Trex Company Inc (TREX) 2002 Q1 法說會逐字稿

Ladies and gentlemen, please continue to stand by. Your conference will begin momentarily. Again, please stand by and thank you for your patience.

Ladies and gentlemen, thank you for standing by. Welcome to the Trex Company first quarter conference call. During the presentation, all the participants will be in a listen-only mode. Afterwards, we will conduct a question and answer session. At that time, and if you have a question, please press the one followed by the four on your telephone.

As a reminder, this conference is being recorded, Friday April 19, 2002. I would now like to turn the conference over to Mr. William Walkowiak from . Please go ahead, sir.

Thank you, . And thank you everyone for joining us today. With us on the call are Robert Matheny, who is the President of Trex Company, and Anthony Cavanna, the Chief Financial Officer.

The company issued a press release yesterday containing financial results for the first quarter. This release is available on the Company's web site at www.trex.com as well as various financial web sites. However, if you need a copy of the press release, you may call us at Lippert Heilshorn at 212-838 -- excuse me -- 3777.

There will be a replay of this call available until 1 p.m. on April 26. The number for the replay is 800-633-8284, service number , and the call is also being Web cast on the investor relations page of the company's Web site, where it will be available for replay for the third day.

Before we begin, let me remind you that this conference call will include forward-looking statements as defined in Federal Security Law. These will include statements concerning our expectations, projected future sales and earnings, business strategy and future operations, new products, working capital needs, and plain capital expenditures, economic trends and competition.

Actual results could differ materially from the results projected in these statements. Please refer to the Company's Form 10-K, which was filed with the SEC on March 21, for cautionary statements identifying some of the important factors that could cause actual results to differ materially from those forward-looking statements made this morning.

Trex Company did not undertake any obligations to public with the update or revise any forward-looking statements, whether as a result of new information, or otherwise. So with that, I will now turn the call over to Mr. Matheny. Please go ahead, Bob.

Thank you, Bill, and good morning.

As many of you are now aware, our first quarter 2002 revenues were very strong at $52 million, an increase over prior year of 23 percent. Earnings per share, 45 cents or 9 cents short of first quarter 2001 performance, this being the direct result of work capacity utilization reduced inventories. We spoke at our last conference call, several objectives we had for the year, and I would like to report that on all dimensions, we are doing quite well so far.

Our revenue growth goals of 15 percent for 2002 are on track and we have taken our inventory deficit substantially during the quarter. This will allow us to increase our manufacturing utilization and thus cover more manufacturing fixed overheads with the end result being improved margins. We have also reduced the debt during the quarter, more than $21 million, putting us well on our way to a year-over-year goal of $30 million in debt reduction.

Our strong revenue generation during the quarter is the result of continued work in the marketplace. We continue to strengthen our wholesale distribution by adding high-quality locations many of which come from our sustained distributor customers expanding. Our efforts with home builders and deck contractors continue to support our position with the consumer. And our continued focus on high profile showcase projects continues to build the plan.

In a moment I will share the details of our performance during the quarter, as well as our view going forward. At this time, I would like to introduce Tony Cavanna, our Chief Financial Officer, who will discuss our financial performance -- Tony.

Good morning. As you are aware, our press release was released last night and numbers I will reference are contained in the last few pages of the release, headed, Condensed Consolidated Statement Of Operations and Condensed Consolidated Balance Sheets.

In the first quarter of 2002, net sales were $52 million versus 2001's first quarter sales of $ 42.2 million, an increase of 23 percent. Income from operations in 2002's first quarter was $12.8 million. First quarter 2002 income is $ 6.4 million or 45 cents per share and compared unfavorably to 2001's first quarter record income of $7.7 million or 54 cents per share.

Gross profit of $20 million, while being slightly higher than 2001's first quarter gross profit of $19.2 million, represents 38.4 percent of sales.

In 2001's first quarter gross profit as a percent of sales was 46 percent. This is unfavorable to compare and it is a consequence of reduced manufacturing capacity utilization, all set significantly by improved manufacturing cost efficiency and the full impact of 2001's price increase carry-over from the second half of 2001.

In the first quarter of 2002, SG&A sales, general and administration expenses totaled $7.1 million. Although this represents an 11 percent increase from 2001's first quarter SG&A expenditures, the total shows no increase from the fourth quarter 2001 expenditures.

This is the result of implied cost controls in the second half of 2001. Revenue expenses were $1.4 million in the first quarter as we continue to emphasize the determination to establish a brand identity for Trex decking. After March 31, 2002, total debt amount is $64 million, representing a significant reduction of 25 percent from December of the last year's debt of $86 million.

This, of course, is a result of solid income EBITDA of $15 million, restrained capital expenditures of $700,000 and finished goods inventory reduction. In the first quarter, interest charges amounted to $2.5 million with the non cash charge for loans amounting to $1.3 million.

You will recall that the issuant warrant was the result of the debit structuring, which was completed in November of 2001.

We are in the initial stages of pursuing a more permanent debt capital structure. Our goal is to have a more permanent address only in place before July 1, 2002. If we are successful, as we expect to be, the loans will be reduced from $708,000 to $354,000 shares. However, the non-cash interest charge for the entire 708,000 warrants will need to be recognized in an accelerated fashion in the second quarter. To clarify this discussion, I would like to restate what I said during the February 2002 conference call.

The non-cash charges to interest expenses are stated as follows: First quarter 2002 was $1.3 million. Second quarter 2002 was $900,000. Third quarter 2002 was $650,000. Fourth quarter 2002 was $650,000 and a carry over to the first quarter 2003 for $200,000. Therefore, in the second quarter the non cash warrant interest charge which is cited to be 900 thousand could be $2.4 million if the debt refinancing is successful, before July 1, 2002.

If the new debt structure is secured, accelerated non-cash interest will reduce second quarter income by about 6.5 cents per share. Debt refinancing, success or non-success will not change the non-cash warrant charges. If we do refinance, the second quarter -- if we do refinance in the second quarter, negative impact will result in the favor of non cash interest charge treatment in the third and fourth quarter of the year. The middle is what we have take in the second quarter will not be taken in the third and fourth quarter -- Bob.

Thanks, Tony. Now, I would like to speak our operating performance for the first quarter and then I'll talk about some for the remainder of the year.

Our revenue performance year over year was a combination of volume, pricing mix, all of which were in our favor. Volume accounted for nearly 15 percent of the increase, pricing was about seven favorable and mix was also favorable.

Going forward, I see will provide only a four percent gain year over year and makes the balance out to be mutual for the year. Demand for Trex continued to grow in the marketplace and as I have stated many times, we are dedicated to take a significant share from to our brand-owning activities and the pull-through efforts of our sales force.

During the quarter, we had increased the number of distributors and dealers in our distribution chain. We have added to our model home program as well as contractors to our Trexpro . We also continue to add new showcase projects to build heightened awareness and have added new products to our line-up, all of which has added to our sales increase year over year.

I can also report that wholesale customer survey responses depicted inventories are up modest levels compared to last year at this time and sales to dealers are up 33 percent over last year. Current reports from all levels of the distribution chain are positive including the contractor and shipments for April are up versus our performance last year.

Weather has continued to work in our favor during the first quarter in most parts of the country. And remembering that last fall ad winter were quite mild, our expectations going forward would be that our revenue growth year over year would not be as strong as our first quarter. However, we feel very comfortable that our full year-over-year revenue performance will be between 15 and 20 percent over the prior year. This forecast will have our 2002 revenue approaching $104 million.

During the quarter, we drew our finished goods inventories down over 50 percent in conjunction with operating cash flows, and were able to pay off more than $21 million of debt, which reduced the company's level for leverage as measured by EBITDA two and a half times. Therefore, with new performance and more acceptable inventory levels, we can now begin to increase line utilization.

As I mentioned at our last call, we exceeded 2001 with manufacturing capacity utilization rate of 40 percent, which resulted in a gross margin of less than 30 percent. During the quarter, we improved our gross profit margin as forecast to more than 38 percent. We are on our way to returning to more stock levels and we feel confident, that the year-end gross profit margin will run 42 to 43 percent of revenue. The improved margin throughout the quarter was a result of several factors, including bringing on idle capacity.

We ended the quarter running at 30 percent of manufacturing capacity. Our for the quarter was also more favorable than anticipated, that's improving our margins and we were able to buy raw materials and lower prices than forecasts, which also contributed to our success in this dimension.

Our SG&A spending, while more than last year's in the same period, as already mentioned, fell short of our forecast by almost 13 percent and this is almost solely due to timing. Therefore, we should see that in the second quarter thus impacting the earnings by several cents. Our original earnings forecast for first quarter was 28 to 30 cents per share, a 15 cent positive variant versus our forecast was due to the favorable volume, mix, pricing and under-spending of SG&A.

We believe full year volume growth will run between 12 to 15 percent, pricing will be closer to the four percent rather than the seven percent experienced during the first quarter. We also have enough reason at this time to believe mix will not turn out according to our original forecast. Therefore earnings would be negative impacted slightly during the reminder of the year.

Under-spending in the first quarter of SG&A will catch up in the second quarter and since we have some issue of brand-building activities under consideration, our year-end SG&A spending may be higher that originally anticipated. With these thoughts in mind, our expectations for the second quarter earnings is 12 to 14 cents per share.

If the fact we refinance during the quarter, our earnings will be impacted negatively by six cents per share as a result of the accelerated non-cash charges that Tony mentioned. This does not impact overall earnings for the year.

For the year, with a strong start in the first quarter, we now believe that full year earnings per share will be between 78 and 82 cents versus the 70 cent per share we forecast in our last conference call. In summary, we find first quarter results in all dimensions very satisfying.

We continue our quest of building up a brand and strengthening our position as market leader in the several billion dollar decking and also related products market. Our sales, sorting, technical and manufacturing teams are pursuing their goals aggressively and are over-achieving. Our strong revenue performance in the first quarter has gotten us off to a great start, pursuing our goals of inventory and debt reduction, increased equipment utilization, margin improvement and long-term income growth.

Now I would like to entertain any questions that you may have -- April.

Thank you. Ladies and gentlemen, if you would like to register a question, please press the one followed the four on your telephone.

You will hear a three-tone prompt to acknowledge your request. If your question has been answered and you would like to withdraw your registration, please press the one followed by the three. If you are using speakerphone, please lift your handset before entering your request. One moment, please, for your first question. l from Wachovia Securities, please go ahead with your question.

Yeah. First I want to say, good quarter, guys. You did an admirable job to bring down inventories. Could you give us a little more clarity as to what SG&A spending is going to look like for the full year?

Sure, . We originally forecast it at about 23.5 percent of sales and if we go forward, we'll end up at least there, and if we go forward with a couple of things that we have on under consideration, which would be useful for us in 2003, it's probably another half percent to a percent.

OK.

We are approaching 25, .

OK.

But we haven't a final determination on those things yet.

OK. Secondly, were there any sort of incentives in the first quarter, you know, for -- any cash purchases or anything along those lines?

No. Nothing other than -- actually we had a very nice selling program if you look at this year versus prior years, there were discounts off the price as we have done in the prior years. In January, February and March on a declining basis, for people to take inventory in those months, there was a -- and there was no datings. There were no terms, 30, 60, 90 or anything like that, which we've done in the past sometimes. So, it's a pretty much in terms of an encouragement kind of thing, it was a pretty much so ...

OK. Good. OK. Thank you very much.

OK, Rob.

The next question comes from with Merrill Lynch. Please go ahead with your question.

Hi, good morning. I good quarter.

Thanks .

In bringing the inventory down, and I think your finished goods were $9 million, you feel that you are at -- had you a shortage anywhere, in any particular either color or piece of product that it may take little longer from a point of order now?

No. We actually started well-aligned up because we are short of color, that was what we had, we had probably four, well -- we had a good forecast and we didn't follow it, but now we have -- besides that and that was a couple of days out. We uncomfortable with where the inventories are and where they are going, .

Our lead times are two week lead times and with our ability to respond even if we had item, we can produce it within the two-week lead time.

Right. That's where that was about the end of the last quarter as well, all right?

Pardon me?

You were at that level around the end of last quarter as well.

Yes, yes.

OK, in the end, I know you had some new home builders as far as model home program and to be able to opt that as an option, do you have any sense if you are starting to do a higher percentage of projects related to the construction?

No. I don't -- I mean it will need it, I guess at some point you start moving it up, but I think if you go back to, you know, deck new homes is only one to six that gets built.

Right.

We're probably still booked the 16 to 17 percent again and I -- we got a ways to go.

The end-motive, Joe, which we talked about before, is that new home models are tremendous opportunity for showcase -- showcasing our products so that people would see and as they come to these new homes as potential buyers, look at the new homes, even though they don't find a new home, they go back to their own homes, potentially built into the deck.

OK. Have a good quarter, guys. Congratulations.

Thank you.

The next question is from from . Please go ahead, sir.

Good morning, guys. Our congratulations too, really very exciting.

Tell me, Bob, if you all finished the quarter roughly at 50 percent utilization rate, where do you see this getting through Q2 and maybe, you know, as we get into the second half, maybe if you could answer in terms of just the number of lines that will run into the end of the quarter, I think there was no change and what may that -- might look like as that stage is up over the course of the year.

, I can -- I can kind of tell you what our plan is and where we will exit the year. When they come on is strictly determined by what the demand is and we -- we put, I guess, one line on in March. I think the plan on exiting the year at somewhere between 70 and 80 percent utilization based on a plan, that we put out ...

That will also contribute some to the minimum at the end of the year for 2003. One other project, and great, in fact, frankly is -- is how effective the manufacturing people are with the current lines running and they've over-achieved by about 5 or 6 million pounds in the quarter and if they continue to do that, we will delay to bring on additional lines.

As you do eventually need to have lines, are you getting in most stores, some portion of the employees who were eliminated in the contraction, are you having to go and get new people and train them up. So it might -- we not have the same sort of output and sort of productivity from the new lines, which had ?

We have brought back to date, I think, certainly at the best, most of the employees that we can get back or we will have very shortly. Back east, we have brought back employees that -- that we unfortunately had to lay off, and I can't really speak if there are any more that either have a job and would like to come back to work for us or are still unemployed. My suspicion is we have run out of the talent pool and we'll have to bring people on and do one or two things, you're bring on a little bit sooner than we need and spend more time training them or bring them on as we need them, as you said, we might suffer some over-production.

OK.

Joel, there is also the plan, the way we've done things in the past when we were starting the line-up is take some people from the -- experienced people from the operating line and distribute them among the new line.

Well, we are not going to take just new people as .

That might be interesting to watch, however. Tony, a question for you. Thinking in terms of interest rate as it goes over the quarters of '02, ignoring the charge would still be in the $7.5 million to $8 million range, or is that going to be too high now?

That'll be too high.

OK.

I ...

Do you have some guidance ?

Well, it is the number given to you.

Yes, but that includes the one. The interest we -- the interest charge we are looking at was about almost $ 8 million that included about .

That'll be less than six, .

havard. OK. Great. Guys, again, congratulations.

matheny Thank you.

Next question comes from with Legg Mason . Please go ahead, sir.

Thank you. Good morning. Congratulations on a good quarter.

Thanks.

Thanks.

Your cap ex plan is still about $7 million for the year?

Yeah. Probably even on the lower side of that, 5 to 6 probably.

And what -- it was about the $700,000 in the first quarter. What should we expect the book for that to show up in the next quarter?

Now probably towards this last part of the third, and early part of the fourth quarter.

OK. And in respect to CCFA values, are you going to see any impact at all, whether it be pricing on or increased interest from dealers in terms of carrying a product?

I think -- David, it's difficult to see, but I think there is high awareness of the subject, which helps us make a case with people, be it the dealer or a contractor or a home owner or an architect or some sort of specifier, so I think -- I think there is heightened interest.

I also -- you know, those things just come and go. I think they are replacements for CCA and how soon that comes along. And I -- you know, we never focused on price at the low end because we are only percent across the deck, so, with the difference between the low-end -treated pine deck, and a Trex deck, is really much of a premium at 20 percent, given the three percent benefits you get. So I think it has heightened the awareness more and makes our -- our message a little clear and some people who may not have listened before would listen today, sorry to say that.

OK. A quick question for Tony. Looking at the deal, the ones that you've got, I would've expected it to be a little higher, could you give us an idea what some of the moving parts were in there and what we can expect the rest of the year?

The share had counted the function of the calculation on what the options that you had aboard or below water. So basically, I think the best suggestion we have at the moment, David is -- is somewhere around 14 four, maybe 14 five.

Given what today's price is.

OK. OK, that's it, thanks.

14 , likely. Roughly at the end of the quarter, is it Tony?

Yes.

OK. Thank you.

Next question comes from Chris with Michael Miller Management. Please go ahead.

Good morning. I had just a question on the guidance for the '02, the new year guidance, if you could just take the upside from the Q1, you know, from a prior guidance, upside was 13 to 17 cents and now, at the start of the full year 8 to 12 cents. I just wondered if you can touch on a few things as to SG&A and possibly I believe some of my findings catch up in '02. (Inaudible) could you just clarify maybe where, going forward Q2 to Q4, we are going to kind of see the upside, anticipate will be?

Well, in the second quarter we had SG&A spending that was high for the first quarter and coming the second quarter, and the mix shift that we gained over the course of the first quarter, I see no reason for that to continue and we will probably be back on plans. That's a -- that's a little bit of a negative. I see also, when you look at our pricing, quarter over quarter we have a 17 percent gain, the first quarter of the prior year. But our pricing increase for the year was a little -- right around four percent. So, as we go through the year, you are going to see a 3.5 to four percent increase of price. So that cent percent gain is on the first quarter. It starts with this pay. So, are you with me?

Yeah, yeah.

OK. I do think that one of the things that we -- that also should be factored in and but I think he didn't think about is we had an extraordinarily warm fall and winter, and if we go back to an adverse kind of fall this year, we're going to see demand for the material to be -- will be year over year higher in all likelihood. It won't be as strong because of the weather, typically. So that's some of the things.

OK. Right, thanks.

Next question comes from Richard Jenkins with AIM Trimark. Please go ahead.

A couple of questions on -- one on new products and then one on competition. Do you have any sense of how some of the new products, the rail ports et cetera are moving and then can you tell us how that's moving as well?

I can tell you that that it is going into distribution this -- our color has been readily received and on a quantitative basis, that's going very, very well. On quality basis, you know sounds like it is going on very, very well but we do not have hard data to prove that.

Terms of rail port and rail systems at -- that's going better than it did last year but -- quite frankly, that's a little more complicated and we are -- we have some plans of recovery in place to accelerate our rail system into the market, you know, accelerate in terms of how we enter the market place with our rail system.

And we are not that sure to also buy and we had -- we are in process of getting some things, for example post cap and post skirt, which one hands the ability for somebody to easily use our rail system and rest it up and I think that will -- that will give our rail sales a big boost.

OK, then second question, the Universal Forest Products body company that plans to be a competitor to you, and you know that, I am not sure if I got that correct, do you -- can you fill in whether that, in fact, they are competitors or do you have any sense of how they are going to be with you or anything like that?

Ah, I am worried of Universal Forest Products obviously. Now, I do not know the company you are speaking of, I mean, there are, well, I don't know, 20 to 25 small companies, not that we are small, but smaller than us out there ...

OK.

Who have operated -- and have very conventional kinds of final extrusion equipment that runs, that we need barging the materials and that runs significantly slower than our material, so the cost of goods are going to be significantly high.

It does not mean they are not successful but we stand pretty well from across the goods perspective versus people like that and quite frankly, not the HSO on a lot of times it is hard for them get awareness with public in getting the distribution.

Thank you.

Sure.

Ladies and gentleman, as a reminder, to register a question please press the one followed by four. with , please go ahead with your question.

Yes, I was wondering what was the expected to be for the year?

It is about $2.4 million if depreciation is no more, and amortization anymore. And the full year is somewhere in the area of $9 million.

Not nine, OK, and you had mentioned that you expect that you can bring on additional lines at the end of the year and have some extra inventory. What do you expect the inventory to be at the end of the year?

I think it will be between $16 million and $18 million finished goods.

Sixteen million dollars to $18 million of finished goods at the end of the year and -- that levels the year out?

Probably -- you can probably expect that we do so by another $10 million.

Somewhere from 50 to 55.

OK. Ah, thanks.

The next question is with from Banc of America Securities. Please go ahead, sir.

This quarter, actually through now -- and still, is the way at the moment, I had a couple of questions for you relating to that. You had said at the end of the quarter, you guys were running at $64.4 million, is that right?

Correct.

OK. I am looking at the balance sheet that you gave us. I come up with 63.1.

Yeah.

I believe is the rest of it in mortgages?

No, the mortgage that there were in, the 64 and 60 and 63. There are some areas of head discount and the relative charges that are lumped together and numbered there, but if you take totals out in plus and minus, it adds up to the numbers I gave you.

I guess I can carry through it on a phone call later, if you like.

OK. That kind of brought another question. In the 10-K, you guys had a -- debt discount seven million?

Yeah.

I am not familiar, I have never seen something like that before, could you briefly explain what that's about?

That is the warrant.

That is the warrant?

That's right. I started it out at $4.4 million total.

OK. Great. One another thing on the cost side, can you talk a little bit about polyethylene costs and anything with respect to the facility in Spain?

Sure. The facility in Spain is running and is running about where it was running four to five months to go, we have made significant progress.

So it is running maybe at 70 percent capacity. One of the things we have done is, over there, is we changed the speed stock, which has reduced the capability and potential output. We went to much less expensive feed stock and I think we are going to talk about that a little bit because we are going to do the balance on output and costs coming into the plan.

In terms of the overall cost, we are buying less polyethylene, as we could run on less equipment and so our costs have come down fairly dramatically.

And we saw that in the first quarter. I would expect as we go out at the marketplace we are going to go, I would not expect to go back to where we were a year ago, but I expect to see that we will pay a little bit more for . But we have a lot of initiatives underway, coming from different places, the manager in that relationship and it gives me an idea, , I don't know, 25 cents today and there are, more than that, I don't know our costs, our cost of polyethylene are, now 11 -- at 11 or 12. So we have some substantial advantage arranged by an resin.

OK.

(Inaudible) are reasonably stable, I mean we don't run with the polyethylene cycle so you know when polyethylene is 45 or 50 stands, we are nowhere near that.

OK. And when do you plan giving some visibility looking out 2003. What can you say to that?

Probably our next conference call.

OK. Great, thanks Tony.

OK. Next question comes from Chris Hannerhan with Michael Miller Management. Please proceed with the follow-up.

I just had a quick question. What was the cost from operations, do you recall the number?

Cost from operations were from, I should have it at the tip of my tongue, but I changed a lot, yes, it's right in the front here -- well, it's under the -- it is on the income statement we showed. I will have the chart in. I got a lot of papers in front of me I apologize. I am operations -- oh, a case for the operations. Why don't you go to the next question and I will get you that.

OK, how many lines do you currently operate now?

Seven.

Seven, OK.

Seven to eight depending on what's going on.

And where was that at the ...

Sixth.

OK. Got you. That was really it, I was -- just want to get a catch from operations .

The earning cash flow for the year second quarter was $22 million.

For Q1?

Yes.

OK. Thanks.

Once again, ladies and gentlemen, to register your questions, please press the one followed by the four.

There are no further questions at this time. Please proceed with your presentation or any closing remarks.

Well, we certainly thank you for your attention.

We had a very good quarter, satisfying quarter, as I said, in all dimensions. I think we'll go on our way for a good year. We will continue to manage our inventories, pay down our debt, and improve our margins and increase our income over time. Thank you again. Bye.

Thank you, ladies and gentlemen. That concludes the conference call for today. We thank you for your participation and ask that you please disconnect your line.

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