Trex Company Inc (TREX) 2005 Q4 法說會逐字稿

Welcome to the Trex Company fourth quarter conference call. [OPERATOR INSTRUCTIONS] As a reminder, this conference is being recorded today, Thursday, February 16, 2006. I would now like to turn the call over to Harriet Fried. Please go ahead, ma'am.

Thank you everyone for joining us today. With us on the call are Tony Cavanna, Chairman & Chief Executive Officer of Trex Company and Paul Fletcher, Chief Financial Officer.

The company issued a press release this morning containing financial results for the fourth quarter. This release is available on the company's website, as well as on various financial websites. Replay of this conference call will be available through February 23rd. This call is also being web cast 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 an expected sales performance and operating results, projections of net sales and earnings per share, and anticipated financial conditions 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 10K filed with the SEC in March, 2005, and its subsequent filings of four 10Qs 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. Cavanna. Please go ahead, Tony.

Thank you, Harriet. As Harriet just said, a few hours ago we issued a press release, which showed the financial results of the Trex Company for the for the fourth quarter and full year 2005. Revenue for the fourth quarter was $44 million, a 49% increase for the same period in 2004, which was $29.6 million. While the recorded revenue for the full year was $294 million, 16% more than 2004's revenue of $253.6 million. Trex recorded an income loss, unfortunately, of $10.1 million or $0.68 per share resulting in a full year 2005 income on a positive side of $2.5 million or $0.17 per share.

Obviously, 2005 has proven to be a difficult year for Trex, with income falling well short of our expectations. As I said during our third quarter earnings conference call, much of this difficulty came about from an unfavorable performance against a very aggressive manufacturing and new product agenda that we set for ourselves as we ended the year. The programs that we pursued in 2005, however, will lead to future revenue, and income growth, and enhance Trex's position as the market leader in the composite decking market. I will talk more about these issues later in my discussion.

Raw material costs, specifically poly, increased 40% in 2005 year-over-year. Manufacturing rates per line achieved reasonable levels. However, combined with relatively poor quality poly and the less than successful new product manufacturing implementations, overall manufacturing efficiencies operated below expected levels. Now, on top of all of this, we initiated operation at our third manufacturing site in Olive Branch, Mississippi and incurred the burden of start up expenses.

Now, I'd like to turn the conference call over to my associate, Paul Fletcher, the company's Chief Financial Officer. Paul?

Thank you, Tony. As you are aware, a press release was issued this morning and the numbers I will reference are contained in the last few pages of the release in a condensed, consolidated statement of operations, condensed, consolidated balance sheet, and condensed, consolidated statement of cash flow.

Net sales for the 2005 fourth quarter increased 49% to $44 million from $29.6 million in the fourth quarter of 2004. We believe excess market inventory levels have largely been worked off in the first of this year, along with favorable weather conditions during the quarter, and a positive outlook by dealers and distributors for 2006, all of which contributed to sales momentum during the quarter.

Net sales for the fiscal year 2005 increased 16% to $294.1 million; $253.6 million in fiscal 2004. Volume, pricing, and product mix all contributed favorably to the increase in revenue in 2005. The Accent product line represented greater than 50% of our total volume shipped in 2005.

Net loss in the fourth quarter of 2005 was $10.1 million or $0.68 per share compared to a net loss of $0.3 million or $0.02 per share for the fourth quarter of 2005. Net income for the fiscal year 2005 declined $2.5 million to $0.17 per share, $27.2 million or $1.83 per share in 2004.

Gross profit for the 2005 fourth quarter was negative $0.3 million compared to $10.7 million in the fourth quarter of 2004. The fourth quarter 2005 gross profit was negatively impacted by three principle factors. Higher purchased poly costs, low manufacturing plant utilization, and the implementation of new quality manufacturing standards and activities in each of the plants.

The price of PE material increased in the 2005 fourth quarter by approximately 21% over the fourth quarter of 2004 and, as Tony said, purchased poly prices for the entire 2005 year were up over 40% over 2004.

In order to balance our finished goods inventory at year end, the manufacturing lines were idled during the fourth quarter in each of our manufacturing sites. During the quarter, the company's plant utilization averaged 54% as compared to 92% in the fourth quarter of 2004. This resulted in the under absorption of the plant's fixed manufacturing costs. This low plan utilization had an unfavorable impact on gross margin of approximately 11%.

During the quarter the company initiated new manufacturing programs around product quality and improved packaging. The net result of the initiatives were higher raw material costs and unfavorable plant efficiency.

In the fourth quarter of 2005 SG&A expenses totaled $15.5 million and represented 35% of sales compared to $10 million or 36% of sales in the fourth quarter of 2004. The increase in spending year-over-year was primarily attributed to customer good will expenses and the growth in personnel, including salary and benefits in both hiring and relocation expense. SG&A expenses in the fourth quarter also included a $1.1 million charge related to the separation agreement between Mr. Matheny and the company. Total SG&A expenses for the year amounted to $77 million or 26% of revenue, compared to $56.4 million or 22% in 2004. The increase in SG&A spending in 2005 was attributed to branding-related expenses and various personnel expenses as a result of higher head counts.

As of December 31st, 2005 total debt in the amount of $74.6 million, an increase of $3.6 million from September 30, 2005. Debt to total capitalization remains conservative at approximately 35%. In the 2005 fourth quarter we did amend our bank agreement to modify the financial covenants for the fourth quarter of 2005 and for the first quarter of 2006. We also increased our working capital line of credit to $30 million for the first six months of 2006.

Accounts receivable at year end amounted to $12.4 million, compared to $22 million at the 2004 year end. Total inventory increased from $52 million at September 30, 2005, to $57 million at December 31st, 2005, primarily due to the build up finished goods inventory.

Cash flow from operations amounted to $12 million for the 2005 year, compared to $45.3 million for the year ended December 31st, 2004. Capital expenditures during the quarter were $2.8 million, bringing the year-to-date capital expenditures to approximately $50 million. Capital expenditures for fiscal 2004 amounted to $34.1 million. The primary areas of investment in 2005 were the build out of the Olive Branch manufacturing site, as well as the incremental casting, projecting, and railing products at our [Framley] and Winchester sites.

Net interest expense in the fourth quarter of 2005 amounted to $1 million, compared unfavorably to the $0.5 million of net interest expense in the fourth quarter of 2004. This unfavorable variance was due to the lower capitalized interest during the quarter.

Finally, in 2005, we recorded income tax benefits as a result of the recognition of certain state and federal tax credits earned and expected to be realized.

Tony?

Thank you, Paul. Even though Trex fell far short of its income target in 2005, it is apparent from our revenue growth, combined with market survey data, that Trex products solidified and even enhanced its position in the marketplace. In 2005 Trex's resilient decking line, a simulation of rainforest timbers, established a credible presence and although we encountered new process production problems, Brasilla achieved about a 10% share of Trex's sales. More importantly, Brasilla proved to be a winner and set the stage as a new product that, along with Brasilla's designer and artisan railing components, will command a long-term prominence in a non-wood decking and railing arena.

Trex's accent decking and railing components continue to establish traction. And although this product has been in the market for only two years, it represents more than 50% of Trex's product mix, a testimony to new product development.

Trex's new Olive Branch, Mississippi plant started production in the spring of 2005 and is currently demonstrating product quality and manufacturing rates comparable to those throughout Trex. Olive Branch is an important current and future component for Trex's manufacturing. However, since only three lines are currently operating, it has not yet reached its potential as a low cost facility in the Trex system.

At Trex, we embarked on a major new product initiative in the fourth quarter of 2005. We decided that after December 31, 2005, and the end of the year, no product in our finished goods inventory would be shipped to customers without first going through an inspection routine bundle by bundle. After inspection, new better protection covers were applied to each bundle before shipping. Since on the ground finished product inventory would not be totally available for shipping in January, because of the inspection process, we commenced the start up process earlier than intended for the previously shutdown production equipment in the latter part of December of last year. We did this to complement the inspection process to make product readily available for shipment in the first quarter of 2006.

The challenge of producing to meet new quality standards is progressing well, but it's not meeting with 100% instantaneous production rate success. The good news is that 95% of our lines, 22 out of 23, are running and producing good quality products. The not so good news is the lines are not all meeting new quality criteria at 100% production. The inspection of previously and inventories finished goods products are 50% complete. We currently have a good book of orders and as a result of our inspection process, we are stretching to deliver these orders on a timely basis in the first half of 2006.

Our net sales forecast for the first six months of 2006 is expected to range from $220 to $230 million, resulting in earnings per diluted share to range between $0.57 and $0.62 per share. This projection of results is favorable to 2005's first half results of $173 million in revenue and $0.49 per diluted share in earnings.

Repeating what I said in October of 2005 conference call, in 2006 we will not introduce any new Trex decking products. I will concentrate on improving the initiatives that were undertaken in 2005. We believe that the raw material cost increases will be less dramatic and our Olive Branch facility, our third plant location, will have completed the task of starting up not only a new manufacturing line, but also a brand new greenfield site.

We're not out of the new product business totally, however. At the International Business Show held in Orlando, Florida in January of this year, Trex formally introduced a new privacy fencing product called Seclusion. We have been testing our design and its success in a few western markets for about nine months. The response at the test location and at the builder's show was extremely favorable. For the remainder of 2006 we will complete these product tests, perfect our design, and sell volumes that will represent a very small portion of our 2006 sales.

This concludes our prepared remarks and we are now ready to answer your questions.

Judy?

[OPERATOR INSTRUCTIONS] Our first question comes from Joel Havard with BB&T Capital Markets. Please go ahead with your question.

Tony, can you go back and hit one of your latter points there? You said some number of lines was up and running currently. Could you review that please?

Yeah, 22 out of 23 lines are running right now.

22 of 23. Are these the primary decking lines or is that throwing in some rail and accessory pieces or --

All of the above.

And that's 23 lines installed. I was thinking you all were more like 25, 26 on the ground, including Mississippi.

23 total.

OK. All right, good. Do you anticipate adding to Mississippi or adding to the, you know, whichever one is idle right now by the end of Q1?

The one line that's not running it's just a matter of, as you know Joel, we were running at about 50%, 55% utilization before we embarked on this quality program for our company, totaled not only quality product. And it became obvious the product we had on the ground was not going to be inspected in time to satisfy the early buy. So we started up lines quickly, but part of that is we had to hire some people and in essence, when a line is down for a while, you just don't press the button and so what it amounted to is we intend to get them all going, but right now we're only short of one.

All right. Tony, this is very interesting. Now, you're way ahead of where we would have suspected yet on reactivating the line. Are you telling us that the quality of the output yet is such that you may be running 23 lines, but you're only getting or running 22 lines, but you're only getting 15 lines worth of product--

We're getting probably about 19 to 20 lines of product. If we were doing our standards, meeting our productions there.

I see, OK.

But they're much better than the 15.

You're right, Joel. The absorption, you know, because the lines aren't at standard, you don't get the full absorption of a normal line, at standard.

And as you all take that substandard product, I guess you throw it back in the grinders, and it gets reprocessed, and becomes another Trex board, what is the gross margin impact you're seeing from that factor here in your Q1/Q2 output?

We have taken some reserves in the fourth quarter of Q4 for the inspection process or the non-sellable product, but to my surprise or pleasant surprise, we're not trashing. We had about $40 million worth of inventory and we're trashing very little of it. We're finding, as I said, we're going bundle by bundle and we're finding boards within the bundles that don't represent the quality that we want; and, therefore, the customer receives a bundle that he says the whole bundles not what I want.

Therefore, you're repackaging?

Right.

Now, is that impact, plus the impact of the new packaging system, are they both cost of goods? Is the first cost of good and the second SG&A? Where do those costs go?

Both of them go in the manufacturing costs and they've both been, not only what we incurred, but we also did some reserving for anticipated program in January and February.

Ok and that's clarifying it a bit. Now, on the SG&A line, again, thinking more about first half, than Q4, how much of the -- well, actually let's start with Q4. How much of that? We were thinking maybe $11, $12 million of SG&A expense in Q4. You came in about $4 million higher than that. Was that all branding related, half branding, half personnel increases? Could you characterize that?

It's split, Joel, between personnel related, you know, higher head count, branding. You have that one-time comp charge with Mr. Matheny.

Yeah, I’ve seen that, of course.

Yes.

Now what was customer goodwill?

That was probably the smallest of-- that's the customer satisfaction type of-- it’s an expense that hits SG&A was about a half a million dollars variance in the quarter.

Joel?

Now, was that buying product that had gotten out in Q2, Q3 that was in bad shape, or rebates, or --

No, it's the labor associated with any dissatisfied customer that we choose to participate in maybe a new deck for someone.

That's why we call it goodwill, Joel, rather than returned product, because, quite frankly, it was a discretionary expense that we chose to accept. However, that and some of our return rates, which are all-encompassing, we didn't like and that's one of the reasons why we've chosen to follow a different path as it relates to upgrading our overall presentation to the market place in product quality, as well as packaging.

OK. Final question, I don't know which side. I presume SG & A, but you've got some exposure to a real estate location. You all were going to move offices last year. You put the brakes on that. When did the exposure kick in? What impact do you see in SG&A, particularly here in the first half outlook?

Well, the lease contract began January 1 and we have built into our plan the expense related to that facility at $1.5 million for the entire year and it's straight lined over the entire year. We're currently marketing the space to sublet the space. But we currently have that entire expenditure planned for the year, the renting factor.

OK.

Well, the one benefit, Joel, other than assuming -- we fully expect to lease it and our lease agents are very optimistic about leading, but even if we don't, the rent rate was only 50% for the first 18 months.

OK. All right. I may jump back in line, but I don't want to hog it.

Our next question comes from the line at Keith Hughes with Robinson Humphrey.

I have a couple of questions. The quality work you're doing, was this started internal review or is this because of customer complaints?

Well, it was an internal review, Keith. But, I mean, having been away for a couple of years, it's easier to see a change from two years and make an observation versus gradually seeing something that might be changing, whether it be, and in this case a form of deterioration.

Has the problem just in the production process?

Tony Cavanna; Yeah. Well, not only in the production process, but in handling.

Yeah. In the handling. A lot of it's packaging, Keith, and the handling, and as a product is shipped and transported all of the way to the end user, a lot of the quality related to protecting the product along the way, so it was not necessarily production-related.

So this wasn't isolated to a specific product family or a specific plant?

No.

All to the product line, Keith, and as Paul said, and as I said earlier to an earlier question, it's not a big number in terms of inventory being downgraded, but if, in fact, you've got a bundle of let's say 50 board and one or two of them are damaged, it's not a good presentation to our customers and our customer then starts saying I'm not sure I want to deal with you guys when my overall impression is not good.

OK. And it sounds like this process is continuing in the first quarter.

Yeah. We've only been through about 50% of our inventory, as I said in my remarks.

Do you think this process will be done by the end of the first quarter?

It'll be done just about the end of the first quarter, right.

OK. And as we look out on the new year here, plastic prices, I think you said, don't seem to really going down that much. Have you been able to do anything going into the new year, taking a little bit of plastic out of the content of your product? Are you working on anything like that?

We haven't yet, but as I said in our last conference call that was one of the possibilities we're working on, and we're still working on it in the R&D arena. But we're not ready to take it to the production arena yet.

OK. That's all.

Our next question comes from the line of John Baugh with Stifel Nicholas.

You didn't give the exact poly cost by quarter. Probably going to be giving that out or just assume not? And I'd be more interested in discussing now that you're into the first quarter and you've been buying a lot of poly, I know you're buying better quality, so I assume your costs are up. But the virgin and the PE we track is actually going down, so some color there would be helpful.

I think we're anticipating and in our plan we have a modest increase of purchased poly costs and it's also a function of the quality of poly that you buy, not just the volume. And so we're very much --

Which categories you buy.

Categories you buy. You know, there's reprocessing costs if you buy a contaminated stream. You really have to put effort and dollars into it to make it be able to feed it to the line, so I think we anticipate our overall purchased poly costs to rise for the year, but we'll get the benefit of buying more higher quality streams on the flip side of having better production rates and better yields.

Let me expand on it just a little bit. As you know, we had a lot of our production shut down, so we weren't buying as much and the individual components we were starting buy at a little lower rate were showing some decline in cost. However, as we instantaneously majorly started up the rest of our production, we had to go buy a lot more poly quickly and in doing so, and, again, being very sensitive to quality, we're buying at the moment some of the more cherished component and a little more costly, so over the year, I think as we come back down to what we want to buy in terms of distribution of components, our plan coming into the year is that that price overall will be slightly higher than the full year 2005. However, there are indications it might come down a little bit, as you indicated on the virgin side.

Can you discuss the fact that you've done all of your lines are running efficiently, is that because you just started them up? Is it because the paper contaminant you're getting is still higher than you want? Are you having problems with coloration on Brasilla or what specifically? Is there something you haven't figured out yet in your mind or it's really just a matter you're getting everything fully up and running?

It's more the latter, because our lines are running at least at 90% of what we want them to run at, so it's not like we're at 50% and it's all of those components. Basically, we've made our production people a little gun shy by holding them to a higher standard and in doing so, the lines might, on an instantaneous base might be running as high as we want them to in terms of pounds per hour, but then when you downgrade more product that we want, because of the quality inspection process, then the net amount is a little bit lower.

OK. And if you look at '05, this customer goodwill and/or product you took back, what was that number gross dollars and what do you expect with this damage you have and is that number going to come down a lot in '06? And, obviously, you're spending money on the front end of the process of manufacturing it right. You're not seeing any of the benefit. Have I got that wrong or should see a material reduction in your "goodwill" number for '06 versus '05?

John, the trend is actually as you described. It's not going to all come to us in one year. We spend about $4 million in this customer satisfaction, the labor component that sits in SG&A. Absolutely that will decline and we expect it to decline over time.

OK. And I wasn't clear on the-- you've taken a reserve in the fourth quarter for what you think will be bad product when you complete all of the inspections and get your running or you're through with the inspection and you're finding less than you say reserve, which is implied at some point you'll have to add that back or is that wrong?

No, we have taken—this is fairly small. It's $700,000 of reserve against our experience to date of going through the inspection of the percent of the boards that are not salable and that we would put into reclaim. And we made an estimate that $700,000 represents the entire universe of the inspection and what it would cost us. That's projected in the year end numbers.

OK. And two last questions. One, brand spend either for the whole year or the first half '06 versus '05?

What we're going to spend next year?

Yeah. '06 in the first half what's kind of the brand spending plan?

Well, we're going to be, first half and full year is going to e down, you know, in the 20% range both in first half and in second half.

We're going to continue, John, to --

In gross dollars?

Gross dollars.

Gross dollars.

Correct. It'll be down both halves, so off of those and we spent about $25 million on branding in '05.

What it amounts to, John, is the $25 million we spent, some of it got away from us, because it really came from something less than $18 million in 2004, so we had a big jump, and so we had a very intense discussion amongst ourselves to decide if we get value out of that incremental $7 or $8 million, and we made a judgment that we didn't get full value for all of it, so our actual branding expenses for 2006 are projected to be lower than 2005. And that's the first time we've done that.

OK. And lastly, what's the CapEx budget for '06 and are there any plans during '06 to bring on any additional lines, other than maybe one, or two, or three in all of the brands?

To answer your first question, our capital expense budget for 2006 is scheduled to be $25 million. In that we do not have any expenditures forecast for installing new lines. However, if the demand for product projects itself into 2007 to be higher than we can produce with these quality standards, we have many of the parts already in our warehouse or in our plant ready for installation, so there is still a possibility we'll install some lines by year to prepare ourselves for 2007.

So where does that $25 million go, Tony?

It's basically MOB type things and upgrades of things like our wood system and our poly system, all consistent with the overall quality program.

It's primarily raw material, wood and plastic related, John.

OK. And what's D&A going to be for '06, roughly?

It will be $18.5 to $19 million.

Thank you so much.

Your next question comes from Bill Gibson with Nollenberger.

Just to follow up on these last questions, what is capacity on 23 lines with the new quality standards this year?

In excess of $400 million of revenue.

OK. So basically $400 million plus. And, Tony, you mentioned having some -- how much equipment or how many new lines could you put in without going out and buying the equipment? Is that what we're talking about or --

We'll have to buy new equipment for the lines we install. What I was trying to say is we have the major components.

Ok.

But what I was referring to was two lines.

Okay. Two lines. And what's your sense of market size? What was it last year and how does it shake out on the competitive front among yourself, and your share, and the various major players there?

Our market share, you mean?

Yeah.

The data we have still indicates we're in the 40% range.

40% range. OK. And you got a best guess on what the market was last year?

I'm not sure I know what you mean.

Well, I guess I could back my way into it by --

Take our revenue and divided it by .4. But that's not totally accurate, because a lot of it, you know, we got a two-step distribution [inaudible]. But I think the most accurate way to do it just take our revenue and divide it by .4.

OK. Thanks, Tony.

Our next question comes from Robert Kelly with Sidoti & Company.

Are you going to break out with the poly costs for the fourth quarter was?

No, we're not. Not on a per-pound basis. On a percentage increase.

I guess my next question would be the poly costs for going forward, '06, you said you'd be buying a higher quality, so we'd expect that to increase, you know, remain flat?

Well, what I was saying, John, was since we had lines shut down and we basically instantaneously decided to start them back up, we had to go out and buy poly at a higher rate, so what we did was the most readily available is material of the higher quality poly at the higher cost. So we buy it the distribution mix, the higher cost of materials. I was not intending to say we're going to stay at that mix as we start up our lines and meet our standards.

Have you see a correlation between the "higher quality" poly and your manufacturing rates?

Not enough to justify the cost increase.

And can you just give a break out for the quarter?

Which, quite frankly, John, I look upon favorably. We felt that our ability to handle less than perfect poly is better than I thought it was. I'm sorry. Go ahead.

It's Robert, by the way.

Robert.

No big deal. Will you give a break out on the year as far as volume versus pricing and mix?

I'll tell you, we have a price increase in the early buy with our early buy program with 11. Prices went up 11% and customers bought in early buy pricing. '06 over '05 went up 4$. And that early buy program lasts from January through April. And then after April, the prices year-over-year will be up 11%.

I was referring more to the fourth quarter what the volume versus mix was on the 49% increase?

The volume was approximately--

Robert, would you repeat your question?

I just wanted to know what the volume was for the quarter versus mix improvement, price, risk, and volume for the jump share in the fourth quarter?

I think probably about a third of our increase was mix and price versus our total volume.

That's correct.

OK. And on the CapEx budget for '06, that' $25 million did not include a new line, just to clear that up?

It did not.

Great. Thanks, guys.

Your next question comes from Steve McNeil with Jennison Associates.

In your comments you had said that the manufacturing inefficiencies had cost you 11 points of gross margin, the utilization?

Yes.

Can you quantify the other 25%?

Well, if you look at the difference in margin year-over-year, it really breaks out-- it dropped from the 36% to break even. Pretty evenly split between the utilization for absorption impact or lack, poly, and then the inefficiencies related to our quality initiatives, so operating below standard. Those three are fairly equal in describing or explaining the variance.

OK. So 11% and 12% for each of those issues?

Correct. Yeah.

OK. Related to the quality initiative, have you reformulated the product at all?

At this stage, we have not. I had a question earlier, have we done anything to reduce the component we call poly, which is the high cost involved. We have not yet. Right now we're trying to really get back to basics as it relates to paying as much attention to the product as our customers want us to.

All right. I was just wondering if you're adding say any new additives that you may not have been adding historically, zinc borate or something?

Well, we're not adding anything new that we weren't adding before. I'm not in a position to confirm whether we've using zinc borate or whatever, things like that. But right now we're not putting anything different in.

So you don't feel as though the mix of the virgin poly will remain as unfavorable as it is today?

I'm not sure I understood your question.

What you've told us is that you're buying more virgin poly today, but it's just --

Only in January, and February, and probably into March.

Okay. But that's just because of these manufacturing issues and it's not due to a reformulated product, you know, to meet the new quality standards?

That's right. As a matter of fact, the main reason for that is some of the other components of our poly mix are not as easy to turn on and off as quickly as we had to do when we started up the line or readily available. It's not a conscious effort to change the components of our poly mix.

Okay. Fair enough. And then, lastly, on the guidance, I think historically, and you can correct me if I'm wrong here, but I think historically you have issued annual guidance. What was the thinking as you looked into '06?

Tony Cavanna; Well, basically we're still in a very significant state of transition, as it relates coming out of a year when we tried to do a lot of things and didn't do them all well. We're also going through this quality program that I described, to a certain degree, which has still not taken hold yet, because it's really a long journey to get there. So whether or not within the execution of the programs, again, I'm repeating myself, that we started in 2005 need to be more effective and efficient. So we are still in a company of transition. I think the transitions are all up. I feel very good about the direction we're going in. I feel very good about the magnitude we're getting on an instantaneous basis, but I feel like it would not be prudent to project beyond the second quarter, at this stage.

OK. So I was looking at a rule of thumb here in terms of the revenue side and it looks like generally you generate over 60% of your revenue in the first half of the year. Is that a fair rule of thumb to use?

Tony Cavanna; Yes, it is.

OK.

Between 60% and 65%.

Okay. Ad what about the earnings side of things? Because it sounds like you're more concerned about cost, as opposed to revenue.

Yeah. The earnings side is going to be a function of the timing with respect to bringing the lines, this quality initiative, bringing those up to standard, maintaining utilization. Remember the timing in the first quarter and the second quarter you have the early buy programs affect our revenue, our revenue per pound or per unit. We have only a 4% increase in price for the first four months, then to jumps to 11%. You also have early buy discounts and programs that cause the revenue per pound to be lower, so naturally you're going to have an increase in margin coming off of the early buy month on the revenue side. And then on the cost side you have if we can maintain utilization throughout the year, that doesn't become as much a factor. The factor is more the performance of the line, specifically to hit standards.

If in fact the demand for our product justifies running more lines at a higher utilization rate than we intended for the year before we came into the year, before we got involved with this quality program, will determine whether the gross profit percentage or gross margin percentage will decline depending on a function of utilization.

Okay. So I shouldn't be using, I was just looking at the math again on the EPS line. The first half looks like it's 75% to 80% of the full year earnings. Is that a good rule of thumb to use for '06?

Well, we haven't given guidance to '06. The third quarter is typically a very favorable quarter from a margin standpoint. You have the full price increase and if you're running at high utilization, that you don’t have, everything being equal, you don't have any negatives there, and the fourth quarter, obviously from a volume standpoint, is traditionally low. So I think you have the relationship is correct from a calendarization. I think you have that correct.

Based on [Inaudible] calendarization.

On both the revenue side and the earnings side?

Well, on the earnings side, I’d rather not confirm that at the moment, but I confirmed your revenue 60% to 65%.

All right. Fair enough. Thank you, guys.

Our next question comes from the line of Claire Davis with Perennial Advisors.

My question's been answered. Thank you.

Our next question comes from Jack Sloan with Sloan Capital.

I hate to beat a dead horse on the utilization issue, but with 22 of the 23 lines running now, given the delta between your revenue guidance and the EPS guidance for the first half, would imply that the quality product yield is pretty low. And so as we look forward, I'm trying to understand if the operating model has changed now that there's this initiative on quality going forward or if this just kind of a two quarter event and then we normalize--

I'm not sure how you come to that conclusion. Let me try and say it this way. We had about $40 million worth of inventory at December 31, 2005. Our normal modus operandi is that all of that material is available and that's that inventory cost. That's not revenue basis. All of that inventory, under normal circumstances, would be used to satisfy the higher revenue portion of the year; namely, the first half of the year. We basically took all of that back, and we had to start over, and inspect it all, bundle by bundle, and in the meantime we had to satisfy a very healthy order pattern, which we have a good book we have right now.

So basically we had to start up lines and then you've got the imperfection of start up process, but for your answer, to your question more definitely, our lines are running now at about 90% of what we want them to run at per these quality standards.

OK. And so three or four quarters out we should get back to more historical profit margins, irrespective of where poly goes?

I would say that's the direction we're going in, yes.

Okay. Thank you. And last question, when did [Phil Pfeifer] leave the company?

First part of the year, early January.

And just curious, you said he was the vice president of sales. Wondering why that wasn't disclosed?

I'm not sure. What do you mean?

That would seem to be a material event, if the head of sales for the company left, just wondering why it was never announced?

It isn't required from an SEC standpoint.

OK. Thank you.

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

Robert Kelly from Sidoti asked a question and I misspoke. I wanted to correct. The increase in revenue in the fourth quarter, about 75% of that increase was due to volume. I don't know if Robert's still there, but I apologize.

Okay. In closing, I would only say that we look forward to 2006 being a recovery year, as expectations of 2005 programs are optimized. Since we didn't give guidance for the full year, you can see that some of it is still in the state of being implemented and, of course, we're expecting our sales to go very nicely, and our programs to support that.

And other than that, I thank you for your participation.

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