Good afternoon and welcome to the Trex Company Fourth Quarter and Full Year 2022 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Viktoriia Nakhla, Investor Relations. Please go ahead.

Thank you everyone for joining us today. With us on the call are Bryan Fairbanks, President and Chief Executive Officer; and Dennis Schemm, Senior Vice President and Chief Financial Officer. Joining Bryan and Dennis 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 fourth quarter and full year 2022. 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?

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 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-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.

Thank you, Amy, and good evening everyone. Our fourth quarter operating results came in ahead of our expectations and represented a strong sequential recovery as we effectively navigated the challenges of the pro channel inventory recalibration. I am pleased to report that, as anticipated, the inventory recalibration was completed by year end. With good participation in the early buy season, we entered the year an upcoming season with inventory levels that align with market expectations. Consumer demand for Trex decking and railing remained steady during the quarter, demonstrating the broad-based appeal of our product portfolio and attractiveness of the outdoor living category as an ongoing secular trend. Supported by our industry-leading brand, manufacturing efficiency and the strength of our longstanding relationships with best-in-class channel partners, Trex offers the most relevant products and strongest service levels to customers’ everyday. 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…

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,…

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.

[Operator Instructions] Today’s first question comes from John Lovallo with UBS. Please go ahead.

Good afternoon, guys. Thanks for taking my questions. The first one is I just want to make sure I have the math right here. So there was $200 million of channel inventory built starting in the third quarter of ‘21. I think $100 million was in the third quarter and fourth quarter combined. So the other $100 million was in 2022. And I believe last quarter, you said that two-thirds of that was in the first quarter, so call it $65 million to $70 million. It looks like the revenue guide year-over-year for the first quarter is down, call it, $90 million to $100 million year-over-year. So is that sort of $20 million to $30 million delta your assumption for the decline in sell-through?

It’s not as much a decline in sell-through as it is the channel being more conservative in the amount of inventory that they are willing to hold at this point. So there is still caution within the channel itself. Our balance sheet, we have additional inventory. We talked about building that inventory going into the end of the year as we were producing at a $1 billion level, but we weren’t selling at that level for the last 6 months of the year. So we are prepared to service the marketplace. But by far, the largest driver of it is a more conservative channel right now, not leaning quite as heavily into normal early buy as they have in the past.

Got it. Okay. And then at the midpoint of the EBITDA margin guide, you’d call it $265 million, it appears that assuming $1 billion in sales, it appears that the decremental margin would be somewhere around 80%. Are we thinking about that right? And what would drive such a sharp decremental margin?

Well, I think the way we’re looking at it because decrementals always get a little bit messy here when you’re dealing with that. But we’re looking at 26% to 27% EBITDA margins for the full year. So the main decreases year-over-year are going to be essentially with the step-up in SG&A as we talked about last year in Q3, right? So we talked about the need that we needed to step that up to support more branding to support our number one position with the brand. We wanted to also support R&D as well with new product deliveries as well as alternative formulations. And then thirdly, continuing to invest in our sales force as we want to grow in the highest wood conversion opportunity areas, but that would be the major ones.

Thank you.

Thanks, John.

The next question comes from Ryan Merkel with William Blair. Please go ahead.

Hi, guys. Thanks for taking the questions.

Hi, Ryan.

So first off, Brian or Dennis, can you unpack the $1 billion revenue guide a bit more? Just looking for details on sell-through and units, remodel outlook and any seasonality details that we should think about?

Yes. I think I mentioned in my opening comments a little bit about seasonality that I expect to see a steeper curve to the season than what we’ve seen in the past. We’re building our plan, assuming a $1 billion production plan, kind of assuming from a channel perspective that what sells in, sells out during the course of the year. We are not expecting any significant inventory build. And as I mentioned earlier, we will be ready to support that inventory need as the summer gets here. But we also have a planning assumption where the consumer is a little bit weaker, down at mid-single-digit type range on a full year basis. And it’s really more of the second half of the year. There is still more concern as there is just general uncertainty in the economy still. And if we do see that there is improvement, we do have the ability to quickly flex up that production and deliver whatever capacity is necessary.

Got it. Okay. That’s helpful. And then I know you said demand is steady. Can you just talk about sort of sell-through in 4Q, what you’re seeing here in 1Q and just contractor confidence heading into the selling season?

Yes, we continue to see good demand in the fourth quarter. October and November were flat with prior year. We did see a bit of a fall off in December, a mid-single-digit type falloff. But moving into the new year, that’s improved where it’s roughly flat again with prior year. And talking with our contractors, backlogs have normalized. So rather than them being out between 8 and 12 weeks, modem are going to be between 4 and 6 weeks at this point. So our contractors are still feeling pretty good about the season.

Good to hear. Thanks.

Thanks, Ryan.

The Next question is from Joe Ahlersmeyer with Deutsche Bank. Please go ahead.

Yes. Thanks for the question. Good afternoon, guys.

Hi, Joe.

So I want to be really clear on what is guidance and what is not here because Dennis, in your prepared remarks, I think you jumped right to the EBITDA margin when you’re talking about 2023 guidance John did a good job of laying out the 1Q. I won’t go into detail on the full year, but other than to say that it implies at $1 billion, down something in the mid-teens. I think, Brian, I heard you say mid-single digits is your sell-through assumption I guess the bottom line of my question is, can we just be really clear on is the $1 billion a production rate assumption, which – to which we’d have to add your assumptions around selling through of your inventory? Or is the $1 billion not a guide here? Like what is the $1 billion?

Historically, we’ve provided one quarter out of revenue guide, and that’s what we’ve done this quarter. And also at the beginning of the year, we have provided a variety of different metrics, in this case, providing full year guidance on EBITDA, SG&A tax. So no, the $1 billion is not a full year guide. We’ve not moved to that. But I think given the changes in the marketplace, giving everybody here an understanding of the type of level that we’re producing to because if I were sitting in your chair, and we said we were producing to, let’s say, a $1.4 billion type rate. I might be a little bit concerned that the customer is not strong enough to support that kind of rate. So we believe that it’s important that we produce at a prudent rate while we have the ability to turn on production as we see the marketplace change.

Very clear. Okay. And then your residential EBITDA margin in 2018 was around 31%. Could you maybe help reconcile or bridge that number to your 26% to 27% guidance? What sort of constitutes that 400 to 500 basis points difference. DNA doesn’t really factor in there. Mix, I’ve always assumed is margin neutral. You’re talking about having invested in productivity and having a highly trained workforce. So is there a way to think about what’s driving that gap into 2023 versus 2018?

I think the biggest factor there, Joe, is really coming down to utilization of capacity. And that would basically drive this difference that you’re referencing at this point in time? We are operating at a level below our total capacity at this time.

Got it. Very clear, thank you, guys.

Thanks, Joe.

The next question is from Tim Wojs with Baird. Please go ahead.

Yes. Hi, guys. Good afternoon. Maybe just first question, just can you talk a little bit about some of the shelf space wins that you talked about in your prepared remarks. And I guess maybe just expand a little bit on the value proposition and the levers that you’re kind of leading with because I think there are some questions out there from investors, if there is any sort of kind of pricing pressure that comes along with that? I don’t think there is, but I’m just kind of curious what you’re levering.

No, we have not seen pricing pressure in the marketplace. Our contractors have been comfortable in selling through the product lines we provided at the current price level. So that’s not something that we see that there is a a high risk of. As it relates to the opportunities to win, I think we talked a little bit in the past about with Trex leading market share. And when you have some uncertainty in the marketplace, much bigger selling proposition is go with the leading brand. The brand is important when the consumer isn’t quite as strong. And we’ve seen a number of our channel partners move exclusively to Trex or increase their commitment with Trex as we move through this period. So that continues to be an opportunity as we move forward.

Okay. Okay. Good. And then I guess just from a margin cadence perspective, I mean anything that kind of call out from a seasonality perspective as we kind of think through the year, Dennis, maybe using Q4 as kind of a benchmark?

Yes. So that’s a great question. Thanks for that. So our jumping off point, if you will, as Brian mentioned, we got the full benefit of all of our restructuring and rightsizing our workforce in Q4. So we ended up at Trex Residential at 36%. We’re looking to see that lift that gross margin lift by about 150 to 200 basis points for the full year. So I would expect to see those cost savings initiatives start to ramp up. Now when you get into the Q2, Q3, you’re offset partially here by a slightly weaker mix as we’re more DIY-oriented at that time. But I would just look at it pretty much level across the year with about a 38% gross margin 37% to 38% gross margin.

Okay, thanks, guys.

The next question comes from Trey Grooms with Stephens. Please go ahead.

Hey, good afternoon. Thanks for taking the question. So the channel inventory normalization, it sounds like that’s behind you First off, if you could maybe give us a little color on kind of how you’re seeing the inventory levels within the channel here as we’re kind of getting into peak season. Sorry, if I missed it, I dropped off for just a second. But do you feel like it’s kind of at or even below kind of normal levels within the channel? Or just kind of what your thoughts are on that?

We attack the excess inventory in the channel aggressively starting in July, and it was effective in getting it down to where we wanted to be by the end of the year. If you heard us talk about the year will be a little bit steeper curve as we move into Q2 and Q3. I Would like to see a little bit more inventory in the channel, as we’ve seen historically? I’d probably be a little bit happier with that. But we recognize where the channel is coming from. We have the capacity here. We have the inventory to be able to support the reduced risk that they’d like to carry right now.

Got it. Got it. Okay. And then as you kind of think about on the cost side of things, any kind of deflation or maybe any kind of good guys on the cost side that you could point to maybe with input as we kind of look at this year?

Moderation is probably the right word for it at this point rather than deflation. I hope to see that as we move through the year, we actually have some commodities that we do see some significant deflation on, but we’re not really seeing that nor are we seeing evidence of that. If you would have asked me a month ago, I would have said aluminum probably is a great opportunity. And for those of you who follow aluminum, it recently shifted quite significantly where it’s kind of back to where it was in the back half of last year at those higher prices. So it’s something that we will keep you up to date on, but we’re not seeing a significant deflationary marketplace. We don’t buy a lot of PVC in the marketplace, which has deflated quite significantly.

Right. And I guess it’s fair to say then that the EBITDA margin guide of 26% to 27%, if we were to see some significant deflation there for you guys that that would create some potential upside for those margins?

Correct.

Alright. Thank you, guys. Take care.

Thanks.

Next question comes from Keith Hughes with Truist Securities. Please go ahead.

Thank you. In response to an earlier question, I think you said you’re expecting sell-through to be down mid-single digits for the year. I just wanted to confirm that, if you could talk about what you were thinking at this point in terms of first half versus second half?

Now we’re not necessarily expecting it to be done. We’re building our production plan with that in mind. And as we see this consumer is stronger as we move into Q2 and Q3 and more product is needed in the channel, we will be able to service that. But that $1 billion is based off of a mid-single-digit type decline.

Okay. And would you expect in the second half of the year, I mean, based on your production planning to get back up positive side, revenue and production year-over-year.

Yes. I think in the third quarter, you would see a significant. Clearly, we’ve got two really tough comps in the first half and in the back half of the year, much easier comps. And then the fourth quarter, really, the question will be, how do we see the consumer moving out into 2024 and how much risk is our channel willing to hold going into the end of the year? What does our early buy program look like in December or does it start in January. So those questions are still to be answered.

And one final one, can you talk about what pricing contributed in the fourth and what you’re planning in the first to revenue?

Yes. So pricing was about 10.7%. And in the first quarter, it’s going to be our biggest opportunity, probably around $4 million there. For the first half, it’s essentially like $5 million to $6 million, maybe max.

We’ve pretty much lapped all of our pricing. January of last year was the last significant pricing we took. We took a very small amount in April. So as we get through pretty much the first quarter, all of that pricing has been lapped.

Great. Thank you.

The next question is from Jeff Stevenson with Loop Capital. Please go ahead.

Hi, thanks for taking my questions today. I was just wondering if you could talk more about your conversations with dealers and distributors about sell-through demand expectations as we move into the spring selling season. Has there been any sequential change you would call out compared with, say, 90 days ago or have expectations remain relatively steady with where they were?

I’d say expectations have remained relatively steady. They continue to see good demand through the fourth quarter. Clearly, there were some questions about that from a channel perspective. Would they be able to continue selling at a level to draw down inventory, but then also be able to bring in the start of an early buy in the month of December. And as you move out to the first quarter, again, we continue to see that consumers are going to both our pro channel as well as DIY customers and placing orders for Trex products.

That’s great to hear. And then I just wanted to touch on the progress you’ve made expanding your distribution and network. So the Texas announcements were encouraging. But just how long a runway do you believe you have in expanding your distribution partnerships moving forward?

Generally speaking, for Trex, it’s going to be less about adding new distributors. These were a couple of marketplaces where we see the growth is quite significant, and we felt that we needed to add some additional representation. So the largest growth will come from additional retail outlets as well as improving our share within the existing outlet that we sell from. But these were important enough in a marketplace that we do see outsized growth in the future that we wanted to call them out specifically.

Okay. Thank you.

Thanks.

The next question is from Phil Ng with Jefferies. Please go ahead.

Hi, guys. Congrats on an impressive quarter.

Thanks, Phil.

Question for you, Dennis, I guess, the 26% to 27% EBITDA margin target, appreciating you’re not guiding to $1 billion of sales, but that implies mid-single-digit volume declines, give or take. What if it was like weaker, like down 10%? Do you have enough levers to kind of still sustain that margin threshold in that demand backdrop?

Well, I think you saw in the past, how we’re able to move and get our cost structure right. So I think that there are things that we would do to improve the margin structure and keep it robust.

Okay. And I forgot to ask, Dennis, any way to help us think how much of the cost out is driving some of that strength in the sustainability and the strength of the margins for 2023?

Well, I mean that’s the baseline, right, for us moving forward. And now what you have is what the cost saving measures of continuous improvement, cost outs that we worked really hard on from a labor perspective, energy diversification, etcetera. They are all coming into play now. That’s that additional in 150 to 200 basis points of gross margin improvement that we’re calling out.

Okay. That’s helpful. And then on your CapEx guidance, the $130 million to $140 million for 2023, to more muted than I would have thought appreciating maybe you are adding some of this little rock capacity further out down the road. Is that $130 million to $140 million sustainable? And if I heard you guys correctly, you are not actually physically adding decking capacity until 2026. Is that when it hits the market?

I expect that we will start to see production out in that timeframe. I think it’s really important for everybody to understand our existing facilities. We don’t have room for additional buildings or additional capacity. So, it’s important that we have the third site and we have a building that’s ready for decking capacity to be able to go in. And based off what we are looking at this point, we think that timing is early 2026 when that would start running.

Okay. Super. That’s helpful.

The next question comes from Reuben Garner with The Benchmark Company. Please go ahead.

Thank you. Good evening everybody.

Hey Reuben.

So, kind of a follow-up to Phil’s question on the EBITDA margin guide, I guess conversely, if the market is better, than you anticipated, are you kind of managing the business to this 26% to 27% level, meaning you will have more investments to make to bring capacity on faster and SG&A investments, or would you see some leverage in expansion on that margin if the market is better than you expect as the year progresses?

Yes, I think that’s a great question. So, I would expect that we would see some margin expansion if we saw demand stronger then we are going to see better utilization, and that will be better cost absorption for us. So, I think that’s where you will see that benefit. And we are pretty committed to keeping the SG&A rate in that range of the 15% to 16%.

Got it. And then the contractor, any update on what you are hearing about contract or backlog, and even pricing of jobs. I know that was kind of a deterrent to some activity over the last couple of years, the extended lead times to get things done and pricing for the labor and other components of the job have gotten expensive? Are you hearing that those are reversing or are starting to settle in a little bit?

Contractor backlogs have normalized at this point between four weeks and eight weeks. They had longer backlogs and some of them they were out 10 weeks, 16 type weeks. They can price jobs wherever they wanted to do excessive jobs, they didn’t really want to do. So, the more normalized backlog, the pricing is coming back in line in the marketplace, and they are looking to continue to drive that backlog. So, make sure that they have got competitive pricing.

Great. Congrats on the strong close to the year, guys and good luck.

Thanks Reuben.

The next question is from Alex Rygiel with B. Riley. Please go ahead.

Thank you. Good morning gentlemen. A couple of quick questions here. The mid-single digit decline in volume assumption, can you disaggregate that between the market decline expectation and maybe some market share gain assumptions that you have implied there based upon the pro and retail markets that you have commented on.

Yes. I think the biggest question is the strength of the consumer in the back half. So, we have not disaggregated that number at least for this call. We know what’s coming through with some of the market share gains that we have had out there. But again, we are being conservative as we look to the back half of this year from a production perspective and then our expectations with the consumer.

And then secondly, are you anticipating any product mix shift with your production plan?

No, we have not seen a shift downward with any changes in the economy. And Dennis did mention that we will see a little bit of a mix shift only because during the summertime, we have a much higher DIY demand, which is heavier on basics. It doesn’t carry the same margin as our other profiles along the way. So, we do end up offsetting that with other continuous improvement along the way. But that’s probably the biggest impact is that we see a steeper curve in the year, which drives a little bit more of the basic sales to the summer months than normal.

Thank you.

Thanks.

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

Great. Thanks and good afternoon everyone.

Hey Kurt.

I just wanted to start out with a high-level question on margins. And Dennis, earlier you said, I think the big difference between the 26% to 27% EBITDA margin this year and what we have seen historically is call it, lower utilization. But I guess looking forward, what are the big areas of opportunity that you see on the margins side, kind of regardless of improvements in, I guess the volume environment?

Yes. I think if I would just go and compare 2021 – or sorry, 2022 to 2023, right. Largest decrement to the EBITDA margin side will be the step-up in the SG&A that we did, right. So, we talked about that last year where we are stepping up in branding and R&D and the like. So, that was definitely part of it. I think another part that’s important to think through, too, right, is we are not utilizing all of our capacity today. And so maybe in round numbers here for every $100 million in net sales that we would be producing for I would be expecting to see about 100 basis points to 150 basis points of gross margin improvement as well. So, these are some opportunities for us to really inflect EBITDA margins higher going forward.

Got it. And I guess that 100 basis points to 150 basis points of gross margin, is that just all volume leverage or…?

Pretty much that would be mainly volume leverage.

Got it. Okay. And then in the release, you talked about focusing on driving accelerated wood conversion. Just curious how that element kind of factors in to your 2023 outlook or kind of the framework you are using for market demand? And what factors you think are working for or against you in the current market?

Yes. So, in today’s marketplace, wood has receded back to normalized pricing. Our basics product sells for 2x the price of wood. All of the market research we did about converting that wood customer to the Trex composite customer started with that 2x price level and then being able to up-market that consumer to the Naturals product line, which has been highly successful over the past few years. And with Decks.com, we will continue to pursue that strategy.

Got it. Alright. Thanks a lot Bryan and good luck here in 2023 guy.

The next question is from Matthew Bouley with Barclays. Please go ahead.

Hey. Good evening everyone. Thanks for taking the questions. Just one on the divestiture of commercial, so what does that do from the perspective of management’s focus? And how should we think about Trex kind of looking at any targeted M&A within residential decking or other residential adjacencies?

Well, as I have mentioned in my comments, it does allow the organization to specifically focus on the residential segment, which by far has the largest shareholder returns and opportunity moving forward. So, it’s one less distraction that’s out there for the organization.

Got it. That’s helpful. Thank you for that. And then just second one, back on the topic of sell-through. If we take 2022, you had the $200 million of destocking at the end of the year and the $100 million of channel and fill at the beginning of the year. So, you sort of had that net $100 million of destock. So, is it fair to say that your 2022 kind of sell-through was actually $100 million higher, right? And then so when you talk about the $1 billion in 2023, you are actually thinking of more like a 10% decline in sell-through. Am I overcomplicating it? Is there an assumption of price in there? Just any additional color on that.

In 2022 versus 2021, if you are just looking at that net sales line then yes, it would appear that we are about 10% higher from a net sales out. But if you look at it on more of a volume basis linear feet basis, I would tell you, sell-through equal to sell-out. And so our main philosophy into 2023 is in how we are building our plan is really sell-in is equal to sell-out. There is not going to be – we are not factoring in any sort of inventory build in the channel.

Understood. So, $1 billion is effectively your view of sellout in ‘23. Okay. Thanks Dennis. Thanks Bryan.

Thank you.

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

Good evening. I want to jump on the question there. So, if Q4 has even – Q4 ‘23 has even some normalized level of inventory build in the channel, that would be upside to thinking about the $1 billion of production. Is that a fair way to think of it?

Yes, depending upon the strength of the consumer. If the consumer behaves as we have expected with the production plan that we have built, then yes, there would be upside based on that.

Okay. Helpful. And then I wanted to make sure I understood on the gained distribution in Texas and surrounding states. You said that was more retail oriented than the wholesale channel, maybe just help us understand if that’s the case and how you see that building in the guidance this year or if that more benefits 2024.

All of our distributors support both the pro channel as well as retail customers. So, it’s really an overall channel opportunity to improve our representation in those markets and ensure that we can get product to customers where and when they need it.

Helpful. Thank you.

The next question comes from Adam Baumgarten with Zelman. Please go ahead.

Hey. Good evening everyone. Just given the kind of more gradual build out of Little Rock, can you maybe talk to the overall dollar amount of capacity you have just because with the return to growth in the coming years and the push out until 2026, just curious if you have enough capacity to grow at maybe your kind of historical rates as we get into the outer years here.

Yes. We are not going to get into the capacity of dollar value of total capacity that we have. We are confident that we have the capacity we need to be able to grow through that timeframe. If we see it come on quicker, we would use inventory as the buffer to build ahead on that.

Okay. Got it. And then in the near-term, if demand does end up being stronger than anticipated, how quickly can you ramp up production? Would that just be with your existing workforce, or would you need to hire additional people to service that additional demand?

It would be a combination of both. We would bring people in. I did mention in my comments, we do have a highly talented workforce today because we have kept our most experienced and long-tenured employees. So, we do have the ability to bring in some less skill, less knowledgeable individuals on day one and be able to train them on how to run our lines. So, they become highly skilled and are with us for a long period of time. But with a much higher percentage of highly skilled individuals who know all the ins and outs of running our lines, it’s much easier to bring on that line today than it was during the peak of the pandemic.

Got it. Thanks a lot. Best of luck.

Thanks.

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

Hi. Good afternoon. Thanks for taking the question. Dennis, I just wanted to follow-up on an earlier comment about the gross margin cadence through the year. You expect relatively consistent other than some of the mix shift pressure in 2Q and 3Q. Does that mean that like in terms of the production levels, you are assuming that it stays relatively consistent through the year? I would think if productions were sort of ramping the gross margin would go up with it.

Yes. So, we build our plan basically assuming a level load of production to support $1 billion in sales. So, to answer your question, it’s a level load across the quarters.

Okay. That’s helpful. And then just on the – are you assuming anything on the international side? Can you give further an outlook for 2023, is there any step-up there now that you have some excess capacity?

Yes. We do have the capacity. International is a challenge. It’s fair to say. Those markets are in a little bit different situation compared to North America, their energy prices continued to be very, very high. Some of the other inflationary factors have been more elevated than what we have seen here in the States. So, we are expecting a much weaker consumer in those marketplaces. Our customers did infill their inventories at the end of the year. They are in good shape, whatever the market throws at them along the way. But I do expect this will be a difficult year with some of our international marketplaces.

Thank you. That’s helpful.

The next question comes from Michael Rehaut with JPMorgan. Please go ahead.

Great. Thanks for taking my questions. So first, I just want to get – make sure I am understanding it right in terms of the first quarter sales. You mentioned that the destocking is largely completed or completed by year-end. At the same time, you are looking at a – on an adjusted basis, if you take out the builds from last year, still sales down about 8% to 12%. And – but the sell out – the sell-through, did I hear it right that you are expecting it to be roughly flat year-over-year. So, the delta would be a difference in channel inventory?

Well, we are thinking sell-in will be equal to sell-out, right. And so I think Bryan talked a little bit about Q1 sales being a little lighter than we would like them to be at this point in time because the channel understand – we understand the channel’s position, they understand as well that we have inventory and we have capacity. However, we expect things to heat up here in the second quarter and be more of a shift, much higher shift in demand in Q2. So, that’s how we are looking at that first half. First half would be larger than the second half as far as sales go. I wouldn’t call it a 50-50 across the halves.

And I think it’s important to recognize, even though the channel is not stocking to the same degree that it has in the past, it will be building inventory in the first quarter. It’s a must to be able to service the marketplace during the peak part of the season as some of that inventory is built. So, that when we talk about producing and what we see in the sell-through, that’s on the course of the full year. But through the first quarter, we definitely expect inventory to be built in the channel. It’s just much more conservative than what it has been in the past.

Okay. We perhaps you can follow-up with that after I guess. Secondly, also, I just wanted to make sure I understood. You are talking about an expectation for gross margins to be roughly similar throughout the year at around 37.5%, 38%. Would that apply the same then to SG&A? And if you could just remind us how to think about SG&A for the year, I think the last time – last call, you talked about 15% to 16%. Just curious if that still applies.

Yes. So, for the full year guide, we are looking at 15% to 16% for SG&A. And as you discussed before, from a gross margin perspective, yes, we are looking at 38%, pretty much ratable or flattish across the quarters. I think it’s just important too, over the longer term here, we do expect to see gross margins increment up. I would see us getting over 40% over the longer term. And as far as incremental EBITDA margins over the longer term as well, I do expect us to return to that 35% to 40% incremental EBITDA margins over the longer haul.

And our branding is more heavily weighted to the beginning part of the year. We started that midway through the first quarter and then continue on that heavily through second quarter and even into the third quarter and then trails off significantly at the end of the year.

Thanks.

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

Thank you for your questions and your attendance on today’s call. We look forward to speaking with many of you during the quarter at conferences and other events. Have a great evening. Thanks.

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