Trex Company Inc (TREX) 2003 Q3 法說會逐字稿

Welcome to the Trex Company second quarter 2003 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 you have trouble hearing the conference press star zero. This is recorded today Tuesday, October 28 2003. Now I’d like to turn the call over to Ms. Freed. 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. The Company issued a press release yesterday containing financial results for the third quarter. This is available on the Company's website as well as other websites. If you need a copy of the release call us at Lippert Heilshorn at (212) 838-3777. A replay will be available until November 4th. The call is also Webcast on the Company's investor page on the website where it will be available for 30 days. Let me remind that you statements on this call regarding expected sales performance and operating results, projections of revenues and earnings and anticipated financial conditions constitute forward-looking statement 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 highly competitive markets in which the Company operates. The Company's report on form 10K 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 statement, whether as a result of new information, future events or otherwise. With that I turn the call over to Mr. Matheny. Please go ahead, Bob.

Thanks, Harriet. Good Morning. As you are aware we released our revenue and earnings for the third quarter last evening. Revenue for the quarter was $41 million in line with our guidance a month ago but falling short of the third quarter of2002.. Earnings reported of $5.1 million for the quarter were unfavorable to last year by $1 million. A number of factors have caused us to reduce projections made earlier this summer and return to forecasts of earlier in the year. Downstream in the Trex business continues to be strong, however extremely wet weather in the east this summer and the desire by some of our customers to more judiciously managed inventory have slowed the Company's sales for the quarter. As expected raw material pricing did improve but continues at higher levels than we would like and thus has impacted income unfavorably. Our expectations for the year continue to be for revenue of 185 to $100 million with earnings in the $1.40 to $1.43 per share range. Now I would like to introduce our CFO, Paul Fletcher who will discuss our third quarter financial performance. Paul?

Good morning, as you are aware our press release was issued last night and numbers I will reference are contained in the last few pages of the release headed condensed consolidated statement of operations, condensed balance sheet and condensed consolidated cash flow. Third quarter of 2003 net sales were $41.2 million. Versus 2002 3Q sales of $49.5 million. Poor weather conditions, especially in the northeast, contributed to decline in revenue. Net sales of 2003 reached $169.1 million, a 15% increase over the same period of 2002. Third quarter, 2003 income was $5.1 million or 35 cents a share compared to $6.1 million or 43 cents a share in third quarter of 2002. Net income for the nine month ended September 30th, 2003 increased 20% to $21.8 million from $18.2 million in 2002. Gross profit of $19.4 million in this quarter represents 47.2% of sales which is unfavorable to 49.4% gross margin of third quarter in 2002. However, improvement in 45.4% in the second quarter of this year. Higher raw materials expenses continues to be the primary factor behind the year over year decline in gross margin. As we mentioned in our last call, plastic prices peaked in the second quarter and together with a more favorable mix plastic purchases per pound improved 6.5% over the second quarter. Productivity related to our Virginia wash-line plant also improved during the quarter. We expect Virginia wash-line to be operating near 85% of its intended full design capacity in the fourth quarter, only nine months after its 2002 start up. Going forward new plastic sourcing and purchasing initiatives are expected to slightly reduce plastic raw materials cost and add more long-term stability for cost per plastic. Third quarter of 2003 SG&A expenses totaled $10.5 million representing 25% of sales. SG&A expenses for the third quarter of 2002 ran $3 million greater at $13.5 million and amounted to 27% of sales. 23% decline over 2002 can be attributed in large part to two areas. First, legal expenses were $1.7 million higher last year as a result of discovery work related to certain patent litigation, second, incentive base compensation was lower in this quarter due to Company's revised earnings expectations. Branding expenses for the quarter were $3.4 million compared to $3.1 million for the third quarter 2002. Here to date branding expenses total $14.5 million. $6.2 million more than the nine month period of 2002. A branding activities are highly seasonal and expected to decline to less than $2 million in the fourth quarter of this year. As of December 30th 2003, total debt amounted to $57.1 million, down $900,000 from the $58 million from the start of this year. Debt net of cash has declined $14 million to $29.1 million at September 30th with strong operating cash flow generated in the first nine month of 2003 in addition to the proceeds from the warrant exercise in the first quarter of this year. Cash flow from operations of the nine month of 2003 amounted to $21.1 million while capital expenditures $13.3 million. In the third quarter, net interest charges amounted to $858,000 compared to $1.2 million in 2002. This favorable variance is attributable to higher interest income and increased in capitalize interest of construction and progress. We do expect to continue building finished good inventory above $30 million by year end, anticipation of the successful early buy introduction. Bob?

Thank you Paul. As we said earlier, third quarter revenue performance was not as robust as we anticipated. While many more Trex stacks were built this year versus last year, we had anticipated stronger sales this summer. Without question, our business was impacted by the wet weather in the east in the summer and the quarter was tragically ended with Hurricane Isabelle. This follows a prolonged winter this year and a wet spring in many parts of the country. The result is deck jobs backing up and weak re-orders for Trex. In addition to weather, some customers have demonstrated a business need to manage inventory differently than we had forecast, therefore impacting summer orders. We also come to believe that many of our customers chose not to order strongly over the summer months in anticipation of new products introductions. These factors all combined have tended to depress sales and caused our inventories to be higher than originally forecasted. However with a strong balance sheet and finished good inventories with a significant shelf life, we are comfortable with our current position. As Paul had mentioned our raw material cost have tracked down as expenses, expected, but at a slower rate than originally thought. Our wash plant in Winchester has improved its performance steadily and is expected to continued increasing output rate in lowering cost over next several months. Also several other streams of polyethylene film have been identified and our being pursued for use. In addition, we have found new approaches for rendering contaminated polyethylene film usable for our process and are developing them to broaden our feed stock stream. On the wood side of the equation, we have found and come to terms with several large new sources of wood waste. This will ultimately improve the security and maintain the cost of this raw material. On the new products front we will introduce Trex origins and accents to our customers in two weeks at annual distributor meeting, along with several other items. It has been our goal to develop innovative new products that meet consumers demands and maintain the company’s positions as the composite leader within the market decking category. As part of our strategic platform for new product development, we are concentrating on two key areas, A higher level of product aesthetics to offer consumers product choices that meet their life-style needs and superior product performance. Over the last several years the composite decking category has seen a trend toward the preference of textured or wood grained pattern decks by consumers. Our research confirms this trend and shows a strong consumer preference for a wood grained product. With this knowledge, we have gone forward with the development of a deck board that features a wood grain pattern. This board is being launched under the name Trex accents. In quantitative research, consumers selected a prototype of a Trex accents boards as a preferred choice over several of the better competitive choices now in the market. The top reasons for choosing accents were: The boards wood-like look, the pronounced grain pattern and the board's natural appearance. Our origin’s boards which is also being introduced has a smooth crisp and a very aesthetically pleasing appearance for those who prefer with the traditional appearance of Trex. Both accents and origins have a crisper more refined profile, consistent dimensions, richer color, and more resistance than ever to the elements. Now in an effort to meet consumer's desires and demands Trex is available not only in many colors but also with a smooth and textured surface. As we go forward and grow it becomes more and more important that we are easy to buy and can reach all consumers. One of our strengths over the years has been our distribution partners. We plan to strengthen our current channel by reinforcing our existing base and add new partners where necessary. However few products go to market in a singular fashion and therefore in coming months you may see Trex products offered in several different venues. Our efforts in these other areas will be to augment our existing base and be expanding our reach to the consumer. While the fourth quarter is seasonally weak in our business, we look forward to improving over last year. We will introduce several new products and vigorously pursue selling programs for the coming year. Now we will answer any questions you may have. Judy?

Ladies and gentlemen, if you wish to register for a question in today's question-and-answer session you need to press star and the No. 1 on your telephone. You will hear a prompt to acknowledge your request. If your question has been answered and you wish to withdraw your request, you may do so by pressing star and number two. If you are using a speaker phone pick up the hand set before your question. one moment please for your first question. Our first question comes from David Weaver of Legg Mason. Please go ahead with your question.

Good morning

Good morning David

David Weaver Can you give us ideas about recent trends you may be seeing in various markets around the country in terms of business conditions?

Maybe you can be a little more specific?

Just regionally, are you seeing any spots that have been seen recently stronger or weaker?

I think -- and this is weather related. I think the east and the northeast have been slower than the Midwest and the west.

Has that picked up I guess since the weather that evened out a little bit?

We can't tell downstream day-to-day or even month to month, you know, what is going on in any particular market.

Okay. How many production lines are you running currently?

17.

17? Any insight into when the other two might be coming up?

Well, I believe they are readying to right now in the last weeks or maybe a month ago but we won't need to start them up probably until next spring. Maybe Paul can add to that.

The two lines, David, that we referred to, that we were putting in place, the construction is virtually done. So the spending is down to very small amounts to put those into service.

Okay. You had mentioned that inventory is still not quite where you would like it in the channel. Can you give us an idea of how it compares to the last quarter?

Inventories have come down as you expect over the course of the summer and, you know, they are fine but there are spots where -- where I would wish people had done something different. But over all, they are okay.

Okay.

They are not like they were two years ago.

Okay. Last Question. Have you instituted price increases for December yet?

We have not announced what our intentions are with regard to price but we will in several weeks when we meet with our distributors.

Okay thanks a lot

Next question from Richard Leader of Burnham Securities.

Good morning

Morning Richard

In reference to a couple of years ago you folks put into place a good inventory control system to closely monitor the distributor level inventories. Did that work this time? Are you looking to improve or tweak that system? Are you happy with the way your inventory monitoring of your distributors are going?

Yes, we are happy with it. I think you always can improve but we are happy with it. I mean an improvement would be -- and I am not sure in the short term that I see how we can do it -- is it would be -- it would be of great value to everyone if we could actually get a really good quantitative handle on what they would be at the retail level. But I think we are several years away from being able to do that. Whereas we have a good quantitative means to establish what they are at the wholesale level. Qualitatively, we have an idea of what is going on at the retail level, but not on a real definitive quantitative basis.

It seems to me that if this weather has been a problem as far as the slow down is concerned, though, that there is bound to be in next year a pent-up demand. People aren't going to decide to put in a deck this year and have it deferred and drop it and never put it back in. Do you envision that the ordinary demand plus the pent-up demand in your forecast of 2004?

You know I agree with you. And certainly, you have got to believe that to be true. Now we have another winter in much of the country like we did last year and I guess statistically that is probably, you know, not likely. Then the demand again gets pushed back in time. But, yeah, I agree with you that if the deck didn't get built this year people don't just walk away and say "oh, gosh I am not going to it." They will do it when they can and assuming economy doesn't change and money rates that dramatically and we have a more normal weather pattern. Yeah I think the expectation should be that the demand for product next year will be strong.

One last question has to with your branding efforts. Can you touch on if you have any number in mind for how much you think you will spend next year? And secondly, relating to the specific examples in your press release today, your show case projects? Can you go into a little bit of detail about that, and are these the kind of things that are net cost to you or are these show cases actually something that you are making a few bucks on?

Let me start with the second part of your question. Show case projects are done not necessarily for the volume sales of Trex. Having said that, we make money on all of those and we aren't in the business of heavily discounting or even discounting at all necessarily for the show case projects. So yes, we make money; and project to project, to my knowledge, most of that gets sold at whatever the price is downstream, because we don't really control that. In terms of what our branding expenses are going to be next year, we haven't totally defined that and we are in the process of doing it but I think Paul can speak to that a little better than I can

Richard, a couple of data point. Last year we spent ten and a half million, this year we will spend 15.5 to 16 million dollars. We don't expect that level of increase on a percentage basis but we do expect it to grow but we are not prepared to give you a number at this point.

But it is going to be bigger than 15.5 or 16?

Yeah, we are probably going to push 20 or more.

Next question from Dax Vlassas (ph) from Gates Capital Management

Yeah I was wondering as far as impact from keeping the extra inventories, does that have any sort of -- when would that have an impact on it, as far as production of your facilities in the gross margin impact from running those at lower rates if you are trying to restock the inventories that -- at your distributors and at the wholesale and retail level?

Well, the impact it has is out in time. We will push back, for example, when we start up these two lines that are -- that are built and installed. So -- and this is totally hypothetical. If we were to need them in January, now maybe we need them in March or April. The money spent, installation there and in effect were not -- were not -- we am employed the capital, you could argue, before we might have needed it. But I mean that is the impact that the inventories will have.

So a delay of bringing those two lines on, they are not being appreciated. So, when they come on that will start.

Okay I understand. My last question was with respect to your working capital, I saw that the, you know, as far as your -- your inventories, as well as your payables are up. Would payables track your inventory in the fourth quarter or would you expect a decline in your payables from the $15 million level? I am just trying to get a sense of the cash impact from the working capital change in the fourth quarter.

Right. The payables really track cap ex and there is not anything unusual. You know we spent around $5 million in the third quarter. The cash impact in the fourth quarter really revolves around the building inventory and the revenue stream in the fourth quarter. So you should see definitely a decline in cash from the third quarter to the fourth quarter to a point where we are probably going to be -- precash flow for the year we probably be close to break-even or two or $3 million positive.

I don't want to you walk away thinking we are dragging our feet or anything on the payables either. As Paul said they kind of follow the cap ex spending and they are what they are on September 30th.

I got you. Has your cap ex budgets changed for this year? I think it was at $20 million.

Yeah we are expecting $20 million, you know, which would make that fourth quarter be in the neighborhood of 8 to $9 million. If there is a pick up in cash, it will be because we don't spend the 8 to $9 million but you may see that number fall short of $20 million.

A lot of it will be dependent dependent on whether -- the exact number will be dependent on whether we close on the land for a third plant site in this quarter or whether we do it in the first quarter of next year. While I am on that subject I might as well answer the next question. We have -- we continue to pursue a third plant site. We narrowed the selection down to actually two spots and we are in the final negotiations to pick a site and that could go on for days or a month or two. So that is where we are. You know, that would significantly affect how much of that $8 million we spent in this quarter. If we don't spend it in this quarter we will spend it in the next quarter of first quarter of next year

Next question from Bernard Horn of Polaris Capital.

I was be wondering if you could elaborate more on the market research that has been done indicating that a more grained-like product is more acceptable to customers? Is this in response to perhaps losing a little bit of share to some of the other products that are more grain like and what led you up to this decision and market share gains and losses and so forth?

Well, the absolute specific research and data, I can only give you generalizations because a marketing group has done it and has all of the specific data which is probably more recent than anything. Having said that, we have looked at this over the years probably as far back as three or four years ago.

If you think about it, it's a little odd that people would desire all ever the bad parts of the wood, but the grain and the raised grain and that kind of thing is actually a bad thing for us. Having said that, the research does indicate that they are looking in some cases -- and in case the most -- in fact, the most recent research we have done would indicate that they have a strong previous preference for a wood-like look. There are people that continue to like -- in another research we have done, there was stronger interest in a Trex-like look as it was. The most recent research is different from that in that it's strongly suggesting people would like it to look more like wood. And it was also done on an unbranded basis. So there was no confusion. It was completely blind. So this is probably much better research than prior research where the brand was involved and could actually cloud what maybe the look they might be looking for.

So we have done -- been looking at this and done this over the last several years. We had some hesitation in terms of where and a concern that the product may over time show a wear pattern in it and we have evidence that that's gone on out in the marketplace. We are very comfortable with the product we are about to introduce. It is more resistant to wear than our product might have been several years ago. So we feel pretty good about that. That was probably one of the reasons why over the last couple of years we have kind of -- I don't want to say dragged our feet but we have been a little hesitant. I think now, this year, clearly people have spoken at the consumer level and there is an interest. And as I said earlier, we want to fill the wants, desires and needs of the consumer. So we are going to bring a product out and it's a great looking product. And as I said earlier, it's very resistant to the elements.

Have you experienced -- have you seen any market data that actually shows other products maybe growing a little bit faster than Trex and is this kind of a response to that, as well?

To answer your question on a qualitative basis, I would say yes. It's very, very hard to get, you know X number of board feet kind of thing but I would say yes, there are parts of the country, very regional, there are parts of the country that have a greater interest for one reason or the other than others and if we are going to be the market leader we need to serve all of the consumers.

Right. Are there any particular customers that would be more inclined -- I am thinking about the big bucks, do-it yourself retailers and so forth. Are they more inclined to carry one product than the other and what is your status with those retailers at this point?

I am not sure why they carry one rather than the other but they might. But that’s there decision. I am not sure why that would be the case. All kinds of people shop in those places as well as others. I am sorry what was the other question?

Yes. How are you positioned at the various big bucks home retailers like Home Depot, LOWWS? Are you there or are there some places where you are not?

We are not there. Like I Said before, that’s not to say that some day we wont be. . The reason we have chosen not to participate in the self-service environment up until this point has been that most of the decking lumbers installed by a professional and for the most part they buy at the contractor oriented lumber yard and that is where the majority -- more than the majority, the substantial majority of the square footage is sold and that is why we have chosen to the market that we have today.

Okay thanks very much

Next question from Joel Havard from BB and T Capital Market.

Morning guys. Its actually Matt McCall, Joel had to be out of the office today. Pending roll out, did you have to produce any products in advance of the role-out and did it account for any of the inventory bills in the quarter?

I don't think it counted for much of the inventory in terms of its growth. But the answer is yes, we have been producing these products for awhile and the inventory we did produce, the salable goods and it will be sold.

You mentioned in the press release several programs for reduced and delivered cost of raw materials. Specifically, you mentioned the rail siding in there. First of all, could you quantify what you see as potential savings both on incoming raw materials side as well as outgoing finished good side and any color you could add to the potential savings from the measures you are taking?

I can't give you a number whether it's $1 million or five but it's all -- I mean it's inbound and freight related and if you truck it far enough it becomes less expense expensive to bring it in on a rail. Given we have some, you know, foreign sources and they have others, why it probably -- it doesn't probably -- it helps us there. On the out bound side, it helps the market hopefully. It doesn't help us because, you know, we sell pre on carrier at the plant. So the out bound freight for customer service would improve to our customer and the out bound freight would go down in many cases and hopeful lie that finds its way down to the consumer but we don't control that.

OK, and I guess as a follow up, is in any way you could quantify the percent of your cost of goods sold that is transportation or shipping related?

Inbound side -- no I can't.

Yeah and it depends on what form that we are buying in. Matt, really the important point to take away is the initiative on poly store scene is really source are really towards providing stability and we are looking for some improvement but all these initiatives are really going forward are going to try to eliminate the peaks that we saw this year.

Okay, thanks a lot.

Next question from Brett Hendrickson of Bonanza Capital

Good morning. I think you gave branding expense for the quarter and year but I didn't write it down fast enough.

Well Paul gave the branding expense for the

Oh, branding expense. Last year was $10.5 million. This year we will spend somewhere between15.5 to $16 million. We didn't speak to the quarter and we historically have not. The only thing I would say, it's highest in the second quarter and a lot less in the third quarter.

We will spend-- I said in my remarks, we spend less than $2 million in the next quarter in branding.

In the fourth quarter.

Just before that did you give the year-to-date range in expenses versus last year

I didn't but if you want that --

That would be around 13 and a half.

Was that comparative to last year?

Last year, we’re running about $6 million below.

Okay. $6 million below.

Once again, ladies and gentlemen, as a reminder to register for the question, please press star then the No. 1 on your telephone. Your next question comes from JD Padgett of Founders Asset Management.

Morning guys. A couple of quick ones. If we look at revenue generating capacity per line, what are you up to that are now and where do you think you could drive that to through product activities improvement?

13 and a half is a good number today and in the short term, you know, we will take small steps. And we haven't come to grips with setting our standards yet, I guess we have but I haven't gone through it for next year. But on an instantaneous basis, we see substantially higher output than we average. It just takes time and work at debottlenecking and looking at the process and figuring out what we can improve. So I think over several years you may see double digit kinds of improvement but I am not forecasting that for next year. There is still opportunity to be had.

On a long-term Average, maybe double digit types percentages improvement but tough on the short term?

Yeah

What was the utilization rate this quarter and last?

We have been running in the 85 to 90% range in the third quarter.

And same in the quarter before that?

Yes, sir.

Okay you did give some commentary around the raw material pricing. I think if memory serves me it was what 20 cents on the plastic side last quarter

Right

Did that drop did you say 6.5% this quarter?

Yes

With the expectation that you can drive that down further as the wash plants ramp and the new sources that you are bringing in.

That's correct

Your normalized is what, 16 that you would like to drive it to?

Yes that's where we would like to drive it to. No guarantee. If we could take another 5% out, I think that is where we get into stability. We would like to hold the line there and not have it spike to the 20 cents.

I think going forward, the more different things we do and then the more things that we repeat, like another wash plant potentially, at some point I think we will catch up to things. But as we grow double digit kinds of numbers each year, seems to be -- I think in a short term our goal is just to get the cost to somewhere, you know, 18 cents or 17 cents and try to keep it there because as you can well-understand, it's difficult to run a business and make forecast if the number keeps going up and down significantly. And then maybe out in time, way out in time, when our business growth is not as substantial as it has been and will be for the foreseeable future, maybe we can take a bigger swing at that and drive the cost down.

The good news about our process is it uses product on the raw material side that others really don't want and it is available out there. It's a matter of collecting it and finding the different types of extremes and being able to bring that material to decontaminated state that we can use, which is still a lot rougher, coarser kind of material than others that are in the business can use.

Uh-huh, do you think you will see the raw material price decline another five, 6% again in the fourth quarter?

I don't know about the fourth quarter but certainly for next year we are going to work at that. That would be a target

So that could get you into that 17 to 18% range and see more improvement like that in the fourth quarter

Yes

One other question just because of my familiarity with standard cost accounting, if you do get some additional price reduction how does that impact your gross margin on the inventory balance that you might be carrying? Is there any adjustment there does that all flow through as period costs or

You no, I the balance sheet was going to be at lower cost to market, it's going to be at cost

And then the P and L, is there a catch up, is that period related or?

No during the year you might have timing differences but the end of the year you are going to have, it's going to be adjusted. You will do standard to actual adjustment, so, it will be actual cost on the balance sheet as well as the income statement.

Okay. Just one final question, If utilization drops from, I don't know, theoretically 85 to 70%, how could we gauge the impact on gross margin? Is there any simple, simple math there?

Ask your question again?

Go down 15% --

Or 10%, whatever makes the math simple. Just trying to gauge sensitivity in your gross margin to utilization rates.

Well you would have to build a model based on lines and the fixed cost of a line, if it's sitting there idle it's somewhere in the 1.2, $1.3 million per year range. So that is the absorption hit you would take.

You know when you talk day-to-day or week to week without doing anything traffic, I mean a lot of the costs become fixed that are really like labor, we are not going to lay people off or anything like that. So it's pretty tough. It's pretty tough to tell. As Paul said, it's, I don't know, 1 million, 3, or.4 a year

And that is just depreciation?

Depreciation, overhead, all of the allocation of overhead and so on.

Okay. Thank you guys.

Next question from Steve Sharkey of Black Creek Investors.

I forgot to press the star earlier. I have one question related to plastic prices and a couple of questions related to the new products. Were the costs to develop accents and improve the product characteristics significant and were those expensed as part of your normal R&D?

Yes those are expensed, yes

And were they meaningful numbers?

They were over a fairly long period of time. As Bob said, we have been looking at this for years now.

Oh, really, okay.

You mean it's all been in the budget all of the way along, Steve and I think I said it before and I will say it again. Our goal is to spend more in R&D and we budgeted more this year than the last and going to budgets more this year and next year and those are the kind of things our people work on.

I’m glad you’re doing this, its something I discussed a lot with Tony, I got a little bit concerned going to some dealers and seeing distributors promotions of some of these new products that they say were being pretty well-accepted. And what about the cost to manufacture accents and switch a line over to its production? Is that -- how are they going to be carried into the cost of regular Trex?

Accents will be higher because there is a capital investment which will get depreciated and then there is actually an initial, as you would expect, a step or part of the process. But we will more than recover that in the pricing because, as you know, we are substantially lower cost in terms of our origins product. We are current product today and even the original engines product will be lower cost than everybody else that is in the marketplace. So we can recover what additional costs we have, we believe without any trouble.

There is incremental labor, there is incremental overhead and capital depreciation and so on and we will recover those costs

Can you give any magnitude, 20% more?

We haven't announced our prices. I’d rather -- rather not

I am sorry, Bob, what is origins exactly?

We have a smooth product that we are going to continue on, will take a slightly different shape and finish in texture and so that will be called origins. And the texture to the grain pattern, however you’d like to describe it, will be accents.

So origins is just new and improved trex. is and accents, is that both textured and grained?

Grained, however some people come it textured and some call it grained.

There are some textured products that is actually, I mean it's rough

No this is grain. It's a grain product. It has the coefficient of friction. It makes it slip resistant

But it's a smooth surface?

Yeah whereas some of the products out there are not slick resistant

Yeah which I think is goofy. And last question on plastic prices. Increase in your cost is product primarily of increase in demand for waste Polly. Has your cost benefit narrowed versus your competitors who say use more virgin resin. I don't know what has happened to virgin Polly prices.

No, I mean they are paying virgin resin prices. So they go up and down or near virgin I expect, they are going to be affected.

But without that your price increases were more a function of your increase, you Trex being a grill in the market and increase--

Yeah well they are and they drive us to post industrial sources that historically we haven't been there and many of the post industrial sources are more expensive because of their market is more. But when I say that I am typically talking about film which is not what others are using. They are using pellets of some sort

Right, right, pellet prices, have they been going up too?

They have been down and they are going back up or at least they are looking to make a lot more.

Last question related to wash-line. Would you say it's been a success and worth looking at another one in your new plant sites?

I think it's fair to say it will be a success. When we get to 120% of what we thought we could do. It is a success and it has been a struggle for awhile. This past spring it was a little more of a struggle than I think we anticipated but yeah it's a success and I think it's going to get better. And yes, I would expect we do another one or two or three some day or something but I am not sure exactly where we will put it. In some sense you need to be where the raw material is versus-- it might be cheaper to be where the raw material is instead of the manufacturer. So we are looking at where we might build another plant actually today.

Okay that's all I have got. Thank you very much.

Next question comes from Ray Riez (ph) from Columbia Management Group.

Hi. Have you seen any anecdotal reference from talking to retailers that maybe they have started to recover some of the sales that they have lost due to the weather in the northeast and the east at this point?

They can never -- I am not sure they can ever tell. But since their sales are somewhat weather dependent and you know the better the weather the better their sales. I mean there is just no question about that. But in this time of the year though, you go to the northeast and the upper Midwest, we are certainly thinking about hibernating.

Right, right, what about the Southeast?

Well in the southern climates and the warmer climates, certainly out west, not in southern California, unfortunately, right now with all of the fires but certainly out west where the weather has been better, our business is better and I think their business is probably better too, not affected by the weather.

And then in the southeast?

The southeast has not ever been great for us but business has been there and our expectation is we will turn it into a great market. I mean the southeast is a market on a whole has tended to be a cheaper market and certainly we are closer to the prices of southern yellow pine there. So historically we have gone there last. We have maybe not had the right -- right partners at times and maybe not done the right things necessarily or all of the things we could have done. So we have always trailed in the southeast and we are still working on it to get it right. And there, as I said, you do face lower cost wood. Having said that, we have been successful with our pricing against lower cost products for ten years now and so there is no reason why we shouldn't be in the southeast.

Okay. Thanks.

Next question is a follow-up from David Weaver of Legg Mason.

Could you comment on your railing business, is that something that is growing faster than the decking business?

Yeah, but we are cutting off a smaller base David.

Right if your new products are successful.

Yes. It's improved year-over-year. For awhile we were a little bit stressed in getting the product out in a timely fashion this past summer and we are taking steps to make sure that doesn't happen again. But it's not where we want it to be but we are making improvements and sales are up and as Paul said, we had some mix advantage and quite frankly that is some of it.

Okay and question about your earlier comments about your new products. Did you say that the weather ability had improved or was higher with these products?

I think because it's probably denser and more impact resistant, that it will fair better in the elements. Having said that, you know, we have been testing Trex in an artificial state now for ten years with no appreciable degradation or -- and so I think its durability is better. But I am not sure whether you and I can you and I can use more durability than we have had over time

Did you change the mix of Polly wood in the mix to make it denser?

No

Last question do you have an idea of when you would be providing guidance for next year?

Specifically in our year end conference call but historically-- and I would state up front that we believe that we said double digit growth in terms of 20% is about kind of the expectation that one ought to have and we still see that for next year and going forward. Top and bottom line.

Top and bottom line?

Right

That's it thank you

Next question follow-up from JD Padgett from Founders Asset Management.

Just looking at the branding expenses you go to formalizing your budget for next year is that something you look to flex up and down based on sales expectations or something based on programs you wanted to. You are pretty much fixed at certain dollar amounts or --

Well, our marketing people would like p to one way. Not -- you know when we put our budget together, I don't want to say there is anything sacrosanct, but marketing in R&D in my mind are in that category and since we are a branded product, I mean you have to -- you have to look at how much you expect your sales to be and how much you can increase it but those two line items I kind of push to one side and I look at headcount and IT costs and all these other things and they are more of a function. Unless we think they can make this money and IT I think is a bad thing to pick because I think out in time if we can drive more -- vie channel kind of things and customer relations and kinds of things we actually may be able to make some money. But I think the other costs are terms of what we might be able to pair back are ahead of marketing and R&D and I think when we put the budget together and we forecast our sales we continue to take bold steps in those two areas

Do you want your branding to grow faster than your revenue?

I have to think. Let me say it another way. I don't envision that our SG&A expenses -- they are going to run around 25%, 25-26, somewhere in that range and I don't expect them to go down and the reason they are not going to down, at least next year, the branding activities and R&D expenses.

JD, we do have, to answer one of your questions about flexibility, we have clearly fixed branding costs going into the year, ad placement and so on. But there is definitely a portion that we can flex up or down.

Right.

And we have in the past. I didn't mean to leave you with some sort of cavalier answer that said we wouldn't if need be move them one way or the other.

But as Paul said, there are things you said pretty quick like in next 30 to 60 days like in the next year that would be tough to get at of and that is the nature of the business

And it's more expensive if you wait. So, you make those commitments now is a so there is a portion of that budget that we flex and we have gone both directions in the past couple of years.

Okay. Thank you.

Next question is a follow up from Steve Sharkey at black creek investors.

Hi, I just wanted to clarify. You said in consumer survey you determined that there was a strong preference for new accents as compared to competitors grain products or as compared to your original Trex?

The former. I mean we came out quite pleasantly the winner in the unbranded research we did versus -- we picked what we thought, based on a lot of factors, what were the better products out in the marketplace and the prototype we used is what we are now producing.

That's terrific, Bob. That's a big deal. That is great. Thanks.

Okay.

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

Well, thank you. We certainly believe we have a strong business and look forward to bringing out original engines and accents in the next several weeks and we do look for a great year in 2004. So we thank you for your time. If as always any of you have any further questions over the next couple of days or weeks, you can reach Paul and I in the office. Harriet Freed up at the Lippert Heilshorn in New York and Tony is still available and working on investor relations. So, you can contact Tony Cavanna if you would like. Thanks again

Ladies and gentlemen, that concludes your conference call for today. We thank you for your participation and ask that you please disconnect your line.--- 0