管理層發言
Good day, and welcome to the Trex Company Second Quarter 2026 Earnings Conference Call. Please note this event is being recorded. I would now like to turn the conference over to Lee Coker, Vice President, Corporate Development and Investor Relations. Please go ahead.
Good morning, everyone, and thank you for joining us today to discuss our second quarter results and outlook. With us on the call are Adam Zambanini, President and Chief Executive Officer; and Prith Gandhi, Senior Vice President and Chief Financial Officer. The company issued a press release earlier this morning containing financial results for the second quarter 2026, a copy of which 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. 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-Q as well as our other 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. I will now turn the call over to Adam. Adam?
Thank you, Lee, and good morning, everyone. As Lee mentioned, we pre-released our second quarter net sales and adjusted EBITDA results earlier this month, so I won't spend much time recapping the numbers. The key takeaway is straightforward. We delivered an excellent quarter with net sales well above expectations, driven by strong execution and strengthening of end market demand. Importantly, that growth was broad-based across our product portfolio, channels and price points. We are particularly encouraged by the momentum we saw as the quarter progressed. Demand accelerated through May and June, supported by strong sell-through activity across the portfolio, and those trends have continued into the third quarter. That performance, combined with our strong execution and improved visibility, gave us the confidence to raise our full year guidance and increase our planned share repurchases for the remainder of the year. We also generated strong free cash flow during the quarter, allowing us to reduce debt and return capital to shareholders through share repurchases. Reflecting our confidence in both the business and our long-term outlook, we plan to repurchase up to an additional $150 million of shares during the balance of the year. While our sales performance was exceptionally strong, profitability reflected the pace at which demand accelerated during the quarter, along with several strategic choices that supported our long-term growth objectives. First, growth was particularly strong in railing and our entry-level decking products. We view this as a positive development, underscoring the growing consumer engagement across the product portfolio and successful execution of our wood conversion strategy. Although the mix moderated consolidated gross margin, it meaningfully accelerated revenue growth and enhances the scale of our long-term value creation opportunity. Second, we continued investing in branding, talent and organizational capabilities consistent with our strategy and our expectation to spend approximately 18% of sales on SG&A this year. These investments are intended to strengthen our competitive position and support sustained growth over time. Finally, demand strengthened significantly as the quarter progressed. To support that growth and ensure excellent customer service, we increased production levels throughout the quarter. That created some short-term manufacturing inefficiencies, but utilization improved steadily and production performance returned to expected levels by the end of June. Taken together, we are very encouraged by these dynamics and what they tell us about our business. Stronger demand, continued gains in key growth categories and disciplined investment in our strategic priorities reinforce our confidence in both our near-term outlook and our long-term growth potential. Overall, we are pleased with our first half performance and increasingly confident in the opportunities ahead. Our strong results, improving demand trends and progress against our strategic priorities reinforce our belief that we are well positioned to achieve our long-term objective of $2 billion in annual sales by 2030. One of the priorities is to optimize our channels for growth. As we recently announced, we have taken decisive steps to further strengthen what we believe is the industry's leading distribution network in North America, ensuring that our products remain readily available to both pro contractors and homeowners. While we discussed these changes during our July call, I want to spend a few minutes reiterating some key points. This is not simply a response to tremendous changes in the broader building products industry. It was a proactive decision designed to position Trex where the industry and the market are headed and to support our long-term growth objectives. I have full confidence in our distribution network we have assembled, built on relationships with companies that share our commitment to growth, innovation and customer service. Importantly, these actions create a meaningful incremental growth opportunity. Across our distribution network, we estimate there is more than $100 million of decking and railing currently represented by small tertiary brands, representing a substantial conversion opportunity as we continue to win, share and transition customers to our brand. While this opportunity will take time to develop, we believe the strength of the Trex brand, our product portfolio and our channel partnerships position us well to capture a meaningful share of that business over time. Ultimately, these actions are about building a distribution network that is simpler, faster and more effective, enabling us to execute our strategy and achieve our long-term financial goals. Another decisive step we are taking, which I'm pleased to announce, is the acceleration of the decking production at our Little Rock manufacturing facility. Little Rock is strategically located near key raw material sources, large residential markets like Texas, a strong pool of skilled labor and a major transportation hub, which will help optimize freight costs for the customers in the Central U.S. who are currently being serviced by our existing facilities in Virginia and Nevada. Equally important, this location positions us closer to several key growth markets for wood conversion, particularly in the Southern Sunbelt. The Sunbelt region remains heavily weighted towards wood decking, specifically pressure-treated Southern Yellow Pine, representing a significant conversion opportunity for Trex. Given these factors, Little Rock is poised to become our wood conversion growth engine. Together with this decking capacity expansion, we have been actively investing in our wood conversion strategy through refreshed branding and marketing initiatives. These efforts are already gaining traction with our Trex Enhanced basic decking products, our primary driver towards wood conversion, also delivering strong sales during the quarter. The opportunity remains substantial. Wood continues to represent almost 75% of the decking category with Southern Yellow Pine accounting for the majority of the wood decking sales. As a reminder, every 1% share we take from wood represents about $80 million of incremental sales opportunity for Trex. With the performance attributes of Trex Enhanced product line, we believe that we have one of the best solutions in the market to accelerate this conversion opportunity, and we will not stop there. We will continue leveraging our world-class material science capabilities to develop innovative, high-performing and more cost-effective products that further expand the opportunity ahead. I'll now turn it over to Prith, who will provide you more detail on the quarter and our outlook. Prith?
Thank you, Adam, and good morning, everyone. Unless otherwise noted, all comparisons are on a year-over-year basis. Second quarter net sales of $418 million came in well above our expectations, growing 8%. Importantly, Q2 sell-out was slightly ahead of sell-in, reflecting strong underlying demand and healthy consumer engagement across our channels. On a rolling 12-month basis, sell-in and sell-out grew 9% and 7%, respectively, compared with 7% and 6% in the first quarter. The difference primarily reflects timing effects within the trailing 12-month period rather than any meaningful divergence in underlying demand trends. As Adam mentioned, our sales growth this quarter was broad-based as we experienced strength across product lines, distributors and price points. Railing sales returned to double-digit growth, while we also saw a nice increase in Trex Enhanced basic sales, the first meaningful sales increase we've seen at this price point in a few years. As Adam mentioned, the basics product line is our primary vehicle for wood conversion. Our growth was also largely driven by volume with minimal impact from pricing actions. Importantly, the increase in sales was supported by underlying end market demand with strong sell-through across the portfolio. As I will discuss in more detail, we also saw a meaningful acceleration in demand in the latter part of the quarter, a trend that has continued into the current period. This momentum, combined with our strong execution, give us the confidence to recently raise our 2026 guidance. Gross profit was $158 million, with gross margin of 37.9%, down from the levels seen in the first quarter and prior year. As expected, gross margin was impacted by product mix and incremental depreciation associated with our Little Rock facility. Gross margin was also affected by short-term manufacturing inefficiencies as we responded to strengthening demand during the quarter. As demand accelerated through May and June, we increased production levels to support customer needs and maintain channel inventories at appropriate levels. The pace of that ramp resulted in higher overtime costs, additional line changeovers and other temporary operating inefficiencies, which we estimate reduced gross margin by more than 100 basis points during the quarter. Importantly, these impacts moderated as utilization improved. We exited June operating at significantly higher efficiency levels and with gross margins well above the overall second quarter average. We expect those improvements to continue as we move through the remainder of the year. GAAP SG&A expenses were $67 million, representing 16.1% of net sales, in line with our expectations and tracking to our annual target of 18% of sales. Excluding the impact of digital transformation and Little Rock start-up costs, SG&A was $66 million. We continue to invest in capabilities and marketing programs to accelerate consumer demand and drive long-term growth, and we believe we are already seeing the benefits through higher sales. I also want to call out that the company took a $5 million noncash write-down for obsolete equipment during the quarter that you will see on the P&L. We removed this expense from our adjusted EBITDA, which was $112 million, but did not remove it from our adjusted diluted EPS of $0.62, which had a negative impact of $0.03. We had a very strong quarter of free cash flow, reflecting the seasonal benefit of working capital and lower capital expenditures as the construction of the Little Rock facility approaches completion. We used the $182 million generated to repurchase approximately $51 million of shares and repaid $130 million outstanding under our revolving credit facility. And we will continue to generate significant free cash flow with the completion of our multiyear capital expansion program, including the Little Rock facility. This will give us the flexibility to pursue capital allocation priorities, including additional share repurchases and selective M&A opportunities. As part of this strategy, we plan to repurchase up to an additional $150 million of shares during the remainder of 2026, underscoring the company's confidence in its outlook and commitment to creating long-term shareholder value. Turning to our outlook. We recently increased our full year 2026 net sales and adjusted EBITDA guidance given our strong year-to-date performance and through confidence in our disciplined execution and strengthening consumer demand. We now expect full year adjusted gross margin to come in at approximately 38%, up from the 37.5% we previously expected, primarily driven by higher capacity utilization with Little Rock starting production in Q3. We are also providing third quarter net sales guidance of $305 million to $320 million, as shown in the press release. Before turning the call back to Adam, I want to discuss our decision to accelerate the ramp-up of the Little Rock facility by over 6 months. This decision is backed by the increased demand that we are seeing because of the successful execution of our strategic plan. As we have discussed in the past, Little Rock will be our most efficient and lowest production cost plant. Once these lines are fully ramped and operating at higher utilization levels, we expect them to become accretive to margins. We anticipate bringing half of the Little Rock lines into production by the end of the year. Because we are bringing on individual lines in a phased manner, most of the margin benefit will be realized in 2027 and beyond as we continue to scale capacity to support demand and our long-term goal of achieving $2 billion in annual sales by 2030. This accelerated rollout is not expected to have a material impact on our expected depreciation as we already began depreciating our lines when we made them production ready. We will provide additional details on the financial impact of Little Rock as we progress through the ramp-up period. I will now turn the call back to Adam for his closing remarks. Adam?
Thank you, Prith. We believe we are already seeing the early benefits of the decisive strategic actions we have begun to take, and we expect this momentum to continue building as we execute on our upgraded distribution program, ramp-up of our best-in-class Little Rock manufacturing facility and accelerate new product introductions by leveraging our industry-leading material science capabilities. The Trex organization is energized, aligned and focused on achieving our long-term goal of $2 billion in annual sales by 2030. Before we close, I want to take a moment to recognize our people. Their commitment, discipline and relentless focus on our customers remain the foundation of our success. The progress we discussed today is a direct result of their efforts, and they remain committed to executing our strategy and delivering long-term value. We believe when our people succeed, our shareholders succeed. Operator, we would like to open the call for questions.
分析師問答
The first question today comes from John Lovallo with UBS.
The first one is, what do you attribute the pickup in demand to throughout the quarter, particularly at the lower price points, given ongoing geopolitical uncertainty and challenged consumer confidence?
Yes. When we laid out with this new management team what we were going to do, it was going to be no excuses. So we weren't going to look back and worry about where the repair and remodeling market was at. When we laid out our strategic plan, we've heavily invested again in marketing, targeting all segments. I don't think Trex is any longer participating in a K-shaped economy. We actually did see that entry-level consumer come back to Trex because now we are focused on wood conversion, which we haven't focused on since before COVID. We've also beefed up and strengthened our sales programming over time, and that has also won us some share back. The great thing I am seeing at Trex right now is every level consumer—good, better, best—is participating in all categories. Trex hasn't seen that in almost four years where we'd been missing that entry level. And the number one opportunity for Trex is that conversion from wood; as we've said, 1% share away from wood is about $80 million of revenue for us. So we're pretty laser-focused on that right now.
Okay. That's encouraging. And then the 2030 revenue target of $2 billion implies about an 11% CAGR. Can you just help us with the building blocks of this target and what your level of confidence in achieving it is?
Yes. So there's still a high level of organic growth there. What I've been telling people is to look at at least a minimum of two-thirds organic growth and about one-third from M&A as we look out longer term. Now that we've got the wood market share moving in the right direction, I feel very comfortable because it's not just bringing that entry-level consumer in, but it's also getting them to trade up into the other categories. I think it has a halo effect, not just on decking, but on railing, on fasteners and a multitude of categories that Trex sells.
The next question comes from Susan Maklari with Goldman Sachs.
My first question is on balancing between the sales growth relative to the profitability of the business. As you target that $2 billion of sales, when you think about some of the benefits you've talked about in terms of margins as Little Rock ramps and utilization rates come up, how should we think about the puts and takes between those two? And what will it mean for the path for margins?
Yes. So, as we've said in the past, for every $100 million of revenue you roughly generate about an additional 100 basis points in gross margin. So that's the way to think about it overall when you're looking longer term.
Yes. We are a capital-intensive business. We need to fill these assets and plants, and that's been my number one goal from day one. As we start to think about M&A longer term, we're focused on EBITDA dollars and return on invested capital. There's been a strategic shift in where Trex is headed in terms of how we're going to grow and expand.
Okay. All right. That's helpful. And then you called out the investments that you're making in branding and talent. As you think about the marketing initiatives implemented in the first half of this year, how did they compare to your expectations? Are there tweaks we should expect going forward? And can you talk about how that all comes in with the digital initiatives you're also focused on?
Yes. This is really the second year into making a heavier investment in marketing. Our campaign performance, 'Engineered for Your Life Outdoors,' has exceeded our expectations in terms of where we were heading. We've seen Trex gain traction in fire applications, marine applications and heat mitigation technology. We're becoming one of the leading brands in those areas. At all tiers and segments we're winning consumers. We've also invested heavily in the contractor piece, which was needed over the last several years, and we're seeing many contractors move toward Trex as well. I feel really good about the campaign, and we're only in year two. Generally, marketing builds over time, and I believe we haven't yet reached optimal marketing levels. I expect further progress in year three.
The next question comes from Ryan Merkel with William Blair.
First topic is cadence. It looks like 3Q revenue growth year-over-year is pretty strong and then it decelerates a bit year-over-year in 4Q. Just talk about what some of the drivers are? And are there any stocking and fill-in benefits in 3Q?
Yes. Ryan, it's Prith. As I mentioned in my prepared remarks, we had solid growth in Q2 driven by improving end market demand, some new retail store placements and sell-through from distribution that was a bit ahead of our sell-in. Those trends continued into July. Regarding distribution upgrades and load-ins, there is some initial new ordering from new partners like Coastal and BlueLinx, but I'd frame that as a modest tailwind, not the primary driver. The bigger picture is demand supported by underlying consumption. Many orders from new distributors are replacing what others would have carried. Overall, I expect a small benefit in Q3 from the transition, but it does not fully explain the year-over-year growth.
Got it. All right. That's helpful. And then just back to the Enhanced basics, it's great to see entry level is doing better. What exactly is working in the marketing spend there? And I assume you expect that will continue in the next couple of quarters?
Ryan, I'm not going to give all tactical details since competitors listen to this call. But we've done some smart things in advertising for conversion from wood and have been testing different variables in the product portfolio. It's encouraging; we're in the infancy of where we can be on wood conversion, and that gives me confidence as we move forward with our strategy.
The next question comes from Trevor Allinson with Wolfe Research.
You mentioned when you announced the distribution changes that you now have a pricing group setting when it makes sense to take price and that many value-added more consolidated industries tend to take annual price increases. Is that something contemplated in your 2030 $2 billion revenue guidance — some annual price increases to go along with some of the market growth?
I think there will be some pricing along the way, but we don't look at it like siding and trim companies that take annual price increases. We look at it from a consumer demand perspective and will take targeted price increases. Trex has a lot of operating leverage: the more we fill plants, the more absorption we get and the lower our cost of goods. There will be some mix of pricing through 2030, but not necessarily an annual price increase every single year.
Trevor, from a long-term planning perspective, yes, we expect some benefit from pricing, but largely pricing is to offset inflation. That's how we look at it long term.
Okay. Makes sense. And then a follow-up on the full year revenue guide, specifically the implied 4Q revenue guide. It seems like the midpoint would imply flat to down revenue year-over-year in 4Q, but you talked pretty clearly about demand accelerating. You're bringing Arkansas on, which would suggest demand will stay strong. Can you square what's implied in that 4Q number versus what you're actually seeing in the market? Is that just conservatism? Or what's driving that?
Yes. I'd say there is conservatism. We still have geopolitical uncertainties, and we want to take that into account. Things can change quickly, as we see in the headlines. So that is part of our thinking. If demand trends continue, it's possible we have upside.
The next question comes from Trey Grooms with Stephens.
You referenced the $100 million in revenue opportunity from tertiary players that you previously mentioned. Can you talk about how you see SG&A trending as you pursue that path to 2030? I know you're running around 18% now, but any way to think about leverage there as you look over the next few years?
Trey, this year we're targeting about 18% SG&A on a GAAP basis and 17.5% adjusted. Over time, we will continue to invest in marketing, sales and innovation in line with top-line growth, but we expect other parts of SG&A to leverage. Over time, anywhere from 10 to 50 basis points is a reasonable expectation for SG&A leverage.
Got it. Okay. Perfect. And then letting margins, railing you've targeted 500 basis points of gross margin improvement there over the next three years. Can you talk about how that's phased — linear or step functions?
It would be nice if it was linear, but I do think there are step functions from vertical integration initiatives. Some things are on track today, but those will hit over the next two to three years and you'll see step-function changes as those are executed. We have those plans over the five-year horizon, but we haven't provided all the internal details.
Next question comes from Tim Wojs with Baird.
Nice job. Maybe just thinking about bringing on the Little Rock lines. It sounds like the depreciation is already in the margin numbers. Are there any other costs coming through the P&L? Or as you start running revenue out of those lines, would you expect them to become profitable pretty quickly?
Yes, it's more of the latter. We'll have some start-up costs that we will adjust out; we adjusted a bit out in Q2 as well. Once we start producing and delivering revenue from the plant, it will start to offset depreciation and noncash costs as well as ongoing operating costs in the plant.
Okay. And then is there any way you could put a finer point on gross margin expectations for the third quarter, given the higher costs in Q2 and the exit rate you talked about?
Yes. If we look at gross margin sequentially from Q2 to Q3 and compare to 2025: in 2025 gross margin declined about 30 basis points from Q2 to Q3 on sales that declined about $103 million quarter-to-quarter. This year at the midpoint of our guidance, revenue will be down about $105 million Q2 to Q3. We would expect gross margins to decline similarly, about 30 to 40 basis points Q2 to Q3.
Sequentially? So kind of mid-37% is what you would think about for the third quarter?
Yes.
The next question comes from Matthew Bouley with Barclays.
You said there was a $100 million opportunity with tertiary players in decking and railing. How much of that is recent versus a year or two ago? How much of the top-line growth this year is due to gains from tertiary players and retail placements? What's the further runway to get after that number?
Very little to date has come away from tertiary players, but that will have meaningful magnitude over the next two years. Regarding distribution changes, many of the companies moved away from tertiary brands on decking and railing. Within three weeks, some distributors converted six dealers immediately from a tertiary brand to Trex, even without inventory on the ground. We think there's a lot of upside over the next two years in that $100 million opportunity.
Okay. Got it. And on new capacity, you mentioned earlier about the size of the market opportunity being different than initially thought. Where is your overall capacity utilization today? Would it make sense to rationalize other capacity across the network if shifting capacity toward Arkansas? How does utilization play out into gross margins?
In terms of turning on Little Rock lines this year, it's all incremental based on the outlook and end market demand. Going forward, we'll always evaluate whether to optimize capacity in Winchester or Nevada. Little Rock lines will be our best cost lines. As Adam noted, the building infrastructure is ready, so expansion there is easier over time.
The next question comes from Phil Ng with Jefferies.
With Little Rock coming up, you're in a better spot from a cost standpoint. Adam, you highlighted filling that capacity and potentially taking some share from tertiary brands. How should we think about the impact over time on margins? Is there enough on the productivity side where margins should continue to power higher? Prith talked about $100 million translating to 100 basis points of gross margin. Can you tease out how filling Little Rock and picking up tertiary brand share gains affect margins going forward?
Margins will expand over time as we fill assets. Considering Little Rock depreciation and the conversion from wood and tertiary brands, operating leverage at Trex returns when we fill the plants. You'll see leverage over time on SG&A and gross margin. It won't be hundreds of basis points every year; you'll see modest margin growth and modest SG&A decreases over time.
Our manufacturing and engineering teams continually work on productivity to offset raw material inflation and other costs. That work continues and will contribute to margin improvement going forward.
Could we see operating leverage, whether it's EBITDA margin or gross margins, as soon as 2027 or will it take more time?
It should start to appear in 2027 and then improve over time. For example, the railing initiatives will take two to three years to realize the 500 basis points improvement, so you'll see benefits building in 2028 and beyond.
Moving up Little Rock by six months has a favorable effect on 2027 versus our earlier expectations. Because we're starting earlier, you'll see some of those benefits in 2027.
The next question comes from Ketan Mamtora with BMO Capital.
Maybe to start, what are you embedding in your guidance for inflation, either on freight or resin?
Ketan, productivity and pricing for us offset inflation from raw materials or freight, and that's embedded in the guidance. Ninety-five percent of our raw material is recycled plastics which are in abundant supply; we've been able to get some productivity gains there. We use little virgin resin, so its effect is limited and embedded in guidance. On diesel and inbound freight, we've seen some increases but offset through productivity initiatives.
Got you. And then as you look to your full year EBITDA guidance of $335 million to $350 million, what are the biggest swing factors that get you to the low end or the high end? Is it demand, Little Rock ramp-up, or something else?
At a high level, it's end market demand and mix. Those affect both top line and margins. The low end is influenced by geopolitical uncertainties; the high end reflects demand continuing as we're seeing in July and strengthening from there.
The next question comes from Keith Hughes with Truist.
With the lines ramping up in Little Rock, what does that bring your total capacity to?
Keith, as we've said in the past — and competitors listen to these calls — with Little Rock fully up and running, we could service up to $1.8 billion to $2 billion in revenue. Let's leave it at that.
Okay. And are you bringing up all the lines in Little Rock or just a portion of them in this six-month acceleration?
We have run through all the lines to ensure capability, but as stated in our press release, we'll be about 50% capacity by the end of this year.
Final question: are those lines fungible between Transcend, Enhanced and all the decking products?
Yes. You can run any decking product line we have on those lines.
The next question comes from Kurt Yinger with D.A. Davidson.
Can you provide an update on Refuse — what you've seen in sales progression and market placement with that new product? And broader, how much of a focus area is the PVC decking market at this stage?
Thanks. Whether decking or railing, we are going to compete in every category. For Trex Refuse, our PVC product line, we've stepped in with a couple of colors and it's in line with our expectations. You'll see us expand in PVC over time: today we have square profiles; in the future you'll see square and grooved profiles and a full product line out of PVC. We've been underrepresented in PVC and need to participate; you'll see more from us over the long term in that category.
Given the distribution changes, some are concerned about inventory and downstream effects. Is there anything you're focusing on during this transition to ensure dealer relationships and shelf space are maintained?
We drove this market change starting July 13. This has been in planning for a while. We've aligned distribution with what we need long term to service the pro channel and home centers. We feel comfortable with these changes and how we'll grow moving forward.
Next question comes from Collin Verron with Deutsche Bank.
On the PVC side, you're currently sourcing all your PVC products. Can you talk about appetite to manufacture PVC and timeline? Could that be organic in Little Rock or require M&A?
I won't outline long-term specifics today. In our plans, we expect to expand margins over time in the PVC arena as part of our five-year strategic plan.
Understood. And the Board announced an additional $150 million share repurchase. Can you talk about cash flow generation in the back half of the year, timing of repurchases, and priority of buybacks in 2027 and beyond?
Collin, most cash flow generation in prior years comes through in Q3. We have ample revolver capacity. We'll execute buybacks over the remaining months of the year based on cash availability and stock price. Share buybacks will remain an important capital allocation tool in 2027 and beyond, but we weigh valuation, M&A opportunities and investing in the business against buybacks, looking at ROIC for each option. Share buybacks do not drive growth the way M&A and investing do, so we consider those trade-offs.
The next question comes from Rafe Jadrosich with Bank of America.
Prith, can you clarify the comment that third quarter gross margin is around mid-37% — is that adjusted or GAAP?
Adjusted.
Okay. You called out some one-time headwinds in Q2 gross margin and the exit rate improved, and you raised full-year gross margin outlook by 50 basis points. With Q3 mid-37% that implies a significant year-over-year expansion in Q4 beyond normal seasonality. What are the drivers versus normal seasonality? Anything happening from a production standpoint?
Rafe, remember that in Q4 2025 we changed our warranty reserve methodology, which resulted in a one-time $6 million step-up in COGS in Q4 2025. If you take that out and compare, Q4 2025 gross margin would be comparable to what we're seeing for Q4 2026. Operationally, the biggest driver is turning on Little Rock and having it running in the network. Increased capacity utilization allows us to cover incremental year-over-year depreciation in COGS. That's what's driving the gross margin change.
Great. One more: can you talk about mix you expect in the back half of the year compared to the first half, especially from railing? Railing was a headwind to gross margin in the first half; what do you expect in the second half?
In the second half you'll start to see railing ramp down and level out. I don't expect significant mix changes as we move into the back half of the year.
Overall, for the full year we expect double-digit growth in railing, and that's embedded in our guidance for a 38% gross margin for the full year.
This concludes our question-and-answer session. I would like to turn the conference back over for any closing remarks.
Thank you, everyone. Prith and I look forward to speaking to you and seeing you at the upcoming conferences in the coming weeks.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.