Trex Company Inc (TREX) 2008 Q4 法說會逐字稿

Welcome to the Trex Company fourth-quarter and full-year earnings conference call. At this time, all participants are in a listen-only mode. Following management's prepared remarks, we will hold a Q&A session. (Operator Instructions). As a reminder, this conference is being recorded today, February 27, 2009. 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 Ron Kaplan, President and Chief Executive Officer and Jim Cline, Chief Financial Officer. Joining Ron and Jim are [Brad McDonald], Controller; [Brian Berteau], Director of Financial Planning and Analysis; and Bill Gupp, General Counsel.

The Company issued a press release this morning containing financial results for the last quarter of 2008 and for the full year. This release is available on the Company's website, as well as on various financial websites. The call is also being webcast on the Investor Relations page of the Company's website where it will be for 30 days. I would now like to turn the call over to Bill Gupp, Trex's General Counsel.

Thank you, Harriet. Before we begin, let me remind everyone that statements on this call regarding the Company's expected future performance and condition constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements are subject to risks and uncertainties that could cause the Company's actual operating results to differ materially.

Such risks and uncertainties include the extent of market acceptance of the Company's products, the sensitivity of the Company's business to general economic conditions, the Company's ability to obtain raw materials at acceptable prices, the Company's ability to maintain product quality and product performance at an acceptable cost, the level of expenses associated with product replacement and consumer relation expenses relating to product quality in the highly competitive markets in which the Company operates.

The Company's report on Form 10-K filed with the SEC in March 2008 and its subsequent filings on Form 10-Q and Form 8-K discuss some of the important factors that could cause the Company's actual results to differ materially from those expressed or implied in these forward-looking statements. The Company expressly disclaims any obligation to update or revise publicly any forward-looking statements whether as a result of new information, future events or otherwise.

To supplement the Company's consolidated financial statements, the Company uses certain measures defined as non-GAAP financial measures by the SEC. A reconciliation of these results to GAAP is attached to today's earnings release. With that introduction, I will turn the call over to Ron Kaplan.

Thanks, Bill and thanks to everyone for joining us on our call. The fourth quarter wrapped up a very successful year for Trex Company and I would like to go over some of the many factors that contributed to this success.

First, let's review the financial results that we released this morning. Net sales for the full year totaled $329.2 million, slightly above 2007 sales despite the very tough market that existed throughout the year. More importantly, we recorded net income of $13.6 million, or $0.90 per diluted share for 2008 compared to a net loss of $75.9 million, or $5.10 per diluted share for 2007. In the last three months, we did feel the impact of the rough economy, but the quarter unfolded essentially as we expected.

I will now turn the call over to our CFO, Jim Cline for a more in-depth look at our numbers and then I will come back on to give you more details on our progress and the course we have set for 2009.

Thank you, Ron. Good morning, everyone. As Ron mentioned, our press release was issued this morning. The numbers I will reference are contained in the tables headed Condensed Consolidated Statements of Operations, Balance Sheet and Statements of Cash Flow. In addition, due to the magnitude of the nonrecurring charges recognized in the fourth quarter of 2007 and fiscal year 2007 results, we have provided pro forma profit loss statements to provide enhanced clarity of the Company's underlying financial performance.

First, I would like to review our fourth-quarter financial results. In the fourth quarter of 2008, net sales were $29.3 million compared to net sales of $30.3 million in the fourth quarter of 2007, a decrease of 3%. When excluding the unusual charges that impacted sales in 2007, the decrease was 31%. This reduction was primarily driven by the macroeconomic conditions affecting North America.

The fourth-quarter net loss of $10 million, or $0.67 per share, was a significant improvement over last year's fourth quarter in which the Company reported a net loss of $41 million, or $2.75 per share. Our business is highly seasonal due to the nature of outdoor improvements and a loss for our business is normal in the fourth quarter.

The fourth-quarter 2008 pro forma gross profit was $6.5 million, a 13% decline as compared to the fourth-quarter 2007 pro forma gross profit. The fourth-quarter 2008 pro forma gross profit was 22.2%, a 480 basis point improvement compared to the pro forma gross profit for 2007. We've continued to enhance gross profit margins on a year-over-year basis through a combination of improved productivity and reduced costs despite operating at significantly reduced levels of sales and capacity utilization.

During the quarter, we continued to optimize our proprietary manufacturing process and managed costs throughout the organization. The price of our purchased polyethylene material in the fourth quarter of 2008 was lower than the fourth quarter of 2007. The Company operated at a 40% lower level of capacity utilization in the fourth quarter of 2008 compared to 2007 due to our focus on cash generation and reduced demand.

Fourth-quarter 2008 pro forma SG&A expenses totaled $12.8 million, a 37% reduction compared to the pro forma SG&A expenses in the fourth quarter of 2007. This reduction was due mainly to lower branding expenses and staffing costs.

The fourth-quarter 2008 pro forma loss from operations was $6.3 million. This was one-half the pro forma loss from operations recorded in 2007. For the full-year 2008, net sales were $329.2 million compared to net sales of $329 million in 2007. When excluding unusual charges from 2007, sales decreased by 10%.

Net income for fiscal year 2008 was $13.6 million, or $0.90 per share compared to a net loss of $75.9 million, or $5.10 per share in 2007. Fiscal year 2008 pro forma gross profit was $95.8 million, or 29.1%, a 500 basis point improvement compared to the pro forma gross margin for 2007.

The Company executed soundly on its process improvement and cost reduction initiatives. The positive effect of these efforts on 2008 gross profit was partially mitigated by reduced levels of capacity utilization. The negative impact of operating at this reduced level of capacity was approximately 560 basis points compared to the pro forma 2007 full-year results.

Fiscal year 2008 pro forma SG&A expenses totaled $59.7 million, a 22% reduction to pro forma SG&A expenses in 2007 due to a reduction of branding expenses and staffing costs. On a pro forma basis, SG&A expenses represented 18.1% of revenue in 2008, which is a 270 basis point reduction compared to the pro forma 2007 period. Fiscal year 2008 pro forma income from operations was $36.1 million, or 11% of net sales. This represents a 770 basis point improvement compared to 2007 pro forma operating margin.

The Company recognized an income tax benefit of $800,000 and $1 million for the 2008 fourth quarter and fiscal year results respectively as a result of recognizing a decreased valuation allowance against the deferred tax asset and other favorable tax adjustments. The combined effect of the 2008 effective tax rate as compared to the 2007 effective tax rate accounted for $0.19 of the increased earnings per share for the 2008 fiscal year.

As of December 31, 2008, total net debt amounted to $111 million, which represents a $23 million reduction from December 31 of 2007. Total net debt to total capitalization at December 31 of '08 was 50% compared to 59% at December 31 of 2007. Inventory was $69 million at the end of December 31, 2008, a $23 million year-over-year reduction or 25% lower than 2007.

Free cash flow was $25.2 million for the fiscal year 2008 compared to a negative $25.2 million for 2007, a $50 million improvement. The improvement was primarily the result of improved earnings, reduced capital spend, inventory reduction and other working capital management.

Capital expenditures for the fiscal year 2008 were $7.8 million, a $16.2 million reduction compared to fiscal year 2007. Our 2008 investment strategy was primarily focused on lower spend projects that supported our productivity and cost reduction initiatives while improving our return on invested capital.

There are two financial reporting topics that will impact 2009 results that I would like to make you aware of. First, Trex will adopt an accounting pronouncement, which relates to embedded interest on convertible debt. This will increase non-cash interest expense in 2009 by approximately $2 million.

In addition, we anticipate that our income statement will continue to benefit from our deferred tax valuation allowance through the end of 2009 and expect our effective tax rate to be under 2% for the year.

Finally, I would like to summarize several achievements from 2008. The pro forma gross profit for 2008 was 29.1%. This strong improvement was achieved in spite of a significant reduction in capacity utilization compared to 2007. In 2008, capacity utilization declined from 73% in 2007 to 47% in 2008, adversely impacting gross profit margin by approximately 5.6%.

While we significantly reduced inventory in 2008, our service levels compared to 2007 improved slightly to 90% in 2008. Management believes that we can achieve our service level goal of 95% while continuing to make significant reductions in inventory.

Since the first quarter of 2008, we have been in compliance with all debt covenants and have eliminated the occurrence of unfavorable surprises to our lenders. Trex has not needed to utilize its revolver since May of 2008 and currently has in excess of $20 million of cash on deposits. Ron?

Thanks, Jim. As most of you know when I joined the Company a year ago, Trex faced both internal and external challenges. Trex's brand strength, distribution channels, sales momentum and product design were all sound, but the Company's operational execution and financial performance needed substantial improvement, especially given the challenging environment we have all been operating in. I am proud to say that with the contributions of a very capable new management team, as well as the expertise and support of the Company's employees and Board of Directors, we have restored Trex to financial health, boosting earnings and free cash flow. I feel that our business turnaround is well underway. We continue to implement further process improvements, which should allow us to realize further benefits in 2009.

They include significant efforts on cost reduction and working capital management. Throughout the year, we focused on growing shareholder value based on the guiding principles of providing a best-in-class product offering, expanding our distribution presence, increasing our brand leadership and advancing our low cost competitive advantage. We also focused on gaining credibility with our key constituents, including our customers, banks, shareholders and employees. As you can see from the financial results, we have been successful in advancing our position in all of these areas.

I want to highlight some of the core accomplishments during 2008 that contributed to Trex's enhanced performance and positioned us for the future. When I joined the Company, we were not compliant with certain debt covenants contained in our banking agreements. We moved quickly to rectify the situation and restore our banking relationships with the core objective of eliminating surprises, which previously had led to numerous amendments to the credit agreements. There were no such surprises in 2008 and we don't intend to have any moving forward.

We overhauled the organization, which reduced costs, established clear lines of authority and made the organization more nimble, which led to more timely and effective decision-making throughout the organization. As you know, we implemented a series of productivity and process improvements focused on manufacturing a higher quality product at a lower cost. Plant productivity increased and costs decreased as we utilized the principles of lean, Six Sigma and other best-in-class manufacturing techniques, including procedures focused on safety. In fact, we had a 65% improvement in safety over prior years based on recordable incidents.

Our cost reduction and process improvement initiatives were broad-based and expanded beyond the manufacturing operations. We reduced the use of consultants and implemented internal controls aimed at driving a level of discipline throughout the organization that supported our goal of execution aimed at restoring confidence with our key constituencies.

Activities taking place on a day-to-day basis that don't receive much attention externally include increasing our information technology effectiveness by upgrading our systems and delivering more timely and effective information and reporting to support decision-making. We expanded our product platform, rolling out Trex Escapes, ultra-low maintenance decking and grew Brasilia with the Trex Hideaway fastening system.

Our goal has been to provide our customers more choices on building products that allow them to build a deck, railing or fence that is distinctive, but requires less maintenance than wood. I am happy to report that our new products have been well-received by the market.

We strengthened our distribution networks through a number of steps, including stronger partners in the West. And we took steps to enable us to expand our supply of Escapes, essentially doubling the supply so that we can reliably meet market demand.

These stories I have highlighted, as well as many more Company successes that I haven't mentioned, help return Trex to profitability and our shareholders were rewarded with a solid performance in our stock price for 2008. In addition, employee morale has increased significantly. This organization has a high sense of esprit de corps and unit cohesion.

Moving forward, we will complete the business turnaround that we began a year ago and continue to concentrate on long-term growth and shareholder value by responding to consumers' desire for attractive, high-quality outdoor living products.

For competitive reasons, I can't share with you yet all the things we have on tap for 2009, but I would like to call out a number of important initiatives. First, product innovation has always been an opportunity and strength for Trex and we are continuing to expand our productline in 2009. We want to make it easy for homeowners as they seek to maximize their outdoor living experience and turn their backyard into the next great room. We think our significantly expanded Artisan line of railing offers an especially promising growth opportunity for us and are focused on considerably expanding Trex's marketshare in this category.

Privacy fencing is another great growth opportunity for our Company. We have been expanding our distribution footprint and recently introduced an exciting new product that is targeted to the DIY segment of the market.

In addition, our R&D engineers are developing some new opportunities that we think have a lot of promise and we will report back to you as these projects near completion.

On the marketing side, I mentioned on our last call that we have retained a new advertising agency, The Neiman Group. We have implemented a two-pronged campaign -- one for the consumer and one for the trade -- to drive awareness and preference to the Trex brand. We are carrying out an aggressive innovative marketing campaign for 2009, including a so-called walk-the-walk tour with a movable on-site display of Trex decking and railings starting Monday. This display will go to 10 different cities to spread the word on Trex to contractors and consumers and I will personally lead the way.

We have also expanded our website to include features that allow consumers to find out more about the advantages Trex offers, design a deck and test out new looks. And we've started a new website, trexpartners.com, to provide the trade with information on Trex and its capabilities and offer tips for helping contractors build their business.

We are proud to offer an eco-friendly product to consumers who are increasingly concerned about sustainability and their impact on the environment. We've utilized waste plastic and waste wood -- most of, which not used by Trex, would end up in landfills across the country. We will continue to foster and deliver green products that satisfy consumer demand for outdoor living.

Finally, although I can't share any details with you at this point, I would like to say that we are assessing strategies that will enable Trex to take advantage of today's tough market conditions and gain additional marketshare.

Turning now to our guidance for 2009. As everyone knows, this is an extremely challenging environment for every business and the economic turmoil makes it difficult for us to predict our top line with confidence. That said, we have established a target of $60 million for net sales for the first quarter.

It is important to emphasize that these numbers are not directly comparable to our sales in the first quarter of 2008. As we noted in this morning's release, we expect a shift in purchasing patterns as our customers order more based on pull-through demand than in past years due to the current economic condition and the redesign of our early buy sales program. As a result, we expect our sales activity to be considerably more weighted to the second and third quarters as been in previous years.

As we get further into the year and have better visibility of sales, which we expect during the second quarter, if necessary, we will adjust our operations and cost structure. This management team is committed to maximizing shareholder value and maintaining liquidity. Throughout 2009, we will maintain a strong focus on free cash flow. This has been a very successful strategy for us in 2008 and we are going to stick to it. Operator, we are now ready to open the call to questions.

(Operator Instructions). Keith Hughes, SunTrust.

Thank you. I guess first question is on cost savings for '09. You have done a great job in '08. How much left is there to do? Is there any sort of metric or number you can put around that?

We could, but it is our policy not to put a metric around that. I guess I would ask people to -- past behavior is probably an indication of future behavior. This management team hasn't shown itself to be bashful.

Okay. A second question on the first quarter given the sales view. Is that going to be a profitable quarter for the Company?

We don't give guidance on profits going forward.

Okay. And third question regarding the balance sheet, just yes or no. In this fourth quarter, we are heading into the cash-poor period of the year. Is that correct and that will improve with the third quarter being the cash-rich period?

That's correct. The first quarter going into the second quarter is typically the low end of our cash availability.

Okay. And as you look at inventory as you stand today, given what is going to be a slow start to the season due to the reasons that you mentioned earlier, is inventory, and a tough environment we are going to be in in 2009, is it going to be another source of cash in 2009?

It is going to be another source of cash in 2009.

Okay. Is there a minimum level of inventory that you just can't go below to keep -- basically they've got to keep product in the warehouse to keep running. Kind of give us an idea of what that is.

There is. It is something that we watch very carefully, but I am not going to indicate what that level is.

Okay. And final question, you talked about some new product initiatives. Not asking what they are, but when would we see those in the market, do you believe?

If we are going to unveil them, we would unveil them most likely at our next distributor meeting, which is held in late September, early October.

All right. Thank you.

Jack Kasprzak, BB&T Capital Markets.

Thanks, good morning, everyone. Congratulations on a good year. First question is the fourth-quarter gross margin looked to be about 23.4%, which is a little lower than what we had seen through the first three quarters of '08. Is that just a reflection of seasonally slower period and lower utilization rates or is there something else going on?

That is primarily what it is. Reduced capacity utilization, as well as you have the holidays in there, two large holidays, a lot of vacations.

Yes. Okay. And CapEx in 2009, I mean can we still expect -- would we expect a similar level to what we saw in '08, fairly de minimis levels?

We wouldn't call it de minimis, but I would say it would be fairly similar.

Fairly similar? Okay. And with regard to the first-quarter sales guidance and the comment about changing in customer buy patterns. Obviously we know the economy is weak, but you mentioned too you have redesigned your early buy sales program. I mean can you -- how much of it is just the uncertainty in people only making a purchase with an order in hand and how much of what is going on with the shifting in sales is redesign of the early buy program?

Yes, that's an excellent question, one I anticipated. It is extremely difficult, if not impossible, for us to conjecture as to how much is attributable to which explanation. What we see out there is the same thing that I am sure you see, which is we have a distribution chain, which appears to be very, very thin. This channel is not jammed at all. We think that there is going to be a very quick response period between when the end consumer buys something and it filters all the way back to the factory.

Having said that, distributors just aren't going to buy anything to put on their shelf. When they need it to replace something that comes off their shelf, they will place the order.

Now on the other hand, we did change the early buy program and we removed the requirement that the distributors by a certain minimum level to achieve their discount. The discount now is based on the function of how early they buy it, but this was not the right year to be jamming the channel in an early buy program. It could have had, I think, an unintended consequence. I will put it that way. So there is going to be some shift to the second quarter based on redesign of the program and some shift based on distributors just not wanting to buy anything a moment before they need to replace something that has left their shelf.

That's helpful. Thank you. Lastly, just starting the quarter, any change in the competitive landscape? I know we have seen some competitors come out of the industry. Anything notable with regard to the competitive landscape in the fourth quarter?

Yes, I have got competitors listening to me right now. We do have what I will refer to as -- well, some finite and some anecdotal information and we continue to go northward on marketshare. And this is a marketplace with -- I will say it is a marketplace clearly in transition. There is a lot going on out there. In the meantime, we are sitting on a treasury and we're going to protect it very carefully.

Great. Thanks a lot, Ron.

John Baugh, Stifel Nicolaus.

Good morning. I believe, if we look at '08, you have achieved this significant swing. I think you said 4 -- I can't remember for the year. It was 480 basis points for the fourth quarter of gross profit margin, but it sounded like it was close to a 500 -- I can't remember -- positive swing, and yet you had a negative impact from underutilization of 560 basis points. So first, I just want to make sure I heard that right. I mean you basically had a 10-point improvement on 1000 basis points, excluding the impact of negative utilization. Is that correct?

John, you are exactly right. The impact was a total of a little bit more than 10% year-over-year on a pro forma basis.

Okay. And that leads into my question, which is how do we think about '09? I think you ran 47% of utilization in '08 and we have to take a stab at an estimate in '09 and presumably revenues will be down. If you are going to lower inventory further, production therefore would be down, but you mentioned you had lower polyethylene going into -- or in the fourth quarter in terms of purchases. I'm just kind of wondering should we be, relative to the pro forma, what, 29% gross margin for '08, thinking that gross margins can still go up because we have got lower costs and productivity initiatives. Or is it volumes are going to be down so much that productivity is going to be down -- utilization, I should say, will be down so much that it is going to offset? How do we think about that?

John, you are hitting on the issues that certainly you ought to be and as you know, we don't give guidance going forward. I think you clearly understand that we are going to be reducing inventory. That is going to cause us to reduce our capacity utilization. We still have a number of initiatives that we believe we can generate positive results on the gross profit line and the balance is how much of that reduced capacity can we overcome with the cost savings. And I would say that we can do a fair amount to overcome that. We have had extreme success over the last year. We have got a number of initiatives, but as far as giving exact numbers on where we are headed, we just aren't prepared to share gross profit guidance at this point.

So I mean it wouldn't be a forecast on [you] if I told you revenues were going to be down 20% or gave you that number, is there all way to, and maybe offline, get at, okay, if that happened, we think gross margins would be roughly X or some kind of variable fixed help? I know you don't want to give out numbers, but that is not making an estimate as much as it is saying --

I think you have got to remember that this management team is committed to not allowing inventory to grow, continuing to effect operational improvements to keep our cost line and structure with our demand and I think the $64,000 question then for you guys to come up with is what is going to happen with macro demand. And so I am trying to give you the formula. I can't really go any further than that.

What was -- are you willing to go out on a limb and say you're fairly confident you would be profitable in '09 based on guesses internally of where revenues will be?

I would love to answer that question, but I am absolutely committed to sticking to the basic principle that I established when I took this job, which was I don't give guidance.

Okay. What was brand spending as a percentage of revenues in '08 versus '07 and then per the plan for '09?

Hang on a second. Branding went down substantially in '08 versus '07, but we do expect it to rise somewhat over '08 levels. It will be higher than '08, less than '07.

Okay. And then -- let's see. I was -- I wanted to -- you had mentioned the early buy program changing. The only change, again with a similar discount for buying early, but no required minimum volume?

Essentially, that is correct.

Okay. And you seem to be, in the comment about marketshare, hinting that there is an opportunity to consolidate somebody out, but without giving away what is going on, would there be a scenario where you would be committing a material amount of capital to a situation?

I don't envision a scenario where we go and buy another company and they give us the keys to the front door and we write them a check. I don't see that classical type of consolidation occurring. I mean if you look at Trex, we sure got more than enough factories. We have got the technology. We have got the property, plant and equipment. So I am not sure that it would be in our interest -- in fact, I am quite confident that it is not in our interest to go out and start buying competitors and paying for the privilege of putting them out of business. I don't think that is a wise strategy. I think what we are going to do is stick to what we do best, which is run our own little business. But having said that, there may be some creative ways of continuing to increase our marketshare.

Okay. Yes, I wouldn't think you would need capacity or inventory at this point. Last question is maybe for Jim. Could you walk us through the liquidity covenants? You mentioned -- we all know seasonally when you peak. Kind of where the issues there are, kind of how the year plays out on that front?

John, as you are aware, companies such as Trex model on a number of different scenarios what the impact would be on covenants. And we have looked at it throughout the year and the only quarter that we believe conceivably could be an issue, and that would be a remote situation, would be the fourth quarter. And I think the other thing to remember is if you aren't borrowing money, it really doesn't make a lot of difference. And we aren't borrowing money outside with our revolver right now. We still have the covenant requirements, but we don't really see a scenario where we are going to be bumping up against any of them at this point.

And are you saying -- you mentioned you were in your revolver last spring. Do you envision not having to go into the revolver this spring?

We don't believe we are going to go into the revolver at all, John.

Great. Thank you very much. I appreciate it.

Eric Glover, Canaccord.

Hi, good morning. I was just wondering if you could talk generally about pricing trends in the business, whether you are able to actually hold the line on some product pricing or whether you are getting some pushback from distributors, particularly given the lower input costs?

Actually, it has been quite the opposite. We put an 8% price increase into effect January 1 and it stuck.

Is that across all productlines?

No, it is not across all productlines. That is a weighted average.

Okay. Thank you very much.

Keith Johnson, Morgan Keegan.

Good morning. Just a couple quick questions. I guess, first of all, given the central shift in demand that we may see in 2009 as people have very little visibility into the spring demand right now, will that require -- I know you guys talked about inventory, focusing on flowing working capital out of that through '09, but will you have to build inventory as you kind of come through the first quarter or just to be in -- have it in place to satisfy demand if it is a quick response?

We are have more inventory on hand than what we would have planned to have had had we had a normal quarter, but we anticipate it will be lower than last year.

Okay and by the end of March?

By the end of March.

Okay. I was wondering -- just to make sure I understand the changes in the early buy program. No minimum order point, the discount (inaudible) stated weighted average 8% price increase. Your customers can still come to you all the way through the end of April this year and still buy the volume and get the price increase or price -- the discount off the price increase?

Well, basically what happens on this, Keith, is, as the months tick off, the discount goes down. So if you buy in January, you get the best discount. If you buy in April, you get the lowest discount.

And so by the distributors waiting to not place their orders until they absolutely need the stuff could actually accrue to our benefit because they are going to pay a higher price. We have actually discussed that with the distributors and they said cash is king. We know that. We would rather pay the higher price than part with our cash a day early.

Okay. Make sure I heard you correctly on utilization in the fourth quarter. Did you say that you ran -- utilization in the fourth quarter was around 40% or 40% of what you ran in the fourth quarter of '07?

It is 40% lower than the fourth quarter of '07.

Okay. Just to make sure I am doing my math, so I guess that puts you down somewhere below 35% of utilization?

Good calculator.

As you kind of -- does that bump up a little bit as you kind of work your way into the first quarter of '09, just trying to adjust for this potential demand shift or will you -- I mean can you -- do you think you can potentially satisfy demand and hold the utilization rate kind of where you are?

It will come up slightly, but not dramatically.

Okay. I was just trying, in my mind, make sure I am thinking about seasonality, potential seasonality shifts this year versus the way the business operated in the past. And I guess last question, could you -- is there a dollar amount that you could give us in relation to costs saved in 2008 from your initiatives? Just put some color around that on the SG&A line or in total.

Well, I think the best way to look at it is percentagewise on a pro forma basis. Jim gave -- I think I heard the number 1000 basis points times $330 million in sales, I think you can do the math.

And part of that -- that was all cost savings or is that a combination of all your initiatives?

A combination of all of our initiatives.

So part of that is lower fee and polyethylene pricing as well?

That's right.

And that's one thing -- could you give us kind of an update on trends maybe in the polyethylene market as we enter 2009 from a pricing standpoint?

Polyethylene prices have continued to decline and they are very soft. We do see some anecdotal information that some of the conversion poly prices are trying to be pushed northward. We don't know the net result of that yet, but there is some upward pressure on virgin poly prices.

But the recycled is still soft?

Yes.

Okay, thank you very much.

[Steve Sharkey], Flat Creek Investors.

Great job in an unbelievably tough macro environment. And thank you for the color on the redesigned early buy program. Just one other question related to that. Do you still also -- does the distributor have an option of getting extended payment terms or a discount or is it just the price discount now?

It's extended payment terms or discount, not both.

Okay, so they still get that option. And I notice the accounts receivable were up a little bit. Do you have any concerns about any of your distributors, their financial condition?

We do not. As most companies, we stay very close to our receivables and basically as we started through the early buy, virtually all of our distributors are taking the discount as opposed to extended terms.

Okay, good. And then on the capacity utilization numbers, do those include Olive Branch?

They do.

What would they have been roughly for the year without Olive Branch? If you can do that off the top of your head.

Oh, gosh.

Too hard? Okay.

One second. So about 50%, a little bit more than 50%.

For 2008 excluding Olive Branch? Okay. And then in the pro forma adjustments, you exclude about $7.2 million related to incremental incentive comp for the full year. Why is it appropriate for us to think of that as an extraordinary non-recurring expense?

Well, I think the reason that we excluded it is because it is not normal for a management team to exceed their objectives by the degree that this group exceeded it. It made it comparable to the prior year to exclude it from both years.

I see. I think, Ron, maybe you explained one time some easy targets had been set and so that might not be the case going forward and that is why --

Well, back in -- prior to my coming on board, management had what I call personal goals that -- we don't have any personal goals anymore. They are all just based on EPS and cash flow.

Okay. So this was an incentive that generally wouldn't be hit under a more normal program. Okay. I think I understand. And last comment is I really appreciate not wasting your time or our time providing guidance. No one knows how bad this downturn is going to get and the keys to manage the business as best you can and generate as much cash flow is you can and survive the depression and you come out bigger on the other side. So thank you for that.

Well, I appreciate that remark. I mean you have hit on a nerve or a sympathetic chord with me because one of the challenges I have got as CEO is to keep everybody focused and there are so many ways in which we can get distracted from the mission. I think one of the very first weeks I was on board somebody asked how do we intend to communicate with the street if we don't give out all this information. I said, well, how about with numbers? We are just going to keep doing our best to fight the fight that is out there, this dragon of an economy and we're going to focus on our sales and we're going to focus on our costs and we're going to make stuff, we're going to sell stuff, we're going to collect the money and put the money in the bank and start over again. That is what we are going to focus on and we will -- we can control -- we can trim the sails, I can't control the wind, so I am not going to worry about it.

Terrific. I feel lucky I am not an analyst who has to try to forecast quarterly numbers in a depression. Thank you.

All right. Take care.

[Ari Rosenberg], [Lowes].

Hi, guys. I was wondering if you could give us an idea how much your polyethylene cost was down percentagewise year-over-year in the fourth quarter and if prevailing polyethylene prices for you guys were to continue for the rest of this year, what do you think your polyethylene costs would be down?

Hang on. I am going to put you on mute for a second. I am not sure I am going to answer this question.

With regard to the spot price on polyethylene, you can figure the spot price on polyethylene that everyone else is buying is down year-over-year by about -- between 35% and 40%. We don't buy polyethylene in that manner. We buy a stream of product that is really outside of that and while the market went up considerably for the polyethylene that everybody else is buying, ours did not increase as much. We aren't going to give out what our polyethylene cost is, but we can tell you that our polyethylene cost is down year-over-year, but not down to the magnitude that the other people saw in their decline.

Could you give us an idea though whether if the current price that you are paying were to prevail for the rest of the year whether your polyethylene cost would be down a meaningful amount versus '08?

We believe we will still hold a competitive advantage. I think that is about as far as we will take that. Trex is the 500 pound gorilla in this recycled poly market and we still have a competitive advantage. Jim talked to you about the relativity between the two streams of raw material and for us to talk any more about it I think would give competitive information to our competitors.

One other question with respect to receivables. I was wondering if you could clarify again why they were up year-over-year.

Sales were up -- sales were up late in the quarter and that is primarily why the receivables were up. No other reason than that.

Okay. Thanks.

[Kenneth Smith], Lenox Equity Research.

Thanks. Ron, you alluded to new products and the question was asked about when you might announce them. I think you said in the fall at your distributor meeting. Would that be -- are you saying that that would be the first time we would hear anything about them or might you be talking about that sooner?

I don't envision talking about it any sooner if, in fact, it is going to happen. I am not yet committed to the fact that it will happen. We continue to work -- I am cautiously optimistic about it, but I don't make any predictions at this point. We will have to make a go/no go decision internally in the early summer. But I think our distributors have -- we have an obligation to make sure our distributors are the first ones to hear about this. And we would launch it for the 2010 early buy and so we wouldn't want to give our competitors any advance knowledge of it. And so I think that is the way the timing will play out. So the distributors will be the first people to hear about it.

Okay. And then the cost initiatives that you seem confident about for '09, are they initiatives that you have already identified and it is a matter of implementing them or is it more a matter of we have been good at this in the past and we are confident we will be good at it in the future, we just need to keep plugging away at it?

I think it is more the former. There are things we are working on. We have got a capital budget put together that speaks to that issue and what we are doing is most of our lean and Six Sigma initiatives have really been focused on the Winchester plant. Now they are going to start migrating to the Fernley plant.

Okay. Thanks very much and good job.

Thank you.

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

Well, thank you, operator and thanks to everybody who has been on the phone. I see that we have got employees, directors, analysts, owners have all been on the telephone. I appreciate everybody's attendance. I'm glad we have had a chance to talk about the significant progress made in 2008, the many plans we have to make 2009 another successful year despite the extremely challenging economy. We look forward to speaking to you again next quarter. That is it. Goodbye and good luck.

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