Building materials: part 2b (TREX, AZEK)
Related posts:
Building materials: part 2a (LP, JHX)
Next month, I’ll conclude this series with a post (or two) on Builder’s FirstSource and Atlas Engineered Products. I actually meant to publish on those companies today, but a discussion of branded manufacturers felt incomplete without a dissection of Trex.
Trex’s origin dates back to 1988, when Roger Wittenberg, an organic chemist, heated shredded plastic bags and reclaimed sawdust into a gooey composite that, when solidified, took on the appearance of wood but avoided its drawbacks – namely, susceptibility to insect infestation, rot, and splintering. In 1992, he sold the IP to Mobil Oil, the largest manufacturer of disposable plastic products at the time, who tried, with limited success, to commercialize the technology as picnic tables and noise barriers. Wittenberg, along with several other Mobil executives, later bought the composite materials division and took it public as Trex in 1999, by which time the technology had found product-market fit in residential decking. At the time of its carve-out in 1996, Trex reported just under $24mn in revenue. In its first year as a public company, the company did $118mn.
Revenue tripled over the next 5-6 years but gross margins collapsed on soaring polyethylene and manufacturing costs. Operating profits halved from 2000 to 2006. Then, Trex labored through a dark stretch from 2008 to 2012. It wasn’t just the housing crisis (though, yes, the worse recession in a generation will wound a business that is ~85%+ reliant on residential remodeling & repair spending). Products manufactured in the company’s Nevada plant were prone to surface flaking while several class action lawsuits alleged vulnerability to mold, fungus, and discoloration. Trex was forced to pad its warranty reserve by $10s of millions through 2016. Of course, by that time they had already come up with a fix: to cap three sides of the composite deck with a polymer coat, protecting it from staining, mold, and mildew.
Transcend, the name carried by Trex’s first capped product, was a hit as soon as it was introduced in 2010. With a materials cost to homeowners of ~$6 per linear foot1, it falls on the mid-to-high end of the “good, better, best” product range:
Source: Trex
Trex Signature, priced at ~$9-$10 per linear foot, sits perched on the high end of the quality spectrum, distinguished by superior scratch resistance, heat mitigating technology, longer warranties (50-year limited vs. 25-year for Trex Enhance), and a strong resemblance to tropical wood. Enhance Basics, Trex’s low-end intro brand, was launched in 2019 at a 2x premium to treated lumber, the threshold where homeowners are supposedly indifferent between treated lumber and composite decking. Pre-COVID, a homeowner might pay ~$1.10 for a linear foot of medium quality wood (~$0.80-$0.90 for low quality) compared to ~$2-$2.5 for Enhance Basics. Enhance Naturals, one step above Basics on the quality spectrum, with a closer resemblance to natural wood, is priced at ~$3 a linear foot.
Even as it commands significantly higher prices, a high-end board doesn’t cost much more to make than a mid-level board. Meanwhile, Enhance Basics, a scalloped entry-level board, uses ~14% less material2. So, compared to a mid-level board, Trex makes more margin on a high-end board than it loses on an entry-level one. Even setting aside that favorable asymmetry, Enhance Basics is probably less dilutive to overall margins than it seems as the product line is often used as bait, first to lure price-sensitive buyers to the composite category, then to upsell them to more appealing (and expensive) options. A deck installer juxtaposes an Enhance sample against Transcend or Select to a homeowner, who then realizes how much more appealing the latter high-end lines are.
While the composite decking industry has introduced differentially priced SKUs over the last 20 years, as far as I can tell it has never engaged in retaliatory price wars, as doing so would blow up the economics on existing inventory held by channel partners, who they don’t want to burn or compensate with credits. When end demand is weak and distributors are destocking, Trex and Azek (the #2 player) will take down production levels and bear excess capacity rather than cut prices to move inventory and maximize plant utilization. Both players dish out rebates, but if margin and ASP improvements are any guide, there is no indication that they do so in a reckless gambit to win share.
Whatever the particular SKU, composite decking’s value prop relative to wood is basically the same: the premium you pay is more than made up for by lower maintenance and superior longevity. A wood deck needs to be thoroughly cleaned and stained every 1-3 years to prevent rotting and cracking. Even when properly maintained, they last only around 10 to 20 years. A composite deck, on the other hand, just requires periodic cleaning with soap and water and lasts up to 30 years. Over a span of a quarter century, the total cost of ownership of a wood deck is more than twice that of one made of composite, according to this illustration from Trex: