Trex Company Inc (TREX) 2004 Q2 法說會逐字稿

Good morning ladies and gentlemen and welcome to the Trex Company second quarter conference call. At this time, all participants are in a listen-only mode. Following management's prepared remarks, we'll hold a Q-and-A session. To ask a question at that time, press star followed by 1 on your touch-tone phone. If anyone has difficulty hearing the conference, please press star zero for operator assistance. As a reminder, this conference is being recorded today, July 23, 2004. I would now like to turn the conference over to Miss Harriet Fried. Please go ahead, ma'am.

Thank you everyone 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 second quarter. This release is available on the company's web site as well as various financial web sites. A replay of the call will be available through July 30th. The call is also being webcast on the investor relations page of the company's website where it will be available for 30 days.

Before we begin, let me remind you that statements on this call regarding expected sales performance and operating results, projections of net sales and earnings per share, and anticipated financial condition constitute forward-looking statements 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'll turn the call over to Mr. Matheny. Please go ahead, Bob.

Thank you, Harriet, and good morning. We are extremely pleased with our second quarter performance, and coupled with the first quarter performance are ahead of our original forecast for the half and well on our way toward our forecasted yearly goals that we outlined in February. We are extremely pleased with the revenue growth of more than 40%, and our income growth of over 70% versus a year ago for the quarter.

In most areas of our business, we are either on our ahead of plan and look forward to a great second half and a strong 2004 performance. Our brand-building activities went into high gear during the quarter and continue to build awareness for our products and enhance our position with both the consumer and the contractor.

Our new product introductions of our Accents deck board and our designer handrail series are doing very well and continue to build momentum. Reverting back to a four-month early buy program versus the previous few years where we had a more compressed, three-month program, was received well by our customers and worked well for us, and therefore is likely to be our practice going forward.

I shall discuss more operating details in a few moments, but now I'd like to turn the call over to Paul Fletcher, our Chief Financial Officer, who will discuss our financial performance for the quarter.

Thank you, Bob. 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; condensed consolidated statement of operations, condensed consolidated balance sheet, condensed consolidated statement of cash flow. The second quarter of 2004, net sales were 83.4 million, compared to 2003's second quarter net sales of 59.2 million, an increase of 41%.

The company's early buy incentive program expired at the end of April; however, product demand remains strong throughout the quarter. You may recall our early buy program in 2003 was completed at the end of March. Contributing to revenue growth was a 5% price increase on the Origins and Railing product line beginning in May.

Our new Accent product line, which was introduced this year, accounted for 21% of total volume in the second quarter. And based on our feedback from the field and current orders, we are optimistic that the Accent line will continue to grow as a percent of our total decking volume and revenue. Second quarter of 2004 net income increased 69% to 11.1 million, or 75 cents per share, compared to 2003's net income of 6.5 million, or 44 cents per share. Gross profit for the 2004 second quarter represented 44.3% of sales, which compares unfavorably to the second quarter 2003 gross margin of 45.4%, but a 500-point increase from the first quarter of 2004.

The second quarter 2004 gross profit margin, compared to a year ago, was positively impacted by lower purchase poly costs, higher prices on our Origin deck products. However, these were offset by lowered manufacturing utilization and early buy discounts and incentives earned in April 2004. Did bring one manufacturing line into service during the quarter and ran 83% utilization, on average, between our two manufacturing plants. The second quarter of 2004, SG&A expenses totalled $18.5 million, compared to $15.9 million in the second quarter 2003. Total SG&A expenses peak in the second quarter due to the seasonal TV and print advertising activities.

As a result of the growth rate and revenue, SG&A expenses as a percent of revenue dropped to 22%, as compared to 27% in the second quarter 2003. Total SG&A expenses for the full year are expected to be approximately 24% of revenue as we have previously indicated. As of June 30, 2004, total debt amounted to $55.6 million, a $1 million reduction from December 31, 2003. Cash balance has increased to $38.9 million, and as a result, total debt, net of cash, declined to 16.7 million at the end of the second quarter.

Accounts receivable at quarter end amounted to 31.2 million. This balance reflects the strong sales activities in June as well as the April shipments qualified for early buy credit terms of 90 days. By mid-July, accounts receivables had returned to a more normalized level below $20 million. Total inventories had declined from $46 million at December 31, 2003; $18.7 million at June 30, 2004. We would expect to add another manufacturing line in the third quarter of 2004 and maintain a high utilization rate during the remainder of the year as we supply the current demand and prepare for the 2005 season.

Cash flow from operations amounted to 39.8 million in the first half of 2004, compared to 9.4 million in the first six months of 2003. Capital expenditures in the second quarter were 6.3 million, driven by spending in the third plant location. We expect capital spending to pick up in the second half, primarily due to the expansion in Mississippi. Total capital expenditures for the full year 2004 are estimated at 25 to 30 million.

The second quarter 2004 net interest charges amounted to 935,000, compared to 884,000 in the second quarter of 2003. This increase is the result of lower interest income in the 2004 quarter. The second quarter results clearly reflect the strength of the composite decking and railing market. The market continues to expand. Trex is well-positioned financially to compete for an even larger share of the market. Bob?

Thanks, Paul. Paul alluded to sales were strong throughout the quarter, with reorders coming in regularly. We expect to show healthy, top-line growth for the remainder of the year, with expectations of achieving the upper limit of the revenue range previously forecasted of $240 to $245 million. Driving the growth is a consistently strong demand for our Origins line, as well as a rapidly growing acceptance of our Accents line. We are quite pleased with our results year-to-date in this regard. Also noted is the acceptance of our designer handrail system, which is running ahead of our planned expectations.

Along these lines earlier in the year, we outlined where our efforts would lie during 2004 with one major effort being directed at new offerings. We're on track in this initiative and will have several new products and line extensions ready for introduction throughout 2005. During the quarter, we saw improved margins, largely as the result of stable raw material costs, higher operating efficiencies, and higher capacity utilization. Also, as Paul mentioned, unit realizations increased slightly as the result of a previously announced price increase.

Going forward, our gross profit margin expectations for the year remain at approximately 43% as previously forecasted, understanding that capacity utilization and raw material costing could move that number several basis points either way. SG&A expenses for the quarter lag slightly versus our expectations, some of which was driven by head count.

We expect to run 24% of sales for the full year by catching up in some areas and spending at higher rates than in previous years. Specifically, we expect to spend more aggressively in the third quarter on advertising production costs and in research and development. Additionally, we may increase spending in the merchandising for both our dealer network and with our continued introduction into the Home Depot. Our entry into the mass-merchandising channel is off to a good start. We are now stocked in over 100 Home Depot stores and seven markets across the country.

Trex is also available as a special order item in more than 1,000 stores throughout the United States. While we are just getting started in this new channel, in some areas we're seeing very positive results already. Paul mentioned that inventories are down from year-end, as you would expect. However, our finished goods inventory is flat over the same period last year. And with higher sales this year, we have, in some instances, disappointed our customers with lead times.

We are currently running at virtually 100% at capacity to make up the gap and will only cut back as soon as we return to lead times to the 1-2 week time frame. Additionally, we are constructing two more lines, one in each plant, which will be ready by year-end. This will then give us revenue generation capability of more than $330 million. As many of you know, we have acquired 100 acres of land in Olive Branch, Mississippi, which is in the Memphis metropolitan area.

We are currently doing the engineering and permitting to begin the phase of this facility with the expectation of having beneficial occupancy of the building before year-end. And this should allow us to begin production during the second quarter of next year and continue to build the plant out as demand requires. Now, I would like to conclude our formal remarks by outlining expectations for the remainder of the year.

Following on the strong demand for Trex during the second quarter, we believe full-year revenue will run to the upper limit of our forecasted range of $240 to $245 million. Gross profit margin is forecasted to be approximately 43%, with SG&A expenses being slightly higher than 24% of revenue. Earnings growth for the remainder of the year is also forecasted to be strong.

We have a high degree of confidence that full-year earnings per share will rise to the upper end of our forecasted range of $1.75 to $1.80, and we are very optimistic about our business in 2004 and look for 25%-plus growth of both the top and bottom line. At this point, Paul and I would like to entertain any questions you may have. Paul, if you could open the line to questions.

Certainly. [Operator instructions.] Our first question comes from Joel Havard with BB&T Capital Markets.

Hi, guys.

Good morning. Hi, Joel.

Running close to 100% of capacity, you probably start to get a little decrease in your operating efficiency as you get close to that full number. I understand you all are adding new lines -- what I'm really getting at is it sounds like you've got the capacity utilization side of the equation okay.

Can you give us some current insight and hopefully a little bit of forward view of what you think the poly cost environment is looking like? And the backend of that question for you Paul, specificly, is what is your finished goods, raw material balance look like of that ending inventory number?

Well, speaking of poly costs, they've been running lower than our expectation all year. I would tell you where the jump in what we perceive as demand -- let me say that another way. Stronger demand than I think we had anticipated why it tends to force us out and buy -- use up inventory and buy in the marketplace. And that may drive our poly costs up a little bit.

But given how much less than forecasted they've been for a while, I don't anticipate that will materially affect our results for the year, Joel.

Bob, does that mean you all are still in, kind of, the 18 cent range?

Maybe Paul can answer that.

We're down about 10% from a year ago, so that's in the range, yes, Joel.

That's impressive that ya'll have got poly costs lower. Is this a function of any new sources of just efficient use of the markets you already know?

Well, I think both. There's a number of things that we embarked upon over the last 12 months and some of them are starting to come to fruition. I hinted at that in the past. But I would tell you, we still have a ways to go with some of them. I mean, we're nurturing these along and we have a lot more ideas and I think over the next several years, you'll start to see us able to stabilize those costs. That's our goal.

Okay. We'll try and learn more about that going forward. And Paul, the back side of that, do you have a breakout between raw material and finished goods?

In terms of going forward, I think the total inventories at the end of the year will be similar to last year. I think you could see us having -- in terms of the split between raw materials and finished goods -- it could be a $5 million swing in terms of less finished goods and more raw materials.

So you'll clearly see us building both categories from this point forward through the end of the year.

Although you're a little light on the ground it sounds like right now, which is an interesting position to be in. Paul, specifically, at the end of the quarter was the ratio of raw material to finished goods similar to Q1? What I'm really getting at is have you started to eat into some of the stockpiles of lower costs poly you guys have put in place there?

No. Really, the raw materials haven't moved that much. The difference in the inventories come in the finished goods.

In a yard. Interesting. Let's see. Bob, back to you. The strength of Q1 and the strength of Q2 and no change in the year-end with Q2 suggest that you're kind of holding the reigns in on your expectations for Q3, particularly.

Is there a notable shift in the pace of building right now that you're anticipating a little bit slower order rate than we've been anticipating? Remembering there was a kind of a catch-up built into our Q3 '04 based on the lost volume that the hurricane caused on the East Coast last September, I believe.

Right. I think, Joel, you've just got to go back to February. And we said here's what our plan is and here's where we expect to be, and yeah, over the half, we're a little bit ahead of it. But we're not dramatically ahead of it in our minds. Now, it may appear that we are.

Yes, it does appear.

We're kind of where we thought we were going to be. We're a little bit ahead of where we thought we were going to be. But given that -- I don't want to stress too much, we feel good about the rest of the year but I see no reason -- and I think I couched that our expectation is to be at the upper end of both ranges,not at the lower end, but I don't think at this point that we need to change our forecast.

Okay. Well, I'll try and respect that. I don't want to hog the call, last question. The timing on CapEx. Looks like maybe you're shifting a little bit out of what we were anticipating for '04 into perhaps early '05. If you're $25 to $30 million for this year, does that then maybe suggest that maybe '05 could be 35ish as you kind of finish up Mississippi and do some other things?

Easily. 2005 could easily be $35 million.

Okay. All right.

I mean, I got to tell you, Joel, my goal is to spend more than Paul talked about because we're kind of getting behind a bit.

Paul's a cheapskate. All right, guys. Great quarter, good luck, and I'll let somebody else ask questions.

Thank you.

Our next question comes from Keith Hughes with Robinson Humphrey.

Thank you. Really two questions. The move of SG&A spending into the third quarter, can you give a little more detail on what that is? Is it just straight advertising or what?

Keith, each year I keep saying we're going to do this and I think this year we're going to, and some years we do and some years we don't. But our goal -- we're putting together a new campaign which I think is going to take us to a different place and the costs of that are going to be incurred, really, in the third quarter -- third, fourth quarter -- but primarily in the third quarter because we're going to do things sooner rather than later this time.

Is this an advertising campaign?

Yeah, we're not paying for any advertising, but it is the production cost in and of itself. If you build a new TV ad, there's a lot of production costs and we will expense them as we incur them. The other thing is in our budget for this quarter, are probably higher R&D costs.

I think I've talked about it a couple of times, we're going to spend more and more on R&D and try to develop more products and refine the products we have and develop line extensions and things like that. So year-over-year you're going to see higher SG&A costs in the third quarter and that's the result those things cause that.

Really, you're spending some money on an campaign on R&D for 2005 and beyond. Is that a good summary?

Yes.

The price increase you talked about, I belive in Origins, 5% in May, the timing of that is obviously after the pre-buy period. Do you expect any pricing changes on Accents this year?

No.

And I think that's it for me. Thank you.

Thanks,.

Our next question comes from David Campbell with Davenport.

Thanks. Good morning.

Morning. Hi, David.

I was wondering if you might elaborate a little bit more on the growth margins in the quarter, why they were down from last year. Secondly, could you [inaudible] an earnings outlook for the third quarter as well?

Paul's going to work on a gross margin. I think we said earlier -- not today, but earlier in the year -- we're not that good, David. So we're going to kind of stick to the half forecast and in this case, the second half is 245 million less 159, and on the earnings side $1.80 less $1.38.

Okay.

David on the margin in the quarter compared to a year ago, on the downside, utilization this quarter ran 83%. A year ago we were over 90. So in terms of the absorption, the fixed cost, it was negative compared to a year ago. Another big reason is, remember, this quarter in April, it was part of the early buy program, which there are discounts and incentives that come off the top line, the revenue. So this quarter had to pay the price for the early buy in April.

Which in 2003 ended in March. So you saw higher unit realization in April. This year, that didn't end until the end of May, or the end of April. So you didn't see that higher unit realization until May.

You know, helping the quarter from a year ago was a little lower, probably purchase costs, and then for part of the quarter, we had a price increase on a portion of our business. Those elements offset.

One of the reasons it wasn't better was because, on the labor side, we actually were a little bit shorter of labor than we thought we were and we couldn't get equipment running as quickly as we wanted to. That's why our bench goods inventory is lower than I'd like right now, and why we have disappointed some customers in terms of order lead times. Which is getting fixed or has been fixed, but I think if we, obviously, ran higher than 83% during the quarter, which was our goal, why our margins would have been a little bit better.

But you're running basically flat-out right at this point point?

Correct. Yes.

So you've staffed up to the level where, I guess, as high as you can staff up?

For right now. And a lot of it's on overtime, which you can't do long term. So throughout the year we're going to hire more people and as I said, we've got two more lines under construction. So both plants, over the ensuing months, I would envision we'll hire more direct labor for going into next year.

How are the costs on the wood chips?

They are pretty stable.

Stable.

Which is okay.

Right. Okay. Thanks very much.

You're welcome.

Next question comes from Travis Meyer with Falcon Fund.

Hi. How many stores for Home Depot did you say you stocked in the quarter?

I said over 100, I can't give you the exact number. It is probably closer to 115, 120, but it's over 100.

Okay. Could you tell me how much of the revenue in the quarter was related to the stocking in June?

Two, three percent, tops.

Okay. Gotcha. And have any of the independent distributors, I mean, are they all willing to carry inventory for resale through Home Depot?

Well, they all had an opportunity and Home Depot chose, based on association or whatever, they chose a particular distributor in a particular area to supply product. And yeah, I think everybody was willing and we're all set in that regard, in terms of distribution.

Excellent. And I guess the last question, I hadn't heard much about this before, but at some point last quarter, something came out on a class-action lawsuit. Is there anything you can you give an update on that, or what's the story there?

Well, I can tell you where we are, maybe a little bit about what it is and isn't. What the court did was to certify the class. What they didn't do was make any kind of decision on the merits of the case, and I think people get confused with that. And they didn't hold our product to be defective or anything else.

Basically what they've done -- and we think in error -- is allowed a small group -- as far as I know it's four individuals -- to be represented by one counsel and bring their claims together, rather than bringing them individually. They haven't presented any evidence and the court hasn't considered any evidence, and there's no evidence with regard to our product being defective that's been presented.

The claim is around the warranty; isn't that right?

There's actually three claims, and I'm not really competent to get into a discussion with you here about that. But yes, one of them is with regards to the warranty.

Okay. Well thank you very much.

And I mean to, that end, we've had product in an accelerated weathering chamber for the last ten years, and you can take that experience and multiply it by four or six times depending on which scientist you talk to, and we've seen the degradation or any kind of wear. But we feel fairly confident that our product's going to weather well over the years in the environment. Plus there's products in the environment that we've made, or the predecessor company has made since '88, actually.

Okay. Thank you very much.

You're welcome.

Next question comes from J.D. Padget with Founders Asset Management.

Yeah Hi, guys. Nice quarter. Are you there?

Yes. I'm sorry.

I thought the line went dead. A couple of questions. One, just trying to understand the number of lines that you're-- it sounds like you put one in place in Q3? Is that right?

We put one into service in Q2. We are putting another one into service in Q3 and Bob mentioned we're constructing two by the end of 2004. That does not include Mississippi.

Okay. So maybe we would open up another two in the fourth quarter?

Well, if we need to, or the first quarter next year.

We will build them and wait to make a decision on whether we put them into service.

Okay. Great. And then have you guys quantified the railing product, how much of a percent of revenue that is?

In the second quarter, railing was a little over 10%.

Which is probably four, five points higher than historically.

Normally its been running 6 to 7. So it's the new system, has been received very well.

And you expect that to continue to grow within the revenue mix?

Yes, sir.

Okay. And the price increase on Origins, what prompted that?

It's something we announced back in December, and it really -- if people bought within the early buy period, they are not subject to that until May the 1st in this case, whereas if somebody didn't, they would be subject to it right away, but --

Right.

-- most folks buy within -- they place their orders in the early buy and then it really doesn't come into effect then until May 1st and that's where we see our unit realization take a lift.

Which has been a fairly standard practice for us over the years in terms of announcing a price increase before the year, having the early buy, and then having that increase take effect.

I guess I haven't been able to totally pin down the strategy there, but I thought you first announced you were going to do a price increase and then kind of backed off a bit from that. And now it sounds like its been implemented.

Well, we didn't increase prices anywhere near what I think people anticipated. That was the only increase we've had across all the lines. for this year.

Okay. So that --

We may have communicated it in a confused fashion, but that's really the only increase we've had, J.D..

Okay. And then the thought is, SG&A is going to be somewhat north of 24% of revenue this year?

Yes. Not a lot, but --

Okay. So it looks probably something like $16 million in change in the third quarter and $10, $11 million in the third quarter kind of thing?

Right.

We're going to push for the year $62 million total. So however the math works.

I was just trying to get some sense for shape of that over the next couple quarters.

Paul is shaking his head yes.

Yeah, right. You were saying 16 and 10, you had it?

Yeah. 16, 17, 10, 11 in the two quarters.

That's reasonable.

Okay. So that's kind of the shape of it?

Yes, sir.

It sounds like to the extent you're front-end loading some of that in this year for some of your marketing campaigns and R&D. Can we see some leverage on SG&A in '05, do you think?

I hope not. I think we're a long way from done in both of those areas. And I think, really, some of what we're doing is doing some things that maybe in the past that we'd have liked to have done and we haven't, and some of it is things we need to do consistently just to improve and grow our product line over time. So I would not forecast that our SG&A costs are going to go down as percent of revenue dramatically next year.

'06 more of the leverage year in your view?

Yeah, we get out in '06, '07, because I've said over and over I want to spend more on R&D, and even with what we're spending this year is probably only 2% of revenue and I'd like to be spending somewhere between 3 and 5.

Okay. Do you think there is enough new product opportunities to invest that?

Yeah. It might not all be in exactly what we're doing today. But I do, yes. And in October we'll talk a little bit more about what we're doing and where we think we're going.

Okay. The final question just, kind of, around gross margins. It looks like to get to the target for the year, you kind of need to be somewhere in the mid-40% in the second half. Is that a rate we should assume for '05? In a mid-40s% gross margin?

I think that's jumping the gun. Your assessment between now and the end of the year is correct, but a lot of things go into the gross margin. I think 45 -- my hope is to get back north of 45 over time, but I'm not sure we will roll in next year. So I'm not going to commit to that right now.

The only thing that potentially holds that back is, what? Just the investment in the new lines and Mississippi ramping and those kinds of things?

Yeah. It's raw material costs, how much equipment we put on, how much running, how often it's running --

The sales programs we put in place next year.

I thought we talked to some extent today about holding raw materials kind of flattish now with your new sourcing strategies and pricing as we just talked about should be helpful next year.

Yeah, we did, and I'm not waffling on that, but you're talking out 18 months, too, and I was talking over the next six. We'll have more to say in October.

Okay. Could you characterize just the linearity in the quarter? Did you get a nice bump in activity in the last part of the quarter?

It didn't come at the end. We had a good April and we had a good May; there's always a dip in May. And then we had good even order pattern all through June and had a great June and that's kind of continued.

So it was probably less erratic than its been in the last couple of years. It's pretty even and similar to what we expected, a little bit better than what we've expected, but in terms of proportionality, it was very similar to what we expected.

Well, keep up the good work then. Thank you.

Our next question comes from Keith Hughes, with Robinson Humphrey.

It's been answered, thank you.

Our next response comes from Mike Carlotti with Palmera Capital.

Yes. Hi, good morning. Congratulations. Great quarter. Two quick questions. One, tax rate assumptions for the second half of the year. Is it 27% or is it going to be a little lower than that?

I'm sticking to 37.

I'm sorry. Thirty-seven?

Yeah.

Okay. Thirty-seven percent. And then on the price differential between Origins [inaudible] and, obviously, that shrunk a little bit, the margins on those two products, I guess, were running about the same prior to the price increase.

So that would imply you're probably getting better margins on the Origins side of the business. Do you think the price increase of the Origins will have any impact on how Accent sells, now that the differential's a little bit lower?

I don't think so. I'm not -- I think demand, ultimately, shakes us all out. And I think the Accents will -- I mean, our [inaudible] would say we need to get to a different split; higher Accents and lower Origins, I think that will happen.

Okay. So that would imply that --

If your question was, are people going to buy more Accents now because the price spread is closer, I don't think that's the reason they will buy it. I think the demand will determine what they buy.

Okay. Okay. Thank you.

You're welcome.

Our next question comes from Brian Jacobs with Fort Pitt Capital.

Hi, guys. Nice quarter. Just if you could kind of fill in with some color on the supply dynamics to Home Depot as a percentage of your shipments in the third and fourth quarter going forward, given that just a hundred stores were stocked in the second quarter.

And kind of, if you could walk through on how we -- how you avoid kind of missing the season with Home Depot, as we progress into the third and fourth and fourth quarter of next year.

In terms of percentage of what it's going to be of our revenue, I think we've said all along -- and someone's got to, as you alluded to, we got off to a slow start this year -- I'm not sure how big it's going to be this year. We're not counting on it being much more than it's been so far, so it's going to be a couple, two, three percent of our revenue, maybe four. Any higher than that then that's all upside.

I think in the fourth quarter, it probably goes away for the most part; I mean, in the warmer climes that may not be the case. But I think the fourth quarter is going to be our business overall, which is dramatically seasonal.

Going forward into next year, to your point, I think we're kind of feeling our way and we want to be a good supplier, so we're not making promises that we don't think we can meet, but I think we'll be more organized and more on-target in terms of the timing. If it's been good for both parties, I think we'll grow those hundred stores, some much higher number, and a number that we're going to be able to accommodate, assuming they want us to do that.

So I think your point, we'll be in stock in more stores sooner in the year and I guess that's late March, early April, looking at an average across the country.

Maybe just a general guesstimate, if you could provide, what kind of level do you anticipate at this time, 2005? You know, how far would you have penetrated the Home Depot retailer base?

You know, I guess I consider "success" high single digits, low double digits, as a percent of our sales, for all of next year. When you're filling a chain it's a little unfair and hard to actually gauge, until you have some history, how much goes into inventory and sits, and how much goes into inventory and turns.

And what you get back at this stage -- and I'll tell you, a year from now the number will be a little bit bigger and the absolute percentage may not be a whole lot bigger in terms of our entire sales. And we'll monitor month to month, and we really don't have a lot of data, other than qualitative kind of information.

And the qualitative information we have, I'm very pleasantly surprised at how fast, in some areas, the product's turning. So I think -- and anything we build or your build, in terms of a model, I wouldn't get too carried away and have it some large percentage over sales.

Okay. Fair enough. What -- I guess, what tools do you guys have at your disposal to monitor sell-through at the Home Depot retailers?

Well we know what we sell into their distribution center, and we are getting our reported volumes back from our wholesalers, in terms of what they sold, in terms of special order.

And so we can monitor it, and as I said, we just got started really in -- the special order, kind of, has been going on for the year, especially in a couple of areas of the country where we had it before. But really, we didn't go into distribution in the Home Depot, in their [DC's] until June.

What about in June? Was it late June?

Yeah. It was late in June because there was -- a circular came out and it was before the last week of June but it wasn't -- it was mid to, I don't know, second, third week.

Okay.

And some stores, I'm sure the product didn't get right there and get on the shelf yet and in spite of all the that, we're happy with what's going on.

Okay. Thank you.

You're welcome.

Our next question comes from [Reinhard Horn with Polaris Capital.].

Hi.

Good morning.

Just one -- I had a couple of questions but the first one, actually, is better to follow up on the last point.

On the Home Depot sell through, I would expect that their point-of-sale systems are reasonably sophisticated, and that they should have very accurate -- almost daily -- sales data on what's selling through. Is that something -- information that you would get?

We would get information from them, absolutely. Whether we're going to get it daily --

I think there was an article in the paper that actually spoke to some of that the other day, and I'm sure it's very sophisticated but I don't think they get daily sales; maybe they do. We're not getting daily sales, but our hope is to get, certainly, monthly data, and maybe weekly data from them.

Okay.

But I mean, I think that's out in time, too.

So you haven't seen enough of that yet to understand how the sell-through or the re-order rates are happening at the individual stores?

At the stocking stores, yes.

Okay. And then, similarly, have you talked about other big box retailers and whether you've made any success in those, like Lowe's and other kinds of stores?

No. We're pretty much sticking to our knitting here and trying to make our entry into Home Depot and our partnership there a success.

Okay. And then with respect to the other distributors that you sell through that normally service the trade, to what degree do you have any good point-of-sale data from them that helps you on the inventory?

I know you've had very volatile inventory situations in the past and I'm just wondering if that's -- if you've been able to improve the data that you're getting from them to better understand the final sell through?

We get inventory at the wholesale level, monthly. And, in fact, it is up a little bit year-over-year, which you'd expect because we're selling more. So we look at that. And then we get some qualitative data at the retail level, which is not something that you want to hang your hat on.

I mean, I think on a gross basis, it points one way or another, are things going well or poorly. And that data points to things are going well. But that is very qualitative, versus the data we get at our wholesale locations, which is what their inventory and sales are.

But as far as --

We have a better view, but we are a long way from seeing the transaction that happens at retail where it goes into use.

Or where a contractor goes in and takes a truckload.

That's what I mean. Correct.

All right. On the poly costs, again, how are they related to oil?

Pretty much for the vast majority of what we consume, they're not. Now, there is a -- it's probably over the last couple of years, there's a growing, off-shore market for waste polyethylene film. And so periodically, you see third, fourth, fifth world -- however, you want to describe them -- countries show up in markets around the world and they'll garner film for periods of time and then they'll go away.

And they are taking it back to their countries and they're cleaning it with, I guess, thousands of hands and some sort of crude process. And then they're putting it in a pellet form. And so I could argue, I guess, if crude or natural gas prices go up or there's a shortage of ethylene or polyethylene, they may do more of that or less but they're really not tied together.

Because what we're buying is -- in this country especially -- is just thrown away. You know, PET bottle, or maybe a rigid container, a detergent bottle, may be recycled in this country but your cleaner's suit bag or the grocery sack or the stretcher [inaudible] used to unitize a pallet in a warehouse, is not in this country; it's just thrown away and discarded.

So as I've said many times, our task is to find more avenues to be able to collect that or encourage people to collect it. And that's really our task, to build an infrastructure of collection of that film. Does that help?

And that's -- so that's not really influenced by -- it's really your cost of building the infrastructure or your direct cost of going to get that material. So you're probably more affected by how much it costs to fill up the tank for the truck to go get that rather than what the actual cost of --

That's for sure. And the cost of fuel affects both the cost of the raw material and finished goods, more so finished goods going outbound.

Uh-huh. Okay.

I mean, we're not paying it, but somebody's paying that and so at the end of the day the consumer pays that.

Right. And then competition, I know I thought I saw warehousers coming out with a product. And maybe if you could talk a little bit about the trends and pressure-treated, and whether your success is related somehow to a greater share of the decking market than has been in the past .

I think warehouse distributes products so I'm not sure what you're speaking to there, in terms of them having a product. They've distributed a product for several years.

So it's an existing product that's been around?

Yeah. They supply a product out in the market, which they buy. I'm not aware of them manufacturing a product.

I guess I was just looking -- I was noticing that they happen to be doing a little bit more advertising and I didn't know where the part product was originating from.

Okay. In terms of treated lumber in the market, I think we are a compliment, in a lot of ways, to lumber because we are the surface decking and the handrail system. And while our goal is to convert that part of the deck into Trex, or see it converted and be the leader in that, I think that's an ongoing process.

And I think our growth and the market's growth are more at parity this year than they were last year. And we don't -- clearly, don't control the rate at which the conversion takes place and how far it goes, but I still think we're only penetrated in the mid teens to maybe upper teens in terms of the conversion process.

Mm-hmm. Well, that takes care of my questions. Thanks very much.

Thank you.

You're welcome.

Gentlemen, there are no further questions at this time. Do you have any further comments?

Great. Just a few. I would just like to reiterate that we're looking forward to a strong second half and we're putting things in place during the remainder of the year to build on the momentum that we're generating today.

The programs, the products, the initiatives that we are currently working on will certainly ensure a robust 2005 performance, and we look forward to speaking again in October with everyone. Thank you for your participation.

Ladies and gentlemen, that concludes your conference call for today. We thank you for your participation. You may now disconnect.