This has positioned Trex as the primary beneficiary of positive long-term trends towards outdoor living. In addition, Trex is the most widely available and purchase decking and railing brand in North America and around the world. In recent months, we expanded our distribution network in Texas, Oklahoma and other Southern states, enabling us to better service many of the fastest growing markets. As the world's largest manufacturer and market leader of wood alternative composite decking and railing with the most expansive manufacturing and distribution network, our dealers and contractors can confidently grow sales. Q4 was the first quarter to benefit from the actions we took in July to align our cost structure with the lower sales volumes due to channel inventory recalibration.

We reduced production levels, right-sized our employee base while retaining our most experienced manufacturing talent and implemented cost efficiency programs. These actions, together with easing inflationary pressures, enabled us to drive sequential increases in fourth quarter for both gross margin and EBITDA margin of 960 basis points and 710 basis points respectively. Additionally, further opportunities for margin expansion are expected with our ongoing investment and focus on continuous improvement programs. During the quarter, we balanced these actions aimed at improving our near-term profitability with longer term decisions to support our growth trajectory, namely investing in the Trex brand and continuing to commercialize new products that broaden our market opportunity.

In addition, we completed the sale of Trex Commercial Products. The divestiture reflects our decision to focus our resources on the most profitable opportunity for our company and its shareholders, namely accelerating conversion to composites from wood and further strengthening our industry leadership. For more than 30 years, we have reinvented and defined a composite decking category and innovation remains a key competitive advantage for Trex. In the fourth quarter, we doubled the number of color options available nationally for our recently launched Transcend Lineage decking collection, which incorporates heat mitigating technology with a refined color palette and finish. We also introduced a tiered warranty structure for Trex decking that underscores the value of our industry-leading good, better, best decking lineup.

More recently, we announced the launch €“ the regional launch of our latest decking innovation, Trex Signature decking. This product offering elevates the premium composite decking category with the achievement of the most authentic wood aesthetics to-date by rising the bar for beauty, performance and sustainability. Signature decking is backed by an industry-leading 50-year limited residential warranty and is complemented by the full range of Trex Signature railing. Trex innovation also extends to our robust sourcing and recycling efforts. Through the NexTrex recycling program, customers such as Rent the Runway, LL Bean and Urban Outfitters have found a solution to transform their single-use plastic waste into beautiful and sustainable Trex decking.

While the economic backdrop remains uncertain, we continue to believe our tie to the repair and remodel sector makes us more resilient than other sectors. As many homeowners are priced out of moving, they tend to invest in their existing homes and pursue renovations, especially those that add long-term value like a Trex deck. Despite our general optimism, we are moving forward cautiously to ensure that we emerge in this period as an even stronger company. We have several key advantages that position Trex to outperform in both the near and long-term. First, the Trex brand, which is synonymous with high performance and low maintenance, continues to receive the most significant and prestigious recognition in the industry, including recently being named America's most trusted composite decking brand by Lifestory Research, earning the highest trust rating amongst 9 decking brands included in the survey, receiving the best reviews and satisfaction scores among survey respondents and being the only decking brand to earn the maximum 5-star rating.

Second, the 95% recycled and reclaimed content of our decking boards. Coupled with our sustainable manufacturing process makes us the ideal choice for today's increasingly eco-conscious consumer and an appealing investment for ESG and growth investors. Third, we have the highest production efficiency in the composite industry. Fourth, we have the industry's leading network of channel partners with products sold through more than 6,700 retail outlets across 6 continents. Our brand appeal and strength has recently allowed Trex to gain additional stocking positions in the pro channel and to extend our market leading availability in the home center channel. And fifth, Trex's company history of cash flow generation and balance sheet positions us for today and into the future.

As we look to the long-term, our new manufacturing facility in Arkansas will give us the capacity to take full advantage of demand growth. While we are continuing with the modular build-out of the facility in 2023, when Arkansas comes online, Trex will have unmatched geographical coverage with east, west and central sites to serve our decking and railing customers and to drive additional long-term growth through expansion of our international sales in addressing the adjacent cladding market. While we are committed to the build-out of the Arkansas facility, we expect the build-out will extend beyond the originally planned 2024 timing with gradual manufacturing ramp starting with processing of recycled materials and then moving to decking manufacturing currently estimated to start in early 2026.

We have entered 2023 with a position of strength supported by our brand and market leadership and a strong balance sheet. At the same time, we remain mindful of the macroeconomic environment, and as such, we are taking a conservative approach to full year planning. We expect to decrease our balance sheet inventory to more normalized levels throughout 2023, which will improve cash flow. As we have noted in prior calls, we have elected to run our facilities with the assumption of a $1 billion revenue run-rate for the year. However, if demand differs from expectations, we have the ability to quickly flex our production level accordingly. I will now turn the call over to Dennis to provide a more detailed view of our financial performance and our outlook.

ash-ashley-t21WuuMXhjk-unsplash

Dennis Schemm: Thank you, Brian and good afternoon everyone. Consolidated net sales were $192 million in the fourth quarter, which exceeded expectations. Trex Residential and Trex Commercial net sales were $181 million and $11 million respectively. As previously discussed, fourth quarter residential sales were impacted by the inventory recalibration in the pro channel spurred by concerns over a potential easing in consumer demand due to rising interest rates, declining consumer sentiment and expectations of a general slowing in the economy. However, as Brian mentioned, we are pleased to report that the pro channel inventory correction was completed by year end 2022 as anticipated. In response to the inventory recalibration, we immediately took aggressive actions to better align our cost structure with current demand by reducing production, rightsizing our employee base and focusing on the cost reduction programs.

As a result, we posted a significant sequential recovery in consolidated gross margin and Trex Residential gross margin, which increased to 34.1% and 36.1% respectively in the fourth quarter. In the year ago period, consolidated gross margin was 38.9% and Trex Residential gross margin was 39.7%. Selling, general and administrative expenses were $35.4 million or 18.5% of net sales in the fourth quarter compared to $36.7 million or 12.1% of net sales in the fourth quarter of 2021. Excluding $4.3 million of other expenses related to the sale of Trex Commercial and non-executive retention compensation, SG&A was $31.2 million or 16.2% of net sales. During the fourth quarter, we completed the sale of our wholly owned subsidiary and reportable segment, Trex Commercial.

The divestiture reflects our decision to focus on driving the most profitable growth strategy for the company and its shareholders through the execution of our outdoor living strategy. The sale resulted in a $15.4 million loss in the fourth quarter. Beginning in 2023, the company will operate in one reportable segment, Trex Residential. We posted the relevant quarterly data in our earnings release and on our website in our investor presentation for ease of comparison. 2022 fourth quarter net income was $10 million or $0.09 per diluted share compared to $25 million or $0.22 per diluted share in the year ago quarter. Excluding the loss on the sale and other expenses related to the divestiture of Trex Commercial and non-executive retention compensation, adjusted net income was $25 million or $0.23 per diluted share.

We are pleased to have delivered adjusted EBITDA of $46 million or 24.1% of net sales in line with our expectations. We used our strong balance sheet and cash flow to repurchase 1.1 million shares of our outstanding stock in Q4, returning $50 million to shareholders. We also outsized our revolver by $150 million, bringing our total debt capacity to $550 million to provide us with the additional financial flexibility. Summarizing our full year results, consolidated net sales were $1.1 billion compared to $1.2 billion in 2021. Trex Residential net sales were $1.1 billion, with Trex Commercial contributing $47 million. Consolidated and residential gross margins were 36.5% and 37.7% respectively compared to 38.5% and 39.3% respectively in 2021.

Selling, general and administrative expenses were $142 million or 12.8% of net sales compared to $140 million or 11.7% of net sales in 2021. Excluding $5.5 million related to the loss on the sale and other expenses related to the divestiture of Trex Commercial non-executive retention compensation and third quarter severance charges, SG&A expenses in 2022 were $136 million or 12.3% of net sales. Full year 2022 net income was $185 million or $1.65 per diluted share compared to $209 million or $1.80 per diluted share in 2021. Excluding the loss on sale and other related expenses, the non-executive retention compensation and severance charges, adjusted net income in 2022 was $201 million or $1.80 per diluted share. Adjusted EBITDA was $313 million, resulting in an adjusted EBITDA margin of 28.3%, in line with guidance compared to adjusted EBITDA of $357 million adjusted EBITDA margins of 29.8% in 2021.

We generated a very healthy operating cash flow of $216 million in 2022. We invested $176 million in CapEx, mostly related to the new Arkansas manufacturing facility. We also invested in our high-return investment cost reduction initiatives that will enable us to improve our profitability in 2023 and beyond. 2022 was also a record year for share buybacks as we returned approximately $395 million to shareholders through the repurchase of 6.5 million shares of our outstanding common stock with 1.5 million shares remaining under this existing program. As Bryan mentioned, we are committed to Arkansas as our third production location, but we expect the investment to occur over a longer time period. Total investment is still planned at approximately $400 million, most of which was initially planned to occur through late 2024.

That investment will now carry on through 2025 and into 2026. We expect to use more working capital throughout the first half of the year as we level load our production to $1 billion of sales and deploy normal early buy programming to ensure our products are properly seeded in the channel. Given our strong share repurchases in 2022, we expect to be utilizing our revolver throughout the year and incurring interest expense in the range of $8 million to $9 million. As we turn to our outlook, we anticipate first quarter 2023 net sales to be in the range of $230 million to $240 million and we are seeing the following for our 2023 annual guidance; full year 2023 EBITDA margin to be in the 26% to 27% range; selling, general and administrative expenses in the range of 15% to 16% of net sales; an effective tax rate of approximately 25% to 26%; interest expense in the range of $8 million to $9 million; depreciation in the range of $45 million to $47 million; and capital expenditures in the range of $130 million to $140 million, which primarily relates to the modular build-out of our Arkansas facility calibrated to demand trends.

With that, I will now turn the call back to Bryan.

Bryan Fairbanks: Thank you, Dennis. To sum up, our fourth quarter performance has set the stage for 2023 to be a year of continuous improvement and return to normalized marketing of both the Trex brand and new products. Trex will continue to provide the consumer with a broad-based product portfolio and deliver meaningful value to our channel partners. We remain confident in our ability to outperform, thanks to our brand strength and market-leading position, distribution and retail partnerships, expanded product lines and most importantly, the dedication and collaboration of the people who make up the Trex organization. They are a key competitive advantage that cannot be replicated. Operator, please open the call to questions.

See also 12 Cash Rich Dividend Stocks To Buy and 25 Companies that Make the Most Money in the World.

To continue reading the Q&A session, please click here.