TREX CO INC Management’s Discussion and Analysis of Financial Condition and Results of Operations (Form 10-Q)

0
The following management discussion should be read in conjunction with the Trex
Company, Inc. (Trex) Annual Report on Form
10-K
for the year ended December 31, 2021 filed with the U.S. Securities and Exchange
Commission (SEC) and the condensed consolidated financial statements and notes
thereto included in Part I, Item 1. "Financial Statements" of this quarterly
report. Trex has one wholly-owned subsidiary, Trex Commercial Products, Inc.
Together, Trex and Trex Commercial Products, Inc. are referred to as the
Company, we or our.

NOTE ON FORWARD-LOOKING STATEMENTS

This management's discussion and analysis contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. All statements regarding our expected
financial position and operating results, our business strategy, our financing
plans, forecasted demographic and economic trends relating to our industry and
similar matters are forward-looking statements. These statements can sometimes
be identified by our use of forward-looking words such as "may," "will,"
"anticipate," "estimate," "expect," "intend" or similar expressions. We cannot
promise you that our expectations in such forward-looking statements will turn
out to be correct. Our actual results could be materially different from our
expectations because of various factors, including the factors discussed under
"Item 1A. Risk Factors" in our Annual Report on Form
10-K
for the year ended December 31, 2021 filed with the SEC. These statements are
also subject to risks and uncertainties that could cause the Company's actual
operating results to differ materially. Such risks and uncertainties include,
but are not limited to: the extent of market acceptance of the Company's current
and newly developed products; the costs associated with the development and
launch of new products and the market acceptance of such new products; the
sensitivity of the Company's business to general economic conditions; the impact
of seasonal and weather-related demand fluctuations on inventory levels in the
distribution channel and sales of the Company's products; the availability and
cost of third-party transportation services for the Company's products and raw
materials; the Company's ability to obtain raw materials, including scrap
polyethylene, wood fiber, and other materials used in making our products, at
acceptable prices; increasing inflation in the macro-economic environment; the
Company's ability to maintain product quality and product performance at an
acceptable cost; the Company's ability to increase throughput and capacity to
adequately match supply with demand; the level of expenses associated with
product replacement and consumer relations expenses related to product quality;
the highly competitive markets in which the Company operates; cyber-attacks,
security breaches or other security vulnerabilities; the impact of upcoming data
privacy laws and the EU General Data Protection Regulation and the related
actual or potential costs and consequences; material adverse impacts from global
public health pandemics, including the strain of coronavirus known as
COVID-19;
and material adverse impacts related to labor shortages or increases in labor
costs.

OVERVIEW

The following MD&A is intended to help the reader understand the operations and
current business environment of the Company. The MD&A is provided as a
supplement to, and should be read in conjunction with, our Condensed
Consolidated Financial Statements and the accompanying notes thereto contained
in "
Item 1. Condensed Consolidated Financial Statements
" of this report. MD&A includes the following sections:

• Operations and products

             - a general description of our business, a brief overview of 

our

             reportable segments' products, and a discussion of our operational
             highlights.



         •   Financial Highlights for the three months ended June
              30, 2022 -
             a summary of the financial highlights for the quarterly period ended
             June 30, 2022, a description of relevant financial statement line
             items, and a general discussion of factors that may affect our
             operations.



         •   Results of Operations
             - an analysis of our consolidated results of operations for

the three

             months and six months in the period ended June 30, 2022

compared to

             three months and six months in the period ended June 30, 2021,
             respectively.



         •   Liquidity and Capital Resources
             - an analysis of cash flows; contractual obligations, and a

discussion

             of our capital and other cash requirements.


OPERATIONS AND PRODUCTS

The Company currently operates in two reportable segments: Trex Residential
Products (Trex Residential), the Company's principal business based on net
sales, and Trex Commercial Products (Trex Commercial). Refer to Note 16,
Segments
, in the Notes to the Condensed Consolidated Financial Statements in Part I.
Item 1.
Condensed Consolidated Financial Statements
of this Quarterly Report on Form
10-Q
for additional information. The Company is focused on using renewable resources
within both our Trex Residential and Trex Commercial segments.

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Contents

Trex Residential
is the world's largest manufacturer of high-performance composite decking and
residential railing products, which are marketed under the brand name Trex
®
and manufactured in the United States. We offer a comprehensive set of
aesthetically appealing and durable,
low-maintenance
product offerings in the decking, residential railing, fencing and outdoor
lighting categories. A majority of the products are
eco-friendly
and leverage recycled materials to the extent possible. Trex Residential decking
is made in a proprietary process that combines reclaimed wood fibers and
recycled polyethylene film, making Trex Residential one of the largest recyclers
of plastic film in North America. In addition to resisting fading and surface
staining, Trex Residential products require no sanding and sealing, resist
moisture damage, provide a splinter-free surface and do not require chemical
treatment against rot or insect infestation. Combined, these aspects yield
significant aesthetic advantages and lower maintenance than wood decking and
railing and ultimately render Trex Residential products less costly than wood
over the life of the deck. Special characteristics (including resistance to
splitting, the ability to bend, and ease and consistency of machining and
finishing) facilitate installation, reduce contractor call-backs and afford
consumers a wide range of design options. Trex Residential products are sold to
distributors and home centers for final resale primarily to the residential
market.

Trex offers the following products through Trex Residential:

Decking and our primary decking products are Trex Transcend ® Accessories

              , Trex Select
              ®
              and Trex Enhance
              ®
              . In addition, our Trex Transcend decking product can also be used
              as cladding. Our high-performance,
              low-maintenance,
              eco-friendly
              composite decking products are comprised of a blend of 95 percent
              reclaimed wood fibers and recycled polyethylene film and feature a
              protective polymer shell for enhanced protection against fading,
              staining, mold and scratching.

              We also offer accessories to our decking products, including Trex
              Hideaway
              ®
              and Trex DeckLighting
              ™
              , an outdoor lighting system. Trex DeckLighting is a line of
              energy-efficient LED dimmable deck lighting, which is

made for

              use on posts, floors and steps. The line includes a post cap light,
              deck rail light, riser light and a recessed deck light.


Railing       Our residential railing products are Trex Transcend
              ®
              Railing, Trex Select
              ®
              Railing, Trex Enhance
              ®
              Railing and Trex Signature
              ®
              aluminum railing. Trex Transcend Railing, made from

approximately

              40 percent recycled content, is available in the colors of Trex
              Transcend decking and finishes that make it appropriate for use with
              Trex decking products as well as other decking materials, which we
              believe enhances the sales prospects of our railing products. Trex
              Select Railing, made from approximately 40 percent recycled content,
              is offered in a white finish and is ideal for consumers who desire a
              simple clean finished look for their deck. Trex Enhance, made from
              approximately 40 percent recycled content, is available in three
              colors and is offered through home improvement retailers in kits
              that contain the complete railing system. Trex Signature aluminum
              railing, made from a minimum of 40 percent recycled content, is
              available in three colors and designed for consumers who want a
              sleek, contemporary look.


Fencing       Our Trex Seclusions
              ®
              fencing product is offered through two specialty

distributors. This

              product consists of structural posts, bottom rail, pickets, top rail
              and decorative post caps.



Trex Commercial
is a leading national provider of custom-engineered railing and staging systems.
Trex Commercial designs and engineers custom solutions, which are prevalent in
professional and collegiate sports facilities, commercial and high-rise
applications, performing arts, sports, and event production and rentals. With a
team of devoted engineers, and industry-leading reputation for quality and
dedication to customer service, Trex Commercial markets to architects,
specifiers, contractors, and building owners.

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Trex offers the following products through Trex Commercial:

Architectural       Our architectural railing systems are
Railing Systems     pre-engineered
                    guardrails with options to accommodate styles ranging from classic
                    and elegant wood top rail combined with sleek stainless components
                    and glass infill, to modern and minimalist stainless cable and rod
                    infill choices. Trex Commercial can also design, engineer and
                    manufacture custom railing systems tailored to the customer's
                    specific material, style and finish. Many railing styles are
                    achievable, including glass, mesh, perforated railing and cable
                    railing.


Aluminum            Our Trex Signature aluminum railings, made from a minimum of
Railing Systems     40 percent recycled content, are a versatile, cost-effective and
                    low-maintenance
                    choice for a variety of interior and exterior

apps that we

                    believe blend form, function and style. Its straightforward,
                    unobtrusive design features traditional balusters and contemporary
                    vertical rods, and can be installed with continuously graspable rail
                    options for added safety, comfort and functionality. The strength
                    and durability of Trex Signature railings make them a choice for any
                    commercial setting, from high-rise condominiums and resort projects
                    to public walkways and balconies. Aluminum railings come in a
                    variety of colors and stock lengths to accommodate project needs.


Staging Equipment   Our advanced modular, lightweight custom staging systems include
and Accessories     portable platforms, orchestra shells, guardrails, stair units,
                    barricades, camera platforms, VIP viewing decks, ADA infills, DJ
                    booths, pool covers, and other custom applications. Our systems
                    provide superior staging product solutions for

facilities and places

                    with custom needs. Our modular stage equipment is 

designed to appear

                    seamless, feel permanent, and maximize the functionality of the
                    space.



Operational Highlights:

Trex Residential Begins Production of New Product
. On May 16, 2022, we announced the expansion of our premium Trex Residential
decking line with the introduction of Transcend
®
Lineage
™
. The new Transcend Lineage boards feature an elevated aesthetic with subtle,
elegant graining, available in two new color options that expand
the Transcend collection with nature-inspired tones and texturing that today's
homeowners are seeking. Like all Trex Residential decking, Lineage boards are
made from 95% recycled and reclaimed content and engineered with a proprietary,
high-traffic formulation and ultra-durable integrated shell. Transcend Lineage
decking launched in
mid-May
and will be sold nationwide through Trex Residential dealers and major home
centers. Production and sale of the new Transcend Lineage boards began in May
2022.

Trex Residential Arkansas Facility
. Construction began on the new Trex Residential Arkansas manufacturing facility
in the second quarter 2022. The new campus will sit on approximately 300 acres
of land and will address increased demand for Trex Residential outdoor living
products. In July 2022, the Company entered into a design-build agreement and,
as previously announced, anticipates spending approximately $400 million on the
facility. The budget for the design-build agreement is contained within this
amount. The first production output is anticipated in 2024.

Strategic investments during the six months ended in June

 30, 2022.
During the six months ended June 30, 2022, we made strategic investments to
enhance the support of our Trex Residential brand and channel partners,
including the debut of our new "We See It Too" marketing campaign. We also
launched Trex Academy, an online multimedia content hub dedicated to helping the
Trex Residential
Do-It-Yourself
customer bring their deck dreams to life by providing
how-to
content. In addition, we are investing to drive margin enhancement through
supply chain and manufacturing cost out programs, and recently hired a new
director at Trex Residential to lead a team dedicated to spearheading these
initiatives.

Publication of 2021 Environmental, Social and Governance Report
. On June 23, 2022, the Company published its 2021 Environmental, Social and
Governance (ESG) report. The annual ESG report highlights how the Company is
"Building a Better Tomorrow Together" through a broad spectrum of initiatives to
address its most material ESG priorities. Highlights include:

• Invest to reduce environmental impact and advance sustainability;


  •   Prioritizing employee safety and career growth;



  •   Nurturing a diverse, equitable and inclusive workplace;


• Conduct business responsibly through strong governance and ethics; and


  •   Adding value to the communities where we operate.


Russian Invasion of Ukraine
. The conflict between Russia and Ukraine has not directly affected our business
and results of operations. We have no operations in Russia or Ukraine but
continue to monitor the potential economic impact of the conflict on supply
chains, commodity and fuel prices, and prices of raw materials. We cannot
predict the impact of the continued conflict on the global economy, our industry
or our business.

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FINANCIAL HIGHLIGHTS FOR THE THREE MONTHS ENDED JUNE

 30, 2022
:

    ?    Increase in net sales of 24%, or $74.7 million, to $386.2 million for the

three months completed June 30, 2022 compared to $311.6 million for the three

         months ended June 30, 2021.


? Increase in net income to $88.9 millionWhere $0.79 per diluted share, for

         the three months ended June 30, 2022 compared to $61.4 million, or $0.53
         per diluted share, for the three months ended June 30, 2021.


? Increase in EBITDA (earnings before interest, income taxes and amortization

         and amortization) of 40.9%, or $37.5 million, to $129.1 million for the
         three months ended June 30, 2022 compared to $91.6 million for the three
         months ended June 30, 2021.


? Capital expenditure of $44.3 million at Trex Residential, mainly

related to cost reduction initiatives, the new Arkansas manufacturing

facility, expanding the capacity of our existing facilities, our new

head office, safety, environment and general assistance.

? Repurchase of 2.8 million common shares outstanding during

the three months have ended June 30, 2022 as part of our share buyback program

for a total of 7.3 million shares repurchased under the program in

June 30, 2022.


Net Sales
. Net sales consist of sales and freight, net of discounts. The level of net
sales is principally affected by sales volume and the prices paid for Trex
products. Trex Residential operating results have historically varied from
quarter to quarter. Seasonal, erratic or prolonged adverse weather conditions in
certain geographic regions reduce the level of home and commercial improvement
and residential and commercial construction and can shift demand for our
products to a later period. As part of our normal business practice and
consistent with industry practice, we have historically provided our
distributors and dealers of our Trex Residential products incentives to build
inventory levels before the start of the prime deck-building season to ensure
adequate availability of our product to meet anticipated seasonal consumer
demand and to enable production planning. These incentives include payment
discounts, favorable payment terms, price discounts, or volume rebates on
specified products and other incentives based on increases in purchases as part
of specific promotional programs. The timing of our incentive programs can
significantly impact sales, receivables and inventory levels during the offering
period. In addition, the operating results for Trex Commercial are driven by the
timing of individual projects, which may vary each quarterly period.

Gross Profit.
Gross profit represents the difference between net sales and cost of sales. Cost
of sales consists of raw material costs, direct labor costs, manufacturing
costs, subcontract costs and freight. Raw material costs generally include the
costs to purchase and transport reclaimed wood fiber, reclaimed polyethylene,
pigmentation for coloring our products, and commodities used in the production
of railing and staging. Direct labor costs include wages and benefits of
personnel engaged in the manufacturing process. Manufacturing costs consist of
costs of depreciation, utilities, maintenance supplies and repairs, indirect
labor, including wages and benefits, and warehouse and equipment rental
activities.

Selling, General and Administrative Expenses.
The largest component of selling, general and administrative expenses is
personnel related costs, which includes salaries, commissions, incentive
compensation, and benefits of personnel engaged in sales and marketing,
accounting, information technology, corporate operations, research and
development, and other business functions. Another component of selling, general
and administrative expenses is branding and other sales and marketing costs,
which are used to build brand awareness. These costs consist primarily of
advertising, merchandising, and other promotional costs. Other general and
administrative expenses include professional fees, office occupancy costs
attributable to the business functions previously referenced, and consumer
relations expenses. As a percentage of net sales, selling, general and
administrative expenses may vary from quarter to quarter due, in part, to the
seasonality of our business.

Product Warranty.
We warrant that our Trex Residential products will be free from material defects
in workmanship and materials for warranty periods ranging from 10 years to 25
years, depending on the product and its use. If there is a breach of such
warranties, we have an obligation either to replace the defective product or
refund the purchase price. Depending on the product and its use, we also warrant
our Trex Commercial products will be free of manufacturing defects for periods
ranging from 1 year to 3 years.

We continue to receive and settle claims for decking products manufactured at
our Trex Residential Nevada facility prior to 2007 that exhibit surface flaking
and maintain a warranty reserve to provide for the settlement of these claims.
We monitor surface flaking claims activity each quarter for indications that our
estimates require revision. Typically, a majority of surface flaking claims
received in a fiscal year are received during the summer outdoor season, which
spans the second and third fiscal quarters.

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It has been our practice to utilize actuarial techniques during the third
quarter, after a significant portion of all claims has been received for the
fiscal year and variances to annual claims expectations are more meaningful. Our
actuarial analysis is based on currently known facts and a number of
assumptions. Projecting future events such as the number of claims to be
received, the number of claims that will require payment and the average cost of
claims could cause the actual warranty liabilities to be higher or lower than
those projected, which could materially affect our financial condition, results
of operations or cash flows.

The number of incoming claims received in the six months ended June 30, 2022,
was significantly lower than the number of claims received in the six months
ended June 30, 2021 and lower than our expectations for 2022. Average cost per
claim experienced in the six months ended June 30, 2022 was significantly higher
than that experienced in the six months ended June 30, 2021 and higher than our
expectations for the current year. The elevated average cost per claim
experienced in the six months ended June 30, 2022, was primarily the result of
the closure of two large claims, which were considered in our estimation of the
surface flaking warranty reserve. We believe the reserve at June 30, 2022 is
sufficient to cover future surface flaking obligations. Refer to Note 18,
Commitments and Contingencies, Product Warranty
, in the Notes to the Condensed Consolidated Financial Statements in Part I.
Item 1.
Condensed Consolidated Financial Statements
of this Quarterly Report on Form
10-Q
for additional information.

We estimate that the annual number of claims received will decline over time and
that the average cost per claim will increase. If the level of claims received
or average cost per claim differs materially from expectations, it could result
in additional increases or decreases to the warranty reserve and a decrease or
increase in earnings and cash flows in future periods. We estimate that a 10%
change in the expected number of remaining claims to be settled with payment or
the expected cost to settle claims may result in approximately a $1.7 million
change in the surface flaking warranty reserve.

The following table details surface spalling claim activity related to our warranty:

                                      Six Months Ended June 30,
                                       2022                2021
Claims open, beginning of period          1,759               1,799
Claims received (1)                         292                 523
Claims resolved (2)                        (304 )              (515 )

Claims open, end of period                1,747               1,807

Average cost per claim (3)         $      5,233        $      3,610



(1) Claims received include new claims received or identified during the period.

(2) Settled claims include all claims settled with or without payment and closed

during the period.

(3) The average cost per claim represents the average cost of settling claims

closed with payment during the period.

RESULTS OF OPERATIONS

General.

Our results of operations are affected by a number of factors, including, but
not limited to, the cost to manufacture and distribute products, cost of raw
materials, inflation, interest rates, consumer spending and preferences, the
impact of any supply chain disruptions, economic conditions, and any adverse
effects from the
COVID-19
pandemic and geopolitical conflicts.

Strong sales growth at Trex Residential continued through the second quarter
reflecting an increase in average price per unit and volume growth from strong
secular trends, including growth in the outdoor living category, and the
successful execution of our
wood-to-composite
market share conversion strategy. Price increases to address inflationary
pressures were absorbed by the market and also benefitted net sales. In late
June we experienced a reduction in demand from our distribution partners,
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. We expect our channel partners to meet demand partially
through inventory drawdown, rather than reordering product. We believe the
drawdown will likely impact the next two quarters. In response to this new
environment, we immediately took measures to manage a production slowdown,
including selective labor force and production optimization, as well as other
coast reduction actions.

Below is the discussion and analysis of our operating results and material
changes in our operating results for the three months ended June 30, 2022 (2022
quarter) compared to the three months ended June 30, 2021 (2021 quarter), and
for the six months ended June 30, 2022 (2022
six-month
period) compared to the six months ended June 30, 2021 (2021
six-month
period).

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Three Months Ended June 30, 2022 Compared To The Three Months Ended June 30,
2021

Net Sales

                               Three Months Ended June 30,
                                  2022               2021         $ Change        % Change
                                                 (dollars in thousands)
Total net sales              $      386,249       $   311,596     $  74,653            24.0 %

Trex Residential Net Sales $373,922 $298,632 $75,290

            25.2 %

Trex Commercial Net Sales $12,327 $12,964 ($637) (4.9)%


Total net sales increased by 24.0% in the 2022 quarter compared to the 2021
quarter reflecting a 25.2% increase in Trex Residential net sales and a 4.9%
decrease in Trex Commercial net sales. The increase in Trex Residential net
sales was primarily due to an increase in average price per unit of 20.3% and an
increase in volume of 4.0%. The increase in price was due to price increases
taken in 2021 and 2022 on certain products to address inflationary pressures
across many key raw materials, labor and transportation. The sustained
broad-based demand continued to reflect strong secular trends, including growth
in the outdoor living category. In addition, we continue to execute on our
wood-to-composite
market share conversion strategy and drive consumers from wood decking to our
eco-friendly
Trex decking. The increase in sales also reflected channel inventory build. Over
the last four quarters the channel has continued to build and restock inventory.
This was due, in part, to strong consumer demand, but was also a consequence of
improved product availability following more than two years of the capacity
constraints and product allocations.

Gross Profit

                          Three Months Ended June 30,
                           2022                 2021           $ Change       % Change
                                            (dollars in thousands)
Cost of sales          $     228,872        $     193,323      $  35,549           18.4 %
% of total net sales            59.3 %               62.0 %
Gross profit           $     157,377        $     118,273      $  39,104           33.1 %
Gross margin                    40.7 %               38.0 %


Gross profit as a percentage of net sales, gross margin, was 40.7% in the 2022
quarter compared to 38.0% in the 2021 quarter. Gross margin for Trex Residential
and Trex Commercial was 41.7% and 12.6%, respectively, in the 2022 quarter
compared to 38.7% and 21.6%, respectively, in the 2021 quarter. The increase in
consolidated gross margin was driven primarily by a 10.8% increase from pricing
realization at Trex Residential and a continuing focus on cost reductions,
offset by inflationary pressures on raw materials, labor and transportation.

Selling, general and administrative expenses

                                             Three Months Ended June 30,
                                             2022                  2021            $ Change        % Change
                                                               (dollars in thousands)
Selling, general and administrative
expenses                                 $      39,568         $      36,899       $   2,669             7.2 %
% of total net sales                              10.2 %                11.8 %


The increase in selling, general and administrative expenses in the 2022 quarter
compared to the 2021 quarter was primarily the result of a $5.6 million increase
in marketing and branding spend and a $1.8 million increase in technology and
other operating expenses, offset by a $4.4 million decrease in personnel related
expenses.

Provision for Income Taxes

                                             Three Months Ended June 30,
                                             2022                  2021             $ Change         % Change
                                                                (dollars in thousands)
Provision for income taxes               $      29,009         $      20,978       $    8,031             38.3 %
Effective tax rate                                24.6 %                25.5 %

The effective tax rate for the 2022 quarter of 24.6% remained relatively unchanged from the effective tax rate of 25.5% for the 2021 quarter.

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Net Income and Earnings Before Interest, Taxes, Depreciation and Amortization
(EBITDA)
1
(in thousands)

Reconciliation of net income (GAAP) to EBITDA
(non-GAAP):

                                        Three Months Ended June 30, 2022
                                     Trex
                                                         Trex
                                 Residential          Commercial         Total
Net income (loss)                $     89,437        $       (521 )    $  88,916
Interest (income) expense, net           (116 )                -            (116 )
Income tax expense (benefit)           29,180                (171 )       

29,009

Depreciation and amortization          11,049                 282         11,331

EBITDA                           $    129,550        $       (410 )    $ 129,140




                                      Three Months Ended June 30, 2021
                                    Trex
                                                       Trex
                                Residential         Commercial        Total
Net income                      $     61,089       $        277     $  61,366
Interest expense, net                     13                 -             13
Income tax expense                    20,886                 92        20,978
Depreciation and amortization          9,020                258         9,278

EBITDA                          $     91,008       $        627     $  91,635




                            Three Months Ended June 30,
                               2022                2021        $ Change       % Change
                                             (dollars in thousands)
Total EBITDA              $      129,140        $   91,635     $  37,505           40.9 %
Trex Residential EBITDA   $      129,550        $   91,008     $  38,542           42.4 %
Trex Commercial EBITDA    $         (410 )      $      627     $  (1,037 )       (165.4 )%


Total EBITDA increased 40.9% to $129.1 million for the 2022 quarter compared to
$91.6 million for the 2021 quarter. The increase was driven by a 42.4% increase
in Trex Residential EBITDA, primarily due to the pricing actions coupled with
cost reductions, production efficiencies and spending controls.

Six Months Ended June 30, 2022 Compared To The Six Months Ended June 30, 2021

Net Sales

                                              Six Months Ended June 30,
                                                2022               2021          $ Change        % Change
                                                               (dollars in thousands)
Total net sales                            $      725,477       $   557,120     $  168,357            30.2 %
Trex Residential net sales                 $      701,117       $   531,702     $  169,415            31.9 %
Trex Commercial net sales                  $       24,360       $    25,418 

$(1,058) (4.2)%


Total net sales increased by 30.2% in the 2022
six-month
period compared to the 2021
six-month
period reflecting a 31.9% increase in Trex Residential net sales and a 4.2%
decrease in Trex Commercial net sales. The increase in Trex Residential net
sales was primarily due to an increase in average price per unit of 19.1% and an
increase in volume of 10.7%. The increase of 31.9% in Trex Residential net sales
during the 2022
six-month
period was primarily driven by sustained broad-based demand and market share
gains from wood and was also impacted by our price increases taken in 2021 and
2022 to address inflationary pressures across many key raw materials, labor and
transportation.


1 EBITDA represents net earnings before interest, income taxes, amortization and

amortization. EBITDA is not a measure of financial performance

generally accepted accounting principles United States (GAAP). We have

included data relating to EBITDA because management believes that it

facilitates the comparison of performance between the Company and its competitors,

and management assesses the performance of its reportable segments using

several measures, including EBITDA. Management views EBITDA as a

important additional indicator of our core operating performance, as it

eliminates interest, income taxes, and depreciation and amortization charges

to net income or net loss. Compared to competitors, EBITDA eliminates

differences between companies in capitalization and tax structures, capital

investment cycles and the age of related assets. For these reasons, management

believes that EBITDA provides important information on operating profit

performance of the Company and its reportable segments.

Non-GAAP

financial measures should be seen as a complement and not as an alternative

for, the Company’s reported results prepared in accordance with GAAP and are

are not intended to be considered superior to or a substitute for our GAAP results.



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Gross Profit

                         Six Months Ended June 30,
                           2022               2021         $ Change       % Change
                                          (dollars in thousands)
Cost of sales          $     433,188        $ 343,046      $  90,142           26.3 %
% of total net sales            59.7 %           61.8 %
Gross profit           $     292,289        $ 214,074      $  78,215           36.5 %
Gross margin                    40.3 %           38.4 %


Gross profit as a percentage of net sales, gross margin, was 40.3% in the 2022
six-month
period compared to 38.4% in the 2021
six-month
period. Gross margin for Trex Residential and Trex Commercial products in the
2022
six-month
period were 41.3% and 11.5%, respectively, compared to 39.3% and 19.4%,
respectively, in the 2021
six-month
period. The increase in consolidated gross margin was driven primarily by a
10.8% increase from pricing realization at Trex Residential and a continuing
focus on cost reductions, offset by inflationary pressures on raw materials,
labor and transportation.

Selling, general and administrative expenses

                                                   Six Months Ended June 30,
                                                    2022                2021          $ Change        % Change
                                                                    (dollars in thousands)
Selling, general and administrative expenses    $     79,529        $     68,949      $  10,580            15.3 %
% of total net sales                                    11.0 %              12.4 %


The $10.6 million increase in selling, general and administrative expenses in
the 2022
six-month
period compared to the 2021
six-month
period resulted primarily from a $10.4 million increase in marketing and
branding spend.

Provision for Income Taxes

                                Six Months Ended June 30,
                                 2022                2021          $ Change       % Change
                                                 (dollars in thousands)
Provision for income taxes   $     52,737        $     36,925      $  15,812           42.8 %
Effective tax rate                   24.8 %              25.1 %


The effective tax rate for the 2022
six-month
period was comparable to the effective tax rate for the 2021
six-month
period.

Net Income and Earnings Before Interest, Taxes, Depreciation and Amortization
(EBITDA)
2
(in thousands)

Reconciliation of net income (GAAP) to EBITDA
(non-GAAP):


2 EBITDA represents net earnings before interest, income taxes, amortization and

amortization. EBITDA is not a measure of financial performance

generally accepted accounting principles United States (GAAP). We have

included data relating to EBITDA because management believes that it

facilitates the comparison of performance between the Company and its competitors,

and management assesses the performance of its reportable segments using

several measures, including EBITDA. Management views EBITDA as a

important additional indicator of our core operating performance, as it

eliminates interest, income taxes, and depreciation and amortization charges

to net income or net loss. Compared to competitors, EBITDA eliminates

differences between companies in capitalization and tax structures, capital

investment cycles and the age of related assets. For these reasons, management

believes that EBITDA provides important information on operating profit

    performance of the Company and its reportable segments.



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                                        Six Months Ended June 30, 2022
                                    Trex
                                                       Trex
                                 Residential        Commercial         Total
Net income (loss)               $     161,652      $     (1,525 )    $ 160,127
Interest income, net                     (104 )              -            (104 )
Income tax expense (benefit)           53,243              (506 )       52,737
Depreciation and amortization          21,240               565         21,805

EBITDA                          $     236,031      $     (1,466 )    $ 234,565




                                       Six Months Ended June 30, 2021
                                    Trex
                                                      Trex
                                Residential        Commercial        Total
Net income                      $    109,833       $        77     $ 109,910
Interest expense, net                     10                -             10
Income tax expense                    36,899                26        36,925
Depreciation and amortization         15,231               472        15,703

EBITDA                          $    161,973       $       575     $ 162,548




                            Six Months Ended June 30,
                              2022               2021        $ Change       % Change
                                            (dollars in thousands)
Total EBITDA              $     234,565        $ 162,548     $  72,017           44.3 %
Trex Residential EBITDA   $     236,031        $ 161,973     $  74,058           45.7 %
Trex Commercial EBITDA    $      (1,466 )      $     575     $  (2,041 )       (355.0 )%


Total EBITDA increased 44.3% to $234.6 million for the 2022
six-month
period compared to $162.5 million for the 2021
six-month
period. The increase was driven by a 45.7% increase in Trex Residential EBITDA,
primarily due to the increase in net sales at Trex Residential.

CASH AND CAPITAL RESOURCES

We fund our operations and our growth primarily through cash flow from operations, borrowings under our revolving credit facilities, operating leases and normal commercial credit terms from operation. To June 30, 2022 we have had
$16.6 million cash and cash equivalents.

S

sources and uses of cash. The following table summarizes our cash flows from operating, investing and financing activities (in thousands):

                                                        Six Months Ended 

June 30th,

                                                          2022              

2021

Net cash provided by (used in) operating activities $189,992 $

  (18,242 )
Net cash used in investing activities                       (66,561 )        (93,517 )
Net cash used in financing activities                      (247,836 )       

(4,472)

Net decrease in cash and cash equivalents             $    (124,405 )     $ (116,231 )



Operating Activities

Cash provided by operations was $190 million during the 2022
six-month
period compared to cash used in operations of $18.2 million during the 2021
six-month
period. The increase of $208.2 million in cash provided by operating activities
was primarily due to an increase in net sales at Trex Residential and higher
collection of accounts receivables in the 2022
six-month
period compared to the 2021
six-month
period.

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Investing activities

Capital expenditures in the 2022
six-month
period were $66.5 million at Trex Residential, primarily related to cost
reduction initiatives, the new Arkansas manufacturing facility, capacity
expansion in our existing facilities, our new corporate headquarters, and
safety, environmental and general support.

Fundraising activities

Net cash used in financing activities of $247.8 million during the six-month period of 2022 consisted primarily of repurchases of our common shares.

Stock Repurchase Program.
On February 16, 2018, the Trex Board of Directors adopted a stock repurchase
program of up to 11.6 million shares of its outstanding common stock (Stock
Repurchase Program). As of June 30, 2022, the Company has repurchased
7.3 million shares under the Stock Repurchase Program.

Debt in May and after May

 18, 2022
. On May 18, 2022, the Company, as borrower; Trex Commercial Products, Inc.
(TCP), as guarantor; Bank of America, N.A. (BOA), as a Lender, Administrative
Agent, Swing Line Lender and L/C Issuer; Wells Fargo Bank, National Association
(Wells Fargo), as lender and Syndication Agent; Regions Bank, PNC Bank, National
Association, and TD Bank, N.A. (each, a Lender and collectively, the Lenders),
arranged by BofA Securities, Inc. as Sole Lead Arranger and Sole Bookrunner,
entered into a Credit Agreement (Credit Agreement) to amend and restate the
Fourth Amended and Restated Credit Agreement dated as of November 5, 2019.

Under the Credit Agreement, the Lenders agreed to provide the Company with one
or more Revolving Loans in a collective maximum principal amount of $400,000,000
(Loan Limit) throughout the term, which ends May 18, 2027 (Term). Included
within the Loan Limit are sublimits for a Letter of Credit facility in an amount
not to exceed $60,000,000; and Swing Line Loans in an aggregate principal amount
at any time outstanding not to exceed $20,000,000. The Revolving Loans, the
Letter of Credit facility and the Swing Line Loans are for the purpose of
raising working capital and supporting general business operations.

The Facility provides the Company, in the aggregate, the ability to borrow an
amount up to the Loan Limit during the Term. The Company is not obligated to
borrow any amount under the Loan Limit. Within the Loan Limit, the Company may
borrow, repay and reborrow at any time or from time to time while the Notes are
in effect. Base Rate Loans (as defined in the Credit Agreement) under the
Revolving Loans and the Swing Line Loans accrue interest at the Base Rate plus
the Applicable Rate (as defined in the Credit Agreement) and Term SOFR Loans for
the Revolving Loans accrue interest at the rate per annum equal to the sum of
Term SOFR for such interest period plus the Applicable Rate (as defined in the
Credit Agreement). The Base Rate for any day is a fluctuating rate per annum
equal to the highest of (a) the Federal Funds Rate plus 0.50%, (b) the rate of
interest in effect for such day as publicly announced from time to time by BOA
as its prime rate, and (c) the Term SOFR plus 1.0% subject to certain interest
rate floors. Repayment of all then outstanding principal, interest, fees and
costs is due at the end of the Term.

The Company and BofA Securities, Inc. as a sustainability coordinator, are
entitled to establish specified key performance indicators (KPIs) with respect
to certain environmental, social and governance targets of the Company and its
subsidiaries. The sustainability coordinator and the Company may amend the
Credit Agreement for the purpose of incorporating the KPIs and other related
provisions, unless the Lenders object to such amendment on or prior to the date
that is ten business days after the date on which such amendment is posted for
review by the Lenders. Based on the performance of the Company and its
subsidiaries against the KPIs, certain adjustments (increase, decrease or no
adjustment) to otherwise applicable pricing will be made; provided that the
amount of such adjustments shall not exceed certain aggregate caps as in the
definitive loan documentation.

Under the terms of the Security and Pledge Agreement, the Company and TCP,
subject to certain permitted encumbrances, as collateral security for the
above-stated loans and all other present and future indebtedness of the Company
owing to the Lenders grants to BOA, as Administrative Agent for the Lenders, a
continuing security interest in certain collateral described and defined in the
Security and Pledge Agreement but excluding the Excluded Property (as defined in
the Security and Pledge Agreement).

Debt before May

 18, 2022.
Our Fourth Amended and Restated Credit Agreement (Fourth Amended Credit
Agreement) provides us with revolving loan capacity in a collective maximum
principal amount of $250 million from January 1 through June 30 of each year,
and a maximum principal amount of $200 million from July 1 through December 31
of each year throughout the term, which ends November 5, 2024.

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Contents

On May 26, 2020, the Company entered into a First Amendment to the Original
Credit Agreement (the First Amendment) to provide for an additional $100 million
line of credit. As a matter of convenience, the parties incorporated the
amendments to the Original Credit Agreement made by the First Amendment into a
new Fourth Amended and Restated Credit Agreement (New Credit Agreement). In the
New Credit Agreement, the revolving commitments under the Original Credit
Agreement are referred to as Revolving A Commitments and the new $100 million
line of credit is referred to as Revolving B Commitments. In the New Credit
Agreement, all of the material terms and conditions related to the original line
of credit (Revolving A Commitments) remained unchanged from the Original Credit
Agreement.

The Company entered into the First Amendment, as borrower; Trex Commercial
Products, Inc. (TCP), as guarantor; Bank of America, N.A. (BOA), as a Lender,
Administrative Agent, Swing Line Lender and L/C Issuer; and certain other
lenders including Wells Fargo Bank, N.A. (Wells Fargo), who is also Syndication
Agent; Truist Bank (Truist); and Regions Bank (Regions) (each, a Lender and
collectively, the Lenders), arranged by BofA Securities, Inc. as Sole Lead
Arranger and Sole Bookrunner. The First Amendment further provides that the New
Credit Agreement is amended and restated by changing Schedule 2.01 to add
applicable Lender percentages related to the Revolving B Commitment for BOA of
47.5%, Well Fargo of 28.0% and Regions of 24.5%.

The Company's revolving credit facility executed November 5, 2019 was completely
replaced by the Company's revolving credit facility executed May 18, 2022. At
June 30, 2022, we had no outstanding borrowings under the revolving credit
facilities and borrowing capacity under the facilities of $400 million.

Compliance with Debt Covenants.
Pursuant to the terms of the Fourth Amended Credit Agreement, the Company is
subject to certain loan compliance covenants. The Company was in compliance with
all covenants as of June 30, 2022. Failure to comply with the financial
covenants could be considered a default of repayment obligations and, among
other remedies, could accelerate payment of any amounts outstanding.

We believe that cash on hand, cash from operations and borrowings expected to be
available under our revolving credit facilities, as amended, will provide
sufficient funds to fund planned capital expenditures, make scheduled principal
and interest payments, fund warranty payments, and meet other cash requirements.
We currently expect to fund future capital expenditures from operations and
financing activities. The actual amount and timing of future capital
requirements may differ materially from our estimate depending on the demand for
Trex products and new market developments and opportunities.

Capital Requirements.
In October 2021, we announced plans to add a third U.S.-based Trex Residential
manufacturing facility in Little Rock, Arkansas. The new campus will sit on
approximately 300 acres of land and will address increased demand for Trex
Residential outdoor living products. Construction began on the new facility in
the second quarter 2022, and in July 2022, the Company entered into a
design-build agreement. As previously announced, the Company anticipates
spending approximately $400 million on the facility and the budget for the
design-build agreement is contained within this amount. Construction for the new
facility will be funded primarily through the Company's ongoing cash generation
or its line of credit. The first production output is anticipated in 2024.

Our capital expenditure guidance for 2022 is $170 million to $180 million. In
addition to the construction of our third facility in Arkansas, our capital
allocation priorities include expenditures for internal growth opportunities,
manufacturing cost reductions, upgrading equipment and support systems, and
acquisitions which fit our long-term growth strategy as we continue to evaluate
opportunities that would be a good strategic fit for Trex, and return of capital
to shareholders

Inventory in Distribution Channels.
We sell our Trex Residential decking and railing products through a tiered
distribution system. We have over 50 distributors worldwide and two national
retail merchandisers to which we sell our products. The distributors in turn
sell the products to dealers and retail locations who in turn sell the products
to end users. Significant increases in inventory levels in the distribution
channel without a corresponding change in
end-use
demand could have an adverse effect on future sales.

Seasonality

. The operating results for Trex Residential have historically varied from
quarter to quarter. Seasonal, erratic or prolonged adverse weather conditions in
certain geographic regions reduce the level of home improvement and construction
activity and can shift demand for its products to a later period. As part of its
normal business practice and consistent with industry practice, Trex Residential
has historically offered incentive programs to its distributors and dealers to
build inventory levels before the start of the prime deck-building season in
order to ensure adequate availability of its product to meet anticipated
seasonal consumer demand. The seasonal effects are often offset by the positive
effect of the incentive programs. The operating results for Trex Commercial have
not historically varied from quarter to quarter as a result of seasonality.
However, they are driven by the timing of individual projects, which may vary
significantly each quarterly period.

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Contents

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