
92,405
83,444
182,102
152,810
Selling, general and administrative expenses
29,009
35,705
63,571
65,872
Income from operations
63,396
47,739
118,531
86,938
Interest income, net
(71
)
(1
)
(593
)
(57
)
Income before income taxes
63,467
47,740
119,124
86,995
Provision for income taxes
16,249
12,030
29,504
19,730
Net income
$
47,218
$
35,710
$
89,620
$
67,265
Basic earnings per common share
$
0.82
$
0.61
$
1.55
$
1.15
Basic weighted average common shares outstanding
57,866,967
58,486,192
57,998,247
58,514,676
Diluted earnings per common share
$
0.81
$
0.61
$
1.54
$
1.14
Diluted weighted average common shares outstanding
58,030,994
58,687,540
58,177,357
58,758,201
Comprehensive income
$
47,218
$
35,710
$
89,620
$
67,265
June 30,
2020
December 31,
2019
$
12,237
$
148,833
Accounts receivable, net
249,682
78,462
Inventories
49,649
56,106
Prepaid expenses and other assets
19,516
19,803
Total current assets
331,084
303,204
Property, plant and equipment, net
224,909
171,300
Goodwill and other intangible assets, net
73,875
74,084
Operating lease assets
36,926
40,049
Other assets
4,196
3,602
Total assets
$
670,990
$
592,239
LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable
$
28,135
$
15,227
Accrued expenses and other liabilities
78,456
58,265
Accrued warranty
5,178
5,178
Total current liabilities
111,769
78,670
Operating lease liabilities
30,776
34,242
Deferred income taxes
9,831
9,831
Non-current accrued warranty
18,951
20,317
Other long-term liabilities
2
4
Total liabilities
171,329
143,064
Preferred stock, $0.01 par value, 3,000,000 shares authorized; none issued and outstanding
—
—
Common stock, $0.01 par value, 180,000,000 shares authorized; 70,266,754 and 70,187,463 shares issued and 57,878,003 and 58,240,721 shares outstanding at June 30, 2020 and December 31, 2019, respectively
703
702
Additional paid-in capital
123,933
123,996
Retained earnings
651,300
561,680
Treasury stock, at cost, 12,388,751 and 11,946,742 shares at June 30, 2020 and December 31, 2019, respectively
(276,275
)
(237,203
)
Total stockholders’ equity
499,661
449,175
Total liabilities and stockholders’ equity
$
670,990
$
592,239
June 30,
2020
2019
(unaudited) Operating Activities Net income
$
89,620
$
67,265
Adjustments to reconcile net income to net cash (used in) provided by operating activities: Depreciation and amortization
7,915
6,792
Stock-based compensation
4,303
4,918
(Gain) loss on disposal of property, plant and equipment
(134
)
10
Other non-cash adjustments
(233
)
(308
)
Changes in operating assets and liabilities: Accounts receivable
(171,220
)
(26,746
)
Inventories
6,457
14,882
Prepaid expenses and other assets
(2,335
)
210
Accounts payable
12,195
(3,777
)
Accrued expenses and other liabilities
(591
)
(16,548
)
Income taxes receivable/payable
21,691
(3,640
)
Net cash (used in) provided by operating activities
(32,332
)
43,058
Investing Activities Expenditures for property, plant and equipment
(62,613
)
(19,061
)
Proceeds from sales of property, plant and equipment
2,146
-
Net cash used in investing activities
(60,467
)
(19,061
)
Financing Activities Borrowings under line of credit
173,000
89,500
Principal payments under line of credit
(173,000
)
(89,500
)
Repurchases of common stock
(44,124
)
(24,172
)
Financing costs
(361
)
-
Proceeds from employee stock purchase and option plans
688
560
Net cash used in financing activities
(43,797
)
(23,612
)
Net (decrease) increase in cash and cash equivalents
(136,596
)
385
Cash and cash equivalents at beginning of period
148,833
105,699
Cash and cash equivalents at end of period
$
12,237
$
106,084
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