Trex Company Inc (TREX) 2009 Q4 法說會逐字稿

Welcome to the Trex Company fourth quarter earnings conference call. Following management's prepared remarks, we'll hold a Q-and-A session. (Operator Instructions). As a remainder this conference is being recorded February 26, 2010. I would now like to turn the conference over to Harriet Fried with LHA. Please go ahead maam.

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 Bertaux, Director of Financial Planning and Analysis; and Bill Gupp, General Counsel. The Company issued a press release this morning containing financial results for the fourth quarter and full year 2009. 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 Relation page of the Company's website, where it will be available for 309 days. I would like to now turn the call over to Bill Gupp, Trex's General Counsel. Bill.

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 27-A of the Securities Act of 1933 and Section 21-E 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 costs associated with the development and launch of new products, and the market acceptance of such new 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 relations expenses related to product quality in the highly competitive markets in which the Company operates.

The Company's report on form 10-K filed with the Securities and Exchange Commission on March 12, 2009; form 10-K A, filed with the Securities and Exchange Commission on August 10, 2009, or 2010; and a subsequent reports on form 10-Q filed on May 8, 2009, August 10, 2009, and November 9, 2009 discussed 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. With that introduction, I'll turn the call over to Ron Kaplan.

Thanks, Bill. Thank you, everyone for joining us this morning. In our November conference call, we indicated that a lot of exciting changes were in the making at Trex. I'm very pleased to provide further details on the events that have transpired since the third quarter, when we began implementing two major steps in our growth strategies. First, we introduced a comprehensive enhancement to our existing decking product platform. Second, we unveiled our groundbreaking new deck and railing product,Trex Transcend. Every indication so far is that the market is responding very positively to both of these important initiatives.

Our fourth quarter results, with sales up 75% over last year's period, show that the enhancements to our existing decking product platform provide a solid fit with the expanding demands in the marketplace. Dealers like the fact that we are giving them smaller bundle packs, which enable them to stock a broader array of Trex product, reduce material handling, and bundle more decking products on one truck. Consumers like the fact that we have standardized dimensions throughout all of our decking lines, giving them greater flexibility and design choices. And as I have mentioned before, these changes also streamline Trex's manufacturing process, helping to contribute to our stronger gross margins in 2009, up 270 basis points over last year.

Trex Transcend has also been really well received by the market. We unveiled the product to much acclaim at our distributor meeting in late November, and we began shipping to distributors and dealers in January. I'll give you more details on our product launch in a few minutes. Before that, however, I want to call out several other aspects of our financial performance that demonstrate the very strong operational and financial foundation we have built for Trex.

In 2009, we endured the most severe recession in decades, while kicking off two major product initiatives, and we ended the year with $20 million of cash on our balance sheet, and no borrowings against our resolving credit facility. We generated $28 million of free cash flow during the year, allowing us to retire more than $30 million of debt prior to maturity, and in November, we replaced our revolving credit facility with a new $85 million credit line on more beneficial terms. This refinancing completed our initiative to consolidate our senior debt, provide management with the right capital structure to continue focusing on running the business, and provide the flexibility to quickly respond to strategic opportunities. At this point, I'll ask Jim Cline to go over the details of our fourth quarter results. Jim.

Thank you, Ron. Good morning, everyone. The press release with Trex's fourth quarter and full-year financial results for 2009 was issued this morning. The numbers I will reference are contained in the tables headed, "Condensed Consolidated Statements of Operations," "Statements of Operation" "Balance Sheet" and "Cash Flow. " First, I would like to review our fourth quarter financial results. In the fourth quarter of 2009, net sales were $51 million, compared to $29 million in the fourth quarter of 2008, an increase of 75%. Sales were favorable in the fourth quarter of 2009 by $22 million, due to the demand for our new Accents and Contours products within our distribution channel. Fourth quarter net income was $1.8 million, or $0.11 per share. These results are consistent with the strong performance from our operations in prior quarters, and the impact of the January 2009 price increase.

The Company's results for the fourth quarter of 2009 also included a one-time tax benefit of $6.7 million. This included a $4.8 million carry back tax adjustment. We have received the tax refund related to this carry back tax adjustment. The Company's fourth quarter 2009 gross margin was 33.5%, a 1250 basis point improvement over the fourth quarter of 2008. The margin improvement was primarily driven by increased sales, the effect of our January 2009 price increase, and manufacturing efficiencies. These positive factors on gross margin were partially offset by operating at reduced levels of capacity utilization during the fourth quarter of 2009 versus 2008, and costs related to the start up of our initial Transcend production lines.

The full year 2009 net sales were $272 million, compared to net sales of $329 million for 2008, a decrease of 17%. Our leading market share, branding strength, and recent product enhancements have allowed us to significantly minimize the overall effects of the economic head winds during 2009. The 2009 net loss was $16.4 million, or $1.09 per share, compared to a net income of $7.5 million or $0.50 per share for 2008. Our underlying net loss, excluding the noncash impairment charges related to our Olive Branch facility and one-time tax benefits was $700,000. The Company recorded a gross margin of 29.7% in 2009, a 270 basis point improvement over 2008. Our capacity utilization of 32% was down significantly from the prior year's 54%, and adversely impacted gross margin by approximately 690 basis points. We were able to fully offset the negative implication of the reduced capacity utilization, and recognized margin improvement in 2009 driven by the January 2009 price increase, and our continued enhancement of productivity and process improvements. Sales of excess poly inventory, due to the reduced demand early in the year, adversely impacted margin by approximately 120 basis points.

SG&A expenses for 2009 were $65 million, compared to $67 million in 2008. The decrease in SG&A spending was primarily driven by lower personnel-related and branding costs. They were partially offset by increased research and development spending. We increased our research and development spending to support the overall of our current decking products, and the successful launch of Transcend decking and railing, and to support other new product development efforts. Net interest was $15 million for 2009, a $600,000 decrease from 2008. This reduction reflects the net effect of carrying lower levels of net debt, offset by charges related to our 2009 refinancing.

The Company results for 2009 and 2008 included a $6.8 million and $5.7 million of noncash interest expense related to the accounting treatment for convertible bonds under APB14-1, and a favorable related noncash tax adjustment of $1.1 million. The Company had $20 million of cash on hand, and no borrowing on a revolving line of credit at December 31, 2009. During 2009, the Company also retired approximately $30 million of debt, with available cash. At the end of 2009, total net debt was $58 million, which represented a $22 million reduction from the end of 2008. Net debt to total capitalization at December 31 of 2009 was 31.6%, compared to 36.8% at December 31 of 2008. Excluding the impact of APB14-1, net debt to total capitalization at the end of the year, was 44.4%, compared to 50.7% at the end of 2008. We have continued to focus on the year-over-year reduction in inventory that began early in 2008. Since December 31, 2007, we have reduced our inventory by $48 million. At December 31, 2009, inventory was $45 million. This was a reduction of $24 million year over year.

The Company generated free cash flow of $28 million in 2009, a $3 million improvement over 2008. The free cash flow results in 2009 were driven by effective working capital management and lower spending on capital investments. Capital expenditures for 2009 were $6.9 million, a $900,000 reduction compared to 2008. Our 2009 investment strategy, which focused on lower spending products offering high returns on investments, complemented our strategic objectives, including productivity improvements, cost reduction, and new product introduction.

Finally, I would like to provide further information related to our guidance for the first quarter. In our press release, we communicated that our first quarter 2010 guidance is for sales of $70 million, compared to the first quarter of 2009 sales of $68 million. This is an increase of 3%. However, we initiated a program in the fourth quarter of 2009 that was designed to allow our distribution partners to increase their inventory to more normal levels, and enabling our operations to focus on the launch of Transcend products in the first quarter of 2010. When considering the impact of this program, we viewed the early buy program demand to be approximately a 20% increase over 2009.

I mentioned earlier that the introduction of Transcend had impacted the fourth quarter. The impact of start-up costs was approximately 2% of sales. In the first quarter of 2010, we anticipate that the impact of these start-up related costs will cause gross margins to be reduced by several percentage points, compared to the first quarter of 2008, as we expand production of transcend on existing lines and convert additional production lines. We anticipate the start-up related costs will decline significantly in the second quarter. Ron?

When we last spoke, I couldn't give you full details on our new product launch because we thought it was important to unveil Trex Transcend at our distributor meeting first. The reason we are so excited about Transcend is because we think it exceeds all other product offerings in our marketplace and will elevate the entire deck and railing category. It is the first composite outdoor living product that truly delivers ultra low maintenance benefits, offering a natural looking, high-definition wood grain pattern that won't rot, warp, crack or splinter, while being impervious to spills and stains. It has rich colors that are engineered right into the board for long-lasting good looks. The Transcend collection includes a completely modular railing system and it upholds Trex environmentally friendly legacy by using almost entirely recycled materials.

We think the market is equally excited about our new product. Ultra low maintenance products have been growing at an impressive pace. The introduction of the Transcend products will enable Trex to take the lead position in the category in 2010. Current, as well as new dealers, are stocking Trex transcend, helping us expand our market share. Obviously, with a game-changing product like transcend, we are putting a lot of effort into our marketing campaign. We are using a robust mix of media, including television, print, online and other outreach methods to generate rapid, widespread awareness with both trade and consumer audiences. We are also scheduling another full round of the Walk the Walk tours, featuring our mobile marketing unit. The tours proved an extremely effective way for management to meet our trade partners, provide expert information on the whole array of Trex products, and reinforce our commitment to product quality innovation service. I personally look forward to embarking on the 2010 Walk the Walk tour and showing firsthand why Trex has been, and will continue to be, the preeminent leader in the alternative outdoor living space category.

Moving away from the product side, I want to mention another important development. The signing of our first licensing agreement with Dry Deck Enterprises, a proven leader in the deck water drainage systems category. Their new product, Trex Rain Escape is an innovative deck water drainage system that allows consumers to double their outdoor living space by creating a completely dry area below their decks. Our goal over time is to enter into a number of licensing agreements that extend the Trex brand into appropriate outdoor living product categories. We think licensing agreements offer an attractive new way to augment our sales and profitability.

In another first for Trex, we'll be holding an analyst day for the institutional investment community in Winchester on Wednesday evening, March 17 and Thursday morning, March 18. Our goal is to show you firsthand the advantages of Trex Transcend, so we are incorporating a deck tour and dinner, as well as management presentations and a planned tour. If you want additional information, or would like to register, please contact Harriet Fried of LHA, at 212-838-3777.

Before we turn to Q and A, let's go over our guidance for the coming quarter, based on the economic market and sales environment we are currently seeing, but adjusting for the strong sales we already achieved in the fourth quarter of 2009, we are projecting net sales of approximately $70 million in the first quarter of 2010. Operator, we are now ready to open the call to questions.

(Operator instructions). Your first question comes from Jack Kasprzak with BB&T Capital Market.

Good morning, everyone. Congratulations on a great year. I wanted to ask about the sales. So, based on your comment of 20% for the impact of the early buy program, does that imply basically you felt like you would have hit your Q4 sales guidance of $40 million or $41 million, but you had basically, Q4 steal maybe $10 or so million in sales from what might have been in Q1?

That's correct.

And Jim, I just want to make sure I heard you correctly. Your comment with regard to first quarter margins, gross margins, you said due to the cost start up costs doing more Transcends product, that Q1 gross margin will be below Q1 of 2008?

I misspoke on that. That should have been 2009.

Okay. So Q1, 2009 was 24.8%, basically around 25%. So we think it will be a little less than that. Just, that's what you are saying?

That's correct.

And maybe, could I ask what you are seeing in the competitive environment? Your comments on Q4 sales are well taken. But do you guys feel like you are taking share in the general environment, and in the general economy?

Yes, this is Ron Kaplan. There is no question in our minds that we are taking market share. We can calculate that either in terms of the percentage increase in our sales. Apples versus apples. We know the industry is not having that much of a gain. Also we've got anecdotal information, the number of dealers that are shifting over to Trex and/or dropping a competitive line.

Has anybody else exited -- any other manufacturing competitors exited the market in the last six months?

Not that I'm aware of.

Okay. That's it for me. Thanks a lot.

Thank you.

Your next question comes from Trey Grooms with Stephens Inc.

Good morning, this is actually Will Green on for Trey. I wanted to talk about the early buy program. Coming into 2009, you guys set out to kind of normalize the revenue line. Judging by what we saw in 2009, it appears you have done that. But I wanted to revisit that topic now that we are a year out. Do you feel the revenue split that you achieved in 2009 is where you want it to be? Or do you see wanting to tweak that a little bit more in 2010?

Tweak it in what way? I don't quite follow.

Well, in terms of whenever you came into 2009, you set out to normalize the revenue line, so you didn't have a lower waiting in the fourth quarter, I guess. I mean you still had a little bit lower of a waiting in the fourth quarter. I know some of that was people waiting for the new Transcend product. Would you like to see an even more split in 2010?

I think the market will only accommodate so much of our desire to want to even out the sales trend. The market has got a lot of history to it. We are not going to be able to overcome the buying patterns. Clearly there is always going to be a heavy bias toward the first quarter. If we've got new products we want to introduce at certain points in the year, we may modify that. But essentially, the model that you see is probably the model that you get.

Okay. And I wonder if you could update us on utilization rates? You kind of went into that a little bit. But could you talk about where they were in fourth quarter 2009, versus fourth quarter 2008? And how much that may or may not have affected your margins in the quarter?

Well I can tell you in the fourth quarter of 2008, the utilization was 38%. And the fourth quarter of 2009 was 34%.

Any guess as to how much that may have affected the gross margin line?

Jim, you want to take that?

A couple of points.

Okay. Great. That's all I had. Thanks. And congratulations on a great quarter.

Thank you.

Your next question comes from John Baugh with Stifel Nicolaus.

Thank you. And my congratulations as well. What do you anticipate, Ron, roughly the utilization rate to be in either first half of this year or the whole year? And I realize you have to make a sales forecast for the year to do that, and you are not going to do that. But what are we looking at? I assume we have left Mississippi out of this, and I just want to be clear, while comparing against Mississippi in the capacity numbers for 2008, or 2009. Just be clear on how that comparison sets up.

We have excluded Mississippi from the numbers I just quoted. I will not quote or predict the level of utilization that we are going to have. I will tell you that we have recently increased it.

Increased it from speed of productivity, or an actual line expansion?

Actual line expansion.

Okay. And refresh my memory on what you have done with pricing in calendar 2010.

We have not increased pricing in calendar year 2010. We don't anticipate any near term changes in pricing.

Okay. And how are the costs, I'm thinking raw materials and plastic specifically, shaping up 2010 to 2009, Jim? And I guess you can comment too, I assume you won't have overage of poly to have to sell this year?

We do have an overage of poly. We'll always have some level of higher poly available, because we take in product that we just don't use in our operations. We do that as an accommodation. However the impact that you saw last year in the first and second quarter are really behind us. The pricing that we sell that for and the costs essentially allow us to break even to make a small amount of money. With regard to our cost of poly and wood dust, those are the two larger categories. In combination, they are essentially flat. That is one of the reasons why we felt comfortable in not increasing pricing for this coming year. Now if you looked at virgin poly or off-spec poly, you would see those prices have been climbing quite rapidly over the last four or five months, and the indications we get is that that is going to continue over the next several months at least.

Jim, I want to be clear. The comment of poly costs being relatively flat, was that a fourth quarter 2009 comment? Was that a general outlook for 2010 as well?

Year over year and certainly through the first half of the year.

Okay. And then, there was a comment in there around more direct shipping to customers. Describe to me, why would that be the case? What is that telling us or telling you? And how may that change the pattern of sales seasonally? Because presumably, they are going to want product closer to when they actually sell it. As opposed to distributor getting it before then.

Well, I think it reflects a trend that's been going on, with an all two-step distribution, which is distributors are holding less and less on the shelf, which then requires them to order more just-in-time deliveries. So we just find ourselves getting more and more orders from distributors for full truckloads that they want bypassed and sent directly to dealers. I think that trend is going to continue.

Then is it too early, still, Ron, to see any consumer demand for Transcends yet? If so, what markets are you looking at, or channels, the home centers. Where are you looking to really see, other than deal and distributor excitement consumer excitement?

It is too early. We figure it's going to really, to get a realistic view of what the sell through is going to be, it is probably going to be in the April-May time frame. We know that there are decks being built right now, as we speak with Transcend. There have been a few complete. But I think the universe is too small to actually come to any sort of a conclusion. So right now the channel is being filled quite enthusiastically by everybody in the food chain. The second half of our push comes starting next month, where we create the pull-through demand, where we are going to have an unprecedented pull-through demand strategy, all of which is aimed toward making sure that -- striving for the ultimate objective of having every contractor recommending transcend, and every homeowner asking for it. You'll see the television advertising start in a couple of weeks.

All right. And two final quickies. One following up on that, what kind of dollars are we looking at in terms of marketing spend? And then, secondly on the Mississippi, I think there was about a $6 million annual expense number. Jim, when did that stop? And what would be the 2010 to 2009 comparison of lower expense just relating to Mississippi? Thank you.

Okay. With regard to the branding/marketing spend, you'll see several million dollars increase in the quarter. There will be an increase again in the second quarter because we get closer to that. We'll give you a little bit more flavor on that. But it is going to be a heavy, year-over-year spend, relative to the branding. With regard to the Olive Branch costs, the quarterly impact would be about $600,000, $650,000. It's primarily the reduced depreciation on the facility and the assets. We continue to have out-of-pocket costs of about roughly $300,000 a quarter maintenance, electricity, taxes and so forth.

Was that $600,000 to $650,000 felt fully in the fourth quarter?

Yes, pretty much.

Great. Thank you.

Your next question comes from Keith Hughes with SunTrust.

Thank you. Are there still dealers that are looking to stock Transcend and don't have the product yet? Or has it fully been rolled out to the dealers that want to carry it?

The former. We've got orders that we are still filling, and there are still dealers that are making their decisions. So it's all of the above. But clearly, we are still filling the pipeline.

And in terms of production, the lines that are set up to run Transcend, are they fully completed at this point?

No, they are not all fully completed. We've got several lines that are fully completed, and in full production, and we've got other lines that are in some stage of completion. We expect them to be complete by the end of April. Then we'll start making decisions about whether or not we need to add additional lines beyond that for 2011.

The final question, I was confused by one of the previous answers on raw material costs. Jim, are saying your poly costs have remained basically flat sequentially?

That's correct.

That would be your expectation in the near term?

That's correct.

Thank you very much.

Your next question comes from Keith Johnson with Morgan Keegan.

Good morning.

Hi Keith.

Among the marketing dollars initiated with Transcend, how much hit the fourth quarter in the SG&A accounts?

Around a $1 million, year-over-year increase.

Okay. And then, you showed a nice, sequential improvement in gross margin going from Q3 to Q4, even though sales dropped off by about $10 million. What was the driver there on a sequential basis?

Capacity utilization was certainly part of it. The productivity and process improvements continue. So it is really a combination of the both, both of those elements.

Okay and could you give us the price volume, or units, or mix effect in the fourth quarter on the increase in sales year over year?

Well, the price impact, looking at quarter to quarter, you would be looking at about a between a 4% and 4.5% price impact.

Okay.

Not all that had hit in the fourth quarter from the first of the year. The first of the year we had about an 8%. Not all of that hit the fourth quarter.

Okay and then the rest is all on the volume side?

Correct.

Okay. Last year, the seasonal sales patterns were much different than what you had seen historically. I think you guys referenced it last year. You didn't have a volume commitment in your early buy program, so it effectively shifted sales to 2Q, 2009. As we look at how things have come together over the fourth quarter this year and into your early buy program and the first quarter of 2010, how should we think about volume from a seasonal standpoint? Similar to last year or along the lines what you did historically?

If you combine both what happened in the fourth quarter and the guidance we gave for the first quarter, you are looking at roughly a 20% increase. Now, if you extrapolated that across the year, I'm not sure that that would be representative of what you should expect in the subsequent quarters. However my expectation is that you will see still a continuing strong demand as the Transcends gets fully launched into the marketplace going into the second quarter. It's not going to be exactly the same mix as you saw in 2009 though, from a percent of sales in the first and second quarter. It is going to be more heavily first than it was last year.

Okay. Okay. And then, maybe could you comment a little bit about maybe how the channel looks from an inventory standpoint after what's happened fourth quarter into first quarter? And maybe how you guys are thinking about positioning your inventory level at Trex as we work our way into the building season?

Well we are going to continue to drop our inventory, not nearly by the same order magnitude as we have last year. But it will continue to come down. As I said in one of my earlier comments, I think that the basic business model of distributors has changed, and we'll always have lower inventories in the economic cycle before the preceded this one. So while they are filling up on Transcend right now, they are still going to be fundamentally leaner than they have been historically.

Okay. That's -- is that kind of what you guys were referring to I think as ASAP orders that you were receiving last year, coming in for quick turn around?

Yes, exactly.

And associated costs with that for you guys try to fill in on that type of basis?

Our lead time continues to be a three week turnaround on orders. So what we are seeing is more direct-to-dealer shipments as a result of that and distributors at this point are, for the most part, adequately stocked. So we aren't seeing that as being an issue at this point.

Okay. All right. Thanks a lot. Good luck.

Thanks.

Next question comes from Eric Glover with Canaccord.

Good morning, guys.

Good morning.

Excluding the marketing spending associated with Transcend, I was wondering if you could comment on the margin profile of the product, compared to previous product launches.

Individual product margins, we just don't share. It's a level of information that we've determined that -- because there is so many competitors out there listening to these calls, we are not going to go in that direction.

Okay. I was wondering if you could talk a little bit about the licensing agreement with Dry Deck Enterprises? And whether, what the pipeline is for additional licensing agreements, and how big a part of the business do you think that could become over the next few years?

Well, I'm legally prohibited from divulging the details of that contract. All I can tell you is that in return for them having the right to use our name, and us making certain introductions, they pay us a royalty. That royalty stream has begun. We are in consultation now with several other companies, and I believe that this is the beginning of what I hope to be a larger stream of licensing agreements and the associated royalties. The business model is particularly attractive us to. There is no investment that we need to make, and the money just comes in this direction. Obviously, the licensee gets the benefit of using what is Trex's strongest asset, which is its brand. So the question that we were confronted with, how can we further benefit from the strength of the Trex brand? And the obvious answer was licensing arrangements. We've hired an outsider to, a consultant to assist us in this endeavor. And we are right about where we expect to be. And we are in consultation with several other companies, and one of the things we make absolutely sure of is that the product that we license is consistent with the strength and integrity of the Trex brand.

Okay. Would you say that you are pursuing more of these licensing agreements now, rather than looking at M&A opportunities? Is the focus more on licensing?

I would say the focus is more on licensing. We really don't have a strong M&A bias. There is certainly no shortage of opportunities out there. They are presented to me about every half hour. But we really are operationally focused and extraordinarily careful with the assets that the shareholders have entrusted to us.

Okay. Thanks a lot.

Your next question comes from Scott Kirk with TCAP

Good morning, thanks for taking my question. A couple of quick questions. First, I'm trying to appreciate the margin profile longer term for the Company. And I can't really understand from the comments you all have made whether the increases in capacity utilization which you talked to, Ron, will enable you to kind of increase that 30% gross margin. Or whether it could be offset by more expensive costs or what have you. So can you give any kind of directional comment longer term on what you expect the margin to look like at the gross margin level?

Let me just begin by saying, I give all margin questions to my CFO, so I'm going to ask Jim to take that question.

There are some short-term head winds related to the start up of the transcends line. Longer term, we don't view that as being a negative, but actually a positive for us. So, from a margin standpoint, he real issue for Trex is utilization of capacity. If we could get utilization of capacity back into the 60% to 70% range, margins in the 40% arena, is certainly possible.

Where did you end capacity utilization? Where was it the end of the last quarter?

34% for the fourth quarter, and we ran about 32% for the year.

Okay. Then how long will the ramp -- or historically, how long has that ramp taken? In other words, you gave helpful guidance on the March quarter gross margin. Do you expect the pressures to continue through June and September? Or can you give us an approximate idea of how long you think that pressure will be there?

I would say based on my manufacturing experience, it takes two to three quarters for a new product like this, it has fundamentally new technology to work its way through the system. It could be less than that. But it doesn't, and it happens in a gradual way. Each month, each week, the performance gets a little bit better than the week before that. But by the time you are at optimum performances, usually two to three quarters.

Thanks, Ron, that's helpful. Then just to follow that through, you have been helpful by sharing the marketing spend ramping up a little bit this year on exciting new product. I'm trying to understand if we have, say two to three quarters of gross margins at that lower level, but some upside, some uptick on marketing spend, could you share with us what the OpEx picture will look like outside of those things? It sounds like there is going to be a little bit of increased pressure from R&D and from marketing on the operating margin. So any comments you can make directionally about operating margin, and even if you want to take it to the bottom line, that would be very helpful.

With regard to operating expenses, absent the expenses related to R&D, which will be going up, and the expenses related to branding, the rest of our cost structure is pretty flat. There is not a lot of change that we expect, so I think if you focused on the change in the branding, you would be picking up the majority of the change in SG&A expenses.

Did you all share what, how much R&D would be up versus last year, this year?

We have not. Compared to 2009, it would be a slight increase.

Okay. Branding? Is that the $4 million that you talked about earlier?

It will be up several million dollars in the first quarter alone.

Did you say $4 million for the year? I can't remember.

No we did not quote a full-year number.

Okay. And then again, I'm just going to ask if you might want to take that to the profitability level? Are you comfortable drawing the line in the sand about being profitable in 2010?

We just don't go there. It is not a question whether we are comfortable forecasting a profit or not. We just, as a matter of policy since I took the job, we don't give guidance.

I understand and appreciate that. Last question, and thanks again for the time, is you talked about that 20% demand. I wondered if you would be kind enough to parse that out into end demand versus restocking. And also I think you said that was just for Q1 and not to expect that for the rest of the year. I just wanted to clarify that.

We were clear, I will clarify that we are not predicting a 20% increase in sales for the year. What we did say is that if you took the fourth quarter, if you took the four month period ending January, year versus years, orders are up about 20%. All right? Now we are not predicting that is necessarily going to hold for the remainder of the year. We are not predicting that at all. I have also said that we can't tell you what the sell through is. We don't know. It is too early in the season to say. So the orders we are getting are from distributors, they are getting them from their dealers, and the channel's being filled. What happens beyond that that is too early to say.

Do you have a hunch on that? I guess we'd all love to see the end demand starting to tick up. I don't know if you can share whether you think that may be happening, or it is just restocking at this point is that.

Well, I can only tell you what our intent is. We are increasing our marketing -- our branding expense purposefully to increase pull through, end-user demand. If the end-user demand doesn't go up after having spent all this money, I'll be very disappointed. So that's the game plan. So far the plan has worked as we have intended it to work. We intended to introduce a breakthrough, new technology. We've done it, and the market has responded accordingly. That's all I can tell you up to this point.

Thank you for your time.

Thank you.

Your next question comes from Morris Ajzenman with Griffin Securities.

Good morning, guys. Hi, most of my questions have been asked. A lot of questions today. But one question on the -- let's look at first the balance sheet and then the cash flow statements. Clearly with the trends in rollout, accounts receivable got built-up. And I presume that $18 million increased year over year, and about $60 million sequentially is basically due to that. Can you give more clarity to how that plays out? Is that going to continue rising? Is that just a peak number here, based on an aggressive rollout?

Morris, the change in receivables at the end of the year, had zero Transcend-related receivables. That was all our basically new Accent and Contours products. The Transcend product did not start shipping until January of 2010. So what you would see is growing receivables, through the first quarter, and then a significant decline in the second quarter. (technical difficulty)

Your next question comes from Robert Kelly with Sidoti & Co.

Good morning, guys. Just a point of clarification on the 4Q gross margin. Utilization was down year on year, and you also had 2% drag from start up costs?

Correct.

Okay. And then, you had a benefit from some cost dropping away from Olive Branch?

Correct.

Got it. Okay.

The Olive Branch didn't impact gross margin. That would have come out of SG&A.

Okay, so that's in SG&A. So the gross margin improvement year on year sequential was in spite of those two drags?

Right. You did get some selling price increase impact in the manufacturing efficiencies that we saw in the prior quarters.

Build go on that, with Transcend being a higher priced product. Even though you haven't raised prices, is price mix going to be a driver of revenue in 2010?

It is.

And that is driven by the faster sales of higher priced products.

It will be driven by the sales of higher-priced products, and that will certainly impact the total sales numbers.

And as far as Transcend, what you have seen thus far for 1Q, if you could -- a percent of that that is Transcend? And has it exceeded your expectations thus far?

Well it has exceeded our expectations in terms of market acceptance. That's obvious when you look at our order book. We're not going to give any specifics in terms of numbers, but I can tell you when we are at the distributor meeting, we intended to have X amount of production lines, and in fact, we've, by the time we get down to the end of April, we'll have two X the number of production lines.

Yes. That is what it sounds like to me a little bit in 1Q, with the drags of the start up. Had you planned for one level of sales for Transcend, and it came in strong? That's what I'm trying to figure out, why there would be a big drag on the margin in 1Q?

The answer is yes.

For the tax rate, are we still going to be paying very little taxes again in 2010, despite what you saw in 4Q?

I think you can see assume it will be de minimus.

Okay. Thanks, guys.

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

Okay, operator. Thanks, everybody. As you can see, we have taken significant steps to increase our market share for alternative decking and railing, and to convert more customers to Trex. Trex invented the concept of durable, low-maintenance outdoor living products nearly 20 years ago, and with Trex Transcend, we have reaffirmed our reputation as the innovator. With our expanded array of products, our strong manufacturing capabilities, rock-solid financial position, and great distribution network,we think we are well positioned for the coming years. Finally, I'd like to thank my Trex colleagues, distributors, and dealers for their support during this extremely successful launch of Transcend into the market. I guess that's, we are finished, so goodbye and good luck to everyone.