Trex - Q2 2023
July 31, 2023
Transcript
Operator (participant)
Note today's event is being recorded. This time, I'd like to turn the floor over to Viktoriia Nakhla. Ma'am, please go ahead.
Viktoriia Nakhla (Head of Investor Relations)
Thank you, Jamie, and thank you everyone for joining us today. With us on the call are Bryan Fairbanks, President and Chief Executive Officer; Brad McDonald, Chief Accounting Officer; and Kara Strosnider, Director of Financial Planning and Analysis. Joining Bryan, Brad, and Kara is Amy Fernandez, Vice President, General Counsel, as well as other members of Trex Management. The company issued a press release today after market close, containing financial results for the second quarter, 2023. This release is available on the company's website. This conference call is also being webcast and will be available on the investor relations page of the company's website for 30 days. I would now like to turn the call over to Amy Fernandez. Amy?
Amy Fernandez (VP and General Counsel)
Thank you, Viktoriia. Before we begin, let me remind everyone that statements on this call regarding the company's expected future performance and conditions constitute forward-looking statements within the meaning of federal securities law. These statements are subject to certain risk and uncertainties that could cause actual results to differ materially from those expressed in the forward-looking statements. For a discussion of such risks and uncertainties, please see our most recent Form 10-K and Form 10-Qs, 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.
Bryan Fairbanks (President and CEO)
Thank you, Amy. Good evening, thank you for joining us today to discuss our second quarter 2023 financial and operating results. We're pleased to report that Trex delivered sales that were significantly above our guidance range, indicating resilient consumer demand for our products and the strength of the outdoor living category. We experienced mid-single-digit growth in channel sell-through, despite a small sales decline compared to last year's record second quarter when the channel was building robust inventories. In contrast, despite our strong sales in the first half of the year, we believe the channel remains conservative, holding inventory levels below the norm for this time of year.
While we remain cautious in our outlook, this performance has certainly improved our confidence in the consumer spending behavior and supports our experience that in challenging economic times, consumers are more inclined to invest in areas that add value and enjoyment to their existing homes, and to trust the Trex brand to consistently add value to their outdoor living spaces. Outdoor living remains the fastest-growing category in the repair and remodel sector. In support of our brand strategy, we continue to make significant investments in decking and railing products at every price point to make it easy for consumers to make the Trex decision, whether they're trading up from wood decking and railing, or building the ultimate outdoor space with high-end products like Trex Transcend Lineage or Signature Decking.
Across the spectrum, the benefits of low-maintenance Trex composite decking and railing, coupled with the easy installation of our products, offers a compelling value proposition for the Trex brand. Thanks to our leading distribution network, extensive retail presence, and top-notch dealers in the pro channel, Trex is the most widely available and purchased decking brand in North America and worldwide, repeatedly earning recognition as the brand of choice from consumers and contractors alike. Our commitment to spending on branding programs and the expansion of our product portfolio are yielding strong returns as we accelerate the conversion from wood to composite decking and railing, while we're also supporting the launch of new products at both the entry and high-end parts of the market.
Over the past several quarters, we've taken advantage of reduced production levels to implement a series of cost reduction and continuous improvement projects that we could not introduce while our plants were running at full capacity. Specifically, our efforts have centered primarily on driving production optimization and efficiency, line upgrades, energy efficiency, and raw material processing improvements. Collectively, these initiatives resulted in a second quarter gross margin of 43.9%, compared to residential gross margin of 41.7% in the 2022 quarter. This 220 basis point improvement in residential margin on less than full capacity is indicative of the substantial leverage inherent in the Trex business model. While we pursue cost reduction and continuous improvement programs to further strengthen our profitability, we also continue to drive innovation through consistent investment in new product development.
In the second quarter, we introduced Trex Select T-Rail System, a competitively priced, high-performance, low-maintenance composite rail system that enables us and our channel partners to compete more aggressively at the entry level, specifically against vinyl systems. This innovative system expands our existing Trex railing portfolio and is backed by a 25-year limited residential warranty and a 10-year commercial warranty. Consistent with Trex's legacy of sustainability, components are made from a minimum of 40% recycled materials. We see railing as a growth opportunity that complements our decking portfolio and believe the T-Rail introduction will enable us to meaningfully increase our railing sales by expanding the addressable audience and competing price points not served before by our existing railing lineup.
Earlier this year, we launched our signature decking product at the top of our product spectrum, which provides all the benefits of Trex decking with unprecedented aesthetics that mirrors the look and feel of true hardwood decking. We also added 2 incremental colors to Trex Transcend Lineage Decking, introduced last year, and quickly gaining favor with consumers in the trade. We also redesigned our Trex Deck design tool and online deck planner, which provides contractors and consumers with comprehensive digital software for deck planning. In addition to offering 3D renderings using realistic Trex product imagery and collections, the software assists users with budgeting, drafting blueprints for permitting, and creating a shopping list for all of the items needed to build a deck. These features make this product ideal for DIYers as well as those working with professional contractors. Turning now to our capacity expansion.
We continued to make progress in the modular construction of our third facility in Little Rock, Arkansas. With its favorable geographic location and proximity to essential raw materials and major transportation hubs, this facility will be our most efficient when it comes online. We expect that production from this plant will enable us to efficiently meet the long-term demand for Trex decking and railing products, as well as support other long-term growth initiatives. This facility will utilize the latest technology and innovation to minimize our carbon, waste, and water footprints, which will drive continued improvement in our sustainability metrics. We recently published our fifth annual ESG report, highlighting our sustainability integration across the company and affirming our commitment to pursue responsible and sustainable growth.
We are pleased to announce that in 2022, we initiated a program to divert construction waste and end-of-life Trex decking from landfills, providing full circle recycling for Trex decking. While Trex decking from our earliest days remains in use across the country and world, we recognize the need to support future generations who may want to replace their existing composite deck with new Trex decking. This is just one way we're helping to contribute to a more sustainable future. As you know, we're in the midst of a formal search for a new CFO. In the meantime, I'm pleased to call on Brad McDonald, our Chief Accounting Officer, to provide a review of the Q2 financials. Brad?
Brad McDonald (CEO)
Thank you, Bryan, and good evening. Similar to the previous quarter, my prepared remarks will compare our second quarter 2023 financial performance to the second quarter of 2022 Trex residential results, given the divestiture of Trex Commercial Products at the end of 2022. Net sales of $357 million in the quarter exceeded our expectations, but declined from $374 million of residential net sales in last year's second quarter, due to nonrecurrence of the channel inventory build that occurred during the first half of 2022. Despite reduced capacity utilization on a year-over-year basis, second quarter gross margin of 43.9% increased 220 basis points compared to residential margin of 41.7% in the prior year period, driven by production optimization and cost savings programs.
When we lowered production starting in the second half of 2022, we took the opportunity to prioritize cost savings programs that quickly produced results and yielded benefits in the first half of 2023. We expect these efforts and improvements to continue. Selling general and administrative expenses were $52 million, or 14.5% of net sales in the second quarter of 2023, compared to $37 million, or 10% of Trex residential net sales in the second quarter of 2022. The increase was primarily due to personnel related expenses, disposal of certain equipment, and expenses related to the exit of our prior corporate headquarters. On a consolidated basis, 2023 second quarter net income was $77 million or $0.71 per diluted share, compared to $89 million or $0.79 per diluted share in the year ago quarter.
Second quarter EBITDA was $117 million or 32.8% of net sales. From a year-to-date perspective, net sales for the first half of 2023 totaled $595 million, compared to $701 million of residential net sales in the first six months of 2022. Net income was $118 million, or $1.09 per diluted share, compared to $160 million or $1.40 diluted share in the first half of 2022. On a consolidated basis, year-to-date EBITDA was $186 million, with an EBITDA margin of 31.2%, compared to EBITDA of $235 million, with an EBITDA margin of 32.3% in the comparable period last year. Second quarter operating cash flow was $223 million.
As we converted significant working capital into cash from collection of accounts receivables and inventory reduction. Capital expenditures in the quarter were $43 million, primarily related to the build-out of the Arkansas facility. Supported by our operating cash flow and continued confidence in our long-term growth opportunity, we repurchased 265,000 shares of Trex stock in the second quarter for $16 million. As of the end of the quarter, 10.5 million shares remain available for repurchase under the program. I will now cover updates to our market guidance. Our first half results and greater visibility have put us in a position to provide full-year revenue guidance. While our confidence in consumer buying trends is improving, we remain cautious. For 2023, we expect revenues of $1.04 billion-$1.06 billion.
That reflect projected sell-through as we anticipate year end channel inventories to be below 2022 levels. Third quarter revenues are estimated to be in the range of $280 million-$290 million, with fourth quarter results reflecting both lower seasonal demand and channel inventory drawdowns. Also we are pleased to increase guidance for our full year EBITDA margin to a range of 28%-29%, a 200 basis point increase when comparing the new guidance midpoint to the previous guidance midpoint. This guidance includes our expectation that SG&A will be at the higher-end of the range of 15%-16% of net sales. Capital spending is estimated at $145 million-$155 million, an increase due to timing of cash flows related to the Arkansas build-out.
Our interest expense guidance is revised to $5 million to $6 million for the year, while depreciation and amortization and our tax rate guidance remains unchanged at $45 million to $47 million and 25% to 26%, respectively. With that, I'll now turn the call back to Bryan.
Bryan Fairbanks (President and CEO)
Thank you, Brad. Our industry-leading brand, expanded portfolio of products that appeal to a broad range of consumers, and top distribution and sales channel network are essential competitive advantages for Trex that position us to capture the substantial long-term growth opportunities ahead. I appreciate the hard work and dedication of our employees and partners who have contributed tremendously to our company's success. Operator, please open the call to questions.
Operator (participant)
Our first question today comes from Keith Hughes from Truist. Please go ahead with your question.
Keith Hughes (Managing Director of Sell Side Equity Research)
Thank you. I guess the question on the implied guide for the fourth quarter, that's a pretty big reduction. I understand it's seasonally weaker, but that's, that's a good bit weaker than what we historically see in past years. Given that sell-through has remained positive, do you, do you anticipate the channel taking down that much inventory at the end of the year, or is that what's driving it down so much?
Bryan Fairbanks (President and CEO)
Yeah, Keith, that's exactly what's driving it down. As you'll recall, the end of the first quarter and into the first -- end of the fourth quarter and into the first quarter, our inventory built, and the timing of that inventory build can change from year-to-year. We're expecting, with the conservatism in the channel, with higher interest rates, that the channel will end their inventories below where they were in 2022, and that's the difference. Now, that's just purely timing. That difference will come back to us in the first quarter and first half of next year.
Keith Hughes (Managing Director of Sell Side Equity Research)
Okay. Are you hearing from your channel partners that this is the stance you're taking, or are you just sort of making an assumption based on trends?
Bryan Fairbanks (President and CEO)
We are hearing from our channel partners, they will continue to be conservative on inventory, especially at the pro dealer level. A little bit less so from a distribution perspective, we do expect that they'll take that inventory on a heavier basis into the first quarter.
Keith Hughes (Managing Director of Sell Side Equity Research)
Okay. 1 final question. On revenue in the quarter, can you give us an idea how much of it was price mix, how much volume in the decline?
Bryan Fairbanks (President and CEO)
There's very little price involved during the first half of this year, as maybe, maybe 1% of price on average through the first half.
Keith Hughes (Managing Director of Sell Side Equity Research)
Okay. Thank you.
Bryan Fairbanks (President and CEO)
Thanks, Keith.
Operator (participant)
Our next question comes from Tim Wojs, from Baird. Please go ahead with your question.
Tim Wojs (Senior Research Analyst)
Yeah. Hey, guys. Nice, nice job. Good, good afternoon.
Bryan Fairbanks (President and CEO)
Thanks.
Tim Wojs (Senior Research Analyst)
Maybe just to start on the, the sell-through, if you can maybe kind of parse out what is, I guess, embedded in the, in the back half guidance around the sell-through?
Bryan Fairbanks (President and CEO)
Yeah, for the back half, we do expect to have a continued strong third quarter. Historically, third quarter is sequentially lower than second quarter. But as we look at the full year-type numbers, I'm expecting roughly flattish on a sell-through basis with prior year. And as I just mentioned with the prior question, that will exclude any normal inventory build that we would have during the December months.
Tim Wojs (Senior Research Analyst)
Okay. Okay, if you're kind of up a little bit from a sell-through basis in the first half, maybe just assuming, you know, things are potentially just a, a touch weaker in the back half on, on sell-through, is, is the way to think about it?
Bryan Fairbanks (President and CEO)
Maybe a touch weaker. If we look at the first quarter, we were down mid-single. Second quarter, we were up mid-single, so roughly flat on a year-to-date basis. Right now, given what we see with the consumer, I, I don't see much changing with that over the next 180 days.
Tim Wojs (Senior Research Analyst)
Okay, okay, very good. Then just, on, on the mix side, have you seen any sort of, you know, kind of mix changes within the portfolio, maybe trading down, trading up? I mean, how, how do you think the consumer's kind of reacting to just kind of overall inflation and just has, has that kind of led to any sort of, kind of, mix implications with, with your portfolio?
Bryan Fairbanks (President and CEO)
We have not seen any significant mix implications. As you're aware, we've launched both the Signature and Lineage deck boards at the top end of our spectrum to make sure that those customers who are looking for those high-end products are driven by the design and capabilities of those products. No, no issues from a mix perspective.
Tim Wojs (Senior Research Analyst)
Okay. Okay, great. Well, good luck on the second half.
Bryan Fairbanks (President and CEO)
Thanks, Tim.
Tim Wojs (Senior Research Analyst)
Take care.
Bryan Fairbanks (President and CEO)
Thanks.
Operator (participant)
Our next question comes from John Lovallo from UBS. Please go ahead with your question.
John Lovallo (Managing Director and Senior Equity Analyst)
Hey, guys. Thank you for taking my questions as well. You know, if we think about the gross margin in the quarter versus your expectations, I mean, can you kind of help us kind of bucket the benefits from maybe volume leverage, cost actions, materials, you know, things of that nature, please?
Bryan Fairbanks (President and CEO)
Yeah. So we've talked a little bit about deflation in the past. As we are primarily focused on recycled raw materials, it doesn't move like market commodities do of virgin resin. There was just a small amount of deflation within the quarter itself. By far, the largest driver of it is the continuous improvement projects and teams that we have together and the building momentum of that flywheel. As we started to pull down our production in the back half of last year, we were really able to focus more of our engineering and expertise on that cost reduction side. We've stabilized the business at this point -- at running the volume we're at at this point, we're able to drive meaningful improvements through the system.
John Lovallo (Managing Director and Senior Equity Analyst)
Got it. Okay. Then on SG&A, to, to hit the high end of the 15%-16%, it would imply something like 17% on average in the second half. Looks a little bit elevated on a dollar basis. I guess, the question is, I mean, is this really driven by continued brand spend moving into the back half of the year?
Bryan Fairbanks (President and CEO)
Yeah, you will see a significant increase compared to last year, where we pulled back significantly on the brand spend in Q3 and Q4 and we're seeing the brand spend is working. It's bringing that consumer through to the channel to buy Trex products.
John Lovallo (Managing Director and Senior Equity Analyst)
All right. Thank you, guys. Thank you, Bryan.
Bryan Fairbanks (President and CEO)
Thanks.
Operator (participant)
Our next question comes from Rafe Jadrosich from Bank of America. Please go ahead with your question.
Rafe Jadrosich (Director and Senior Equity Analyst)
Great. Thanks for taking my question. Bryan, just, just following up on the, the, the kind of 4th quarter comment. Can you just help us kind of understand, is that incremental destocking the rest of the year, or is that just kind of what's already happened year to date in the channel? In other words, like, do you expect sell-in to lag sell-through in, in the, the 4th quarter of the year?
Bryan Fairbanks (President and CEO)
Last year, we did have some restocking at the end of the year. We were successful in getting to the channel inventory targets, and we started our early buy program in December and ran through the end of March. This year, as we look at where interest rates are, the desire for the channel to hold inventories later in the cycle as possible, we will not have a program to the same degree that we did in the prior year. So I wouldn't really call it incremental destocking. It's really just a timing of when that inventory is moving into the channel.
Rafe Jadrosich (Director and Senior Equity Analyst)
Okay. Very, very helpful. And then, just following up on the earlier comments on, on SG&A, just, you're, you're taking up the percent on a high, higher sales number. How do we just think about that kind of longer term and going into next year?
Bryan Fairbanks (President and CEO)
There's still leverage available to us within SG&A as we grow as an organization. So that's something as part of the value proposition with Trex. As we grow that top line, we can leverage the, the SG&A line. We are seeing the branding working and pulling people through. In this economic environment, and we don't know what we're going to see first half of next year, we'll continue to look at the things that are working to drive people to our channel partners to buy Trex products.
Rafe Jadrosich (Director and Senior Equity Analyst)
Great. Thank you.
Bryan Fairbanks (President and CEO)
Thanks.
Operator (participant)
Our next question comes from Alexander Rygiel from B. Riley Securities. Please go ahead with your question.
Alexander Rygiel (Senior Managing Director)
Thank you. Nice quarter, gentlemen. Could you quantify the one-time items in the second quarter within the SG&A line?
Bryan Fairbanks (President and CEO)
They were minimal. There were some moving out from our old headquarters, as well as some asset write-offs. In total, it was about.
Alexander Rygiel (Senior Managing Director)
$1.5 million
Bryan Fairbanks (President and CEO)
Yep, $1.5 million between the 2.
Alexander Rygiel (Senior Managing Director)
Excellent. Is it possible to estimate the annual savings associated with your other cost reduction efforts or process improvement initiatives?
Bryan Fairbanks (President and CEO)
We have not put an exact number on that. I think it's fair to say that as a management team, we're highly focused on gross margin and EBITDA margin. We're looking for continuous improvement in everything that we do. As I mentioned, the flywheel really has kicked in during the second quarter, and we'll continue to see that. Now, some of that will be offset by lower volumes as we move through the rest of the year as seasonally lower revenue along the way, but it's something that we'll continue to focus on. A sizable part of that increase came from those improvement actions.
Alexander Rygiel (Senior Managing Director)
Thank you very much.
Bryan Fairbanks (President and CEO)
Thanks.
Operator (participant)
Our next question comes from Ryan Merkel from William Blair. Please go ahead with your question.
Ryan Merkel (Research Analyst)
Hey, good afternoon. Congrats on the quarter.
Bryan Fairbanks (President and CEO)
Thanks, Ryan.
Ryan Merkel (Research Analyst)
I wanted to, I wanted to also follow up on the fourth quarter. Can you just quantify the drawdown on inventory? And is that, is that something that you'll see in the first quarter? You mentioned it was just delayed.
Bryan Fairbanks (President and CEO)
Yeah, I estimate that number to between $60 million and $80 million. And yes, I would expect to see that move into the first quarter. Now, it's possible, depending upon the desires of the channel, that some of that may be in the fourth quarter still, but right now, the expectation is that inventory build portion moves out to the first quarter.
Ryan Merkel (Research Analyst)
Got it. Okay, that's helpful. Then I had a question on second half gross margin. It looks like guidance implies a bit of a step down. Can you just unpack, you know, why it's dipping in the second half? I realize revenues are a little bit less. Is there anything else going on?
Bryan Fairbanks (President and CEO)
No, there's really nothing else that would be going on that would drive that. The revenue drives down. We still do have the, the fixed cost within the operation, the maintenance activities that we take, indirect labor, those sort of things that don't all go into inventory, so we do see a step down. I'll remind everybody on the call, the best way to look at Trex is on an annualized basis for gross margin. There will be variances from quarter-to-quarter, depending upon our sales volume, as well as how much we're running through our facilities. We don't really focus on it as much on a pure quarterly basis, but what are we driving on a full year basis for our shareholders?
Ryan Merkel (Research Analyst)
Got it. Thank you. That's enough.
Bryan Fairbanks (President and CEO)
Thanks.
Operator (participant)
Our next question comes from Stanley Elliott from Stifel. Please go ahead with your question.
Stanley Elliott (Managing Director)
Hey, everybody. Thank you for the question. Hey, sticking on the margin side, can you talk maybe, you know, how should we think about the margin split between 3Q and 4Q with the moving parts and the revenue, and then also kind of the, the voluntary, destock it sounds like?
Bryan Fairbanks (President and CEO)
Yeah. I think if you look at, there'll be a fairly sizable difference because of the, the difference in revenue between those. When you look at the third quarter, you're probably looking at a step down between 300 to 350 basis points, and then the difference would fall out in the fourth quarter.
Stanley Elliott (Managing Director)
Great, guys. Thanks so much.
Bryan Fairbanks (President and CEO)
Thanks.
Operator (participant)
Our next question comes from Joe Ahlersmeyer from Deutsche Bank. Please go ahead with your question.
Joe Ahlersmeyer (Equity Research Analyst)
Hey, Bryan, good evening. We're doing well.
Bryan Fairbanks (President and CEO)
Hey, Joe.
Joe Ahlersmeyer (Equity Research Analyst)
Hey, if I look at your balance sheet at the end of 2022, when you had the destock and you were running the plants at about a $1 billion run rate, you were building finished good inventory. You carried that into the first quarter, and then it looks like with the upside to the second quarter sales, you sold out of inventory, kind of a $40 million-$45 million sequential change lower in finished good inventory. Just curious, with the, with the assumptions you're making in the back half, and I hear you on, you know, maybe $60 million-$80 million is pushed from 4Q to 1Q. What are you planning to do with respect to finished good inventory?
Is that something you're willing to do again this year, take that on and, carry that, just respect-- with respect to the conservatism in the channel?
Bryan Fairbanks (President and CEO)
Yeah, we're absolutely willing to build into the inventory to support the channel, knowing the conservatism is out there. I think we've got a really good view of the consumer, and we'll have, of course, a better view of the new year as we get closer to the end of the year. I don't see us building to the same level that we were last year, but end of the year does tend to be the highest inventory level historically, as we build into early buy.
Joe Ahlersmeyer (Equity Research Analyst)
And so thinking about how that manifests in margin in the first and second quarter, along with some of the deflation and the improvements you've made to the production processes, we should assume, I suppose, that the favorability and profitability would get hung up on the balance sheet, the second half margin guidance, correct?
Bryan Fairbanks (President and CEO)
We haven't provided any, any, guidance on that. I guess it would depend upon how much of that inventory gets used and in what quarter.
Joe Ahlersmeyer (Equity Research Analyst)
All right. Understood. Good luck. Thanks a lot.
Bryan Fairbanks (President and CEO)
Thanks.
Operator (participant)
Our next question comes from Michael Rehaut from JPMorgan. Please go ahead with your question.
Michael Rehaut (Executive Director and Senior Analyst of Equity Research)
Hi, good afternoon. Thanks for taking my questions. First, I just wanted to revisit the upside on the second quarter sales, which is obviously well above guidance. If you could kind of parse out, the drivers of that upside, and also comment on, sell-through versus sell-in, you know, how much of the strength was due to better than expected sell-through?
Bryan Fairbanks (President and CEO)
I would say all of the strength was due to better, better expected sell-through as we moved into the quarter. As the quarter moved its way through, that sell-through increased. As we look at the month of July, it's continuing at an elevated level. It's fairly normal in a seasonal business for those peak summer months to be the strongest sell-through periods for us. But I would say the strength of the consumer, their desire to continue investing in outdoor spaces and remodeling projects, is holding up a little bit better than what we had expected, and we sure hope that continues.
Michael Rehaut (Executive Director and Senior Analyst of Equity Research)
Okay. I, I appreciate that, Bryan. I guess, does that mean that embedded in your back half guidance, you're still expecting sell-through to be positive? Or , I know you said flat, I guess, for the third quarter. Does that reflect any type of deceleration?
Bryan Fairbanks (President and CEO)
We're expecting on a full year basis to be roughly flat.
Michael Rehaut (Executive Director and Senior Analyst of Equity Research)
Okay, great. And then just secondly, on the gross margins, you know, you had some nice upside there as well, and you cited a lot of the continuous improvement projects that, you know, are yielding benefits, yielding some fruit. I think earlier you had talked about, you know, if you think about the gross margins that you achieved, from, like, 2016 to 2019, you know, about 42%, you had said that you expect, given the lower level of capacity utilization that you have today, on, on a normal basis, you might be below that. Is that still how you feel, given some of the, you know, upside, perhaps, that you've seen in the second quarter in terms of the continuous improvement initiative? Has that changed at all, you know, relative to your prior comments?
Bryan Fairbanks (President and CEO)
Well, I think there's a lot of opportunity for us as we continue to go after costs within the organization. Now, how that manifests itself over the long term for gross margin over any specific quarter, there's a lot of other business decisions that are made as well, and business opportunities. Also overall, I would expect that you will continue to see us driving for improved gross margins here. We also know there's changes to businesses each year and what's happening with the economy and what our customers need from Trex. Thanks.
Michael Rehaut (Executive Director and Senior Analyst of Equity Research)
Great. Thanks.
Operator (participant)
Our next question comes from Jeffrey Stevenson from Loop Capital. Please go ahead with your question.
Jeffrey Stevenson (VP of Equity Division)
Hi, thanks for taking my questions today, and congrats on the strong quarter.
Bryan Fairbanks (President and CEO)
Thanks.
Jeffrey Stevenson (VP of Equity Division)
The last earnings call, Bryan, you mentioned that dealer and distributor partners were conservative about sell-through demand expectations this year, given the reduced early buy. I wondered if the channel has become incrementally more optimistic after the strong second quarter demand, or whether it's relatively stable from kind of where things were at that point?
Bryan Fairbanks (President and CEO)
Yeah, I think it's fair to say the channel has become more optimistic than where we were. I believe in the last earnings call, I mentioned that I would've been happy to see an additional $30 million-$40 million of inventory in the channel heading into the season. Obviously, that wasn't there. You see that that came off of our balance sheet to be able to support the marketplace. But yeah, our, our channel partners are definitely feeling the consumer being stronger, and the marketing actions that we continue to pursue quite heavily is, is working in bringing those customers in the door.
Jeffrey Stevenson (VP of Equity Division)
Great. No, that's helpful. And then just wondered if you could talk more about the demand trends you've seen in the retail channel. There was some concerns of a potential slowdown after home centers slated a, a deceleration in large ticket at R&R last quarter, and wondered if you saw any sequential change in channel demand.
Bryan Fairbanks (President and CEO)
Through the pandemic, the home centers grew more quickly, because they were available to be able to sell. We're maintaining those gains that we're seeing in the home home centers, and continuing to do very well from a special order perspective. Both what's selling on the shelf, as well as what they're ordering on a special order basis, are at good levels.
Jeffrey Stevenson (VP of Equity Division)
Great. Thanks, Bryan.
Bryan Fairbanks (President and CEO)
Thanks.
Operator (participant)
Our next question comes from Philip Ng from Jefferies. Please go ahead with your question.
Philip Ng (Managing Director)
Hey, guys, congrats on a very strong quarter. Bryan, I guess, the destock, the channel that, in the channel that you're calling out, is that all happening in the fourth quarter? Just because it sounds like sellout strengthened through July, and then implicit in your sales guidance and EBITDA guidance for the full year, does that assume you're curtailing your inventory to a certain degree in the fourth quarter, like, ahead of where sellout is expected to track, track for the year?
Bryan Fairbanks (President and CEO)
No. We'll, we'll be putting the inventory on our balance sheet. Just won't be turning into revenue. We'll be building it, recognizing that it's moving into the new year. We'll need that inventory.
Philip Ng (Managing Director)
Okay, that's helpful. And then from a CapEx standpoint, it sounds like CapEx is gonna come in closer to the higher end, some of that timing. Any color on how to think about next year? Is there a pull-forward dynamic of sorts?
Bryan Fairbanks (President and CEO)
No, there'd be about a $10 million difference. We haven't provided a number, but I think in the past we've said that we thought next year would be similar to what we saw this year from a total CapEx perspective.
Philip Ng (Managing Director)
Okay. Is that still a good way to think about it, then?
Bryan Fairbanks (President and CEO)
Yeah.
Philip Ng (Managing Director)
Okay. Thank you.
Operator (participant)
Our next question comes from Adam Baumgarten from Zelman. Please go ahead with your question.
Adam Baumgarten (Equity Research Analyst)
Yeah, hey, I was just wondering, is the fact that there's plenty of industry capacity now for the first time in years, also playing a role in how distributors order maybe closer to when they need the product than stocking up like they did in the past?
Bryan Fairbanks (President and CEO)
I'm sure there's some of that thinking in the marketplace, I would say probably the bigger issue was the confidence in that end consumer of what they were going to do, that nobody wanted to get ahead from an inventory position.
Adam Baumgarten (Equity Research Analyst)
Okay, got it. And then just thinking about raw materials as we get into the back half, do you expect more meaningful deflation than you saw in the first half at this point?
Bryan Fairbanks (President and CEO)
No. I think HDPE will probably level out where it is. We've seen a little bit of benefit there. We just don't use that much virgin HDPE. We don't use much in the way of virgin PVC. While it's nice, we're not seeing the costs go up on them like we did for a couple of years. It's not something that drives a large benefit to us because of our reliance on using recycled polyethylene.
Adam Baumgarten (Equity Research Analyst)
Okay, got it. Thanks. Best of luck.
Bryan Fairbanks (President and CEO)
Thanks.
Operator (participant)
Our next question comes from Steven Ramsey, from Thompson Research Group. Please go ahead with your question.
Steven Ramsey (Senior Equity Analyst)
... Good evening. On the brand spend that's being effective, what is driving that effectiveness? Is the brand spend in the current times more effective than in the past?
Bryan Fairbanks (President and CEO)
Well, we had moved away from a heavy brand spend through the entire pandemic. In the first half of last year, we did get back into roughly a full load of, of brand spending, and then pulled it back significantly as we were restructuring our, our business to achieve financial goals and the appropriate market volume that's out there. We look at each one of the programs that we're offering from a branding perspective to understand its effectiveness in the market. How does that result in website views? It's not just about people going to the overall trex.com, how are they interacting with us? Are they buying samples? Are they looking for a contractor? Are they looking for a retailer to buy that?
We've been able to correlate those numbers, pretty closely over the years to understand the effectiveness of that marketing spend versus bringing people through the channel and resulting in an end market sale.
Steven Ramsey (Senior Equity Analyst)
Okay, helpful. Then thinking about you having a more robust view than channel partners on the market, the actual results beating your view, thinking about channel partners, what is keeping them from buying more? Do you see a catalyst on the horizon that maybe brings them stocking to greater levels heading into 2024?
Bryan Fairbanks (President and CEO)
I think if we all see that the consumer is going to hold up to the same level that it did this year and get back to a growth-type environment, our channel partners are absolutely going to want to build more inventories into the year. We'll make sure that we have appropriate safety stocks here as well to be able to support the channel.
Steven Ramsey (Senior Equity Analyst)
Great. Thank you.
Bryan Fairbanks (President and CEO)
Thanks.
Operator (participant)
Our next question comes from Kurt Yinger from D.A. Davidson. Please go ahead with your question.
Kurt Yinger (VP and Research Analyst)
Great. Thank you. Bryan, I guess I'm just curious your thoughts on kind of wood to composite conversion this year. As you look forward and you think about kind of the accelerated rate of conversion, and call it the 2 years post-pandemic, how confident are you, or, or how are you thinking about the ability to kind of achieve those elevated conversion rates going forward versus, you know, maybe falling back to something more normalized that we saw in the 2010s period?
Bryan Fairbanks (President and CEO)
There was a lot of noise throughout the pandemic, and composites, well outgrew and out-converted against wood during that timeframe. I think the best way to look at it, and I don't have complete data for this year, but the anecdotal data, I would say, is, as we look at over the past 3 years, we've still been converting at about 200 basis points per year. It's been choppy. One year being really high, the next year being flat, maybe down a little bit. Thus far this year, we are continuing to see positive indicators from the market that that conversion is continuing.
Kurt Yinger (VP and Research Analyst)
Got it. Thanks. Then just one follow-up on capital spending. Could you remind us where you're at in terms of the total Arkansas spend at this stage? Then, I guess, if you were to try to estimate, like, a, a run rate or normalized capital spending number excluding that, what would that look like?
Bryan Fairbanks (President and CEO)
Well, our maintenance CapEx is going to be roughly 5% of revenue. The, the Little Rock number, I think, is about $150 million, maybe $170 million.
Kurt Yinger (VP and Research Analyst)
Got it. Okay, thanks so much.
Bryan Fairbanks (President and CEO)
We've got a ways to go with that.
Operator (participant)
Our next question comes from Matthew Bouley, from Barclays. Please go ahead with your question.
Matthew Bouley (Managing Director and Senior Equity Research Analyst)
Hey, good evening, everyone. Thanks for taking the questions.
Bryan Fairbanks (President and CEO)
Hey, Matt.
Matthew Bouley (Managing Director and Senior Equity Research Analyst)
In terms, in terms of the channel inventory, you know, you, you sort of mentioned that the channel is kind of looking for better visibility or comfort in the consumer to, to kind of, you know, return to more normal ordering patterns. Is that a comment that as we think about 2024, from what you can tell today, you know, that maybe we could see a more return to more normal seasonality next year? Or should we think that what we saw this past year might, might still be the, you know, the kind of new normal for, for the near term?
Bryan Fairbanks (President and CEO)
I think the return to normalcy is what we're all looking for. So our operations have absolutely stabilized. The channel got used to running with very, very low inventories, high turns, higher margins, and this year, some of that's normalizing back out again into holding normalized inventories going into the season itself. That doesn't completely turn around in 1 year. I think we'll see further normalization next year. I hope it's completed in 2024, but it may extend out into 2025.
Matthew Bouley (Managing Director and Senior Equity Research Analyst)
Got it. Okay, that, that's helpful. Thank you. Then, previously, you guys had spoken to sort of 100 to 150 basis points of better gross margins on $100 million of higher sales. You know, obviously, your visibility to margins has progressed here and production for the balance of the year. Is that still a good rule of thumb for us to think about?
Bryan Fairbanks (President and CEO)
Yes.
Matthew Bouley (Managing Director and Senior Equity Research Analyst)
All right. Thanks, guys. Good luck.
Bryan Fairbanks (President and CEO)
Thanks.
Operator (participant)
Our next question comes from Reuben Garner from The Benchmark Company. Please go ahead with your question.
Reuben Garner (Senior Analyst)
Thank you. Good evening, everyone, and congrats on the strong results.
Bryan Fairbanks (President and CEO)
Thanks.
Reuben Garner (Senior Analyst)
I guess, first, a, a clarification; You, you were previously building to a $1 billion-dollar sort of production level. your outlook now is something better than that for, for revenue. Have you had to add people or, or lines or anything, or, or will you have to in the second half, and is that kind of baked into to the gross margin outlook? There's some investment in ramping back up, or, are you able to kind of manage by working, using some of your existing inventory?
Bryan Fairbanks (President and CEO)
As we got later into the quarter, we did start to add back. It's not something that we can do overnight; and we'll add that on as we go through the rest of this year. It does take time to add those people and lines in.
Reuben Garner (Senior Analyst)
Okay. Then, the next question is a working capital one. It's been a source of, excuse me, on use of cash in the first half of the year. I know there were some things going on in the first quarter. With, with you potentially having to build inventory, how do we think about how working capital will play out in the second half of the year?
Bryan Fairbanks (President and CEO)
Well, you'll see that accounts receivable, the first quarter accounts receivable balance was all collected in the second quarter. You'll see the second quarter balance all collected within the third quarter and the majority of that receivable balance will turn to cash by the end of the year. A certain amount of that will be offset by higher inventories.
Reuben Garner (Senior Analyst)
Perfect. Thanks, guys, appreciate it. Good luck going forward.
Bryan Fairbanks (President and CEO)
Thanks.
Operator (participant)
Ladies and gentlemen, with that, we'll be concluding today's question and answer session. I'd like to turn the floor back over to Bryan Fairbanks for any closing remarks.
Bryan Fairbanks (President and CEO)
Thank you for your questions and your attendance on today's call. We look forward to speaking with many of you through the rest of the quarter. Good evening.
Operator (participant)
With that, ladies and gentlemen, we'll be concluding today's conference call and presentation. We thank you for joining. You may now disconnect.