Trex Company Inc (TREX) 2010 Q3 法說會逐字稿

Good morning and welcome to the Trex Company third-quarter 2010 earnings conference call. (Operator Instructions).

As a reminder, this conference is being recorded November 2, 2010. I would now like to turn the conference over to Ms. Harriet Fried. Please go ahead, Ms. Fried.

Thank you, everyone, for joining us today. With us on the call are Ron Kaplan, Chairman, 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 third quarter of 2010. 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 available for 30 days.

I would now like to 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 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 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 the product replacement and consumer relation expenses related to product quality; and 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, 2010, and its subsequent reports on Form 10-Q filed on May 6 and August 5, 2010, 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 is using certain non-GAAP financial measures in today's earnings call. A reconciliation of these financial measures to GAAP is attached at the end of the Company's press release in the two tables entitled, Reconciliation to Pro Forma Results of Operation Measures to the Nearest Comparable GAAP Measures Three Months Ended September 30, 2010, and Reconciliation to Pro Forma Results of Operation Measures to the Nearest Comparable GAAP Measures Nine Months Ended September 30, 2010.

With that introduction, I will turn the call over to Ron Kaplan.

Thanks, Bill. When we last spoke, Trex had just finished a strong second quarter with revenue up 26% over the prior year period and up 14% for the first half of 2010. We had completed retrofitting existing manufacturing lines to meet market demand for Transcend. We are gaining traction with our sales of railing and Trex trim, and we are looking forward to another good quarter.

Shortly after our call, however, based on declining economic indicators, consumer confidence deteriorated, and the environment and the building materials sector changed significantly. The solid flow of orders we have been receiving quickly turned downward, substantially reducing our sales and operating performance for the third quarter. This confluence of events turned into a perfect storm as we continued to experience some startup costs associated with the introduction of Transcend, recognized a charge related to a supply contract and increased our warranty reserve. Despite lower sales and forecasts in the third quarter, trailing 12-month revenue increased 17%, driven by sales volume growth of 11%, coupled with a favorable sales mix, including sales of our Transcend decking and railing product lines.

Now I would like to bring you up-to-date on the recognition our decking and railing have continued to receive positive developments in our annual distributor meeting, which took place just last week, the many new products we are in the process of launching, and the progress we are making on margin improvement. These trends, combined with a recent pickup in demand, give us confidence that our strategy to increase market share is on track, despite the change in the economic landscape since this summer.

First, in terms of recognition, I want to reiterate how pleased we are to have won Building Products Magazine's MVP Award in August and topped Remodeling Magazine's recent 2010 Brand Use Study. Both achievements underscore Trex's determination to exile at design, performance and branding.

Second, after just returning from our annual distributor meeting last week, I want to report that our distributor partners are just as bullish as we are about the overall trend toward ultralow maintenance decking and the superior durability and aesthetics of Transcend. They, too, view the Transcend decking and railing system as the cornerstone of our product portfolio, and they were extremely pleased with our growth strategies moving into 2011 and beyond, as well as the new product offering and sales on pricing programs we have designed.

On the new product side, we do have a lot of exciting activity. Just yesterday we announced the expansion of our Transcend decking collection, adding new colors with subtle shading and variations for consumers that prefer the tropical decking look. Like our other Transcend products, the tropical decking contains 95% recycled content and is designed to outperform wood, composite and PVC for decades.

In addition, we have introduced new sizes of Transcend boards. The first provides consumers more options in their deck and railing design choices, one of Trex's guiding principles, while the second offered more flexibility for commercial applications.

To leverage our strength with contractors who have so much ability to influence dealer and consumer behavior, we will be launching Trex's CustomCurve in the fourth quarter, a machine that enables them to heat and bend boards on site to get the look their customers want.

To continue expanding Trex's presence throughout the outdoor living arena, we also launching a line of energy-efficient LED deck lighting. Deck lighting is a fast-growing trend as more and more consumers use their outdoor living spaces in the evening and look for both functionality and ambience. Trex's deck lighting comes in four styles and collars, is designed for posts, floors and steps, and can built into a new deck or retrofitted into existing space. An added advantage is that it will give our professional partners sales opportunities in conjunction with other Trex product lines as a total package.

In early December we will begin to market DeckWorks, a deck-designed software for outdoor living. Some unique features in DeckWorks is the ability to design curved deck frames and deck rails. With DeckWorks Trex will be the first WPC manufacturer with a proprietary software solution for the professional.

In September we announced Trex's second licensing partnership, this one with Poly-Wood Inc., to develop and market weather-resistant, low-maintenance outdoor living furniture. Trex's outdoor furniture will be offered in four different lines -- the first a deep seating collection, another collection that features classic Adirondack styling and two dining collections. All the pieces are in colors that can be mixed and matched with Transcend decking and railing. Available this month the furniture will be sold through four channels -- casual outdoor furniture retailers, Trex's dealers contractors, big box and other national retailers and online.

I would like to mention our efforts to expand on the international front. We are in the early stages of developing opportunities, and we are encouraged by the positive reception that we have received. We will report to you in more detail as our efforts progress.

Finally, I would like to provide insights on our progress on Transcend. In the fourth quarter, we have begun to achieve manufacturing throughput rates and yields for production of Transcend comparable to our Accents product. In 2011 we expect to continue to achieve productivity improvements that will put our rates and yields consistently at higher levels than previously experienced by Trex. Our Transcend profit margins have consistently improved each quarter in 2010. We expect to see continued cost improvement at least through the end of 2011.

Jim?

Thank you, Ron. Good morning. The press release with Trex's third-quarter and year-to-date financial results for 2010 was issued this morning. I would like to review our third-quarter financial results. The Company recognized net sales of $60.6 million in the third quarter of 2010, a 2% decrease compared to the third quarter of 2009. The third-quarter sales volume was approximately 8% lower than 2009. Net sales were favorably impacted by a shift in sales mix towards higher-priced products, specifically our high-performance Transcend deck boards and strong sales of railing products which carry higher prices per linear foot than our core Accents-branded products.

As Ron discussed, third-quarter sales were negatively impacted by economic conditions. The Company recorded a net loss of $8.7 million or $0.57 per share in the third quarter of 2010 compared to a net loss of $22.5 million or $1.49 per share in 2009. The Company's results for the third quarter of 2010 include $3.9 million of charges, including an $800,000 increase to our warranty reserve and a $3.1 million charge related to minimum purchase commitments that we do not expect to meet.

The 2009 third-quarter results included a $23.3 million impairment charge for our Olive Branch manufacturing facility, which was shuttered in 2007. Before giving effect to these charges, our third-quarter net loss was $4.9 million or $0.32 per share, compared to the third quarter of 2009's net income of $800,000 or $0.05 per share.

I would like to provide further details related to the two charges that were recognized in this quarter's results. As a result of the class-action lawsuit, related public announcements and several national periodicals and the subsequent announcement of our settlement in March of 2010, there was an influx of claims beginning in 2009 and continuing into the third quarter of 2010.

During the third quarter, our review of claims data indicated that a small number of claims from 2009 were reopened, and in addition, an expected decline of claims did not occur until late in the quarter. Based on the reopened claims and a delayed reduction in claims, we determined that expected claims will be higher than previously anticipated and accordingly increased our reserve by $800,000.

In 2008 Trex entered into two purchase contracts. In reviewing our anticipated future demand, we determined it necessary to recognize a charge of $3.1 million in the quarter for penalties that we expect will be assessed in future periods. These charges fully cover our financial exposure under these types of contracts.

These two charges totaling $3.9 million in the third quarter were recognized in cost of goods sold. Excluding these charges, the gross margin was 21.7%, an 810 basis point decline from 2009. There were three primary drivers to our decline in the pro forma gross margin. Transcend's startup costs, the negative impact of reduced sales and a related decline in production, and a reduction in income recognized due to lower inventory liquidations in 2010 compared to 2009.

Our third-quarter financial results were negatively impacted by the startup costs associated with our 2010 introduction of Transcend by 280 basis points. However, target margin improvement initiatives continue to reduce the impact of startup costs related to the introduction of Transcend. Second, the change in economic climate, which negatively impacted the general building materials sector during the third quarter, caused an unexpected reduction in sales orders as compared to the more robust demand we saw in the first half of the year.

Although we reacted to this abrupt reduction in sales demand, we were not able to rightsize the manufacturing spend as quickly as conditions changed.

Third, the Company recognized $100,000 of income in the third quarter as a result of inventory liquidations compared to $1.7 million of income in the third quarter of 2009.

SG&A for the third quarter was $14 million, which was comparable to 2009. We continued our commitment to our 2010 branding strategy and recognized higher costs versus 2009, which were offset by lower personnel-related costs and other general costs.

Net interest of $3.9 million in 2010 was comparable to 2009. Lower cash interest due to lower net debt was offset by a $340,000 increase from 2009 for the non-cash convertible bond impact of APB 14-1.

For the first nine months of 2010, net sales were $242 million compared to net sales of $221 million for 2009, a 10% increase. Year-to-date sales volume was approximately 3% higher than 2009. We recognized a net loss of $7.7 million or $0.51 per share for the nine months ended September 30, 2010, as compared to a net loss of $18.2 million or $1.21 per share for 2009.

The Company recognized $17.2 million of charges in 2010, which consists of a $9.8 million increase to the surface flaking warranty reserve, $5 million related to minimum purchase penalties on two contracts, and the $2.4 million impairment related to a joint venture in Spain that recycles waste polyethylene.

The 2010 net income, excluding the $17.2 million of charges, was $9.5 million or $0.62 per share as compared to the 2009 net income, excluding the Olive Branch impairment charge of $5.1 million or $0.34 per share.

Excluding the warranty reserve and purchase commitment charges, the pro forma margin was 29.2%, a 40 basis point improvement from 2009. Our capacity utilization of 46% was up considerably over 2009 and positively impacted gross margin by approximately 410 basis points. Startup costs associated with our 2010 introduction of Transcend were $13.3 million or 550 basis points of revenue, which offset the positive impact of capacity utilization.

SG&A for the nine months ended September 30, 2010, was $52.3 million compared to $47.9 million in 2009. Excluding the previously mentioned joint-venture charge, SG&A was $49.9 million, a $2 million increase compared to 2009. The SG&A -- the increase in SG&A was primarily driven by branding initiatives, which were partially offset by reduced carrying costs related to our Olive Branch facility.

Net interest was $11.6 million for the nine months ended September 30, 2010, a $600,000 increase from 2009. Favorable cash-related net interest due to reduced net debt was more than offset by a $1 million increase in the non-cash interest charges related to the accounting treatment for a convertible bond under APB 14-1.

At September 30, 2010, the Company had $43.2 million of cash on hand and no borrowings on a revolving line of credit. Total net debt amounted to $57 million, which is a $10 million reduction to our net debt at September 30, 2009. Total net debt to total capitalization at September 30, 2010, was 25%, which is comparable to the ratio at September 30, 2009.

Inventory was $57 million at September 30, 2010, a $20 million year-over-year increase. Inventory was higher than targeted due to an abrupt reduction in sales demand, which did not align with our previous established production plans. Our goal is to reduce inventory by the end of the year to the December 2009 level.

The Company had free cash flow of $25 million in the first nine months of 2010, which was $18 million lower than in 2009. The free cash flow was primarily driven by higher inventory. Capital expenditures for the first nine months of 2010 were $6.3 million, a $1.3 million increase compared to 2009.

Our full-year 2010 investment strategy will be a spend level of approximately $10 million, primarily to support additional Transcend line retrofits and new products. Full-year free cash flow is not expected to exceed $10 million. We expect the higher sales in the fourth quarter will enhance our 2011 cash generation.

Our guidance for the fourth quarter sales is $60 million. This is 17% higher than the prior year. It will be influenced by our fourth quarter early buy program and the distributor's desire to avoid price increases effective January 2011.

One element of our 2011 pricing strategy is a price increase on our Transcend decking product line. Our internal market research and the overwhelming positive response by our customers to the 2010 Transcend product line introduction gives us confidence that the new Transcend pricing will be competitive in the marketplace.

Our progress on Transcend cost reduction continues to show steady progress. Through the first nine months, we have steadily improved Transcend's profit margins. We anticipate the Transcend earnings drag in the fourth quarter to be 600 basis points due to a greater than normal concentration of Transcend orders in the fourth quarter.

In addition, we expect capacity utilization will decline from 34% in the third quarter of 2010 to 23% in the fourth quarter as we draw down inventory to normal year-end levels.

The reduction in margin related to the reduced capacity utilization will be about 550 basis points. We anticipate SG&A will be reduced as compared to the third quarter of 2010 by $2 million primarily related to branding. Beginning January 1, 2011, we expect the Transcend products will generate margins equal to our Accents products. Transcend cost reduction initiatives in 2011 will allow us to show continuous improvement to our gross profit margin throughout the year.

Operator, we would now like to open the call up for questions after which Ron will provide his closing statement.

(Operator Instructions). Jack Kasprzak, BB&T.

Jim, the comments you just made with regard to the fourth-quarter margins, the impact from Transcend, 600 basis points drag, lower capacity utilization 550 basis points, was that a comparison with the fourth quarter of last year?

No, the 600 basis point drag will be basically the drag on the sales. So at $60 million of sales multiplied by the 6%, and that would give you the drag.

Okay. With regard to the warranty reserve, what kind of confidence level do you guys have that you will not have to take any more of these kinds of charges?

Basically what we do is we go through a fairly exhaustive review each quarter, and as we complete that quarterly review, we look at the trends in place at that time. And based on what we see at this time, we are confident that we are properly reserved. As we mentioned in the comments earlier, the decline of expected claims did not occur as early as what we had anticipated. We have now seen two months of that decline in claim activity, which gives us comfort towards our future projection.

I can tell you that I do review the calculations myself and make sure that our outside auditors review them rigorously. That is to be expected, but I place special emphasis on it. So take that for what it is worth, but it is a matter that is very high on my radar screen and within the context of generally accepted accounting principles satisfy myself that we are where we need to be at that point in time.

Well, Ron, as far as the overall potential impact, I mean do you guys know how much board is out there that could be subject to these kinds of claims, or is it more open-ended than that?

Well, we know that it was material that was produced -- a small percentage of the material produced at one plant between 2003 and 2006. What we do is we just do a statistical extrapolation of claims that are coming in. They seem to be consistent with -- if they are not consistent with our expectations, then we make a modification of the reserve accordingly. So I cannot predict it precisely, but we can make the best reasonable estimate.

Okay. That does it for me. Thank you.

I can tell you that making adjustments is anathema to us, but I cannot go beyond what generally accepted accounting principles allow. But in my very first statement to you folks back in the first quarter of 2008, I think I said there is nothing worse than death by 1000 cuts. So we do go through a very rigorous analysis and try to administer this in a fashion that gives the highest level of predictability as we possibly can.

Keith Hughes, SunTrust.

In the press release, you talk about a recent strengthening in demand. Is that in response to the pricing strategy you laid out, or is there something else going on here that is causing the pickup in business?

Well, we saw a pickup in demand prior to our pricing strategy. So it does appear as if in the last few weeks there has been some general underlying strengthening in demand.

And can we step back on the January 1 price increase, I guess, number one, what kind of magnitude is that? Is it on all products? And what is the thinking on that versus you have historically done these sort of things in the March/April timeframe?

Well, we are not going to talk about the magnitude of the price increase in this forum. I can tell you that it only affects our Transcend line.

And historically you have waited until really the beginning of the season to raise price. Now you have moved it to January 1. How has that played in?

Actually our price increases historically since Ron and I have been here have been effective the 1st of January, and usually there is a discount period. We elected to change that slightly this year. That is why the effective impact, as Ron mentioned, on the Transcend is the first of the year.

There will be other consideration on products relative to pricing in the marketplace. But at this point our distributors have not had an opportunity to discuss these prices with their dealers, and we really preferred that conversation to take place prior to any announcement in this type of forum.

Keith Johnson, Morgan Keegan.

Just a couple of quick questions. Maybe, first off, on the I guess last year if I look or try to remember correctly what happened in the fourth quarter last year, there were some sales programs that incentivized distributors to take product last year in the fourth quarter. And I think you guys suggested maybe it was about maybe $10 million that shifted in the fourth quarter last year. When you look at your guidance for this year of around $60 million, I mean how should we think about the potential shifting in demand patterns out of the first quarter of 2011 into the fourth quarter of 2010?

You know, Keith, that is an imponderable I think. We cannot really define what motivates the dealers and the distributors to take inventory this year versus in the first quarter of next year. We lay out our programs. They place their orders as they see fit. I cannot really answer that question with any real precision.

The one thing we could say, Keith, is the program and its makeup is similar in nature to the prior year. So it's not something that would create a change one way or the other absent the impact of the price increase.

Okay. And then just real quick, as we think about 2011 from a branding ad spend, how should we think about that in the SG&A line as we go through 2011?

I think you should think of it as essentially a flat year. I don't see any big increases or decreases.

Morris Ajzenman, Griffin Securities.

I'm a little confused. I might have got some numbers wrong here. I think you said for the first nine months of this year free cash flow was $25 million. Is that correct or not?

Yes.

Okay. And then I think you said afterwards for the full-year 2010, free cash flow will be $10 million. Is that correct, or am I wrong on that one?

No, that is correct. We anticipate that it will be approximately $10 million.

Okay. So but what I'm a little confused about is, from the third to the fourth quarter based on your current inventory reduction, inventory should be down another $12 million. So I'm not exactly sure what in the fourth quarter -- I guess the only other item would be then to hit the gross margins or whatever is causing the decline in free cash flow. Am I on the right track in that perspective?

Yes. The other major element in there would be receivable collections. A lot of the sales occur late in the quarter with extended payment terms which will not turn into cash until next year.

Would that be greater than the $12 million reduction in inventories?

Yes.

Eric Prouty, Canaccord Genuity.

Just a couple of housekeeping questions. It looks like D&A popped up a little bit during the quarter here. Is that some of the new spend on the Transcend line creating new higher depreciation, and is that going to continue going forward?

I think the change there relates to the APB 14-1. So I think that is the only impact, and APB 14-1 will increase as we go forward through mid-2012.

Okay. Great. Then what was -- during the quarter you took on extra inventory -- warranty reserve. What were the actual charges against your warranty accruals during the quarter, do you know?

The actual payout for claims and settlement with the attorneys that filed the class-action was $4.3 million.

Okay. Would we -- is that going to probably be the high watermark at least as far as any individual quarterly charge against warranty?

I would expect it to be.

Okay. And, guys, again for warranty, when you're done with this -- the warranty for these past products, would you expect your warranty accrued on your balance sheet warranty reserves to be down at zero? What do you plan on doing with warranty going forward once it appears that the issue behind this past product stunt?

The warranty reserve would be essentially a de minimis reserve. Absent the surface flaking issue at the Fernley plant, the product claims relative to manufactured quality are essentially de minimis and have been since I have been with the Company, and I think prior to that -- I am looking at my colleagues who have been around a little bit longer -- it has been extremely slow, extremely low. So we would expect it to be a de minimis on the balance sheet.

Okay. Great. And then finally, just because I got a little confused on the gross guidance, if we look sequentially since the revenue rate is going to be similar, if we ex out the charges during the quarter, it looked like gross margin was a little over 21.5% if we add the charges back to cost of goods sold. Could you just say it again what you thought those quarterly kind of the sequential impact to gross margin was going to be from Q3 into Q4?

Sure. Relative to the Transcend drag, it would be roughly 3% greater. So you have a 3% drag compared to the third quarter, and from a capacity utilization, you would have about a 5.5% drag compared to the third quarter.

Okay. And then, again, that would be off of the third-quarter gross margin without the charges in it?

That is correct.

Okay. So you're looking at about 13% gross margin from the December quarter if my math is right?

That is correct.

Ryan Thibodeaux, Maple Leaf Partners.

Could you walk through, again, the reconciliation on gross margin for Q3 2010 versus Q3 2009? If I remember correctly, I think your capacity utilization in Q3 '09 was around 25%. You said it was 34% in Q3 2010 on the same revenue. I'm just trying to back into why the gross margin is half the level it was last year.

First of all, Q3 of 2009 was 32%, excluding our Olive Branch facility. I think you may be referring to a number that had included the Olive Branch facility. So capacity utilization was only a couple of points higher in Q3 of 2010.

Okay. So virtually the same capacity utilization, virtually the same revenue. Even if you back out the charge, you are at 21% gross margin versus 29.8%. Was the rest of the delta there?

Well, you had the drag of the impact to the inventory liquidations. That is about $1.6 million, which would be about 260 basis points.

And the remainder?

Part of it would be the -- as we ramp down the production as we saw the sales are not going to come in, we could not eliminate the expenses as quickly as we reduced the production level. So we continue a drag compared to the prior year.

Okay. And then just a clarification on Q4 gross margin. The prior questioner said 13%. I was reading it more like it was going to decline more than that, but is 13% around about the correct number?

Yes, that is.

Forrest Tempel, FlyLine Partners.

Actually my question has been answered. I think I'm fine. Thank you, though.

Alan Mitrani, Sylvan Lake Asset Management.

The last couple of questions cleared it up, but one issue is related to branding. You said branding next year would likely be flat with this year. Could you just give us a sense of what branding was in the third quarter and where you expect it to be for this year?

Give us a second here.

Yes, branding is roughly $4.5 million in the third quarter.

And approximately $18 million year-to-date for the nine months through September.

Okay. And you expect it to be what, around $20 million for the year then?

Right.

Okay. So you are looking at another $2.5 million. And I know you launched new product, the Transcend product last year, and branding is up significantly from '09. Do you feel you need to spend this much money in branding on the product that has been around -- (multiple speakers)?

Well, we have got a lot of momentum that we have picked up in terms of we are gaining market share. We think that it is appropriate to keep that momentum up. We think there is a lot more business to get. We have announced some time ago that we had a goal of 50% market share by 2012, and we think this is what you have got to do to get there.

So clearly it's an easy way to goose your earnings by cutting back on branding. But branding is one of the most important assets that Trex has. It clearly differentiates us, our brand identity from all the other competitors that we compete with. That is why we get the awards that we get, and, of course, the awards are not the objective, but they are a reflection rather of what we're doing in the marketplace.

So we're going to keep the pressure on. We are going to continue to cultivate the number one identifiable building product within the outdoor living category, and we think it is in our interest to do so.

And I think also if you consider the fact that we are not estimating in our 2011 year flat sales. So, as sales increase, the percent of sales for branding obviously will decline.

As a percent of sales. I understand that. Management's compensation, can you just remind us, is it tied to earnings-per-share?

It is tied to earnings-per-share and free cash flow.

And that is reported earnings-per-share or operating earnings-per-share?

Reported.

Okay. Well, I mean I'm looking at operating earnings-per-share. Given that you're looking at roughly about a $0.50 loss in the fourth quarter now using $60 million of revenues, around $13 million and change gross margin, and you said SG&A is going to drop $2 million sequentially of about $12 million, it is easy to get down to the number. It looks like there is going to be no earnings this year, even on an operating basis. Are we going to see a reversal of share-based comp in the fourth quarter?

There was an adjustment to the share-based comp in the third quarter.

There was?

Yes.

Forrest Tempel, FlyLine Partners.

Sorry, just a quick question on the extended payment terms. Can you give us any flavor for what this will mean in working capital, and will you be able to handle this all with cash, or will you draw down on lines for that?

We anticipate that we will be into the revolver for some period of time in the early part of next year, consistent with what we were this past year.

Ryan Thibodeaux, Maple Leaf Partners.

I apologize if you have already repeated this, but did you say that your branding expense for 2011 is going to be flat with 2010?

Yes.

Okay. And would you expect core SG&A to be flat as well?

We may spend a little bit more on research and development.

Okay. So net-net in total SG&A would be flat to up slightly for 2011?

Yes, I would say that is fair.

Jeff Graf, Springhouse Capital.

I just wanted to clarify something that I think you said earlier on the call. How much of a hit in the quarter was the Transcend startup costs?

Did you say in the third quarter?

In the current quarter, yes.

In the third quarter, it was a drag of 280 basis points.

And that was comparable to -- that is a year-over-year comparison?

That is 280 basis points on the sales.

The 280 basis points on the sales --

It is about $1.7 million.

Comparable to third quarter of '09?

No, no, a straight $1.7 million drag on earnings in the quarter.

Okay. And did you say in the comments that -- let me just ask it this way, when do you think that these startup costs on the Transcend product line shifts will be -- you will be fully efficient, up and running, and these hits will be -- there will be no more drags from the startup costs?

Well, effective January 1 of 2011, the profitability on Transcend will equal the profitability on our Accents-branded product, which is basically what we compare ourselves to.

Throughout 2011 we will continue with process and productivity improvements specifically related to Transcend, things that we have identified that we will continue to see improvements on. So you'll see continuous improvement on the Transcend throughout 2011, but the drag basically ends January 1.

Right.

I also said in my comments that in 2011 our rates and yields consistently will be higher than that previously experienced here at Trex.

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

Thanks, everyone, for participating today. Despite the challenging economic climate, you can see that we are taking a lot of steps to expand our product line, strengthen our franchise and expand our market share. We are looking forward to a good fourth quarter and talking with you again in a few months, and we will bring you up-to-date on our Q4 results and update you on our strategies for continued market growth in 2011.

And finally, I would like to thank my colleagues, particularly the salesmen in the field and the production workers in the plant, many of whom listen to this call. They have worked very hard this past quarter, and I do appreciate it. Thank you. Bye-bye.

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