Trex Company Inc (TREX) 2004 Q1 法說會逐字稿

Welcome to the Trex Company First Quarter Conference Call. At this time all participants are in a listen-only mode. Following managements prepared remarks will hold a Q&A session. To ask a question please press "*" followed by "1" on your touchtone phone. If anyone has difficulty during the conference, please press "*" "0" for operator assistance. As a reminder this conference is being recorded today, April 21, 2004. I would now like to turn the conference over to Harriet Fried of LHA. Please go ahead ma'am.

Thank you every one for joining us today. With us on the call are Bob Matheny, Chairman and Chief Executive Officer of Trex, and Paul Fletcher, 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 website, as well as, various financial website. If you need a copy you can also call Lippert/Heilshorn at 212-838-3777. A replay of the call will be available through April 28. The call is also been 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, the statements on this call regarding expected sales performance and operating results, projections of net sales and earnings per share, and anticipated financial condition constitute forward-looking statement and are subject to risks and uncertainties that could cause the 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 10-K filed with the SEC in March 2004 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 will turn the call over to Mr. Matheny. Please go ahead, Bob.

Thanks, Harriet. Good morning. As many of you are now aware our first quarter performance has us off to a very good start for the year. Virtually all indicators for our business are either on target or ahead of expectations. Revenues of $76 million are slightly ahead of our previous forecast, with income also being ahead of our expectations by more than 10% at 63 cents per share. We are in a strong position to achieve our full year forecast of 25% growth both the top and bottomline.

Our Accents deck board is in distribution with early sales results being very positive. The Treks Designer handrail is shipped on time throughout the country with early feedback being quite impressive. Our strategy to proactively introduce our new products to the contractor and builder should result in superior first year results.

In other areas of our business, from sourcing to manufacturing and distribution, results were very positive and set up for future success to remainder of the year and beyond.

Now, Paul Fletcher, our Chief Financial Officer, will review the company's financial performance for the first quarter.

Good morning. As you are aware, our 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 statements of cash flows.

The first quarter of 2004, net sales were $76.3 million, compared to 2003's first quarter net sales of $68.7 million, an increase of 11%. 2004, early buy program runs through April, compared to March in 2003. A longer early buy period will contribute to a more favorable year-over-year revenue comparison in the second quarter of 2004.

Our new Accent product has been very successful in the early 2004 launch. Accent volume in the first quarter amounted to approximately 20% of total products shipped.

First quarter 2004 net income was 9.3 million or 63 cents a share versus 2003's net income of $10.1 million or 69 cents a share.

Gross profit of $30 million represents 39% in sales, which compares unfavorably to the first quarter 2003 gross margin of 43%.

This result is consistent with our plan and is attributed to the following year-over-year factors; one, higher purchase poly costs; two, incremental Accent and Origin formulation expenses; three, lower utilization rates causing unabsorbed fixed manufacturing costs, and higher incentive-based sales program.

In the first quarter 2004 SG&A expenses totaled $14.1 million compared to $12.6 million in Q1 2003. Similar to the first quarter last year SG&A expenses represented approximately 18% of sales in the first quarter of 2004. We still expect SG&A expenditures to be approximately 24% of full year 2004 sale.

Advertising expenses, in particular our national and cable TV campaign, as well as, selling and promotional expenses related to The Home Depot rollout will cause SG&A expenses to increase in the second and third quarters of 2004.

As of March 31, 2004 total debt amounted to $56.6 million, unchanged from December 31, 2003. Cash balances increased to $22.5 million and as a result total debt net of cash amounted to only $34.1 million at the end of the first quarter.

Accounts receivable increased to $31.9 million as 2004 early buy programs included credit terms up to 90 days. Inventories declined from $46 million at December 31,2003 to $30 million at March 31, 2004, entirely due to a decline in finished goods.

The strong early buy shipments coupled with a reduction in production outfit during the quarter has positioned inventories and the manufacturing operations where we'd expect to increase production levels later in the year.

At this point virtually all of the legacy 5/4X6 and 2X6 inventories has been sold.

Cash flow from operations amounted to $6.8 million in the first quarter of this year. Capital expenditures in the first quarter were $2 million. Capital spending in the first quarter was less than anticipated primarily due to the delay in the closing of the land purchase for the third plant site in Mississippi.

The first quarter was very successful and inline with our plans for 2004. We will continue to be diligent about the maintaining the proper balance of inventory and manufacturing capacity. In addition to creating operating efficiencies across the enterprise. Bob.

Thank you Paul. We like the first quarter for many reasons beyond the top and bottomline. We are hearing many positive comments from our Traxs [pros] regarding the enthusiastic acceptance of our Accents deck board. While our expectations for the product line are high based on our market research, it is always nice to have that verified with purchases by the consumer.

Initially we are only going to manufacture the line in five quarter by six offering three colors. But we have reassessed that position and will no doubt be making two-buy Accents also. On a special order basis we can also provide Accents in Natural and Woodland Brown and we can easily offer other profiles such as one-buy and other two-buy sizes with the Accent finish.

Our new design on hand rail adds a new dimension to our rail offering well beyond the traditional. Not only is the system statically attractive for the homeowner it is simple and more importantly quick to install for the contractor with our unique pattern pending bracket system. Several other rail offerings are in the design and testing and will be offered in the near future.

Our goal as I have stated many times is to offer decking profiles, which allow the designer and consumer to think outside their rectangle and create their own space. The curves, [starbursts], [Claiborne] or [Porches] of we want the homeowner to built the deck of their dreams.

Also during the quarter we carefully measured the balance between raw material costs, manufacturing overheads, and inventory. Early on we felt raw material costs were trending down sooner than anticipated. We also saw higher manufacturing rates sooner than we anticipated with our new products. Our plan calls for utilization rates of more than 80%, however, we opted to run closer to 75% utilization giving us the opportunity to draw down inventory a little more then we anticipated without sacrificing customer service. Of course there is a trade off in that manufacturing overheads will spread over fewer pounds thus affecting margins slightly but on balance our quarterly performance was essentially as forecasted and we are positioned very well for the remainder of the year.

Our significance is our installed capacity that can generate over $255 million in revenue and our ability to manufacture Accents at twice the rate that we originally anticipated as a result of process improvements we have instituted during the quarter. These factors along with our ability to add $40 million in revenue generation capacity for very little capacity allow us not only to serve our existing customer base, but also expand it significantly in the near term, a distinct advantage over anyone else in the market place.

Following on with this thought we recently announced a new partnership in distribution with The Home Depot. We view this association as part of the evolution of our distribution strategy. Our current base of more then 90 distributors and more than 3300 dealers is the mainstay to our business and will continue to be so. The agreement reached with the world's largest home improvement retailer will provide significant benefit beyond the revenue generated. This allows us to reach a different customer base and the do-it-yourself and the buy-it-yourself segment along with those contractors who now buy at The Home Depot. The opportunity to partner with The Home Depot will challenge us to be more efficient and innovative, thus making us more competitive. And of most significance, it will further our efforts to build our brand. Our agreement calls for us to be available in 90 plus stores in 6 regions. We will be stocked in these stores within several weeks. We'll also be available as a special order item in all Home Depot stores. This arrangement, while modest to start, will give us the opportunity to insure good service immediately and develop the necessary expertise to roll out a nationwide program.

Our brand building activities this time a year ratchet up significantly. This year we have developed a program beyond anything in the past. If you haven't already, you can expect to see this on the Today's Show, Good Morning America and This Old House as well as the HDTV and the weather channel over the next several months. These 649 TV spots should generate approximately 645 million impressions. In addition, our plans also call for us to run many, many print placements this year that should generate approximately 636 million impressions. We also have plans for other media outlets in local markets, so you may see us in your market. Our brand building activity should yield nearly 1.5 billion impressions and boost awareness for the Trex brand.

At this point I would like to just reiterate our full-year guidance. Our forecast for revenue calls for $240-245 million with earnings of $1.75-1.80 per share. Even though our gross margin was slightly less than expected for the quarter, we feel we'll average over the course of the year 43%. Selling, general and administrative expenses were lighter than we anticipated during the first quarter as a result of timing, and therefore should run 24% of sales as previous outline. As Paul mentioned a moment ago, we are pleased with our first quarter results, and feel confident that 2004 will be another strong growth year for our company. Now if there are any questions, Paul and I will try to answer them. Linda, if you would open up the session to questions and answers, I would appreciate it.

Ladies and gentlemen, if you wish to register for a question, for today's question-and-answer session, you will need to press "*" then the number "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 polling request, you may do so by pressing the "*" then the number "2". If you are using a speakerphone, please pick up your handset before entering your request. One moment please for the first question. Our first question is from Keith Hughes of SunTrust Robinson Humphrey.

Thank you. I have questions really in two areas. First, Paul you mentioned raw materials as recycle bag, those costs were still up year-over-year, is that correct?

They weren't.

Did they trend down sequentially than what we thought at the end of last year?

That's correct. We were down over a penny per pound, from a purchase standpoint over the fourth quarter 2003, but up about a penny and a quarter over first quarter of 2003.

If those numbers stay flat for the rest of the year, will we crossover that being a help out when at the time of second quarter or third quarter or when?

In the second quarter.

In the second quarter, okay.

Costs went up dramatically, Keith, last year, starting in the second quarter and I guess peaking in July or August.

Right.

June or July, I guess it was.

Is the -- given the with the [inaudible] and hope you have a lot more volume coming your way, how do you feel over the next couple of years regarding the availability of recycle bags continue -- the get margins you have now?

Well, the source of our polyethylene raw material is not just bags. Its other things like stretch wrap, and mostly industrial scrap bits, it's stuff coming out of [merves] which we have a means of sorting and cleaning, and that needs to be cleaned, so it's a whole host of different things. I don't see the amount of bags generated available to us anyway increasing that much, so it's got to the other streams that we cultivate and bring along. There's roughly over 30 billion pounds of polyethylene consumed in United States each year. And some 11 or 12 million of it -- or billion of it, excuse me, is film, which is really what we are going after. So it's out there. We just need to cultivate a system whereby we can collect it, and that's what we've done. And our [wash] plants in Spain and [inaudible] material that that isn't very attractive at all to anybody including us and allows us to clean it up and use it. So, I feel good about the search of raw materials there. The question is can we -- as quickly as we need it develop or conduit to bring it back or do we have to augment it with more dense types of things like [white spakar], [phostac], polyethylene, or milk jug resin or things like that, which is --

Which is material we don't buy today.

Right but you don't even foresee a problem, you are going to --?

No, no I think the basis of our business is that we can do that and we've built a system, which pretty much has done that for us over the last 12 years. Now there are fits and starts in points and time where we have to go out in a market and pay more for raw material, but I don't see it as a threat to our ability to grow.

Okay. Just final question on the Home Depot, there's initial phase of 90 stores with product and stock, special orders in the road. The special order stores -- will there will be some type of display?

No, they will be point-of-sale, point-of-purchase material and -- when I say all the stores, not every Home Depot store in the United States would be useful for us or them to have a display in, but I am sure we are talking about well over the majority of their stores.

Okay. Is the goal -- if the program succeeds to have products in a lot more than 90 stores?

Oh yeah, our intension is.

So the 90 stores is a test more or less--?

Well, I think it is a way to get started.

Just to rollout, which is first phase, Keith.

Okay. And you have an estimate of what the rollout of this -- I assume [inaudible] play, you will be paying forward, is that correct?

I'm sorry, Keith, I didn't understand what you said.

The rollout of this display in the stores for the special order business, are you trying for that?

Yes.

Are we going to [inaudible] stock in second quarter or is that declared out ever several quarters?

It is second and third.

Do you want to say how much?

Well, no -- I mean, no, I think we've got some budgeted that was actually budgeted in the first quarter and so we got a little bit of listed income from that. You will see it come back as a cost in the second and, as Paul, said the third quarter.

Okay, that's good enough. Thanks a lot.

Okay.

Our next question is from Joel Havard of BB&T Capital Markets.

Thank you, and good morning guys.

Good morning.

Hi, Joel.

Paul, I missed your second point on the gross margin impact, higher [inaudible] something utilization and incentive cost, what was the number two?

Incremental expense and origin formulation expenses.

What does that mean?

The origin and accent product includes additional materials that are more expensive than the legacy products.

There is actually -- one of the things we've tried to do last summer which I think we've done successfully is, you know, most of our products, they were anything, but some of our products stayed out in the sunlight and we have put more color in them in an effort to or different color in an effort which is more expensive.

Okay as opposed to some sort of --

Minimize --

UV protector or something like that?

There is the -- I mean the wood protects the polyethylene and we haven't done anything special since the day we started to provide additional UV protection.

So that means this is an improvement of the existing formula, not a new formula?

Yeah, correct.

Okay. If you could quantity in rough terms, what do you think the impact of each of those four factors was on margin? Is there one or two of these that are particularly pronounced in Q1 that may moderate? I am assuming utilization might have been -- or that end wood poly would probably important?

Poly and the utilization was the primary drivers, Joel. The overheads affects us substantially more than anything else. A year ago, we were running in the 88-89% range and as Bob said, we are down in the 75% range on average.

Does that mean 11 or 12 lines during the quarter?

Of the 19, correct.

Okay and what you are running at the end of the quarter entering Q2?

It's picking up. I mean, it is -- right now we are -- billed supplying the early buy and at this point we are looking to add production. So, I think you would expect it would be more lines running or a higher utilization rate in the second quarter.

Okay, so, the point is you all will start to get closer to the -- you said, Bob, I think you said 85% maybe during the quarter?

More than 80.

Okay. On the SG&A side, you referenced in a couple of different ways. Maybe Q1 was a little below normal. You hadn't quite started with the roll out cost for Depot. Marketing and advertising, we understand, is generally more geared towards Q2, Q3. In that sense was Q1 timed to normal or did you actually get some savings or deferral of costs that again you will see a pick up or was there selling?

Let me answer your question this way. If some we saw last spending in our plan called for, some of that just won't get spent now and some of it like the Home Depot expenses will get spent and they will get spent in Q2 rather than Q1. So, some of the lift over what we told you the 55-57-63, a couple of those cents are going to -- are just moving from quarter to quarter.

Okay, that's what you will get. You said to about a 24% right through the next three quarters.

For the full year, that has change.

For the -- okay and probably a little heavier in Q2, Q3, than Q4?

Oh yeah.

Okay. So, we are back kind of on normal amount adding the expense of the Depot rollout?

Correct.

Okay. Now, back to Depot, phase I, you will stocked in 90 stores, special order in and will that -- you will merchandise those floors and be available as a special order in the rest of those that are appropriate. I think you all suggested may be 75% of the based.

Well, whatever the number is, you know, 1000 stores our of 14 or 1600 or 1200. I am not sure what the number is, but yes.

Okay. And what do you think will be the timing to move from Phase I with 90 stores to stocking in Phase II or III or V or whatever it is?

Well, I think a lot of that's got to do with the Home Depot. At the latest I would expect it to be this time next year as our agreement discusses, but that's pretty much up to them, I think. We are ready to go, will be in terms of volume, you know, we can turn it up pretty quick within 30-60 days. So, I think it's prudent to start this way when we get some feel and they get some feel and then we, kind of, move on out, probably not until the end of the year, early next year though.

Okay, CAPEX was lower than we are looking for in Q1, you had discussed why -- are we going to see it catch up in, you know, still get to that kind of 35 million range or --

We expressed the CAPEX guidance last call at 25-35 million.

Yeah.

That is unchanged.

Okay.

The land -- the closing on the land will be in the first of week of May.

Okay and one more on cost -- actually part A and B on cost, we'll talk about maybe where poly is right now, we north of 18, 19 cents average or --

First quarter we ran below that, we ran below the fourth quarter, but above the year ago quarter. So, I would expect that to -- and that's ahead of our expectation, which Bob referenced, so I would expect that to trend up some, but I think our guidance or expectations for the year in terms of being in the 17.5-108 cent range is still where we think we would --

For the year?

Yeah, average for the year.

Oh, good, okay, let's see. And then on the incentive [comp], could you elaborate just a little bit on that. Was that accents-specific to get dealers or distributors to --

It was a combination, Joel, everything from accents specific to direct-to-dealer rebate, if they took truck load to incentive based on year-over-year growth to discounts based on payments where they paid quickly for [those] to take terms -- there was combination of incentives to -- the focus was really at the dealer.

None of which were different than -- different terms of kinds of things we do. None were different with the exception of the accent promotion.

Okay, I can say if you, kind of, aggregate the various forms that incentives can take, how much more aggressive do you think you guys were in Q1 versus a year ago or versus, kind of, the average for the last year, how do you want to compare?

Million dollars.

$1 million? Okay. And I know I have got others, but I'll turn it over to somebody else.

Our next question is from David Weaver of Legg Mason.

Good morning.

Hi Dave.

On the Home Depot arrangement, I guess, based on what you've been saying about branding, kind of being pushed into the next quarter, was this originally expected to happen, say, before the season started? Or was is timing pretty much as expected?

We put it in the first quarter because we though it was actually going to happen in March and for nobody's -- at nobody's fault it just didn't happen that way and so it's just happened in April and May kind of thing.

Okay.

But our plan, David, to answer your question call for us. Pretty expenses occur in March, and that was the basis we gave guidance, you know, 60-70 days ago.

Okay, can you talk a little bit about pricing of your products in Home Depot and how that will relate to your other dealer network?

Well, I am not going to tell the Home Depot how to price the product. Number one, it wouldn't list and number two, it's against the law.

Where your sales priced then?

We will -- we are not going to talk about price, but they are going to be, I assume, competitive in the marketplace and I expect that our normal chain will be as competitive also. We don't, I mean, we don't control those prices, and we just set the prices to the different classes of trade where we think it's appropriate. And then it gets price to the market higher or lower than we may anticipate. The only thing that changes any of that is competition.

Okay, the shift in your early buy, I'd guess that's changed your pattern of buying pretty dramatically, can you give us any flavor for April so for to give us an idea of or maybe even a year-to-date number in terms of how the buyers are behaving early second quarter?

Behaving well enough for us to feel really good about what we forecast for the year and think we're off to a strong start. I want to -- we are taking the fiduciary co-monthly sales or anything like that because our sales, as you know, are very seasonal in nature and we don't control inventories downstream, but we feel, as I said, reiterated our guidance to feel very good that we were off to a good strong start and I am not going to comment anything more than that.

Okay, one last question. Can you give us an idea, you have got quite a bit of product besides deck boards out there now, railings and so forth, can you give us an idea what that is as a percentage of your total business, on deck board part?

10%.

Its significant but its not --

You know this is outside of the 5/4X6 and 2X6 --

12-14% of our sale, hopefully, -- actually we want to grow them both and we wanted to become more than that but that's where it is today.

Any new product coming in the next year that we should be thinking about?

There is a lot of them but I am not going to talk about them today.

Okay, congratulations on the good start of the year.

Thank you.

Our next question is from Tyler Berg (ph.) of Trends (ph.) Capital.

Hi. Did you say that the increase in your accounts receivables was due to extending the terms?

We didn't but that's the answer to the question.

Okay, so what --

I would say, it's a temporary, during the early buy -- during the first quarter we gave the customer the choice that they are going to discount or giving extended term, that only last through the early buy period.

Okay, so you would expect that at end of the second quarter your accounts receivables will be baked under the --

Most of receivables at the end of March are due and will be collected during April.

Okay, as far as the inventory build looks like it was, you know, at the end of first quarter 60 days versus 45 days last year.

Okay.

Do you expect it to be to a more normalized level at the end of the second quarter.

We would expect inventories to -- finished goods inventories to continue to decline in second quarter, to the point of maybe another $5-7 million. Where -- it would be the low point and then the third quarter would either be flat, slightly up and then the build [will happen] in the fourth quarter.

Okay, with respect to The Home Depot deal have you got any feedback from your distributors about that or dealers of their feelings of you selling through The Home Depot?

Well from a distributors perspective a lot of what will get delivered to The Home Depot will actually go through the distributor. Any of the special order we're not in a configuration to be able to supply that, which is normal for a lot of products that go through Home Depot or that type of channel. Certainly from our dealers there are those that understand what is we're doing and at the end of the day don't feel threatened by because it is a different customer and -- not somebody that they see today. I think from a brand building perspective [anyone] understand that they benefit from that actually. And it opens some market to people we don't sell to, and of course there is the emotion that whereby, you know, people don't like what we've done, but I think as time goes on they'll see that the marketplace settles all this out, whoever, you know, brought at Home Depot before is going to can probably continue to buy there and people that didn't are aren't probably going to buy their now. And they do it for a whole lot of different reasons. So we, you know, and I'm not I'm a little bit away from that and so is Paul or what we get -- we clearly get feedback. But I think it's going itself out. And we haven't had any violent reaction, if that's your question.

Well, I was just curious if you had any feedback positive or negative?

Sum of boths.

Okay. What type of formal relationships do you have with your distributors, something there -- is there any type of, you know, contract, I mean, in other words, if you wanted to cancel them as distributor, could you do that at will? And if they didn't want to carry your product in market, could they do that at will?

The answer to your question is either party can, we have formal agreements, and either party can leave those agreements given certain terms of the contract. In practice I can say very comfortably that we have never arbitrarily abandoned a customer and nor would we. We've always talked about the fit in the partnership and whether its working well or poorly and quite frankly, sometimes those things don't match up, be it out fault or the other parties. And so, we go on a separate way. But, you know, its not -- I don't think, it's a good partnership if it is done on an arbitrary basis walk away, and nor to my knowledge or recollection that we have a customer who just up and said I am leaving for no good reason. Had pretty good preview relationships with all our customers overtime and, I think, we have been for the most part [for us right], and we strive to be, and I think, our customers are the same way. I think, we have a good group of customers and they pay their bills, which is even better.

And then final question. Do you anticipate that The Home Depot business will be lower margin business for you?

It won't for us, and I don't expect it will be for our distributor either, it's in fact, well, I mean, someone [more] supplying on Home Depot.

Okay. Thank you very much.

Sure.

Our next question is from Claddis Meyer (ph.) of Falcon Fund

Hi, a quick follow-up on the distributor Home Depot relationship, and given that you are primarily going to be supplying Home Depot, [wouldn't] you guys do to kind of prepare them for the announcement in the new program?

Well for, at least five may be longer than that years, we've talked with our distributors in terms of, you know, as the process evolution and some day this would occur and what most people are realize is -- most if not all of them apply at some level some product to either Home Depot or Lowe's, or [Minars] to people like that as part of their normal business. And so, we've talked about it and we -- although we met the appropriate time and when we announced it to the rest of everybody we told them the same thing, [inaudible] a month before if that was the question. But since I think we had those ongoing discussions it wasn't necessarily a larger big surprise and part of that discussion is now how they might -- and Home Depot get they buy from obviously but how they might participate in some of that business.

Okay. A question on the warranty if for some reason or any reason that customer is dissatisfied then who bears the risk of that? Does the distributor bear the risk if there is some sort of a fading, staining, or [dabbing] issue?

Well for the most part we wind up bearing the risk no matter whose fault it is, and that's been going on for years and years and I guess if you want to [be a successful] reseller [consumer] product and make the consumer happy, the manufacturer at the end of the day, at least our view of it is the manufacturer winds up bearing the risks. Now, you know, when a contractor installs it incorrectly while we certainly encourage that person to bear up to the responsibilities but in some cases they don't, and in some cases we will shoulder that burden, not as we haven't, but certainly anything do with the product and people's dissatisfaction with the product, we always resolve that as best as we can.

Okay, last quarter you mentioned that you were going to be pricing the product to regain share in shelf space, I was just curious how market share may have changed over the quarter and what it might be at the end of this quarter?

All right, that's really tough to tell. I can -- the only thing I have anecdotal information on is other people have raised their prices and as anecdotal was quantitative, but there is indications that the other people were forced to raise their prices, so I suspect our positioning is better than it was could be 90, 120 days ago in terms of price.

Okay, and my final questions, I'm not sure if you said this earlier, but did you disclose your branding expense for the quarter?

We did not. It was $5.5 million.

Okay, thank you.

Our next question is from J. D. Puget (ph.) of Saunders Asset Management (ph.).

Yeah, hi guys. Couple of questions, that was actually one of them, said 5.5 million in branding expense in the first quarter?

Yes, sir.

So, the recurring kind of SG&A and so forth is only 8.6 million.

Right.

Okay, so running pretty lean right now?

Right.

Do you have the target for the branding expenses that's still; I forgot you guys had said the four-year target?

17.5

Okay, and that's kind of rebalanced for another Home Depot relationship being in place --

That includes the Depot -- 17.5 includes at what's occupied -- it's 5.5 this quarter that our actual expectations sort of run a little higher than that but that will catch up in the second quarter.

Okay. Is Home Depot going to do anything out of their own pocket terms of branding and trying to build some exposure for the Trex brand?

Yes.

So, within their own stores do they do something in print or on TV?

I think they do all normal things they do. I mean we are not -- its relationship much like other suppliers have with them, and we will be included in many things they do.

To get visibility for you guys. Are you going to sell directly to them or just --?

In those regions six regions -- I don't know 90 to 100 stores, we will sell into their distribution center, and it will be limited profiles and colors, and then relaxing colors. And then as with many, many other products the fill-in or that special order will be done through the distribution channel.

Okay.

So this is not different in other products that get sold and carried.

And is this the decision where you have been talking with Home Depot corporate to try and develop this rollout plan or is this kind of just go-region-by-region?

This is the corporate program.

Okay. It's just any -- kind of convince and you can get traction on the stores and convince them beyond that to if they want to roll it out and consume more shelf space with Trex?

That's correct.

And is that lumber they get squeeze out of --

I suspect so, I don't run their stores and that's up to them, but we will be in a rack like other lumber products and in that section of the store. And they have to -- I am sure they look at what turns and what doesn't and make those decisions.

Okay. Is there any incentive on your part that will step up your branding to try and make sure you can get pulled through distribution or your lumber yards or at Home Depot right now just because that relationship is so new, you want to demonstrate good traction?

I don't feel anymore added pressure if that's the question. I think we always do want to do and do the pull through. I mean we are selling now and I think what differentiates us with -- besides our brand is we have our sales forces that's out and distributors have a sales force and the retailers have a sales force that's out doing a pull through and calling on prospective buyers and the builders and contractors and the Trex pros and people like that, and it won't be any different. Clearly we want Home Depot to have a great experience just like any distributor or retailer and then there is not a lot of discussion whether they are going to stock our product or anything else. So we are going to do all the same things. I think the merchandising part of it is a little bit different and there are added expenses in that regard. Clearly we are not doing this just to build our brand, we are doing it to sell some products and cover those costs and improve our margins.

Did you guys talk about Q2 expectations more specifically?

No and we talked about the first half and those -- 60 days ago and those kinds of numbers are still our same numbers. As I said some of them -- revenues a little bit higher and some of SG&A cost were a little bit lower so --

So probably we see --

Traction and plus or minus and that's where we ought to be for the second quarter. I mean I think what we focus on is what our full year plan is and what we are going to do for next year and try to dissect it by quarter and we do have a quarterly plan but we feel very confident in the full year kind of numbers. I think we are off to a great start so --

When you had given the full year revenue numbers you kind of knew about Home Depot at that point?

Yes.

Okay. It was kind of built in not necessarily incremental to what the ---

You are speaking about the 60 or 70 day guidance and the answer is yes.

Okay, okay great thank you.

Thanks.

Your next question is from Dusty Culbertson (ph.) of Second Opinion Research.

Good morning. I have one question, a few contracts that we have spoken with, mentioned you might move into fencing. How adaptable would your products be to fencing?

Well it's very adaptable but the reason we don't have a fencing line out there today is because it's not very adaptable -- I mean the panels and things like that in a fence are fine; where we struggle a little bit is and where -- we have a technology I think now that solves this problem, is in the post and if you want an [alter] expense you have got to provide a post.

Okay.

And I think technologically we know how to do that now and so you will see us -- that's one of the things that we will enter into, I suspect -- we should have -- while our hopes were we had done it a year or 2 ago and now it looks like we will have a full fence line probably for next year.

Okay great. Well thank you very much.

Sure.

Thank you.

Your next question is from Mike Marionache (ph.) of Ragrenault (ph.) Capital.

Yeah hi Paul. Can you just remind me what the branded expenses were for the first quarter last year?

$3.8m.

Okay. So the corporate SG&A is actually down from a year ago, is that correct?

Yes.

What you guys are doing there to -- if the organization was growing, may be I missed something?

Well its precise just a people expense -- some of the occupancy expenses are down, some of the -- it's the mix of people. I don't want to dissect it too much other than.

Its okay.

It's going to grow through this year.

Those fat cats are no longer on the payroll?

You said it.

[inaudible]

I'll tell you one of the expenses that's actually for small company like ours, we plan for but quarter-to-quarter to change dramatically is like moving expenses. When we hire somebody you have to move him in, so you could be seeing some of that.

Okay.

It cuts it for hiring expenses kind of thing. You have to pay a headhunter; you got to move somebody's household, things like that. A lot it timing whether it's coming across in the IT department or the HR department, but I think it really is timing you shouldn't look at one quarter and come front and pull that into the whole year. It will pick up.

Okay. Just getting back to the AR [inaudible] you guys have had the early bag program in the past -- I think you know either they have extended the terms or discounts in the past. I am still not quite understanding why the AR is [2X] what it is, has been the last 2 years at the end of the first quarter?

We haven't given extended terms every year. We have done that in certain years. Last year we did not [inaudible]; this year we gave terms -- some of them related to Accent, some of them were related to just the normal early buy, the AR is also reflection of the March activity. So, just keep in mind to that it isn't necessarily -- it's a point in time, so as I said about 80% or 90% of those receivables are cash today

And that's not at our choice its our customers choice -- a lot of things go into their business and whether they want to take the discount or whether they want to take the terms. So some of it we just can't explain it other than in my mind -- I don't know about Paul's -- in my mind it was a little higher that the receivables are tended to be a little higher ten I would have anticipated.

Okay. Alright. And as far as the railing system you said that's all being delivered is that --?

Well its on distribution, we started shipping it in March, and, in fact, I have got personally a couple of calls where people are looking for it and then I had to go, find a dealer that had it already but -- and these are couple of weeks old actually. But, yes it's out in distribution.

Okay. So you didn't deliver the bottoms, in that the tops and the tops in that the bottoms.

No -- and so we didn't do things like that, that's the reason it was going out in March, not in January and February.

Okay. All right. Fair enough. Thanks a lot.

You are welcome.

Our next question is from of Cliff Josephy (ph.) of HT Brown (ph.).

Hi guys.

Good morning.

This buy period, what's the normal time of the early buy program, like what was it last year, how long did that last?

Let me go -- from about '99 through last year, might have been 2000 through last year, we did it for the quarter. Historically from '92 or '93 when we first had one in the '99 or 2000, whichever year it was, we did it for four months and ever since we went to a three-month period I think our customers felt that they liked it better when it was four months, so this year we decided to go back to the four months, kind of, selling period and -

So that took sales from normally from the March period into the April period?

Correct, our April this year will be bigger than it has been by a lot through last couple of years and --

And what would you say which month do you think it came out of the most? Maybe the March month, you know, to move into April?

It's right across the entire -- I mean, we try to express the early buy across all the months, so you really can't take it from one month.

Right. I would think that if sales move from the March quarter to April, you know, then maybe the DSO wouldn't have doubled year-over-year, so that's what surprised me. I know that you answered with the extended to payment terms. So, there is nothing more to it in that range?

No.

No.

Okay and then before you had mentioned to another caller about the Home Depot guidance, but -- so the Home Depot is included in the guidance, which you affirmed last night?

Yes, we have been talking to them before, you know, February or whenever we talked last.

Sure, wonderful, thank you very much.

You're welcome.

Our next question is from Brett Hendrickson of Bonanza Capital.

Hey, good morning, guys. Great quarter. Hey, Paul, I just wanted to -- I think, I understand when you talked to Joel earlier in the call about -- hey, can you guys hear me, by the way?

Yeah.

Yes. We can.

Okay. You guy's talked to Joel earlier in the call about how capacity utilization is the biggest thing, and second margin. And I can understand that, but -- and so, the finished goods inventory, you brought that down in the quarter, and that's really what affects your capacity utilization more than any other one thing probably, right?

and margin.

Yeah. And so, Paul, is that down -- that was down 38%, not year-over-year, but from the --

Inventories were down on a volume basis from, you know, the start of the quarter and that was, obviously, a combination of the build activity to production activity and we made a decision to, you know, to try to bring those down, so we could be well positioned to be running at, you know, the most optimal throughout the rest of the year.

We took the inventory -- let me --

I guess, the question is -- so, finished goods inventory was down, you said in the press release it was down 38%, but from the beginning of the year.

Yes.

So, it's still -- so, what is that, is it about 22ish then?

Finished goods 20 million.

Okay.

Now, the reason we did, let me explain it, the reason we did it was, we had not planned on taking it down as much as we had. We saw raw materials polyethylene, the costs were lower than we anticipated and going forward, I think, they will hold somewhat lower, and the other end -- so we again -- and the other thing is --

[Must betray your] thought for a second.

Oh, operating or manufacturing rates were sufficiently higher -- quicker on the new products that we were making that we said to ourselves, we don't have to carry quite as much inventory going into the spring and so we given those two things we chose to reduce production beyond what we anticipated we'd run.

That's great. You guys are off for a better rest of the year and that's great, but what are you thinking finished goods inventory is going to get because it still is pretty high, on a year-over-year basis, I think, it was 7 million last year, now 22. What is the kind of -- how is it going to flow throughout the year?

Well, it's going still trend down in the second and third quarters. It could come down another, you know, $7-8 million --.

We need to run -- provide the kind of customer service that we need to provide given that, I think, down the chain people are --- even though money is inexpensive, I think people are more and more hesitant to carry inventory. And we have more products, so we are asking to do more. So, we need to run with $10, 11, 12 million minimum of inventory to run a $250 million business. So, as Paul said, it could come down another $7 or 8 million, but we can't be run -- if you see our inventory in the middle of summer at $5 or 7 million, we don't have enough.

And easily going into next year, given our business -- our core business, the Depot business, we could easily need it to be $30-35 million worth of finished goods inventory.

Okay, so we are talking flat at the end of year. That's what I was trying to get out in projecting your gross margin. I kind of need to know that, but we are talking about flat finished good at year-end?

Flat or down, I mean, down slightly. But yes, it could be -- it can easily be flat given what we need to supply in the first quarter 2005.

It makes sense, thanks guys.

You're welcome.

Our next question is from Claddis Meyer (ph.) of Falcon Fund.

Hi, I had a follow-up question. Just to get a better sense for the overall market, how big do you think the composites market is right now and how quickly is it growing?

Well, our number will be less then probably what you here from everybody else, but we figure it's -- and a commercial part of it is the hard part to get our hands on. We say $2.3-2.5 billion in decking and railing is our number. Now, that's in it's current configuration. If you were to translate that all into Trex, it's somewhere between $4 and $5 billion. Did you follow the point I was trying to make?

I think so.

Okay. I mean, what is much less expensive than we are? At least Southern yellow -- Southern yellow pine. So, in current configuration, it's $2.3-2.5 billion, somewhere in there. If you were to translate that into just Trex, it would go up by $2 billion.

Okay, how quickly do you think the composites, you know, the shares supposed to grow or just the, you know, I mean, a lot of composite manufacturers sell in this market, how quickly do you think this market is going to be growing?

That is a very difficult question and answer, in fact [inaudible]. I don't know, we have looked at a lot of conversions, bias-ply to radial-ply tires, [inaudible] things like that, a whole host of them and now we put a plan together and have a manufacturing or a capacity plant that, kind of, matches what we think might happen, but it's taken a long time, if you think about it, for us to get -- when I say, "so, I am talking about the market converted to somewhere between 13 and 15 -- converted or less than 20 certainly, somewhere between 10 and 20. But at some point given your point that there are other competitors beyond us, that drives the conversion and wins credibility and everything else to it and so the conversion may -- curve may become, I think, as your point really steep at some point and then will flat out when the market get 50%, 60%, 70% converted and it will never in all likelihood be 100% converted, but I'm not really prepared to answer what -- at the rate we think it is going to convert it -- and I don't think anybody -- you ask 100 people, you are going to get a 100 different answers, some ones dramatically different.

All right. So, do see it being 50-70% of the overall?

I think over time, yes.

Okay, thank you.

Once again, ladies and gentlemen, as a reminder, to register for a questions, please press "*" then the number "1" on your telephone, our next question is from J.D. Puget (ph.) of Saunders Asset Management.

Yeah, just two quick follow-ups. At the onset of call, Paul, I think you mentioned 20% of revenue, was something I missed that? There wasn't a new product for this.

20% of the shipments were Accent shipment in the quarter.

Okay. What was that last quarter?

I think it was 18.

Okay.

Paul Fletcher 18 or 19. It was up slightly.

What would you expect for a ramp there through the end of the year or whatever?

That's fairly good comparison because in the fourth quarter our shipments are very low --

Right.

Because we were drawing inventory down, so you can't really compare those two numbers.

What do you think as a good target to exit the year at?

30 plus.

Okay and the other question was just on, you know, you already had a conversation about poly prices and then as we look at gross margins now and start to compare a year-over-year -- looking back last year, you had a couple of pretty nice gross margin quarters, seems like if anything poly costs become [inaudible] or easier compares for you. Are there things that when [you did back or into] making some estimates and gross margins from our perspective in the terms of utilization rates now that maybe have more lines up and running or?

Well the gross margin is obviously going up and higher utilization is going to cover those overheads and drive that. I would -- in our margin in our product, given the pricing we decided to establish a little bit less and that's why we are saying on purpose, that's why we are saying the years going to average about 43%. So, you are going to obviously see quarters that are higher than 43%

Right

But you are not going to see us end the year at 40s, at least I would be surprised at this point if we exit the year at 45 or 46 or 47% --

What about looking just Q2, Q3 versus last year you had 45, 47% gross margin last year and that's with high poly, now with that normalizes --?

Very high utilizations in the second and third quarters that offsets the poly.

Okay. But the expectation wouldn't be that with easier poly comparison, you can do gross margins better than last year for the next couple of quarters --

No

Because of the utilization --

Right.

Okay. Thank you.

Welcome.

Our next question is from Dusty Culbertson (ph.) of Second Opinion Research.

Hi, another quick follow-up question. We were curious what you guys see on the competitive front specifically in regard to Lowe's, they are offering ChoiceDek.

Well, I mean, we don't track them other than we look at whatever is in the public arena and I think you could see if you track the supplier to warehouser, what their sales were last year, over year their sales were -- a lot of those that's going to Lowe's I guess, we are up I think that's the best indication of what's getting sold through.

Okay, any specific comments as far as differentiation. I know you have been a lot of branding, will there'd be any specific way as consumer start checking out, you know, both sides in order to get a feel for which is better, which is different?

I think the look of our Origins or Accents dramatically different than certainly the products that going through Lowe.

Definitely agree

That is the customer's choice.

Okay, great. Okay, well thank you very much.

You are welcome.

You are welcome.

Our next question comes from Brett Hendrickson of Bonanza Capital.

I am sorry guys, its a long call but it is a quick one, is the one color that's gone be in The Home Depot, is that going to be a Accents or Origins?

Origin

It's going to be Origins and I think in Saddle in some parts of the country and Winchester Grey and Olives.

Okay and then the customers can special order Accents and get in a few days right?

Correct.

Okay, thanks.

You are welcome.

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

Thank Linda. In conclusion, I would like to leave you with several thoughts. Our brand is redefining the decking category Trexs. We have a product line that is far more extensive than anyone in the marketplace and it covers the needs of the consumer and contractor when designing their deck. Our in-store capacity and our ability to quickly increase it will support continued strong growth and we are evolving our distribution channel to make Trexs easy to buy. Thank you very much for your attention and participation.

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