Trex Company Inc (TREX) 2005 Q2 法說會逐字稿

Welcome to the Trex Company second quarter conference call. [OPERATOR INSTRUCTIONS] I would now like to turn the conference over to Harriet Fried. Please go ahead ma’am.

Thank you everyone for joining us today. With us on the call are Bob Matheny, Chairman and CEO of Trex Company; and Paul Fletcher, CFO. The company issued a press release yesterday containing financial results for the second 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 August 3rd. 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 market in which the company operates.

The company’s report on 10K, filed with the SEC in March, 2005, and its subsequent filing on Form 10Q 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 introduction, I’ll turn the call over to Mr. Matheny. Please go ahead, Bob.

Last evening we released our financial results for the second quarter of 2005. Our revenue was slightly stronger than indicated several weeks ago at $82.9 million bringing the first half revenue to $172,800,000.00. [Inaudible] sales towards the end of the month were stronger than anticipated causing the quarter’s revenue to performance to be several million dollars higher than our projection of five weeks ago. Earnings per share for the quarter were a $0.07 loss which is more favorable than our most recent forecast last month and was caused by several factors that Paul Fletcher will detail in a few moments.

Quarter’s bottom line performance brings the first half earnings to $0.50 per share. Downstream at both the distributor and dealer level we continue to believe that sell-through of Trex products is running at more than 20% over last year. Our product offering today has been enthusiastically accepted and is significantly better than just a year ago.

While manufacturing performance has improved over the quarter, there are still areas for significant improvement. With many changes to our product line and a short span of time requiring various process changes, we have had shortfalls in rate and yield beyond what we had anticipated.

Turning to raw materials, we saw a continuing increase in polyethylene costs through the quarter which has also impacted both margins and earnings. For the second half we believe this to be less a factor since we’ll have capacity idled and we will buy less polyethylene versus the first half of the year.

Now, Paul Fletcher, our Chief Financial Officer will discuss our financial performance.

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 few pages of the release in a condensed consolidated statement of operation, condensed consolidated balance sheet and condensed consolidated statement of cash flow.

In the second quarter of 2005 net sales were $82.9 million compared to 2004 second quarter net sales of $83.4 million, a decrease of approximately 1%. Higher than anticipated trade inventory levels resulted in the adjustment of inventory by retailers and distributors and reduced Trex sales during the quarter. As we previously stated, an 8% price increase was implemented at the beginning of the quarter for all shipments not included in our early-buy program.

Approximately, 60% of the volume shipped during the quarter was not placed in early buy. The Accent product line continues to be very successful as total Accent volume in the quarter comprised approximately 48% of sales compared to 21% a year ago. We are also encouraged by the success of the new Brasilia product which accounted for 12% of the volume in the second quarter.

The second quarter of 2005’s net loss was $1 million or $0.07 per share compared to net income of $11.1 million or $0.75 per share for the second quarter of 2004. The loss for the quarter was less than previously forecast as a result of the higher sales volume in late June and a conservative assumption for our effective tax rate in the quarter.

Gross profit for the 2005 second quarter represented 28% of sales which compares unfavorably to the second quarter of 2004’s gross margin of 44%. The second quarter of 2005’s gross profit margins compared to a year ago was negatively impacted by a higher purchase poly cost and manufacturing plant inefficiency. The price of PE material increased approximately 83% over the second quarter of 2004. Operating difficulties resulting in lower production yields and higher raw materials usage attributed to a higher cost of production.

Looking ahead to the second half, we anticipate curtailing production in order to end the year with the optimal level of finished goods inventory. We estimate utilization of installed capacity will average 70% during the last six months of this year. Idle capacity in Virginia and Nevada will cause unfavorable absorption or fixed manufacturing costs in addition to the higher cost of production out of our new Olive Branch facility as it ramps up. Raw material acquisitions, we’ll have to moderate with lower production and may provide an opportunity to lower our cost per pound of PE.

The fourth quarter results will be most affected by the low capacity utilization as well as any year-end adjustments including any LIFO inventory valuation. These items have been included in our full year earnings estimate; however, they will cause the fourth quarter to be $0.30 to $0.35 worse than our historical fourth quarter trend.

In the second quarter of 2005, SG&A expenses totaled $25 million compared to $18.5 million in the second quarter of 2004. The increase in spending this year was primarily attributed to the Create Your Space™ marketing campaign which utilized both t.v. and print media. In addition, the growth in our staffing levels across all functional areas of the company contributed to a higher salary and benefit expenses. SG&A expenses as a percent of revenue increased to 30% compared to 22% in the second quarter of 2004. Total SG&A expenses for the full year are expected to be approximately 25 to 26% of revenue.

As of June 30, 2005, total debt amounted to $71.8 million down $8.4 million from December 31st, 2004, as a result of scheduled principal payments on our long-term debt. Accounts receivables at quarter end amounted to $26.8 million which is a more normalized level compared to the $68.8 million at the end of the first quarter of 2005.

Previous quarter’s AR balance reflected the impact of the 2005 early-buy program. As a result of the shortfall on second quarter sales volume, total inventory is increased from $38.8 million at March 31, 2005 to $47.6 million at June 30, 2005. We expect to finish the year with total inventory of approximately, $50 to $55 million.

Cash flow from operations amounted to $16.6 million in the first half of 2005 compared to $39.8 million in the first six months of 2004. Capital expenditures in the first half of 2005 amounted to $39.6 million. The primary areas of investment in the first six months included the build-out of the Olive Branch manufacturing site as well as incremental capacity for the decking and railing product that are firmly in Winchester site.

Total CapEx for the full year 2005 is estimated at $47 to $50 million. And finally in the second quarter of 2005, income taxes were positively impacted by approximately $800,000.00 due to the recognition of various states’ tax credits. We expect the full year effective tax rate to be near 32 to 33%. Bob?

Thank you, Paul. As I mentioned earlier, June finished slightly stronger than we anticipated at the time of our last call and our order flow has picked up since May and early June. We’ve also seen inventory at distributor levels fall substantially in the month of June as well as continued robust sell-through at retail.

In addition, we have canvassed a significant number of our dealers and believe inventory at this level could be very reasonable for this time of the year. We also continue to add new stocking Home Depot Stores each week and forecast that we will finish this effort, being stocked in 340 stores, by the end of the fall of this year.

These factors, in conjunction with the overall positive acceptance of our new product line-up, leads us to continue to believe our most recent revenue guidance of $270 to $280 million for the year is achievable. Recognizing our customers are having a successful sales year with Trex and our new products take hold in the marketplace, our expectation going forward is for continued significant revenue growth.

During the first half, our Accents line grew to almost 50% of sales and will continue to become a more important product. Brasilia is off to a good start and will continue to grow. Our Artisan railing launch was slightly retarded as a result of early production issues. These all have been resolved and we now have sufficient inventory to see this line contribute during the second half of 2005 and really take off in 2006.

As stated a moment ago, our product offering has improved and changed a great deal in the last 24 months. Origins is more aesthetically pleasing, Accents is now reversible and with the addition of Brasilia decking and railing, we have something for everyone at varying price points. And, of course, our Artisan white rail will appeal to a new set of customers entirely.

This overhaul of our line-up, while extremely positive, has not been without some pain to have the many process changes as well as new technologies introduced. All these changes have stretched our manufacturing capabilities and caused us to under-perform versus expectations in the short-term. This in conjunction with slightly poor quality polyethylene raw material has caused manufacturing rates to suffer – both yields and rates actually have suffered in the first half. Improvements have been seen during the quarter; but our performance has not reached an acceptable overall level. Our expectation is to seek continued improvement through the second half and to achieve more acceptable levels of performance by year-end.

Operating at 70% capacity, as Paul stated, will substantially impact our margin due to under-absorbed overhead and labor but will allow us to focus on improving manufacturing performance. This should pay dividends next year. Paul’s outline of polyethylene raw material costing for the quarter and I have only a few comments to offer. During the second half we will draw down our polyethylene raw material inventory and, therefore, will reduce presence in the marketplace. This may actually reduce the cost of what we buy in the second half.

Our first half performance is falling short of our expectations. This is primarily caused by a significant shortfall in revenue and higher than anticipated raw material costs. Price unit spending was built on a higher revenue plan and, therefore, is disproportionately high. Our learning curve in manufacturing for all new products has proven to be longer and more difficult than anticipated.

During the second half, raw material costs will continue at high levels. Our manufacturing performance will improve and position us well for next year. But with only 70% capacity utilization, our margins will be affected significantly. We have also taken steps to significantly curtail second half SG&A spending which will positively affect our second half performance. Reduction in downstream inventory, our revenue should be more reflective of sales at the dealer level and they have had a strong year so far.

In addition to deriving better results in the second half, we are vigorously pursuing initiatives to strengthen our company for 2006. Following our successes with Accents, Brasilia and Artisan, we will continue to set the standard for market based innovation and leverage our leading brand to create product awareness, assurance and interest.

Again, I would like to reaffirm our guidance at $270, $280 million revenue for the year and earnings of between $0.50 and $0.60 per share. Now we would like to take your questions.

[OPERATOR INSTRUCTIONS] Our first question is from Joel Havard with BB&T Capital Markets.

Paul, I want to make sure I understand from your comments - the up 83% year-over-year on poly. That implies a per pound of $0.35 to $0.40. Are we in the proper range?

That’s high.

Little high. Okay - $0.30, $0.35 more comfortable for you?

A little bit over $0.30 for the second quarter.

That you’re able to draw down over the second half on the raw materials side-- I know that the wash line you’ve implied in the past and, I think, just today that maybe there’s a little inefficiency still there. Is this a matter of giving it time to get up to speed so you absorb the raw material that you’ve got on site? Or is it related to just that total demand picture? Could you elaborate on that a bit?

We’re going to make less product than we anticipated in the second half, so we’re going to buy less raw material. The wash line is actually doing pretty well and its average cost is below what average cost is. So, we’re going to run a wash line. The good news is we’re going to run out a wash line and we’re going to run it for whatever it’s worth and if we can run it faster we’ll even buy less material.

Staying on the raw materials for just a moment, staying--? No change there?

No change.

And I understand you guys were working on some other sourcing initiatives in Europe; any progress to report?

We continue to source across the world. So we are sourcing from Europe today. Yes.

Paul, your comments about the EPS outlook for the second half, did I understand you to say that you thought the loss would be three to four times the recent norm for Q4? Did I hear that right?

I said $0.30 to $0.35 higher than the historic trend in the fourth quarter. I was trying to give you some estimates about how to calendarize the second half. We stand by our guidance of $0.50 to $0.60 and I was trying to shed some light on the fact that the absorption, the under-absorption, will be most negative in the fourth quarter.

Okay. That’s exactly where I wanted to go. It sounds like you are implying that the loss, then, in Q4 may become something more like $0.25, $0.35, maybe $0.40 and that we won’t see as much impact versus where the street is now in Q3 which I believe is $0.30, $0.25-$0.30? Is that--?

That’s what I’m saying.

Okay. Understood. Paul, I was going to get on you about the failure to pull back on the spending side to the degree that advertising marketing is discretionary. You beat me to the punch and you’re already doing it. Let me reverse then and complain about maybe lessening the efforts going into ’06 or do you see that pace picking back up in ’06 as things get, hopefully, back to normal?

Well, let me start at the beginning. I think many people may not understand it; but well before the second quarter we tend to be committed on what our brand building activities are going to be. And so, as you’re going through the quarter, especially at the end of the quarter there’s not much you can do about spending at that point. I think the things that we will not spend in the back half of the year – everybody on my staff probably could argue why we should – but there’s always a certain amount of your budget that you can manage down and that’s what we’re going to do.

Going forward next year, we haven’t come to a conclusion but I think it’s fair to say that we have decided that there are other ways to deploy our spending. It doesn’t necessarily mean less; but, that might be more effective for us going forward and so we’re in the process of putting those thoughts together today.

Is that to say that all programs are under review and you’ll make your decision here in the second half?

I think as best we can, measure the effectiveness of a lot of these things are always under review; and, yes, between now and the next time we talk we’ll have shaped what we’re going to do next year pretty well.

All right. We’ll listen for an update then. I don’t want to hog the call, guys. Good work chugging through it – tough environment and good luck moving forward.

Our next question is from Keith Hughes with Robinson Humphrey.

I just wanted to get an update on Mississippi and where that plant stands right now?

Mississippi is producing finished goods inventory today. We had minimal shipments out of Olive Branch during the quarter, Keith. But there are two lines running at Olive Branch. There is a third line that is near completion that I think we’ll hold commissioning into production until next year; but it is ramping up. Clearly, it’s a higher cost of production than the other two plants; but it’s improving and we’re very pleased with the start-up.

Do you think you’re going to ship some in the third quarter?

Absolutely. It just got going in June and we had plenty of material in Fernley and Winchester so that’s where the shipments came out of in June.

And those two lines, will they be near or, I guess, ready to run at full capacity as you go into the decking season next year?

They are now.

All ready now. Okay.

Yes. The two lines are going now. But it’s not-- The whole facility is obviously underutilized. The building there can hold six lines so we’ve got two running and a third ready.

By the end of this year, if you’ve got those two lines in Mississippi and the other two plants, what would be the revenue capacity to the company at that point?

We’ll have between $350 and $370 million of revenue capacity on the ground with the ability add very quickly another $30 million.

And that other line that you can potentially have next year, is it a $30 million line in terms of capacity?

No. It’s about 15.

Fifteen. It would be across two lines.

Our next question is from John Baugh with Legg Mason.

What are your thoughts, if any, at this juncture about pricing your product? And when are you going to entertain a price increase? When do you sort of have to make a decision on that?

We don’t really have to make one until late in the fall. And if we follow what we’ve done historically, we’ve given people some warning and part of the early buy was in advance of whatever price increase that might come in the following year.

Are your purchases of polyethylene - and I assume you’re still buying some you’re just buying less - in the last few weeks at or above or below the $0.30 level?

I could answer you truthfully but I don’t want you to do anything with this information. They’re below $0.30.

And then lastly, is there some level of feet per minute or whatever of production in say the Artisan line or the Brasilia or the areas where you’ve had production issues. Can you give us some metric that says where you are in improving efficiencies of production. Obviously, the start-up at Olive Branch we’ve already talked about so that’s not my focus.

I think in terms of Artisan, this is an entirely new technology which we [inaudible] from Anderson and they have been a great partner in helping us and I just think it’s a matter of-- we just started doing this in January and quite frankly once we got the hang of it our rate is significantly higher than we anticipated so I think that is just a matter of new equipment installed and a brand new technology for our people and we were maybe more optimistic in terms of timing than we should have been.

In terms of Brasilia, our issues have been in the railing side and I think what we thought might breed over or scale or transfer from our deck board to our railing it wasn’t as linger [ph] the technology as we had thought and so we have struggled and still continue to struggle with running railing. The good news is the success of the product and the popularity of the look has dragged up those railing sales so there’s been a lot of demand for Brasilia railing and much of our backorder situation has been caused because we haven’t been able to build the railing fast enough to match it up with the Brasilia deck board sold. And we’ve made some process changes. We’ve made some hardware changes. We have seen improvement, but day in and day out we still struggle a little bit at getting the yields and rates where they need to be where we’ll call it highly successful. And that, again, is a new technology for us in the sense of process technology, some of which is patent pending.

Back on the pricing thing, given what polyethylene has done year-to-date, will you need – and let’s assume it comes off a little but not a lot in the second half – will you need a material price increase next year to get these gross margins back into the 40+ range?

I think in the short-term the answer is, yes. In the longer term, I think we can do some other things in our costs that get us back to low to mid 40’s even with these higher costs of polyethylene. But if we wanted to be at 45% in the first quarter, probably one of the few ways to do it would be a substantial price increase which, as I think I mentioned several quarters in a row, concerns me because as we raise the price, our partners raise the price and at some point, potentially, we slow the conversion from wood to Trex and Trex-like material.

Our next question is from Robert Henderson with Rutabaga [ph] Capital Management.

Two things, could you tell us what the capital capacity utilization was in the second quarter? And then, secondly, can you give us any flavor for what you think the industry capital spending is on increases in plant?

The utilization in second quarter was 92%; and your second question was capital spend in the industry?

That’s right.

I think you have as much ability as we do listening to the public companies talk and there are a number of private companies where we don’t have any sense what it is. We don’t see any or we don’t hear any anecdotally evidence of shortage of any other people in the market really; so, I’d argue that they’re spending the capital they need to continue to share or grow it.

You hear about expansion. You just don’t have the details about the size or the magnitude of the dollars but you do hear some information about expansion.

Our next question is from Bernard Horn with Polaris Capital.

This is kind of a follow-up question to the capital spending. If you go to the lumber yard these days you see, obviously, a lot more product in your space than you ever have before and I wonder if you could just give us a market overview of where you’re seeing competition? You’ve obviously responded to some of it by coming out with an awful lot of new products, so clearly there’s been an effect at some point that you feel that you’ve had to respond to. But it would just be helpful, I think, to give your shareholders what’s the real market competition and how is that manifesting itself in these swings in your inventory; because it’s not clear to us it’s just weather related but maybe it’s somehow related to the competitive forces as well.

I think there’s a lot of things that affect it. Five or six years ago, many places we owned 100% of the shelf space which longer term we recognized wasn’t going to be the case. So, as you pointed out, there are now-- Actually, this year, I think, there are fewer people in inventory in many places but there’s still two or three or four. There was a period of time where there might have been five or six or seven in certain parts of the country. I don’t think you see that. I think dependent on what part of the country you are in would depend on who the other people are there that would share our shelf space; and so, there really aren’t in my mind today, really, a national competitor - having said that, there are two or three that very quickly will probably be there.

One of the other things that has impacted in the short-term the inventory situation is since we brought out or made so many changes in a very short period of time, probably four, five, six iterations of our product in inventory and today we feel pretty good that anything that is prior to the last six or eight months or nine months, there isn’t much out there any longer; but for a period of time probably late last year, second half of last year, early this year, we with our product innovation longer-term, I think, that’s very, very positive. In the short-term I think there was a number iterations of our product out there that probably caused some build-up at retail in terms of inventory; but we believe that to be worked through and I think going forward you’re going to see our inventory shift downstream to more Accents and more Brasilia and less Origins; but the Origins will sell through. It’s just going to take a little longer time. So there’s a certain difficulty in continually innovate and bring out new products that we’ve seen and we need to try to execute and handle that a little better going forward.

Now you had previously discussed when you first came out that the percentage of decking material used by pressure treated versus your product-- there was a figure there. What is that now? And what’s your share of the decking market at this point and how has that been changing?

We don’t have data for this year so whatever-- I think we talked high teens, 16, 17% converted kind of number through last year and our share is probably 35, 40% of that. Now depending on the venue you go to, if you go to pro yards, our share would be higher. If you were to look at self-service environment it would be lower.

And is that-- obviously it shifted to 35% because previously you were probably 100% of most markets.

Correct.

So who would you say the toughest competitors now are coming out because it used to be that you were the most advanced, well-financed competitor. Now you’ve got Certainty [ph] and a few other folks out there who have bigger balance sheets and so forth. How is the market share shaping up for your competitors?

Obviously, some of them have grown since we’ve lost it; but I think there are two or three well-financed, as you put it, competitors. Louisiana Pacific is a public company so you can go read their balance sheet. There’s a large private company that makes a product, or company called Crane [ph] which I think is doing well. And then there are a lot of other companies after that and a lot of it depends on where you are and what you hear or see. And there have been several announced in the last six to nine months struggling, some of the public companies. So as I said, depending on where you are in the country, besides us you’ll see some other product and it’s going to take some time for that to sort itself through. I think through innovation and building our brand, why we stand a pretty good chance of doing quite well over the long haul.

Our next question is from Jonathan Beagle [ph] with Manning and Napier.

I was wondering why you guys were projecting such a large loss in the fourth quarter and why that’s not more balanced out in the third quarter and the fourth quarter. And, also, I was wondering about the Olive Branch facility and when it will reach the normal cost basis as in the other two plants?

The primary reason for the fourth quarter-- the utilization, it will bear the brunt of the higher-- We’ll have more lines shut down in the fourth quarter than the third quarter. So the under-absorption effect will primarily hit in that fourth quarter. That’s the primary reason there. Olive Branch is really not going to be as economic as our other facilities until we have that third line and part of a fourth line probably running. So the quicker we can get that done, the quicker its costs will come in line on a per pound basis with the other facilities.

Our next question is from Tom Lightcat [ph] with Value Holding.

Sorry, I jumped in a little late on the call so you might have covered this already; but in your earnings report you talked about expanding into new retail channels. Can you elaborate on that and also elaborate on how the Home Depot roll-out is doing?

Home Depot is primarily the new retail channel for us. There are other channels throughout the U.S., some co-ops that we’ve entered into and partnerships there. The expansion in Home Depot stores is going in a very methodical basis, week-to-week, additional stores. We have a plan with Home Depot and we’re following that plan; and, as I said, our expectation is to be into approximately 340 stores sometime this fall which will be three-fold increase actually from last year; close to a three-fold increase.

About how many HD stores are you in right now?

I believe the number is 160 we’re stocking.

Yes. We’re available for the most part, I think, in most any store as a special order product. And much of our sales are actually that way today. But we are stocked in 150 or 160 stores today.

Also, you alluded to reaching some sort of optimal finished goods inventory level by year-end in your earnings release as well and I was just wondering if you can give us an actual figure for what you think that finished goods will be.

Finished goods dollar amount will be somewhere in the $35 million range as a component of the 50 to 55 that I mentioned in total inventory.

Our next question is from Louis Corgin [ph] with Kingsford Capital.

I just wanted some clarification on your strategies for improving gross margins. You had mentioned that the utilization rate in the second quarter was 92% and I would say there was a sales shortfall, but your production was running very strong the end of the quarter with from my calculations 72 days of inventory versus 36 a year ago. And yet the gross margin was about 28%. I guess the way I think about it is you need to curtail production quite a bit in the second half. You’ll get a bit of a benefit from pricing. You should get a bit of a benefit from improved manufacturing; but I guess, I’m looking for kind of a timetable for when you think you can get back to mid-30% gross margins; because I’m not sure that I can get the number in ’06. Are you looking for that in ’06?

Yes. One of the things is, our yields and line rates through-- Even though we’re running at 92%, we’re not where we want them to be. Now, exiting the quarter line rates for the most part have improved dramatically. Yields have also but still aren’t where they are; so just because you are running a machine doesn’t mean you are making money. You need to run it fast and you need to have high yields. So that’s improved. I think part of the back half of the year though is-- that 22% it’s down is a big drain on the margin.

And that will offset-- Any improvement in yields and rates will be more than offset by that under-absorption. You won’t see the margin positively effected in the second half. You’ll see it next year when utilization comes back up to a more normal level.

Do you think you can be in sort of the mid 30% gross margin range for the first half of next year?

I think it’s achievable. Again, as we told Joel, I think we’ll give more specific guidance as we’re entering our planning process for next year in the next call. But I think that is achievable.

And a second question regarding the sell-through. It sounded like on the last call that the sell-through data that you have access to has a significant delay to it. I think it was three months or so. Has that improved any? Are you getting a better handle on what the current sell-through is?

Well, the shelter that was that way at retail, it still takes that amount of time. I think over time it will improve; but anecdotally and that information and then looking at our distributors sales and inventory lead us to believe that sell-through is well over 20% at both levels year-over-year; but it is still 69 days-- The very specific third party data that we have contracted for is still 60 to 90 days in arrears.

And in terms of the stocking of Home Depot, what kind of dollar range for inventory--? I guess, 180 new stores that you plan to stock in the next three months, what would be roughly the dollar amount of inventory that they would need?

I don’t think we’re prepared to talk about how much we’re going to stock and when. I think we’re pleased with the Home Depot roll-out and I think as we go into next year we’ll talk about the success of how much is going through that channel – both special order and direct.

That volume doesn’t drive our second half success.

Our next question is from Gregory Nickham [ph] with Assessment and Rogers.

After spending approximately $50 million over the last three years on branding, can you discuss whether the company is specifically benefiting from this spend or is much of this spending supporting industry growth. Also, can you discuss how you measure the impact of that spending?

It’s very hard to quantify it other than if you look at-- We’re a consumer product. We believe that. At the end of the day, you as the consumer who owns a house and builds a deck has to write the check for whatever you use. The power of the brand goes from toothpaste to soft drinks to beer to motorcycles. I think if you speak to consumer and you have a compelling brand, you can do a great many things in the marketplace that you can. And we participate in a market of commodities and our goal from early on is to build that brand. Now, today, I don’t think we are where we want to be. We have brand recognition, we have awareness. That has served us well in the marketplace and I think that’s why we still have the leading share by a significant amount.

Having said that, I do also think that we are driving the conversion for the most part from wood to Trex and Trex-like material; and over time I think we need to make our brand more compelling, differentiate ourselves through continued innovation and better and better product quality and make ourselves more available to the consuming public and I think we’ll continue to be successful and more successful than we’ve been today. But I can’t give you a number and say $2 million in income is because of the brand.

One other question on Home Depot. Other than Veranda, are you the only other product being stocked at Home Depot at this time?

I’m not sure. I think from a national perspective that’s probably the case; but there may still be other product in parts of the country.

And do you eventually see more stores in that 340 being stocked with your product?

Our goal would be to be in more stores than 340.

Our next question is a follow-up from Jonathan Beagle with Manning and Napier.

I was wondering what a curtailment in home equity loans. I know you guys talk about all the time that you’re not directly relating to housing; but we saw a great drop-off in home equity loans. What will that do to the decking market as a whole and how would that affect Trex?

If interest rates go up and there’s a lot less cash out there, I guess our argument about continued growth would be we still have a better proposition. There’s 4 million decks, roughly, built a year. There’s 40 million plus out there at some stage, needing repair or replacement; and so with the low percentage of sales in terms of being at 15, 16, 17 and 18%, I still think there is considerable opportunity even if only 3.5 million decks are built a year, for us to continue to grow.

Now, if we were 50, 60% of the market – we being composites – I think my argument would be a lot weaker; but the other thing is home starts go up, higher interest rates, people tend to rather than buy a new house fix the house they have. And one of the things that provides great return and is inexpensive living space is a deck.

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

Thank you. I’d like to thank you all for listening. We’ve not performed the way we’d like in the first half. We have a lot of things going in the right direction in the second half and we are positioning ourselves with product and manufacturing performance for 2006 and we look forward to talking about the third quarter in several months. Thanks again.

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