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Trex (TREX) is trading roughly flat higher following its Q4 earnings report last night. This supplier of wood-alternative decking and railing reported strong EPS upside. Revenue fell 14.4% yr/yr to $167.6 mln, but that was better than expected. Importantly, Trex guided Q1 revenue above analyst expectations, which is important as it starts to prepare for the spring/summer season, when many people decide to renovate their decks.

• We are not overly concerned about the Q4 revenue decline because this is Trex's seasonally slowest quarter of the year. Also, channel inventories decreased by $45 mln, which is almost double what Trex had originally forecasted as distributors worked down current inventory levels. Notably, Trex revised its channel inventory strategy in 2H24 to reduce its quarterly volatility related to channel stocking and destocking. The goal was to minimize production fluctuations within its manufacturing plants, but that did result in a revenue decline in Q4.
• Trex continues to see positive Residential sell-through growth, strong contractor backlogs, and favorable customer surveys. All of this suggests optimism heading into 2025. Trex is also excited about capacity expansion that will come online soon. It's building a plant in Little Rock, Arkansas that is on schedule to start pellet production in Q2. Once the initial startup expenses are behind it, this facility will be Trex's most efficient plant.
• Trex is enjoying strong demand for its premium-priced products and sequentially stable demand for its entry-level products. Trex has been seeing particular success with its premium decking called Transcend Lineage, which features heat-mitigating technology, now branded SunComfortable. It reflects UV rays and heat to keep decks feeling cooler. Heat-mitigation attributes are becoming more popular, especially in the Sunbelt where high temps and abundant sun are the norm.
• Railing is another area of focus for Trex. The company accelerated its pace of new product introductions in 2024 with new steel, mesh, and aluminum railing systems; cable and glass systems; and enhancements to its Trex Select and Trex Enhance composite railing systems that are priced to provide an alternative to vinyl railing. Trex now has a comprehensive portfolio of railing products addressing all major design preferences and price points. Trex has a goal of doubling its share of the $3.3 bln railing market over the next five years, moving from 6% to 12% share.

Overall, this was a pretty good way to wrap up 2024. Despite the decline in revenue, the retail-level sell-through and contractor backlogs are solid. The issue is that distributors worked down their inventory levels, which impacts sales in the near term but Trex should benefit from lean channel inventories as we head into the all-important spring/summer selling season. That helps explain the upside guidance for Q1.