Trex Company Inc (TREX) 2007 Q2 法說會逐字稿

Welcome to the Trex Company second-quarter earnings conference call. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded today, July 31, 2007. I would now like to turn the conference over to Ms. Harriet Fried of LHA. Please go ahead, ma'am.

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

The Company issued a press release this morning containing financial results for the second quarter of 2007. 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 until Tuesday, August 7. 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 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 Form 10-K filed with the SEC in April 2007 and its subsequent filings on Forms 10-K, Form 10-Q and Form 8-K 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 would like to turn the call over to Mr. Cavanna. Please go ahead, Tony.

Thank you, Harriet and good morning. This morning we released our financial results for the second quarter of 2007. Revenue of $118.8 million is slightly less than the revenue recorded in the second quarter of 2006. However, a six-month recorded revenue of $234.7 million represents a 3.5% increase from the first half of 2006.

Trex's net income for the second quarter of 2007 is $2.6 million or $0.17 per share. Revenue of $234 million and income of $0.42 per share for the first half of 2007 are consistent with the revised revenue and income guidance issued recently on May 30.

Now I would like to turn this call over to Paul Fletcher, Trex's Chief Financial Officer, who will describe our financial performance and financial status in more detail. Paul?

Thank you, Tony. As you are aware, our press release was issued this morning, and the numbers I will reference are contained in the last few pages of the release headed Condensed Consolidated Statement of Operations, Condensed Consolidated Balance Sheet and Condensed Consolidated Statement of Cash Flow.

In the second quarter of 2007, net sales were $118.8 million compared to net sales of $121.5 million in the 2006 second quarter, a decline of 2.2%. Total volume shipped during the 2007 second quarter decreased 9.7% compared to the second quarter of 2006. Net sales were favorably impacted by a higher percentage mix of railing, Brasilia decking and Seclusions fencing. Product replacement cost increased to $2.5 million during the second quarter from $1.8 million in the 2006 second quarter.

For the six months ended June 30, 2007, net sales increased 3.5% to $234.7 million from $226.8 million in the first six months of 2006. Volume for the first six months of 2007 was 2.9% lower than 2006, but the decline of volume was more than offset by the 7% pricing (technical difficulty)-- from May of last year.

Net income in the second quarter of 2007 was $2.6 million or $0.17 per diluted share compared to net income of $7.5 million or $0.50 per diluted share for the second quarter of 2006. Net income for the six months ended June 30, 2007 was $6.3 million or $0.42 per diluted share compared to $11.6 million for the six months ended June 30, 2006 or $0.78 per diluted share. Gross profit for the 2007 second quarter represented 25% of sales compared to the second quarter of 2006 gross margin of 30%. However, it was favorable to the 2007 first-quarter gross margin of 21%.

The second-quarter 2007 gross profit margin compared to a year ago was negatively impacted by lower manufacturing productivity, lower plant utilization and incremental labor and overhead expenses associated with the quality initiatives implemented in 2006. On the positive side, the price of purchased PE material decreased approximately 5% over the second quarter of 2006, which was a result of recent capital projects installations to improve material processing and reduce purchase poly costs.

In the second quarter of 2007, SG&A expenses totaled $22.9 million compared to $23.6 million in the second quarter of 2006. Branding-related expenses were $8.3 million in the 2007 second quarter compared to $7.7 million in the second quarter of 2006. Incentive-based compensation was adjusted during the second quarter, which created a $2.8 million favorable variance to last year's second quarter. Consumer relation expenses increased $1.7 million from the second quarter of 2006. And SG&A expenses as a percent of revenue were 19%, which was equal to the second quarter of last year.

Net interest expense in the second quarter of 2007 amounted to $2.5 million, an increase of $1.6 million from the second quarter of 2006. The increase in interest expense was the result of higher average borrowings on our working capital line of credit and a $700,000 prepayment penalty which was the result of the retirement of our 8.32% senior notes with the proceeds from the senior subordinated convertible bond offering during the quarter.

On June 18, 2007, the Company issued $85 million of senior subordinated convertible bonds due 2012 with a coupon of 6% and a conversion premium of 15%. Following the close, the Company's underwriters exercised their overallotment option, bringing the size of the transaction to $97.5 million. Net proceeds from the offering were used to pay off the outstanding balance of the Company's line of credit in addition to the remaining balance on our senior notes.

In addition, the Company renegotiated its working capital line of credit. The restructured facility is designed to meet our seasonal borrowing needs with a maximum borrowing limit of $70 million and a final maturity of 2010. As a result of the debt restructuring, our annual debt service during the next two years has been reduced from $9 million per year to $1 million per year, and our weighted average cost of debt has been reduced from 7.6% to 5.7% at June 30, 2007.

As of June 30, 2007, total debt amounted to $121 million compared to $61 million at June 30, 2006. Total senior debt was $36 million at the end of the second quarter, which consisted of $25 million of industrial development bond and $11 million in real estate notes. Our senior debt to trailing 12 months EBITDA was 1.7 at June 30, 2007. Total debt to total capitalization at June 30, 2007 was 41% compared to 26% at June 30, 2006.

Accounts Receivable at June 30, 2007 amounted to $42 million compared to $38 million at June 30, 2006. Total inventories increased from $51 million at June 30, 2006 to $80 million at June 30, 2007. Raw materials decreased $9 million, while finished goods inventories increased $38 million. Cash flow from operations was a positive $32.7 million for the three months ended June 30, 2007, primarily as a result of the decline in receivables and inventories during the quarter.

Capital expenditures during the second quarter of 2007 were $6.6 million. Investments in 2007, the remaining of 2007, have been focused on process improvements, poly reprocessing and extrusion line upgrades. We expect capital expenditures for 2007 -- for the full year 2007 -- to be approximately $25 million. Tony?

Thank you, Paul. As I commented earlier and then Paul just did also, sales revenue for the first half of 2007 grew by $8 million or 3.5%. Although this is not a very impressive increase, it is favorable to the experiences of competitive composite lumber producers and other building material manufactures nationwide.

During our May 4, 2007 first-quarter earnings call, I reported that we were behind schedule for the installation of quality and productivity enhancing equipment in our manufacturing plant. Today I can report that all of the hardware has been installed and is operating, and the startup process is largely behind us. The challenge of manufacturing top quality product without excess inspection and rejection namely managing quality in is materializing.

We are not yet at the end of the journey. In the month of June, the last month of the second quarter, we experienced improvement from the level experienced in May. Even more significant, the improvement continued into July.

Two other projects designed to reduce costs and are not production yield-related have also been completed. All three of these programs will allow us to manufacture Trex product at a higher quality and at lower cost. Although we are still a long way from achieving our gross margin target of 35%, we have reported 2007 second-quarter gross margin at 24.6%, 3.4% higher than the level reported in the first quarter of 2007. We're making progress towards achieving the equilibrium of manufacturing top quality product at lower cost.

The Trex product offering continues to change and become more formidable. The second quarter of 2007 was the first full quarter where our new Contours product was available. In a 90 to 120 day period, Contours, the value decking product which expands the breadth of our product offering, has captured about 8% share of our product sales, whereas our newly introduced enhanced Brasilia product represented 11% of second-quarter sales.

Railing products is an area where we have worked hard to improve our position. Because of increased sales and unit higher pricing, railing sales now represent more than 15% of our product mix and at a higher gross margin than that for decking. Our railing post sleeve and box railing kit have been well-received and are contributing to our improved position in the railing segment of the market.

In a new product and new business arena, we continue to be enthusiastic about Trex's Seclusions fencing designed specifically to compete in the privacy fencing market. In addition to selling fencing to installers and wholesalers, we're in the process of making Seclusions available to our two-step distribution network to further broaden its availability.

Holding the position of being the branded product on its shelves of Home Depot and Lowe's has contributed to broadening the availability of Trex to all segments of the decking market. Trex is currently available in about 2500 big box locations, and combined with our presence in more than 3000 lumberyard type locations, it is clear that Trex is the composite decking that is easiest to buy as both channels complement each other very well.

Through the first half of 2007, total sales to Home Depot and Lowe's represented between 15 and 20% of Trex's sales volume. As we indicated in our press release of May 30, 2007, we all know that there is an uncertainty surrounding the direction of the homebuilding and remodeling market. Under these uncertain circumstances, we reduced our full year 2007 revenue projection to between 330 and $350 million, and at this time we are reaffirming this full-year projection. However, given the uncertainty regarding the cost of the quality and productivity program implementation, combined with the anticipated lower equipment utilization because of lower seasonal sales in an effort to reduce inventories, we're refraining from providing earnings guidance for the second half of 2007.

Those are my prepared remarks, and I am open for questions.

(OPERATOR INSTRUCTIONS). Bill Gibson, Nollenberger Capital.

On that gross margin goal, is that a function of manufacturing efficiency, or is utilization playing there as well? I guess what I'm asking, at these revenue levels, let's say it's 350, could you meet that target?

Probably not, Bill, but we can certainly get better than the 25%. What I referred to in that goal is a goal that we have set for ourselves internally and I have shared with you folks who are either on the phone or in Investor Relations core, that our goal is to get to about a 15% EBIT in the near-term. And to do that, we have said 35% gross margin, somewhere around 20% SG&A with an EBIT of 15%.

So that is our near-term goal, and hopefully someday we can get back to the 40 or 45% gross margins we had in the past. But I think we can have a very profitable and very nice return on capital with getting to the 15% EBIT.

Good. Let me ask just one debt-related question, and then I will turn it over to someone else. Paul, where do we stand right now in terms of total debt? Is it just the convertible?

There is the convertible, which with the overallotment, was 97. There is the industrial development bonds of 25 that funded the Olive Branch facility, and we have $11 million of real estate notes that are in essence mortgages that funded the other two facilities.

Okay. I think you threw out that number. I just wanted to confirm it. And in terms of with the net share settlement provisions on the convertible, what do we use for a diluted share count?

Well, at this point you would not change your diluted share count until the stockprice went through the conversion premium, which is a little over $21.

Okay.

But it is not adding 4 or 5 million shares. It is heading roughly 1 million shares.

With the net share settlement at, say, $25, you would have about a 4% dilution, and if you went as high as $40 per share, you would be in the 13 or 14% as I calculate through the net share settlement process.

And then we have about 15 million shares, Bill.

Okay. Good.

Keith Hughes, SunTrust Robinson-Humphrey.

On the railing, you had given us a 15% number. That was in the second quarter? Is that correct?

That is correct.

What would it have been all of last year average the last couple of years as kind of a comparison?

Somewhere around 10%.

10%? And what has caused it to move up?

Well, the two things that we have done that are concrete is number one we have actually we reduced -- we reduced our unit sales because of the fact that we introduced this post sleeve, this sleeve that goes over a 4 by 4 wood post. And then that was really asked for by our contractors more than our homeowners because they don't really care. Most decks are installed by contractors.

But then we also introduced a box railing kit where now when people go to buy the railing kit, they don't have to count how many -- what the length of (inaudible) they have to buy, what the length of top rail and bottom rail. Basically it is in a kit form.

And any other part of it, Keith, and probably more importantly is I think we've improved the quality of the overall offering, and we're really emphasizing through our product management (inaudible) the importance of railing as well and make people aware of the upscale railing offering we have.

And then on a different note, in terms of distribution, have you had any change in your or about to have any changes in your distributor partners? I know one of your nearest competitors announced it in their agreement here recently. (multiple speakers)

Well, why don't we let Andy Ferrari let him earn his keep a little bit on this call. Yes, we have had one, and Andy will talk to it.

Yes, we are severing our long-term relationship that we have had with Parkside Plunkett-Webster, Keith. And let me give you a little history of what happened. Parkside Plunkett-Webster informed us on July 20 that they intended to take on a second competitive or a competitive non-wood decking line in competition with Trex, and that violates the contract we have with all of our distributors. They asked to have us amend the agreement. We feel very strongly that the strength that we have is that our distributors are all focused on Trex. They don't carry competitive lines, and it would not be right for us to amend the contract for one distributor and not the whole country.

So we informed last Friday, informed PPW that we were exercising a clause in the agreement to terminate them for violating the exclusive provision in the agreement, and we have done that and sent out an announcement to our distributors. The good news is that we have another distributor in each of the markets that PPW was serving. We have another fine distributor -- not the same one -- in each market.

We have never -- all of our regions always have two distribution elements to it.

Okay. What area of the country does this incorporate?

The primary area here would be Baltimore, Washington, up through New England. So we have -- so the good news is, we have another strong distributor.

The other good news is that we are now in the process of meeting with distributors and selecting replacements for PPW, and there is no shortage of very fine distributors who have stepped up and said that they want to be considered to carry Trex either our brand position, our market position, our breadth of product line.

And the third thing is the PPW will continue to service their accounts on an interim basis as we phase through this.

How long will the phaseout take do you think?

It will take at least 30 days.

30 days, okay.

The bottom line, Keith, is our dealers will not be short of product, irrespective of whether PPW supplies it or the alternate distributors (inaudible).

As you pick up the alternate distributor, it seems like there could be a lag period as you are making the transition.

Well, there would be, except that with the fact that we have two distributors in every territory allows us to feel more optimistic about it.

John Baugh, Stifel Nicolaus.

Well, first of all, congratulations or condolences whichever the case may be.

Well, the only qualification you need, John, is to be old.

Well, sorry to see you go, but I'm sure you will enjoy retirement. And hopefully this will be permanent retirement.

Well, it is the third time.

There you go. Let's see, Paul, you mentioned 15 to 20% mix of Home Depot, Lowe's here. What was it a year ago roughly?

Probably about 8% to 10%.

Okay. I missed it -- there was a comment about Contours being 8%, and then there was something right after that being 11%. I missed that.

That was the new Brasilia product which we had basically deemphasized as we improved not only the quality of the product but our ability to manufacture it. We introduced it in the second quarter this year.

Okay. And how is the production of that product going? Because I know you are like almost negative gross margin on it at one point.

Right. It is much better, and we're doing as -- basically we went back to the drawing boards in R&D, and the components for making that Brasilia type product with the rainforest type of appearance, we really reevaluated all the components in that particular cross-section of the composition component. And I would tell you I'm not 100% pleased at where we are, but it is almost there, and we're producing product that is consistent with the same quality that people see day in and day out. It does not look different. And our yields and production rates are improving. I feel good about that it is going to happen.

Okay. And there was a 1.7 million customer relations. I think that is sort of claims or returns or whatever. How did that number compare year-over-year?

I'm going to let Paul try that.

It was up 1.7. This year it is about -- this quarter it is about 3% of sales. Last year same quarter about 1.7%.

Okay. And is there any way of projecting that going out? I mean with all the improvements you are making on the quality end, when does that start to show up as an improvement year-over-year?

I think we're going to start seeing some improvement probably 12 months from now. How rapidly that decline will be, I am not sure because we have a fair amount product out there that sometimes gives the reason for sending it back or not being happy with it. So, therefore, we feel like the client is not too far away.

I guess you're not going to break out a fencing number. But if you don't -- if you do great -- but how is that tracking relative to your expectations? You mentioned the distribution opening it up a little bit, but my understanding was this was a different, primarily a different distribution network.

I am going to let Andy try to answer that.

We're very pleased with the progress we're making as we're rolling out fencing. You're right; we have gone to a different distribution path. We have gone to major companies -- major fence installation companies across the country, and they have signed exclusive agreements with us for non-wood fencing. And we have 28 of those really premier countries companies across the country in 55 locations.

And we are also, as Tony mentioned in his remarks, rolling the program out now to our distributors who service lumberyards. So we feel that we will have the best of both worlds there, having strong installer base and also using our Trex's lumberyards to handle our decking product.

And are you having any quality issues with fencing?

No, we're not. Quality is very good.

And lastly, there was a I think $38 million year-over-year increase in finished goods inventory, and I know you have got extended fencing and other things. But how does that in light of the building environment we are in, how do you feel about that number, and what does that imply?

I guess your revenue guidance for the year implies your revenues will be flat for the second half. Your inventories are well up. I am just trying to get a feel for implied productivity or plant utilization in the second half relative to your inventory and outlook?

The inventory levels will come down somewhat between now and the end of the year, and basically we are managing the inventory product line by product line. So when you look at a gross number sometimes, it does I give you a full feeling of whether the inventory is too high or too low. And, as we are making some of these changes with the Brasilia, which we have to make sure we have inventory to support as well as the Contours. So basically we expect the inventories to be about where they were at the end of 2006.

[Chris Vanis], Wachovia Securities.

I just had a couple of questions here. I am wondering if you could just talk about you had mentioned that the price you paid for plastic in the second quarter there had retreated a bit. What have you seen in July so for, and kind of what is baked into your estimates through the end of the year?

We expect the decrease to hold and maybe even decline a little bit more. And part of that is not because the market for plastic or poly has come down. Part of that has to be -- has to do with the fact that we are using the poly more efficiently, and it is a function of the productivity equipment that we are basically just finishing installing.

Okay, makes sense. And if you could just give us a little bit better idea about the gross margins you're seeing across your different products. I would assume that you are seeing pretty significant variances there.

Well, if you talk about Brasilia, which we just really got started, it is not really up to snuff with the entire product line like Accents. Contours, which is a pretty relatively easy product to manufacture except for the volume being not up to Accents and things of that nature, it is comparable to the mainline of our product line. And the fencing area is just basically getting started, and we're seeing good productivity in terms of shall I say units per hour or whatever. But it's carrying a third fairly heavy burden at these lower volume levels.

Keith Johnson, Morgan Keegan.

Just a couple of quick questions. One, it looks like the tax rate in the quarter was a little bit I guess lower than what you guys had in the first quarter. I did not know if there was a particular driver there.

I'm going to let Paul answer that.

Well, we're tracking -- we adjust the quarters to get to it is a more of a full year number we are tracking to. So I think the full year tracks to more of a 35% number then to historic 37. But that is subject to change as you know.

Okay. So it was just kind of a one quarter true-up?

No, it's just -- yes, it is just to bring it to a full-year estimate that is in the 35% range.

I know you guys talked about the number of Lowe's and Home Depot stores in total. Can I get that broken out between the two?

Why don't we just leave it at the 2500 and just say there's not much difference between the two.

Okay. I guess it looked like sales showed a little bit more strength maybe than what expectations were kind of coming through May, early June. Were there any particular channels where you saw the strength as you came through the quarter?

No, I think overall we have been pleased with the demand for the product. Our latest reports from the inventory levels and sales levels out from our distributors are the inventory levels are down a little bit, but more importantly the sales out are up pretty nicely. And if we can keep that kind of rate, we are going to be very happy with the second half of the year.

And I heard part of the conversation on the change with I guess PPW. How does that work with any inventory that they had at their existing locations?

I think that will be a case-by-case situation. In the contract, we're not required to take back inventory, but we will certainly work with them.

Okay. And you talked about that I guess toward the end of the quarter you started seeing better efficiency improvements and all that take hold. Is there any way you could quantify that between kind of May and June on an operating basis how it affected your production?

We've talked about material yields in the past, and you have heard me use terms as low as 70, 75%. We're north of 80 now and moving up.

The nice thing is we have had three months in a row where we have had increasing yields each month, and that is continuing into July. And part of that is because, as I said earlier, all the equipment did not get installed instantaneously in one day. So we have been installing the equipment periodically day in, day out month by month, and as the equipment gets installed, we're starting to see the benefits of that installation.

Okay. Now it has been in all three of the producing locations?

It is now, yes, and some of the lines that we have modified have only had about a two or three week experience right now. So we're still on a learning curve. There's always a startup process when you install equipment no matter how much you know it. But, of course, the last pieces of equipment installed are benefiting from the learning curve of the first pieces of equipment.

And so does that allow you -- can you talk a little bit about fee, price (inaudible) to go. But did that allow you guys to get further down in the plastic stream to some of the lower call sources here in the quarter?

Yes. And I had suggested that to you guys on our last conference call, and when I cannot keep track of all the times we have met and who met with. But that is something that is going to be an upside to us. When we installed the equipment, it was mostly to get better yields with the existing raw material feedstream. However, I did say there was an upside that we did not count on in estimating our economics that we might be able to go to lower cost feedstreams. And in some of our lines, we're experimenting with that already.

Robert Kelly, Sidoti & Co.

Congratulations to you. I don't know if you covered this already. You guys were carrying the direct labor, and then you mentioned in the release you had the equipment installed. Should we start to see that trend toward zero in the second half of the year, or are we already there as far as the quality checks that you had?

Okay. We had I think the last time I reported that, we had about 250 people in our three plants doing that inspection in terms of -- the term I use inspecting quality in. We're down around 150 now and moving down hopefully quickly.

And that is the second half 2007 or 2008?

We expect to have probably a big portion of that down by December this year.

And how much -- can you quantify how much savings that gives you?

I don't have it off the top of my head.

It is probably in the 100 basis points of margin, somewhere in that range.

(OPERATOR INSTRUCTIONS). Eric Prouty, Canaccord Adams.

Maybe a little comment on some of the competitive landscape. I guess could you give us a little flavor for what you think the industry capacity is like now? And then maybe a comment on the LP exit. Do you expect to see more consolidation or other people exiting the industry?

Well, I think it is not a secret there is excess capacity out there, including ourselves. We are operating at somewhere around 80 to 85% utilization. But there are smaller players that you don't see that have exited the market also. And also the market -- overall composite market has not grown the way it had in the past 15 to 18% a year, and we believe some of that has to do with the price elasticity curve that you might want to draw as it relates to speaking to the attractiveness or the premium you pay for a composite or Trex deck.

As you know, we did not have any price increase so far this year, and with the prices of lumber continuing to drop, we're not sure where it is going to go in terms of suggesting to the homeowner that, in fact, it is a better deal to be paying more now and paying less in maintenance later.

But overall there is excess capacity. In the line of that excess capacity, we believe our market share I am pleased to say has grown from about 31% to 35% over the last 18 months.

One of the nice things about our market share increase, it has occurred with the independent lumberyards, with the national lumberyards, with the big box channel. All three of those have all shown share increases for Trex.

And I guess do you have a view into what is going on with the pure plastic lumber manufacturers? Do you think that composite is gaining over the pure plastic?

Well, I don't -- when I hear the term pure plastic, I refer to some products that were existing several years ago that for the most part are really not survived or have survived at very low levels. If you're referring to a product called Procell, which is a -- it is not pure plastic, however, because it has some material in the organic material in there also.

I think that is a category that will have its place in the marketplace and overall will capture a portion of the market. We are evaluating how we if we want to or how we will participate in that section also. Did I answer your question?

Right, yes. Thank you.

Tyler Burke, Trenton Capital.

I wanted to follow-up on a question about PPW. Are you having similar discussions with other distributors? Do you think that others might follow suit?

We do not feel that other distributors will follow suit.

Okay. And what percentage of revenue was PPW?

They were one of our major six distributors, and I would put them into the 10 to 20% range. I don't feel comfortable giving you an exact number for one of our customers.

Okay. That is fine. On Home Depot, Lowe's, can you go back over what you said? Did you say they were 15 to 20% of revenue for this quarter?

Yes.

Okay. Because looking back from last quarter, that is higher than I would have expected. Was business better there than you expected and worse other places, or how did that work out mix-wise?

Well, part of it had to do with the fact that Lowe's was just getting started. And in the second quarter, I forget exactly when in the second quarter, but in the second quarter, say mid second quarter is when they got fully outfitted of handling Trex on the shelf.

Okay. And then finally, on the line of credit, can you -- you said that you refinanced the line that was to mature in September 30.

Yes, that is correct. The prior maturity was September of this year. We renegotiated that out to 2010 with a maximum $70 million in restructured covenants based on our senior debt level.

Okay. Were you in violation of those covenants at the end of the quarter?

No, absolutely not.

So you reduced it from $100 million down to $70 million. Did you get a better interest rate?

We are on a grid, so our debt to EBITDA is the pricing metric. And so as we -- our senior debt to EBITDA is about 1.7. That grid goes from 1 to 3.25. So we're in the middle to lower end of that grid (multiple speakers) quadrant.

Okay. So that looks only at senior debt?

Yes, absolutely.

Because total debt to EBITDA is more like 5.5 with my numbers.

That is correct.

Okay. But they only care about the senior debt?

That is correct.

Okay. Great. Thank you very much.

[Neil McConnell], [Ronis Capital].

I just had one follow-up on PPW, and I apologize if you have gone through this. Can you help us understand how much inventory may be -- they might have right now and how that gets worked through?

Well, we -- I don't think I feel that I should be talking about what a customer's inventory position is right now. But their inventory is not an excessive amount of inventory. It is very typical to what they would normally carry. We will work with them on trying to make sure that there is an orderly transition over to the new distributor. Their inventory right now as it stands is actually about 25% lower than it was at the same time last year.

Okay. And would you expect them to discount, to move that through now that you have discontinued them?

We're going to work with them to make sure as I said that it is an orderly transition. So hopefully we will not have discounting in the marketplace.

Okay. And then the last question I had on the inventory, did I hear you say correctly that the balance should be roughly equivalent to where it was last year, so around $110 million?

The overall, yes. Within the degree of accuracy we can predict right now, yes.

Keith Hughes, SunTrust Robinson-Humphrey.

I kind of want to follow up on the inventory question. You were pretty substantially versus second quarter prior year. Is this going to entail in the third and fourth quarter pulling out production below last year to keep the inventory at 110 for the year?

Yes.

Yes.

We had a lot of new products that we had to have inventory for while we were trying the fencing, the Contours, the Brasilia. We wanted to make sure that we were not going to short the market because we could not assign a line to manufacture that. So we have had higher inventory of our mainline products. Now we're going to bring that down.

Is there any one specific product of all of your lines, or is it across the board?

Well, our main -- I mean you know Contours, I mean Accents is 70% of our product mix. So you've got to figure the lion's share is there.

(OPERATOR INSTRUCTIONS).

I guess we don't have any other questions?

There are no further questions at this time.

Let me close with a few remarks. Is that okay?

Yes, sir. Please proceed with any closing remarks.

Okay. I want to close by saying Trex is making progress in a weak building materials marketplace. Trex's distribution channels have broadened with the agreement with Lowe's and the expansion at Home Depot. Decking product lines will be expanded, and we have already done some of that this year. Trex's market share in the decking and railings sector will increase as it has in 2005 and 2006. As I said during this call, our best estimate is we increase from 31 to 35%.

Our fencing product line, Seclusions, will establish itself as the best available product in the privacy fencing market, and we're getting ahold on that right now. We're getting some of that right now.

Productivity and quality capital expenditures have started to yield lower costs and will be the basis for improved gross margins in 2008.

Those are all the remarks I have to conclude our discussion, and I'm ready to terminate the call.

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