Trex Company Inc (TREX) 2004 Q4 法說會逐字稿

Welcome to the Trex Company fourth quarter conference call. At this time, all participants are in a listen only mode. Following managements prepared remarks we'll hold a Q&A session. To ask a question please press star, followed by 1 on your touch-tone phone. If anyone has difficulty hearing the conference please press star, 0 for operator assistance. As a reminder this conference is being recorded today, February 18, 2005. I would now like to turn the conference over to Ms. 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 fourth quarter this release is available on the Company's website as well as on various financial websites. A replay of this conference call will be available through February 25, 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 conditions constitute forward-looking statements, 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 market in which the Company operates.

The Company's report on 10-K filed with the SEC in March 2004 and its subsequent filings on Form 10-Q discuss 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. Go ahead, please, Bob.

Thank you, Harriet and good morning. Most of you know we finished the year with results slightly better than forecasted several months ago. Revenue for the year was $253 million, which is an increase of 33 percent over 2003, and our net income was $27 million, or $1.83 per share, it was an increase of 28 percent versus the prior year's performance. We are quite satisfied with our performance in 2004 especially in light of the significant increase in cost of our polyethylene feed stock stream. We introduced our Accents board which can be used with either the texture side or the smooth side up and have established a nice foothold in the market. Our designer handrail was well accepted and will over time become a significant part of our lineup.

Our quality initiatives to enhance the appearance of our entire product line have proved successful and we will continue to work in this dimension, our goal being to provide the consumer with both new products as well as always improving existing products. This work, while having some unfavorable effect on margins in the short term, will ultimately help us grow at a high rate for many years to come. As I stated a minute ago, 2004 was a very good year for our Company, and many of our efforts during the year will help us to deliver strong results in 2005. While raw material costs are expected to continue at higher levels, we have put some pricing in place to offset the effect on margins. Our product lineup is stronger than ever and our manufacturing capability will be significantly larger with the start-up of our new facility in Olive Branch, Mississippi. In a few minutes I would like to talk in more detail about our thoughts going forward but at this time I would like to turn the call over to Paul Fletcher, our Chief Financial Officer.

Thanks, 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 three pages of the release headed condensed consolidated statement of operations, condensed consolidated balance sheet, and condensed consolidated statement of cash flow. Net sales in the fourth quarter ended December 31, 2004, were $29.6 million, compared to 2003's fourth quarter sales of $21.9 million. A 35 percent increase. We've successfully launched the new Brasilia deck line during the fourth quarter and we fully expect demand for this product to grow quickly as it sells into the channel and is installed into the field. Net sales for fiscal 2004 increased 33 percent to $253.6 million, from fiscal 2003's net sales of 191 million.

One year after its introduction our Accent product line has grown to over 30 percent of our current product mix. Net loss for the fourth quarter 2004 narrowed to $351,000, or $0.02 a share, from a net loss of $763,000, or $0.05 a share, in the fourth quarter of 2003. Net income for the fiscal year 2004 increased 29 percent to 27.2 million, or $1.83 a share from 21 million, or $1.43 a share in 2003. Gross profit of $10.7 million in the fourth quarter represents 36.1 percent of sales, which compares favorably to the 35 percent gross margin in the fourth quarter of 2003. The average price for purchased poly in the fourth quarter of 2004 was 35 percent higher than the fourth quarter of 2003. However, this was offset by higher unit pricing, product mix, and an increase in manufacturing utilization.

In the fourth quarter of 2004, SG&A expenses increased $2.8 million to $10.8 million, and represented 36 percent of net sales. The increase in SG&A during the quarter was attributed to branding activities and higher headcount related expenses including salaries and benefits. SG&A for the year amounted to $56.4 million and represented 22 percent of net sales compared to $46.8 million and 25 percent of sales in 2003. In 2004 branding expenses were $17.3 million compared to $15 million in fiscal 2003. As of December 31, 2004, total cash amounted to $44.9 million, compared to $61.9 million at September 30, 2004. Accounts receivables increased during the quarter by 9.2 million to $22 million as extended credit terms were made available. Total inventories increased during the quarter by 22.4 million to 44.4 million as we prepare for our peak demand in early 2005.

As of December 31, 2004, total debt amounted to $80.2 million, an increase of $23.6 million from the December 31, -- from December 31, 2003. The Company successfully placed $25 million of variable rate demand bonds in December of 2004 to fund the construction and acquisition of certain equipment for our third plant in Olive Branch, Mississippi. These bonds are due in 2029 and are backed by a direct-pay letter of credit. In January of 2005 the floating interest rate exposure on $20 million of the bonds was effectively swapped to an average fixed rate of 3.04 percent over six years. Leverage remains very conservative with total net debt to total capital of 18 percent at year end. Cash flow from operations in fiscal 2004 amounted to $45.2 million, up from $5.6 million in fiscal 2003.

The improvement in operating cash flow was primarily driven by the changes in inventories during 2004 compared to 2003. 2004 inventories declined by $1.6 million while in 2003 inventory levels increased by over $23 million during the year. Capital expenditures for 2004 amounted to $34.1 million, as compared to 17.1 million in 2003. Approximately $15 million in 2004 was spent on land, construction costs, and equipment purchases related to the Olive Branch manufacturing site. Our current revenue generating capacity between our Virginia and Nevada plants exceeds $300 million, by the end of 2005 we expect to be near $400 million of installed revenue capacity. We expect capital expenditures in 2005 to be approximately $40 million and be concentrated around the buildout in equipment needs in Olive Branch. Bob.

Thanks, Paul. Paul mentioned in his remarks the great gains we have made with our Accents line, as well as the introduction of our new Brasilia product line composed of burnished amber and cayenne. Accents with its muted appearance of wood grain in its first year in the market has become more than 30 percent of sales. That's quite a success. I think even though we had some challenges getting Accents into distribution, once the consumer got the choice, as we expected, sales took off. Brasilia was introduced to the distribution channel during the fourth quarter and was warmly received.

Our research tells us that Brasilia will be a winner and nicely fills out our deck board lineup. Conceived using a patent-pending process Brasilia brings the distinctive looks of tropical hardwoods without the high installation costs and ongoing maintenance requirements associated with rain forest timbers. Its subtle shadings and natural color variations made it a huge hit in January at the International Builders Show in Orlando, Florida. Our Origins lines is available at a modest price for those who want all the advantages of a wood-plastic composite, Accents priced slightly higher offering the appeal of wood grain, and Brasilia in the premium position, our lineup offers a breadth of choice for the consumer well beyond any competitor.

We also introduced a new Artisan rail series in white at the IBS and will begin shipping in March of this year this railing line is particularly important for two reasons. First, its styling and warm white finish make it equally appropriate for a Trex or non-Trex deck or porch, expanding our railing potential greatly. And second, it is manufactured with a technology that is entirely new to the Trex Company. This fibrex technology licensed from Anderson Corporation we believe may ultimately spawn other new products. We are very excited by the initial market reaction to our product news for 2005. We have received strong favorable comments from our channel partners, the media, and from the public. Builder magazine based on a recent poll ranked Trex products number one in preference, in usage and also in quality against all competitors.

2005 plans for advertising and promotion were firmed up in the fourth quarter. We completed production of a new TV commercial which will begin airing in March. We have created some stunning new print ads that will be appearing soon in consumer publications. Our media plan for 2005 will be similar to 2004 in that we will have a major presence in television and print in the prime deck planning season. The entire campaign supports our new consumer theme, "create your space", using dramatic personalized decks to inspire customers. The photograph from one of the -- from one of these ads, by the way is now on our home page. So I would encourage you to take a look at that if you've not visited our website, Trex.com, lately.

Beyond push advertising we are expanding our poll programs. Through 2004 we increased our Trex pro contractor base by approximately 10 percent while removing some of the contractors that did not measure up to our standards. We also established a Trex pro gold level for those contractors of substantial size that exhibit a true dedication to our line. We will continue these efforts in 2005 as this program has proven to be very valuable. Our partnership with DEWALT and Roush racing for the NASCAR Nextel Cup series was finalized late in 2004 and it officially kicks off with the large deck display and training sessions at the Daytona 500 this weekend. We at Trex and DEWALT are very excited about the numerous opportunities for our firms to share ideas and success in this relationship.

Lastly, our 2005 program for Trex distributors and dealers is also being well received. Historically our programs have focused on early buy incentives. This year we are more focused on a full-year partnership and results. As the building materials distribution industry, like many others, focuses on increasingly -- on turn rates and lower inventory levels our programs are evolving to meet those needs. As the 2005 seasons begins to get underway we will be in great position to capitalize on opportunities and build our business. With an unmatched product lineup, advertising, and promotion set, and distribution strength, all of the pieces are in place for a great year.

As Paul outlined in his remarks, while our gross profit margin in the fourth quarter was favorable to the same period in 2003, we continued to pay very high prices for polyethylene. This we have seen through January and have forecasted these higher costs in our plans for the year. We continue to work on productivity gains and other means to improve margins but believe substantial gains will only be realized when pricing for poly returns to more historical levels. Our expectations for gross profit margin during the first quarter are similar to our fourth quarter experience. Our goal last fall was to only have a modest price increase for Trex products in 2005, and thus we announced a 3 percent increase for all orders outside our early buy program effective last December. Realizing in the last month that our costs will not be reduced dramatically in the short term we have also announced an additional increase of 5 percent for a total of 8 percent effective April 1. These increases should bring our gross profit margin to more historical levels during the second quarter and we believe that by year end the average gross profit margin for the year will be slightly over 40 percent.

Several other things in poly pricing will be a drag on margins. During the first few weeks of this year the torrential rains and snow on the West Coast affected our Fernley's plant's performance. It was difficult at times to get raw materials in and finished goods out and therefore cost of goods suffered as utilization was affected and revenue was off. Our expectation is that we will overcome these impediments to cost and sales over the course of the year but not likely in the first quarter. Circling back to our pricing discussion I'd like to share our thoughts with you. Believing that we have an advantage with regard to cost of goods versus competition, our feeling was to introduce a more modest increase in gain share and or speed to rate of conversion from wood. We felt that a significant price increase might slow conversion or impact the size of projects negatively. Consequently we opted for the 3 percent increase. Since then, as I have mentioned, we felt it prudent to move up another 5 percent.

We still believe we have significant gains in the market since our competitors have reportedly increased prices far more than we have, many up more than 20 percent. These actions, along with a terrific product lineup and the strong communications program, cause us to remain very bullish for 2005. Our revenue forecast for 2005 is between 300 million and $310 million, falling in line with our previous forecast of last October. Gross profit margin we've already spoken about at slightly more than 40 percent, our expectation for SG&A expenses is between 21 and 23 percent of sales for the year, and as you know this fluctuates by quarter affected mostly by our marketing spending. Income for the year we forecast to range between 33 and $34 million, or on an earnings per share basis, $2.16 to $2.23. This guidance is also consistent with our guidance several months ago.

Our distribution partners supported our efforts quite well during 2004. Most of our revenue was generated through the two-step distribution channel that many building materials use. We also expanded distribution with our partnership with the Home Depot. This allowed us for the most part to introduce our products to a new customer and gain additional awareness for the Trex brand. Both parties felt good about the year and we can point to some success stories regionally both in-store and on a special order basis. Our plans going forward call for expansion to additional markets, rolling out in store inventory to between 300 and 400 stores. We will, of course, continue to supply special orders throughout the country.

During 2004 we also added some one-step distribution and will expand that customer base this year. Going forward it is important for our growth to continue to expand our distribution through existing and new channels, which brings additional classes of trade and ultimately new end users. To support our growth in May we bought 100 -- May of last year that is we bought 100 acres of land in northwest Mississippi. In late summer/early fall we began Phase I of the development of this property with the construction of several buildings totaling 170,000 square feet. Currently we are in the process of installing the first three lines and should be operational mid second quarter of this year. These lines will give us an additional $50 million in revenue generation capacity. As demand dictates we will construct additional lines.

Some of the long lead time equipment for two more lines has been ordered giving us the ability to exit the year with a total of five lines operational at our Olive Branch facility. As Paul mentioned CapEx spending for the year will range between 40 and $45 million. I think most of will you agree that we are poised to have another strong growth year in 2005 with a great product lineup, a good media plan, additional capacity, and expanded distribution. Now we would like to entertain your questions. If you would open the call up to questions, please.

Ladies and gentlemen, if you wish to register for a question for today's question-and-answer session you will need to press star then the number 1 on your telephone keypad. You will hear a prompt to acknowledge your request. If your question has been answered and you with withdraw your polling request you may do so by pressing star then the number 2. If you are are using a speakerphone please pick up your handset before entering your request. One moment, please, for the first question. Your first question is from Joel Havard of BB&T Capital Markets.

Thank you. Good morning, guys.

Hi, Joel.

Hi, Joel.

Sorry, we're having some technical difficulties with our new phone system here and missed the first I think probably four or five minutes of prepared commentary. If you don't mind what is probably a review, could you go back over the up side in revenues to start with? 35 percent. We were looking for more about 5. Wonder if you can characterize how much of that gain was into the rollout of the depot distribution versus just better than expected sales in your existing channels.

Joel, are you speaking of the fourth quarter volume?

Yes, sir.

All right. I think it's a combination of things. Home Depot really didn't play into it, but we did bring out Brasilia, and as we do each year, we have an opportunity sometimes for customers to buy at pre-2005 pricing, for example, and some customers choose to do that. Those are probably to two highlights of the quarter.

In Q3, Bob, you all talked about Depot rolling out, capturing some $3.5 million of sales. Can you characterize I know it's still a small part of the Company, but just to get an idea of what that contribution was in Q4.

Joel, for the year, it's probably better to say we were around 3.5 to 4 percent in terms of total revenue from Home Depot, special order, and stocking.

I don't -- most of the fourth quarter, Joel, my suspicion, is special order volume. And we in all likelihood won't see very much probably in the first quarter, maybe late March.

Okay. So Paul, make sure I understood that right, you're saying that for the year --.

The year, as a percent of revenue, around 3.5 percent to 4 percent of revenue was by way of Home Depot special order and stocking.

Oh, good. Okay. And that was really just Q3 and Q4?

Yes, that was starting from July.

Wonderful. Second, Paul, we joined the conversation right as you were finishing up your discussion of the debt facility for Mississippi. I caught that -- we knew that that was a $25 million piece. Thanks for the time line on it.

Right.

Glad to know you've fixed 20 million of it for six years. The float, what I got out of the 8-K was prime plus 200. Is that right, or was that temporary?

No, that's -- I don't know where you're getting that number. This is a tax-exempt bond, so it floats at a tax-exempt rate which represents about 70 percent of LIBOR.

Of a one-year LIBOR?

Of a 30-day LIBOR.

Okay.

And we fixed 20 million of it on average for six-year duration for 3.04 percent, and 5 million of it is floating, based on the index, the tax-exempt index, as it trades in the market, every seven days it reprices.

Okay. That helps. And is the intention to try and fix what's left floating or are you comfortable with that structure?

We're comfortable today.

That helps. Thank you. And on the gross margin side, well, I guess let's think just cost of goods. We understand our poly index internally which touches more of a virgin resin market is still up substantially looks like it's easing a bit. Did you all see any, or could you characterize the change in the pricing that you're getting in the market today versus maybe the contribution you got from a higher throughput level, if there was one, at either Spain or Virginia reclamation lines?

You've got to help me with that question, Joel. I'm not sure.

It's always a mouthful. I think faster than I can talk, guys. On cost of goods, as we book at what we think are the proportional requirements to cost of goods, you know, poly representing X, looks like you might have gotten just a little relief in the quarter. Now, I understand there could be some seasonality there. Pricing still looks pretty tough in the market at the proxy we can see, which isn't the same as the stuff you all buy, so I'm wondering, did you actually see lower pricing, or did you get better throughput, a better contribution from either Spain or Virginia? Is my model just wrong, and, in fact, you paid more sequentially?

Well, we paid more, Joel, talking about year-over-year, we paid more in poly, but it was completely offset by the pricing and some utilization in the plan. The pricing, as you know, we raised prices last year on Origins and the railing product lines year-over-year, Origins was up 5 percent and railing was up 9 percent, so that contributed to offsetting the poly increase. That's the --.

We watch it, you know, I watch it weekly, others watch it more frequently than that, but it dipped a little bit in January, and then it's gone back up, so I don't -- you know, we're kind of where we're going to be until something drives it down in the market, and some of it actually, you know, does follow oil, gas, and ethylene and then down into the virgin polyethylene.

Joel, if you recall, a year ago we pulled back on production to balance inventory levels as we exited the year a year ago. So utilization a year ago was around 80 percent. Utilization in the current quarter, the December quarter, was closer to 90. So there was a pickup in terms of year-over-year absorption.

Yes, that helps. Okay. And could you talk a little bit -- I know historically you don't think you've gotten quite what you're capable of getting out of either Spain or the Virginia reclamation line. Are you making progress there? Is that still slow? Are you getting closer to nameplate?

I think in Spain they're doing a terrific job, and I think nameplate was probably overstated when we, in theory, put this thing together.

Yes.

But it's still a great project. In the U.S. we're doing a better job, and we're not quite where we need to be. One of the things the advantages Spain has, it has very consistent feed streams, two feed streams, and they're very consistent. The amount of contaminants goes up and down, but in terms of the type of polyethylene it's similar. In the U.S. we have all this disparate kinds of film, and that -- it has been a struggle to try to run the plant at times with so many different types of film going through it. So we're looking for some more consistent sources of supply, and then maybe run it, even though it's a continuous process, batch the raw materials through it, so you have a consistent type of raw material going through it at any point in time.

Do you all have kind of a back of the envelope figure for what your quote blended poly cost was in Q4 versus a year ago?

It was $0.23 in the Q4 2004, $0.17 a year ago.

Great. Don't want to hog it, guys. I'll get back in line. Thanks and good luck.

Okay.

Your next question is from Keith Hughes of Robinson Humphrey.

Just wanted to ask about the pricing. From what you had said, did you go up 3 percent on January 1, and another 5 percent on top of in that April? Am I thinking about that right, or --.

You know, in effect, well, we made two announcements, but since people bought in the early buy, in effect, the 3 percent price increase, really never took effect, Keith. So what you'll see is 8 percent in April.

8 percent April 1, Keith.

April, 1. Okay. And is that across the board, Origins as well as Accents?

Yes.

Did you ship in the fourth quarter any meaningful amount of the Brasilia line?

Yes, it was over -- it was over 10 percent of our shipments.

Oh, Brasilia was 10 percent in the fourth quarter?

10 percent.

Really. Interesting. And finally, Paul, you said earlier going up from 300 million capacity at year end to 400 million by the end of '05, is only 50 of that coming out of Mississippi?

No, no. Let me -- we -- the first three lines will give us about 50 million. We bought some long lead time equipment for two more lines which we will then be able to install easily before the end of the year, and those five lines would take us from 300 to close to 400.

Okay.

You know, if we don't install those lines until next year, then we'll be at 350.

Okay.

But the increase is all in Olive Branch.

I understand now. Final question. Paul, I believe you said 17 million of marketing spending in '04, is that correct?

Right.

What do you expect to spend in '05?

21 to 22 million in branding.

And that includes everything from the TV ads to the NASCAR sponsorship?

Correct, it's all in there.

Thank you.

Your next question is from Tyrone Cana of Wellington Management.

Good morning everyone. Paul, I was wondering if you can just run us through kind of the earnings walk for the year, if there's any way of doing that. I know you indicated gross margins in Q1 are going to be down year on year. Just on the operating margins, you know, you're seeing gross margins kind of flattish for the full year versus last year. Are the operating margins essentially the same, then? Is that how you want to us read this?

Right, I believe you're going to see -- Bob indicated you're going to see the first quarter being similar to the fourth quarter, and then improving as the pricing takes hold in the second and third quarter, and I think you see it then again in the fourth quarter traditionally it would back up a little bit based on utilization impact in the fourth quarter. So I think on average you're going to see it in the low 40s, the gross margin.

Okay. And in terms of the earnings, for kind of March and June quarters, you know, is March going to be down, then, because gross margins are down year on year?

We're not giving you a specific guidance number to the first quarter. I think we're -- we're more comfortable with the full year guidance, Tyrone as opposed to trying to break this down for you.

Sounds like it's basically just more back end loaded, right?

No, it's more first half.

It's still first half, but a couple of things. I mentioned more and more people are wanting to take less and less -- or hold less and less inventory, so we're going to wind up, as we expand, holding, I guess as a percentage of what's out there, more inventory and we're going to spread the sales probably out further in the second and third quarter than historically has been the case. The other thing is the weather out west really hurt us in the first couple of weeks out in our plant at Tistarino. So shipments in and out were significantly deterred and we actually had equipment down because we couldn't get raw materials in. We're going to catch that up, but how quickly we do is kind of something that I'm not exactly sure of, so we've been a little hesitant to kind of describe the first quarter, but we feel very, very good about the year, and I would tell you I think there's a lot more upside than downside in the year.

So can I just follow up with one more question, Paul and Bob, I guess I look back at 2004 and I think in the early part of last year when you guys released earnings you said you're going to see top-line growth of I think 22 to 28 percent, and I think in my discussions with you all, you've always kind of indicated that this Company should grow between 20 and 25 percent, and now, you know, you're saying 18 to 22, and I'm just trying to get a handle on this. Is there a meaningful change here in terms of the longer term growth rate? What's in play here? It seems like you've -- 18 to 22 is still very healthy, don't get me wrong, but it is a change from the historic 20 to 25 you always talked about.

When we gave the numbers out a couple months ago, we said we're going to grow 20 to 25 percent on 240 to $245 million in revenue and on a $1.75 to $1.80 in terms of income earnings per share, and, you know, our targets today are the same absolute targets in that they represent -- actually, the revenue is a little bit higher on the high end, and we've kind of tightened the range in the earnings per share, and I think at this time we're just comfortable with those numbers, and as you said, 20 percent growth is fairly substantial.

Got it. Okay. Thank you all very much.

You're welcome.

Your next question is from Mike Pralotti with Palmera Capital.

Good morning. Couple of questions actually. Q4 CapEx. What was that number?

40 to $45 million this year. A lot of it will have to do whether we build this fourth and fifth line in Olive Branch.

The current year CapEx?

Yes, for fourth quarter.

I'm sorry.

18 million.

18 million. And some of that was planned expansion CapEx?

It was mostly Olive Branch.

Okay. Have you given CapEx guidance or estimates for '05 or not?

40 to 45 million.

40 to 45?

40 to 45 for the year.

Last year you extended the early buy buy in program through (INAUDIBLE). Is that the plan for this year as well?

Yes.

Okay. And then expectations for Home Depot in '05?

Will be -- it will be above 5 percent, probably 5 to 7 percent of revenue.

Okay.

Compared to 3 to 4 percent this past year.

Then on the accounts receivable being up this quarter for the extent of the turn, is this something that you expect to continue through '05? Should we be expecting elevated AR balances through '05, or is this just --.

No. Well, you'll see it during our early buy. We give the customer a choice of a discount or taking terms, so you'll see receivables as it relates to volume, and potentially dating be higher in the March quarter, then by the June time frame it will come down substantially in -- be down the rest of the year. Go back to the normal terms, which are our receivables turn about every 15 days normally. Thanks, guys.

You're welcome.

Your next question is from David Campbell of Thompson, Davis.

Thank you. Good morning. How much of in the mix do you expect Brasilia to be this year?

Paul's turning the pages. I think it's 15 percent.

Ye, it's going to be 10 percent to 15 percent.

Okay.

At a minimum, probably, David.

Okay. And I thought the Brasilia looked good when I saw it. Are there any competing products out there for that at this point?

I think there's one, but as Builder Magazine said in their survey, they pale in comparison to our products, but I do think there is one.

Question on the price increase. Why did you decide to implement it on April the 1st rather than immediately in the first quarter?

Well, historically we've -- anybody in the early buy, the price doesn't take effect until April 1. And so people have committed that they're going to buy so much at prior year price, and that's why it doesn't really take effect until April 1.

Okay. And how are you doing on improving the sources of supply for recycled polyethylene?

Well, we continue to grow them, and we have what we need to generate the product for sale. We haven't hit a gold mine anyplace that's going to lower it, but we continue to work at it, and we actually have a number of different alternatives or initiatives underway, more than last year at this time, and we'll keep working at it. I don't want to describe them because others might be able to tap into them, but we do have a constant ongoing effort and a number of initiatives that we were not focused on last year.

Let's see. Okay. I think that should do it for now. Thanks very much.

You're welcome.

Thanks, David.

Your next question is from Najandra Geanty of TIAA.

Hey, guys I'm probably the only debt holder in this call so I want to say nice year. Just wanted to ask you, 30,000 foot question on competitive environment. I know you said the Brasilia line just a second ago probably only had one competitor and Building Magazine has -- rates you guys the highest. What you see the growth in the overall residential decking market and then how positive the decking market stacks up against it?

Well, I think the growth of the market is low single digits. I think in terms of rate of conversion, we're -- after '04, and we don't have -- one of the things we do is collect everybody's numbers as best we can, and not everybody has spoken yet, so, in terms of public companies and things like that. But my expectation is that somewhere -- 16, 17, 18 percent converted, one of the things that concerns us a little bit, and I tried to articulate it, in my prepared remarks, is we're not sure exactly where the price -- the pricing of composites gets where the rate of conversion slows, and that's why we're trying to kind of hold the line even though raw material price increases were coming at us hot and heavy. And so I would not be surprised necessarily if the rate of conversion slowed a little bit this year, but I think at the end of the day the features that drive all the benefits the homeowner gets are significant enough that we'll continue to convert the market. That's about the best answer I can offer up.

Okay. You guys still estimate the year, you know, I don't know, or rate as a percent of the (INAUDIBLE) what market needs fill.

I'm sorry, we had a little trouble hearing you.

I'm sorry. Can you hear me now?

Yes.

I've read estimates that you guys tick up about 40 to 50 percent market share of the non-100 percent wood market. I was wondering if you still agree with that.

Well, our number actually last year was a little bit less than that. It was 35 to 40 percent. I'm more comfortable with our number. Our goal is to get it to where you ascribe it to be, but I think our feeling is somewhere between 35 and 40 percent.

Great. Thanks, guys.

You're welcome.

Your next question is from J. D. Padgett of Founders Asset Management.

Hi, guys. Couple quick ones for you. When when would we expect incremental depreciation from Olive Branch to start rolling through?

It would start in significant amounts in the midpoint of the second quarter, J. D., so you could probably see, you know, 150 to 200,000 per quarter incremental depreciation beginning in the second quarter. Probably looking at more like a 15 million, 15.5 million depreciation number full year.

So in total?

Yes.

Okay. That makes sense. Then it sounds like the new gross margin guidance or the first gross margin guidance here, slightly over 40 percent. Is that assuming poly stays in this $0.23 a pound range?

Yes.

What do you think is the most likely case in terms of all these sourcing strategies, you've talked about potentially being able to pull that down versus just continued inflationary pressures? Do you think those balance, or you hope that that's kind of a conservative gross margin target now?

I don't think we have anything that's going to drive it down going in the next six, seven months. Some of the things that we're developing actually unfortunately the raw material floats with -- not float, but is affected by virgin offs that kind of pricing. That's why we've been kind of conservative, I think, in giving our gross margin and guidance as we have. I don't think we're going to see a lot of change, at least in plastics, or wood, because our wood kind of is locked in to what it is, but any change over the course of the year, and certainly not for the first half of the year.

Okay. You're kind of looking at there's not really any sourcing strategies that are lowering the prices there but you don't expect a ton of additional inflationary pressure there either?

No. Correct.

That makes sense. I think that's all I had. Thank you, guys.

You're welcome.

Your next question is a follow-up from Joel Havard of BB&T Capital Markets.

Thank you. Just want to make sure I had the calendar straight here, guys. Last year you made it clear that you were taking the early buy program back to four months after being two or three years maybe at three months. Did I get that right?

Early buy is still four months, Joel.

We did that last year and we're going to do that this year.

Okay. But you're saying the price increases won't really be in effect until --.

If you order -- starting April 1, you begin to order it will be 8 percent higher than 2004 prices. Early buy shipments go four months, from January to the end of April.

Okay. All right. So orders placed on April 1, through --.

You order in December -- you order in the early buy, submit early, for the early buy period, and those shipments go out over the four-month period. You start ordering in April and you pay an 8 percent --.

Pay in the new price.

Right.

Okay. So I could order March 31, for delivery --.

Well, to get orders it's time of shipment, so if you -- you order in February and you take it in March, it's at the old old price. If you order in March and take it in April it's 8 percent higher.

Got it. That is in keeping with the way you did it in '04?

Yes.

Okay. Bob, wanted to come back to one more on you, too. Brasilia, I know you all introduced that at the sales meeting late last year. I didn't think you'd really be getting much volume out of it. How -- how broadly is it distributed, yet how much more rollout can we look for in the -- as we get the --.

If we can, if we have a new product historically what we've done is made it available in some limited basis in the fourth quarter, and that's what we did last year. Paul is, why don't you -- what are we going to do for the first?

Joel, the Brasilia product, we converted a lot of the manufacturing operations here in one of our facilities in Winchester to make Brasilia so I think we're very committed to it, and I hold to that 10 to 15 percent number for the year.

Yes. We have a ways to go.

Yes.

Okay. That helps. Thanks, guys.

Your next question is from Hank Wilson of Seidler.

Good morning.

Good morning.

My first question is actually kind of a follow-up to one of the questions that was asked earlier. You referred to a 35 to 40 percent. Was that Trex's share of what would have been the 100 percent wood market or is that composite?

No, no, that's composites. It's the 35 to 40 percent of the 18 percent converted.

Just wanted to make sure I had that right. Now, drilling in a little more on Brasilia, could you give us the relative price differential of Brasilia versus Accents and then perhaps versus Epay on a percentage basis?

It's about 15 percent higher than our pricing is, 15 percent higher than Accents, and, you know, depending on where you buy the Epay and what they're trying to do with it, it's probably similar in price.

Last question, could you characterize what you think inventories look like today in the channel relative to '03 and then looking back to '02 at this time of year?

Well, I don't have a report, but I would say they're probably pretty much similar or even at this time of this year versus last year, '02, they're probably up over '02. Because they were up '03 over '02, and so '04 -- I'd say right today we're probably about where we were a year ago.

Thank you very much.

Yes.

Your next question is a follow-up from Keith Hughes of Robinson Humphrey.

The Home Depot stores are not going to be carrying the product. Is there any kind of timetable to roll out more promotion kiosks, signage, things like that, surrounding that?

In the stores that don't have the product?

Where it's just special order.

Well, there should be signage now. If that's not the case, it's -- one of the two of us hadn't gotten it right, but there should be signage now, and we will spend money to update it if necessary.

Okay. Well, you had talked at one time about, you know, a kiosk and an end cap or something like that with product and flyers and things of that nature. That may be in some market. I still haven't seen it yet. What's the status of that if that is still going to happen?

Actually I think we're going to reset all the stores but the timing of that I'm not totally sure, Keith, but it's probably not until March, April kind of time frame.

Okay. But during '05 there will be a reset? Is that the plan?

Early '05.

Early '05. Okay. Thank you.

Your next question is a follow did you know from Tyrone Cana of Wellington Management.

Just a quick question on the revenue number. I know you talked about 20 percent, which is very respectable, but I'm just curious, you know, you also have been talking about significantly raising prices for a lot of your products and I'm wondering, at some point, you know, that's going to have an impact on demand, and I'm wondering how much of that is kind of factored in, because you're raising prices, this is not the first time that you've raised prices. At some point the consumer kind of pushes back. Know what I mean?

Yes. I think I tried to articulate that, your very point, in our remarks, and that's one of the reasons why we're trying to be a little more prudent this year with a 3 percent increase because the raw materials are going up. And so I -- I'm not sure where we are exactly with the consumer, but as you said at some point they may push back, but I believe that, you know, we'll gain share and or still continue to convert the market from wood to our product this year.

I was under the impression that it's an 8 percent increase that you talked about in April. Maybe I misunderstood that.

No, you're right, we said originally it was 3, then because we felt between the time that we announced that back in October, the middle of October, and today, that raw materials were going to stay where they were, and they had actually risen since we had made the original decision and we went back and added another 5 percent for a total of 8.

Got it. Okay. Thank you very much.

You're welcome.

Your next question is a follow did you know from J. D. Paget of Founders Asset Management.

Could you update us on the revenue contribution from the nondecking applications?

J. D., the railing constitutes about 10 percent, and accessories, which is the 1 by 12s and so on constitute about 5 percent, so decking would be 85 percent in total.

It seems like given some of the recent product introductions in railings and so forth, and the great opportunity you have there to follow on those kind of products with your decking board, shouldn't that be pretty robust grower for you in '05?

It should. I mean railing was up revenue wise over 50 percent in 2004. So it definitely is growing faster. It's coming off a smaller base, obviously.

Right. Okay. What about fencing? When will we start to see some contribution from that?

Well, we're going to have product in the market late spring, early summer, but it's going to be, at this point, in four test markets, and we have very modest -- I think we've got a terrific line and a terrific opportunity, but we're -- we haven't plugged in a lot of revenue for that this year. The channel is a little bit different, and it's going to take us a while, I think. But I think our product, people are going to be very pleasantly surprised when they see it.

That's more of an '06 kind of thing as you get it out there, get people familiar with it?

Yes.

Thank you.

You're welcome.

Your next question is a follow-up from Hank Wilson of Seidler.

Hi, guys. I just wanted to drill in a little bit on production. You mentioned that Brasilia, your expectations were that that would ultimately be 10 to 15 percent of sales. Does that equate to the percentage of production capacity that you have dedicated to that product at this point?

Well, it's a little more expensive, so, you know, it's not totally congruent in that sense, but we can make -- I've got to be careful. If we wanted to sell 100 percent Brasilia we probably would struggle a little bit with getting that out the door this year, but it's a different tool and a little different process but we can make it at almost equivalent rates as we do our other products.

When you're changing over, let's say changing from one product to another does, that require to you take the line down for a period of time? How long does it take in terms of reconfiguring a line to move from one product to another?

Well, we haven't made my goal, which was 16 seconds, like you do gas and tires in NASCAR, but we've come a long way. They can change a tool pretty quickly within minutes.

Okay.

But what you have is product to product or color to color you may have this period of time where you have an interface where a product is out of spec.

I see.

So, you know, we could lose 15, 20 minutes, or we could lose an hour kind of thing of production.

That's much smaller than I thought.

Our folks have gotten pretty good at it.

Then I don't know if you guys talked about this publicly but could you describe what your current configuration is in terms of the percentage of your production capacity that's dedicated to your various products?

We could make pretty much -- and this is a bit of an overstatement -- we can make pretty much everything on everything we run with exception the Artisan rail, that's different equipment and different process, so we have the capability of making -- let me say it another way. All the deck boards and things like that we can make on the bulk of our equipment.

Okay. So as it stands right now, just in rough percentages, what percentage of your production would you say right now is dedicated to Accents versus Origins?

Oh, it's probably 50, 60 percent at this point Accents, 10 percent Brasilia, and the rest Origins.

Great. Thank you.

Once again, ladies and gentlemen, as a reminder, to register for a question please press star then the number 1 on your telephone keypad. Your next question is from Mike Pralotti of Palmera Capitol.

Hi guys. One other question on the '05 guidance. What is tax rate assumption?

37.

Should that be fairly consistent throughout the four quarters or will it bounce around?

No, it will be consistent.

Thanks.

Okay. Well, we appreciate everybody participating in the call. We are very satisfied, as I said, again, with our performance last year, and we have a lot of things going in 2005, and I think we're going to have a really strong year in 2005. Thank you.

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