Trex Company Inc (TREX) 2003 Q2 法說會逐字稿

Welcome to the Trex Company second quarter conference call. At this time, all participants are in a listen-only mode. Following management's prepared remarks, we will hold a question-and-answer session. To ask a question, please press star followed by one on your Touch-Tone phone. If anyone has any difficulty hearing the conference, please press star-zero for operator assistance. As a reminder, this conference is being recorded today, July 29th, 2003.

I would now like to turn the conference over to Ms. Harriet Freed. Please go ahead, ma'am.

Thank you, operator, and thank you, everyone, for joining us today. With us on the call are Bob Matheny, President of Trex, and Paul Fletcher, Chief Financial Officer. Also available for questions is Tony Cavanna, Executive Vice President.

The company issued a press release yesterday containing financial results for the second quarter. This release is available on the company's website, www.trex.com, as well as on various financial websites. However, if you need a copy of the release, you can call us at Lippert Heilshorn at 212-838-3777.

A replay of this call will be available until August 5th. The call is also being webcast on the investor relations page of the company's website, where it will be available for 30 days.

Before we begin, let me remind you that statements on this call regarding expected sales performance and operating results, projections of revenues and earnings, and anticipated financial condition constitute forward-looking statements and are subject to risks and uncertainties that could cause actual results to differ materially. Such risks and uncertainties include the extent of market acceptance of the company's products, sensitivity to general economic conditions and the highly competitive markets in which the company operates.

The company's report on Form 10-K, filed with the SEC in March 2003, discusses some of the important risk factors that could cause actual results to differ from those expressed or implied on this call. The company disclaims any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

With that, I'll turn the call over to Mr. Matheny. Please go ahead, Bob.

Thank you, Harriet. Good morning. Revenue results for the second quarter of this year proved to be very strong at $59m and well above that of a year ago. Earnings per share of 44 cents for the quarter were on target with our previous guidance, despite a very rainy spring. Year-to-date income results of more than $16.5m are quite satisfying, especially in light of the poor weather conditions of the first half and higher-than-anticipated raw material pricing, which has depressed our gross margin.

Other elements of this year's plan continue on track as anticipated. Our marketing communications plan has been very successful so far, with requests for Trex literature during the first half of 2003 running 22% ahead of all of 2002. Our market expansion is on schedule with two additional lines ready for production, ensuring our customers a supply of Trex products when they may need them.

As I'm sure you have read, Tony Cavanna, a founder of our company and Chief Financial Officer since its inception, has elected to retire later this year. I would like to personally take this opportunity to thank Tony for all the guidance and assistance he has given our company and me during the past seven years. Without his leadership, our buy-out from Mobil in 1996, our initial public offering in 1999 and our debt restructuring last year would not have been possible.

Our new Chief Financial Officer, Paul Fletcher, will now review our financial performance. Paul?

Good morning. As you are aware, a press release was issued last night and the numbers I will reference are contained on the last few pages of the release, headed ``Condensed Consolidated Statement of Operations,'' ``Condensed Consolidated Balance Sheet,'' and ``Condensed Consolidated Statement of Cash Flow.''

In the second quarter of 2003, net sales were $59.2m versus 2002's second quarter sales of $45.9m. Second quarter 2003 income was $6.5m or 44 cents per share. This second quarter 2003 performance is 16% favorable to 2002's income of $5.6m or 39 cents per share.

Gross profit of $26.9m is 11% higher than 2002's second quarter gross profit of $24.2m and represents 45.4% of sales. 2002's second quarter gross profit as a percent of sales was 52.8%. This unfavorable comparison to last year is a consequence of increased raw material expenses, in particular the result of higher poly prices and startup expenses related to our Virginia wash-line operation.

The current price trend for purchased poly is down and we expect the trend to continue through the remainder of the year. In addition, the Virginia wash-line plant, which began operation earlier this year, continues to make progress toward achieving full design capacity and production cost.

In the first quarter of 2003, SG&A expenses totaled $15.9m and represent 27% of sales, a 35% increase from 2002. The increase over 2002 can be attributed to the branding expenses, which for the quarter were $7.7m compared to $3.3m for the second quarter of 2002.

Trex launched an extensive marketing campaign in March 2003 that included print media, cable TV and network TV. The campaign ran through June and by early accounts it was very successfully in further strengthening Trex's brand identity. Our branding activities are heavily weighted towards the first six months of the year and, as a result, branding expenditures should decline to less than $6m for the remainder of 2003.

As of June 30, 2003, total debt amounted to $57.8m, representing a slight reduction from the $58m at the start of the year. Debt, net of cash, has dropped by $6.9m to $36.2m at June 30, 2003, as a result of strong operating cash flow generated during the first six months of the year. Cash flow from operations in the first half of 2003 amounted to $9.4m, while capital expenditures amounted to $7.9m during the same period.

In the second quarter, net interest charges amounted to $880,000. This expense is favorable to 2002's second quarter interest charge of $3.3m. 2002's $3.3m total interest expense included $2.4m of non-cash charges as a result of issuing warrants for a previous lender.

Our financial condition continues to be very sound as Trex's debt-to-capital ratio at June 30, 2003, was 32.3% and debt-to-trailing-12-months-EBITDA was 1.19. Bob?

Thank you, Paul.

Given the adversity we faced during the first half, I find our performance very satisfying. Sell-through during the quarter began later than expected in the East and Southeast as a result of the weather. Our performance for the full year continues to be forecasted at above $200m in revenue but significant volume growth beyond this milestone may prove to be dependent on a warm, dry fall.

We still project earnings for the year at between $1.63 and $1.66 per share. Our expectation for the second half would be that the margin erosion we've seen during the first half will not continue.

Raw material pricing fell in June and we expect lower pricing during the second half. As Paul has mentioned, our Virginia polyethylene wash plant performed quite well during June and our expectation going forward would be for continued improvement. Additional lower-cost supplies of raw material are anticipated to come on during the second half and will help improve margins.

Our manufacturing performance to date has been at higher rates than originally expected and we are forecasting this to continue for the remainder of the year. In all likelihood, this will allow us to end the year with slightly more inventory than originally intended.

With finished goods inventories of $25m-plus, and two additional lines available for startup, we anticipate strong revenue growth possible for 2004. Further to that end, we have continued our search for a third manufacturing plant site. We have narrowed the selection process to three sites and would hope to have a site selected in the third quarter of this year for a plant opening in early 2005.

On the sales front, we continue to strengthen our TrexPro initiative by doubling the number of club members during the first half of this year versus the first half of last year. As you may remember, these are professional contractors, trained and skilled in building innovative, high-quality Trex decks and other products. We have participated in more than 300 trade and home and garden shows during the year, including the AIA show in San Diego and the Pacific Coast Builders show in San Francisco more recently. And our builder focus has continued with several thousand decks due for construction with Trex at a major home builder across the country.

Our product offering has been enhanced with the introduction of a new rail system, to be followed by additional designs before year end and ready for launch in 2004. Also, fencing prototypes are out in the market for anticipated regional kickoffs next year.

In summary, our business is on track, demonstrating continued healthy growth, even in the face of higher-than-anticipated raw material costs and poor weather in parts of the country. Our expectations are to finish the year with more than $200m in revenue and income growth of more than 40% over the prior year.

Now I'd like to entertain any questions you may have. Matthew, maybe you can open it up to questions now?

Certainly. Ladies and gentlemen, if you wish to register for a question for today's question-and-answer session, you will need to press star, then the number on your telephone. You will hear a prompt to acknowledge your request. If your question has been answered and you wish to withdraw your polling request, you may do so by pressing the star, then the number two. If you are using a speaker phone, please pick up your handset before entering your request. One moment, please for your first question. And your first question is from Joel Havard with BB&T.

Hey, good morning, guys.

Good morning.

Hi, Joel.

I wonder if we could, first of all, kind of break out the cost impact on gross margins between the startup or inefficiencies or whatever sort of the underlying issue is at the Virginia wash plant as that gets up and running and raw materials cost differences?

Go ahead, Paul.

Joel, it's [--] you know, as the wash-line plant becomes more efficient, you know, that [--] in the second half of this year we anticipate the cost of poly coming out of that plant to be, you know, very near or at our average cost of poly. Today you're probably looking at a [--] you know, a penalty or an additional cost of somewhere in the 20% range.

More expensive than what our standard cost is, or our average cost.

What is average cost, recently?

The plan for the year is 16 to 17 cents. We ran 15%-20% higher than that in the first half. I think June's number in our wash plant is below 20 cents a pound.

We ran about 19 or 20 in the wash-line plant and we came in about 2-1/2 cents higher, on average, in the quarter than expectations.

And, Paul, in your opening remarks you said that that already looked like it's rolling over again?

Yeah, absolutely. That's [--] it's coming back as a result of a mix and price. So both of those are contributing to improvement in this quarter that we're already seeing.

OK, good. The [--] and, again, if we kind of weighted the difference or the impact between the wash and the overall poly cost environment, is it 75/25 environmental versus inefficiencies at the wash line?

No, the wash [--] the wash line does not have that great an impact. If you're saying the wash line is 25% of our costs [--]?

Yes, sir.

No, it's not that high.

OK. I guess the--

Probably it's somewhere 10% and 20%, Joel.

10% and 20%? OK.

Now as the volume grows, OK, as it comes closer to reaching the 50-55 million pounds of name plate, why, you know, its impact will grow.

And it's running at half of name plate yet?

No, it won't run anywhere near half so far this year, but in the month of June it ran at 70% [--] 65%-70%.

Good.

If you took that month and multiplied by 12--

OK.

It would have been at 65% or 70%.

Got you.

So it's actually running right where it was supposed to run.

So it [--] I know when you showed us the facility, you know, to my untrained eye it sure did look like a whole lot of plastic. I guess-- is this really a matter of getting personnel trained or is it still tweaking equipment or what's the nature of the curve there?

No, I think our people are doing a great job. The nature of the input that's going into the machine is a little different than what we built it for and that has caused us to go back and do some engineering work and redesign the plant a little bit and make some changes. And much of that is starting to take hold now.

OK. All right. Let's move up one line item here. The top line is very impressive, guys. Was there a [--] was there an increase? You all are still running 17 lines, I believe?

Yes.

OK, I guess tonnage continues to increase faster than we've been allowing for or are you all just getting better pricing right now? Could you go into [--]?

No, I think the output [--] you're right, the output of the equipment, as I said earlier in the remarks obviously not clear enough [--] but the output of our equipment is beyond what we forecasted it would be so far this year. We did build two more lines, as we said we would, but we haven't started them up other than to turn them over and see they run and everything else. But they have not contributed to our manufacturing output.

So they'll start to come on stream in Q3?

Well, when we need them.

OK.

That's my point. Between the higher output and the availability of those lines [--]

It's a bigger inventory.

[--]we have a fair amount of upside if we were to ever need it, especially going into next year.

Sure.

Joel, we're running a little bit better on the revenue per pound because of the mix, as well, as you mentioned.

And is there kind of a round figure for maybe gross tonnage of output in Q2?

I'm not [--] I mean, you see it in our inventory. I'm not sure [--] I don't have a manufacturing number.

You mean how many pounds did we produce in the quarter? Is that your question?

Yes.

We produced 150 million pounds in the quarter.

OK. And, Paul, when you spoke about pricing [--] the mix side, was that to infer that there was more high [--] higher value, say, rail and component pieces?

Yeah, and the different profiles, some of the color [--] the color profiles are more expensive [--] or sell more per pound than the natural or the gray color.

OK. And do you have a break-out of the finished goods inventory position versus raw materials?

Yeah, the finished goods at the end of the quarter was about $10m of the total.

OK.

The difference would be raw materials.

Got you. I'll let somebody else ask and I'll probably jump back in line. Congratulations, guys.

Thank you.

Your next question is from Steve Wizinski with Legg Mason.

Hey, guys. Good morning.

Good morning.

Good morning.

Are you going to [--] do you have any guidance for the third-- the actual third quarter? Are you going to give anything like that?

No, we're going to forecast the year, as I said, Steve. It's pretty difficult, given the seasonality of our business, to give this to you quarter-by-quarter.

OK.

So our guidance will be for the end of the year.

OK, great. And then how was pricing in the quarter? How did it look?

What we anticipated. It was fine.

Yeah. OK and then [--] were there any [--]

Finished goods pricing, sales pricing.

Exactly.

Not raw materials.

Yes. Now were there any incentives or discounts in the quarter?

We had-- as we did last year, we had a sales promotion, yeah, which is going on right now.

OK.

Which is [--] you know, has been in our plan and figured into any of the numbers we've given you.

OK, great. And the last question, then, how is the inventory looking at the dealers?

I don't have real hard data at the dealer level. It's a little bit higher at the distributor level this last month.

OK, great. Thanks.

You're welcome.

Your next question is from Vinnie Braxton with Breckin Capital.

Guys, can you just explain to me [--] I mean, it sounds like this quarter the raw materials far outweighed the hit you took on the plant and I'm just trying to, as always in my mind, trying to justify why exactly the raw materials were so much higher, especially versus last quarter? Can you just describe what [--] you know, what the influences are on those raw material prices being higher?

Yeah, I'm not sure [--] the beginning of your statement about the raw materials versus the hit on the plant. Maybe you could clarify that a little bit?

You said there was two influences of why the gross margins [--]

Oh, OK.

[--]were pressured.

Right.

And it sounds like the raw materials were much more of an influence than the plant issue.

Than the wash plant issue.

The wash plant, right?

OK, I'm with you now. Yeah, out in the market place, we anticipated [--] we buy a whole array of raw materials, going from dirty [--] very, very dirty film, which goes into the wash plant, all the way through off-spec, wide-spec virgin for some of our equipment. Our forecast for the pricing of all those variant streams was not as [--] well, it turned out to be higher than what we had anticipated in our forecasting.

We forecast [--] I think we said in the first quarter, our forecast called for raw material pricing to come down early in the year, March-April, and that really didn't happen until last month in June. So two thirds of the quarter the pricing was higher than we anticipated.

But what's influencing those prices? More the supply and demand of the products? Is it [--] I mean, what took it so long for it to come down, actually?

I think the market and we participate in so many different markets, it's hard to quantify what exactly pressured it. For example, on the West Coast some of the material that we compete for actually goes offshore, also. And it [--] that continued and the pricing stayed up longer than we anticipated. So lots of different factors.

Right. OK.

We purchased twice as much poly this quarter than we did a year ago in the second quarter. So there's clearly a demand difference from a year ago.

I mean, our [-- with our equipment] running substantially faster from a rate standpoint than we had forecast, it makes us go out in the market and buy more raw material since we don't slow the equipment down or we haven't shut it down. And so that, in and of itself, when we go buy on a spot basis, you know, unanticipated, typically it has also driven [--] you know, we're going out and buying higher-priced poly there, typically.

Right. Are you [--] so the specific poly you're using, is there another competitor actually bidding for the same material or that's not really an influence?

In some cases [--]

I guess what I'm trying [--]

--other than [--] Film, for the most part, is not-- we're not competing against another company. There is one other competitor that can use film, but beyond them, nobody else is really competing for film. The film is going offshore and when prices are [--] going offshore, typically, to the Far East. When prices of resin stay very, very high, film can go offshore, get reprocessed in Third-Fourth-Fifth World countries back into a resin pellet and compete. When the prices of polyethylene come down, it's unattractive to take it offshore and clean it and reprocess it and so that ceases. So that [--] on the film side we compete in that regard when prices of polyethylene are very, very high.

Post-industrial film, that comes and goes and, of course, the virgin or the off-spec or wide-spec resin market fluctuates with, you know, polyethylene, ethylene and crude.

I mean, could it be that there's many more companies bidding for the raw materials, whether within your segment or out of segments like roofing? There's recyclable roofing material now that's coming on. Is it just because the recyclable market is, you know, is seeing better demand for the products and they're [--] you know, the reusable material is thus being bid up? And if that's an influence, then why would it reverse?

I don't [--] We don't see that. I mean a lot of people that we're competing with [--] most of the people we're competing with are buying either reprocessed or virgin resin and we're not a huge buyer of that. Hopefully that answers your question.

OK. Thanks, guys.

Sure.

Your next question is from Doug Fossas with Key Capital.

Yeah, this is Dax Fillasas with Gates Capital. Anyway, what is-- what is your expected capital spending for this year and next?

This year we stated that $20m would be the annual capital expenditure rate. Next year [--] we haven't discussed that. You know, if we had to put a number to it, it's going to be in the $35m to $45m range, given the expansion that Bob spoke to.

OK. And then my next question was on working capital, you were talking about your cash flows, where you would expect to come out after the $20m in cap ex on a free cash flow basis this year?

Twenty million.

OK. And then can you just reconcile, I mean, I don't mean to beat this inventory issue to death, but I mean, can you reconcile the fact that these costs were still flowing through your inventory so your inventory should still have the high-cost resin and your expectations for margin improvement in the second half of the year, as far as gross margin goes?

No, we recognize [--] you know, the high-priced [--] anything that we buy runs through the income statement and we adjust it to a standard. So it's not sitting on the balance sheet. The balance sheet inventory is at standard, the inventory is at standard.

OK. Thank you.

Your next question is from Steve Sharkey with Flat Creek Investor.

Hi, I'm sorry to keep beating this question on raw material cost variances to death, but do you have an estimate of what your cost of sales would have been without the unfavorable variance from both higher costs and the plant inefficiencies?

Not right at the top of my [--] off the top of my head, Steve.

OK.

It was[--] it was several million dollars above what we anticipated.

Yeah, I'm just looking for a ballpark number.

Right.

And could you give me depreciation and amortization for this quarter and the same quarter last year?

The depreciation this quarter was $3m and amortization. The previous quarter was $2.3m.

OK. OK, thank you.

Right around $3.5m was the raw material variance.

$3.5m? OK, great, Bob. That's helpful. Thank you.

Yep.

Once again, ladies and gentlemen, if you have a question, please press star then the number one on your telephone keypad. Your next question is from Joel Havard, BB&T.

I told you I'd be back. Paul, what's going on with the debt side? You all did a better job on interest expense in this quarter. Did the derivative cost go away entirely? I thought that that was still going to phase out over the year?

No, there's two things going on with interest expense, Joel. One is the [--] we capitalize some interest. We capitalize about $70,000 a month because we have some projects under construction. And the other is interest income is offsetting interest expense. It's a net number. We have about $100,000 in interest income in the quarter.

OK. So the derivative [--]

The derivatives is on the balance sheet. The mark-to-market is on the balance sheet. It doesn't run through the income statement.

Ah-hah. OK. All right and so are you all still, then, in the 8-1/2% kind of average cost, then?

It's a little bit lower than that. It's about 8.33%.

8.33%?

Yep.

Great. Thanks, guys.

Yep.

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

I'd just like everybody [--] appreciate your time and interest and we look forward to speaking to you at the end of the third quarter. Thanks again. Goodbye.