Trex Company Inc (TREX) 2010 Q4 法說會逐字稿

Welcome to the Trex Company Fourth Quarter 2010 Earnings Conference Call. At this time, all participants are in a listen-only mode. Following Management's prepared remarks, we'll hold a Q&A session. (Operator Instructions) As a reminder, this conference is being recorded today, Monday, February 28, 2011. 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, 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 fourth quarter of 2010. This release is available on the Company's website, as well as on various financial websites. The call is also being web cast on the Investor Relations page of the Company's website, where it will be available for 30 days. I'd 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 product replacement and consumer relations 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 Securities and Exchange Commission on March 12, 2010, and its subsequent reports on Form 10-Q filed on May 6, August 5, and November 4, 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 conference 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 December 31, 2010" and "Reconciliations of Pro Forma Results of Operation Measures to the Nearest Comparable GAAP Measures 12 months Ended December 31, 2010."With that introduction, I'll turn the call over to Ron Kaplan.

Welcome, everyone, to our year-end conference call. I'm proud to announce our fourth quarter financial results today as we report record sales, strong pro forma margins and cash holdings of $27 million. Our record fourth quarter sales were almost 50% higher than Q4 2009. Our business strategy has worked. Our goal was to invent a game changing transformational technology that would provide superior aesthetics, durability and performance. We did it. And we have been rewarded with more market share. Conclusive market share data is ethereal in our category, but own measures show us to be marching toward our goal of a 50% share.

Transcend is now recognized as the benchmark against which all other ULM boards are compared. Our fourth quarter sales record reflected our dealers' and distributors' enthusiasm for our business strategy and our pricing on sales programs as we entered the pre-spring sales season. Our fourth quarter sales were supported by a significant level of dealer direct shipments, which is important from a competitive positioning standpoint. On the production side, we made outstanding progress. Transcend rates, yields and margins now equal Accents -- a significant operational achievement. Trex has pivoted successfully.

For three years, this Management team has focused on the repair, rehabilitation and repositioning of Trex. The result has been a transformation. We now have a Company that is operationally effective, financially solid, technologically advanced and is increasingly geographically diverse. When we started on this journey in 2008, we were focused on turning the business around. Now we leave those concerns to our competitors. We are focused exclusively on growth. Growth in sales, growth in market share and growth in profit. In the past year, we introduced Transcend, Tropical Styling, Trex RainEscape, LED lighting, Custom Curve and deck design software -- even outdoor furniture.

We will continue to invent innovative responses to evolving consumer preferences as we further strengthen our position as the industry leader. We have also grown beyond our borders. By the end of Q1 2011, we will have shipped to 11 foreign countries. The Trex brand has global awareness. I have seen this first hand. We will build a solid distribution network to exploit that strong, globally-recognized brand identity.

Leading edge technology, innovation and superior customer service are all paramount to Trex. So is credibility. Accordingly, we have positioned Trex to provide more consistent and predictable returns. You can expect Trex to remain aggressive in the marketplace. Our marketing is comprehensive, innovative and effective. Independently commissioned marketing research shows our advertising initiates not just brand awareness, but extraordinarily high rates of purchase. We have 96 Walk the Walk events planned.

We'll be everywhere as we continue to lead and grow the burgeoning outdoor living category. Finally, on behalf of the Board of Directors, let me pay tribute to the outstanding Trex employees. Their dedication, perseverance and innovation have truly distinguished Trex from our competitors. Now, I will turn it over to Jim Cline.

Thank you, Ron. Good morning. The press release with Trex's fourth quarter and full-year 2010 financial results was issued this morning. In the fourth quarter of 2010, the Company recognized net sales of $75.3 million, a 47% increase compared to the fourth quarter of 2009. The Company recorded a net loss of $500,000, $0.03 per share in the fourth quarter of 2010, compared to a net loss of $300,000 or $0.02 per share in 2009. The Company's results for the fourth quarter of 2010 include $4.1 million of charges. We elected to increase our warranty reserve by $5.2 million. In the first nine months of 2010, we recognized charges related to two purchase contracts entered into in 2008.

In the fourth quarter of 2010, the penalty related to one of those contracts was reduced by $1.1 million, due to the early termination of that contract and the elimination of certain purchase commitments. The fourth quarter of 2009 results included a $5.1 million tax loss carry-back benefit. Before giving effect to these charges and benefits, we recognized $3.6 million of income during the fourth quarter of 2010 or $0.23 per share, compared to the fourth quarter of 2009 net loss of $5.4 million or $0.36 per share. The net impact of the 2010 adjustments noted previously totaled $4.1 million in the fourth quarter and was recognized in cost of goods sold. Excluding these charges, the gross profit margin was 30.1%. The strong margin was driven by improved manufacturing efficiencies and reduced manufacturing spending, offset by reduced capacity utilization of $1.1 million and a final $3.9 million earnings drag related to Transcend. SG&A for the fourth quarter was $15.5 million, which was $1.9 million lower than 2009.

Branding spend was $700,000 lower in the fourth quarter of 2010. The fourth quarter of 2009 included spending related to the 2010 launch of our Transcend product line. In addition, the fourth quarter of 2009 included an $800,000 allowance for doubtful accounts. Debt interest was $3.7 million in 2010, as compared to 2009 -- it 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. Full-year 2010 net sales were $317.7 million compared to net sales of $272.3 million for 2009, an increase of 17%. Net sales were favorably impacted by a shift in sales mix to our high-performance Transcend debt boards and strong sales of railing products which carry higher prices per linear foot than our core accent branded products.

We recognized a net loss of $10.1 million or $0.66 per share for the year-ended December 31, 2010, compared to a net loss of $16.9 million or $1.12 per share for 2009. The Company recognized $21.3 million of charges in 2010.This included a $15 million increase to the warranty reserve, $3.9 million related to minimum purchase penalties on two purchase contracts and a $2.4 million impairment related to a joint venture in Spain that recycles polyethylene. The 2010 net income, excluding the $21.3 million of charges, was $11.3 million or $0.72 per share. The 2009 net income, excluding the Olive Branch charge and the $5.1 million tax loss carry-back benefit, was $1.3 million or $0.09 per share. Excluding the warranty reserve and purchase commitment charges, gross margin was 28.9%, a 70 basis point decline from 2009.

The earnings drag associated with our 2010 introduction of Transcend was $17.5 million. This was offset by increased capacity utilization of 42%, up considerably over 2009 and positively impacted gross profit by approximately $8.5 million. In addition, in 2010, we eliminated the $3.3 million drag on earnings from the sale of excess poly that incurred in the first half of 2009. SG&A for 2010 was $67.8 million, compared to $65.3 million in 2009. Excluding the previously mentioned joint venture charge, SG&A was $65.4 million, roughly the same as 2009. We increased spending on branding initiatives in 2010 by $4.2 million to support our Transcend launch and overall reach. This was partially offset by reduced carrying costs related to our Olive Branch facility of $3.6 million and a 2009 bad debt charge of $800,000.

Net interest was $15.3 million for 2010, a $600,000 increase from 2009. Favorable cash related to net interest due to reduced net debt was more than offset by a $1.3 million increase in the non-cash interest charges related to the accounting treatment of our convertible bonds under APB 14-1. At December 31st, 2010, the Company had $27.3 million of cash on hand and no borrowings on our revolving line of credit. Total net debt amounted to $57.8 million, which was comparable to our net debt at December 31st, 2009. Total net debt to total capitalization at December 31st, 2010 was 36%, compared to 35% at December 31st, 2009. Inventory was $29 million at December 31st, 2010, a $1 million year-over-year decrease. The Company had free cash flow of $9.2 million for the fiscal year 2010, which was $19 million lower than 2009.

The reduced free cash flow was primarily driven by a smaller reduction in inventory. Capital expenditures for fiscal year 2010 were $10 million, a $3 million increase compared to 2009. Our guidance for the first quarter of 2011 sales is $70 million. This is 6% higher than 2010 and would produce trailing six month sales through the end of the first quarter of 2011 of $146 million or a 24% year-over-year increase. This underscores a strong commitment by our distributors and dealers to ensure appropriate levels of inventory are available to support the decking and railing season. We were able to meet our productivity and cost targets for Transcend in the fourth quarter of 2010, as we've steadily improved margins. This coupled with the January 1, 2011 price increase on Transcend will eliminate the earnings drag that we experienced in 2010 related to the introduction of Transcend.

Our Transcend products now generate margins equal to or greater than our Accent products. Transcend cost reduction initiatives will continue throughout 2011. Our orders in the first two months of this quarter continue the trend toward the high performance Transcend products. As Ron noted earlier, our early buy program has been strongly supported by our distribution partners. Most of our distribution partners have elected early payment discounts versus favorable payment terms for the early buy orders. As a result, we do not anticipate utilizing our revolver in 2011. Cash on hand at the end of last week was over $30 million. Operator, we would now like to open the call up for questions, after which Ron will provide his closing statements.

(Operator Instructions)Our first question is from the line of Trey Grooms with Stephens, Inc. Please go ahead with your question.

Good morning, guys.

Good morning, Trey.

Good morning.

Could you talk just a little bit about -- Jim, could you talk about what caused the big difference? I know you pointed to a few different things on the call, but the guidance for 1Q margin versus how they shook out, could you really tell us what was the swing factor there?

You mean the fourth quarter margins?

Sorry -- yes, fourth quarter, I'm sorry.

Sure. First of all, the significant increase in sales basically was a strong driver. We had improvements in our productivity related to Transcend that was better than with what we'd anticipated and actual spending was down somewhat. So, those are the primary drivers. We did take the production level up a little bit higher than with what we had anticipated because of the higher than planned sales. That would have been an additional contributor.

So, where did the utilization rate shake out for the quarter?

Capacity utilization for the fourth quarter of 2010 was just under 30%.

Okay. Okay. And then if you mentioned this, I think you did on the gross margins, what they would have looked like ex some of these one time charges. But if you take out, for 2010, if you take out the impact of Transcend start up costs, the lower margins for Transcend through most of the year, all of the other things that -- there was a lot of moving pieces and one time or extraordinary type things going on in the year, what did -- and if I missed it I apologize, but what did gross margins -- what would they have looked like excluding all of those things in 2010?

It would be in the mid-30%s.

Okay, yes, that's where I was getting. And then, so is there -- are most of these things like purchase penalties and things like this? Are there any other charges expected looking forward into 2010, or are those largely behind us?

Yes. The purchase penalties related to those two contracts are behind us. We don't have any other contracts that are of that nature. The Transcend start up is behind us. As I mentioned, we're seeing better performance than what we had anticipated in the fourth quarter on Transcend. So, we think, as Ron mentioned, we've positioned the Company for a very successful 2011.

Great. That's helpful. So, could you tell us also, what is the current mix? How much does Transcend -- at the end of the year, how much of your shipments were Transcend?

Trey, we really aren't going to release the percentage. It was a sizable piece of our business. It has continued to be a sizable trend in the orders for the first two months. I think it's fair to say over the next several years, that Transcend will become the dominant share of our sales in the market.

Okay. Well, I appreciate that. And I'll jump back in queue. Thanks, guys, and great quarter.

Thank you.

Your next question comes from the line of Jack Kasprzak with BB&T Capital Markets.

Thanks. Good morning. With regard to your sales guidance for the first quarter, which is essentially flat from Q4, if you look back over time, usually Q1 is up sequentially from Q4 and usually by quite a bit. What's impacting the sales trend from Q4 to Q1 this time around?

Well, we had a strong fourth quarter -- very, very strong fourth quarter. If you look at the six months at the end of Q1, I think you have to look at that in its totality and that would show about a 24% increase over the prior year.

So, was there -- you talked about your pricing strategy and some demand by dealers. Was there a price increase for early 2011 that dealers are trying to get ahead of?

There was a price increase on Transcend product only that went into effect January 1. So, I think it's fair to say that a portion of the sales that went into Q4 probably were designed to avoid that. How much is impossible to say. That's why I think it's prudent to look at the whole six months in its totality and compare it to the same period prior year.

One other thing, any price adjustments related to other products were really offset with other program discounts. So, basically net change on other products would have been zero.

And so, for the quarter, was your -- was the improvements -- so the improvement in sales in the quarter was basically volume driven?

Volume and efficiency driven and cost controls.

Okay. And with regard to the warranty reserve, I think you mentioned $15 million in total for 2010. Any way to know where we stand with that? Are you going to have to take some more at this point or have you guys put the issue in the box so to speak?

I think that I've addressed how we -- we're expecting a strong year going forward and the Company is well-positioned. Clearly, if we thought we're going to have to reserve more, we would have reserved more. We think we are properly reserved and we've taken a prudent view.

Is this a situation where the -- I mean, it's -- there's some unknown in that the claims keep coming? Have they come at a faster pace in recent months or has it been fairly steady or has it abated a bit?

Well, there are cross currents. The number of claims changes, the amounts spent per claim changes. I think it's just fair to say that we've taken a very prudent view and that there are -- we'll examine it quarterly. We have no reason to believe that additional reserves will be required.

Okay, that does it for me. Thanks for your help.

Your next question comes from the line of Keith Hughes with SunTrust.

Thank you. Question was on inventory and I don't really want to turn this into an accounting discussion, but can you just, in terms of units or whatever metric you want to use, try to tell me where we are in inventory versus this time last year?The inventory in the prior year changed is a link change that you had put in on a previous press release, so I'm just trying to get a feel for that.

The inventory has declined slightly from prior year.

On a unit per unit basis?

Yes.

Okay. And so, as you head into the season, this, numerically, is one of the smallest inventory numbers we've ever seen. Do you feel like you're a little short on inventory right now if the season were to be strong?

We're really focused on trying to level load our plant as best we can. I mean, clearly, we've got the money in a productive capacity to increase our inventory, should we choose to. We're focused on return on invested capital and we try to cut it as closely as we can. Clearly, if we're going to make a mistake, we'd rather have a little too much inventory, than not a little -- not enough inventory. But this has been part of a three-year ongoing effort to drive down the capital employed in this business.

Okay. Final question on raw material inputs, any change up or down in raw material inputs in the last several months?

Well, yes. The raw material has changed, but in a very, very small amount. It's -- in terms of the net acquisition costs of our polyethylene, it's within spitting distance of the rate of inflation.

All right. Thank you.

Your next question comes from the line of John Baugh with Stifel Nicolaus.

Good morning, Ron and Jim. Congratulations. Quickly, a couple of things. Market share, that's always an elusive number in this business and you, I think, are defining it by ultra-low maintenance boards, Ron. And I assume that's inclusive of PVC resin. Can you give us what you think the market did in 2010? What you think you did? And I guess I'm asking more on a pull through from consumer standpoint more than a loading the channel? And how you might think that share would change in 2011 versus 2010? Thanks.

First of all, we look at it in terms of not just ULM, but all WPC products and alternative wood products, which would include PVC. So, we think that -- in total, we think that the market for W4 alternative wood products is growing slightly within the overall decking market. And we believe that Trex is taking more than its fair share of that market as the market grows. So, Trex is growing within a category and the category is growing within the overall decking market. So, it's very tough get exact numbers. There's one outside agency that will issue numbers probably in Q2 for the year 2010. But we know by the number of dealers that we've added, the number of direct shipments going out the door and what we hear from the big boxes, we know that cumulatively, we're taking some substantial market share. But I'm reluctant to put a number on it.

Could you comment, Ron, on the number of dealers you think you added in 2010 or will add in 2011 from an '09 start point?

I think that over the past year we've added between 200 and 300 dealers. I know that's a wide range, but that's the safest way to say it. Something between 200 and 300 dealers have been added.

Okay. And then, Jim, I want to go back on the gross margin. I think you commented that there was a 28.9% gross margin and I think that was sort of an adjusted number. I'm not sure. First of all, was that for the year? Was that for the adjusted number? And then you commented on the Transcend cost being something like $17 million. Would you add that $17 million back, which is like over 500 basis points, to try to get or where you are on a run rate basis going forward on gross margin?

You're exactly right. You'd add the $17.5 million back to that underlying 29% that I mentioned earlier.

Okay. And was there a double-digit price increase on Transcend? Was that effective with shipments beginning January 1? Any color there?

Yes. It was effective January 1. It was a double-digit price increase.

Okay. And then, share count for 2011? Tax rate for 2011, Jim?

Tax rate should be de minimus.Share count, Brad, help me out, just under 16 million.

Yes, that's where it is and I would expect it would probably stay there.

Yes. So, it'll stay around 16 million, roughly.

Okay. And any comment, Ron, on rail as a percentage of the mix? How did you do in railing in 2010 and how do you think you lined up in 2011?

Railing jumped several percentage points in terms of our total sales and I expect that trend to continue. The design of the Transcend railing, which is sold now as a system with the decking, really has been a hit with dealers, distributors and consumers.

Any comment on like what an attach rate is now with decking, with railing?

No. We don't divulge that number.

Okay. And what will your brand spend, as either a dollar or percent of revenue in 2011 look? What's your strategy there versus 2010?

Strategy is it'll be essentially flat.

On dollars or percentage?

Dollars.

Thank you.

Your next question comes from the line of Ali Motamed with Boston Partners.

Hi, guys. You guys have consumed $11 million of the warranty reserve this past year. You're sitting on like a $14 million reserve. I think the quarterly rate that has been consumed has accelerated, because I looked last year and it was $10 million. So, what gives you confidence and what gives your auditors confidence that you shouldn't be taking a regular product reserve? You pushed out your warranty from five years to 25 years on the new products and the consumption of the reserve keeps going up. Wouldn't it be prudent to just say we'll take 2% or 3% of sales or something?

Well, we're going to -- I'll let Jim comment in a minute. That warranty reserve is not associated with any of our new products. That's associated with one specific product made in one particular plant many years ago. So, it's a so-called de-lamination issue. It has nothing to do with current sales or --

But why is it accelerating? You know what I mean? I mean, if I look back at the consumption of that reserve, this year was the highest consumption of reserve that we've had in probably two or three years. And so, I can understand that. But it would seem like that would have been something taken care of and put to rest. But now we have gone through three reserve increases in the past year. And can you talk more specifics then? Is it the number of claims going up? Is it the cost per incidence? What is it?

If you'll recall, in previous conversations and announcements we've had, we had a class action suit that was filed against the Company in 2009. As a result of that class action suit and subsequent public disclosures of the settlement in national periodicals, the claims for 2009 -- the latter part, specifically and 2010 in particular, the first two quarters went up dramatically. And as a result of that, claims accelerated in and in addition, we believe people who had not previously identified that their deck was in need of replacement, came forward. And so, the reason why you saw greater payouts in 2010 were a result of that class action notification and our desire to deal with those claims very quickly. What we have seen in the latter part of 2010 is a significant decline in the number of claims that are coming in. However, that decline was not as great as we anticipated in the middle of the year and as a result of that, we've revised our estimates on what is appropriate to reserve.

And also, you said we're in a great inventory position at the dealer level. Can you comment on how you view that and what is that inventory position going into this decking season, relative to last year?

I can't comment, or won't comment on the exact level of inventories that they have in the channel. What we do measure are the sales into our distributors versus the sales out of our distributors. And we're very confident that an analysis of those numbers reflects a fundamentally robust underlying demand and that the channel isn't jammed in any way.

Thank you.

Our next question comes from the line of Robert Kelly with Sidoti.

Good morning.

Good morning.

Good morning.

I had a question on the gross margin run rate if we add back the drag from Transcend. 2010 was kind of a disappointing year from the sense of you did have weakening utilization from mid-year on. If we're starting off with a 34% run rate for the gross margin and we're right about volume starting to click back, isn't that -- what would be the drag on gross margin this year? Shouldn't we be assuming a mid-30% maybe plus gross margin for 2011?

I think mid-30%s is the starting point. Our capacity utilization is, as we're projecting it, will be slightly lower than the 2010. That would draw those margins down slightly from that mid-30% range.

But then you have the positive benefit of mix with the double-digit price increase? Right? That's all additive to gross margin?

You need to be careful on the gross margin with that price increase. The $17.5 million drag is eliminated with the process productivity improvements and the price increase. So, you don't want to double up on that.

But where we are as far as utilization and the rates on the boards, you're on target for those start up costs to fall away beginning 1Q 2011?

Yes.

Okay. And then you threw out some sales of the international market, any way you could give us more color on that? Where you're selling?

Well, I'll say this. When I came here three years ago, we were selling into two foreign countries, now we're selling into 11. We're selling at a price equivalent to what we sell for in the United States. The customers pay the freight. So, we're prosecuting our international strategy not by establishing bricks and mortar overseas, but by filling our plants here and just shipping from Winchester, Virginia, or Fernley, Nevada into 11 foreign countries. So, it's starting out small.

I don't want to overplay it. But I've done this before in my life. It starts small and we'll see where it goes. But the fact of the matter is, there are people in 11 foreign countries that are sending us letters of credit and paying for their product cash on the barrel head, so to speak. So, we're encouraged by the reception that we get around the world.

Thanks.

Your next question comes from the line of Eric Glover with Canaccord.

Hi. Good morning. I was just wondering if you could just comment on how much of the price increase on Transcend that was taken in January related to any increase in your raw materials costs?

When we announce price increases, it has not been our habit to try and justify price increases by discussing cost increase information. With Transcend, that was no exception. We announced a price increase to put the Transcend pricing where we believed it was appropriate in the marketplace and we believe we're priced right in the middle of the pack of the high performance ultra-low maintenance products.

It's generally our philosophy that we price our products based on the market, not based on our costs. The costs will determine how we respond in terms of procurement and production. But it doesn't determine our pricing. The market determines our pricing.

Great. Second, just wondering if you could comment a little bit more about the performance of Transcend given the kind of winter we've had?How -- what are some of the field reports you're hearing about how the product has held up in this kind of severe weather?

We get nothing but superlative reports about the performance of Transcend. It has been absolutely devoid of product complaints or operational problems in the field.

Okay. Great. Thanks.

Your next question comes from the line of Morris Aizenman with Griffin Securities.

Hi, guys.

Hello, Morris.

Most of my questions have been asked at this point. But, just kind of quick follow-up on the market share numbers and the fragmented market out there. How does it look to you as far as the marginal plays there? Are they going to continue hanging on?There's been falling over the last couple of years.But how does it play out for 2011, based on a 64,000 foot view from your perspective?

Well, there is some, what I'll call turbulence in the marketplace. I do think -- I'm not going to mention any competitors specifically, but some that we're aware of are getting closer and closer to the edge based on what I can read. There is some -- we know that some of our competitors have lost market share. I think one of them has gained a little market share. But on the whole, I think that, chances are there'll be fewer players a year from now than there are today.

Okay. Fair enough. And the last question, most of the others have been pretty well picked through, on a cash flow basis, free cash flow, looking at the next year, should it just match the increase in net income? How does that play out with working capital and everything else?

Yes. Morris, I think that the cash flow in 2011 would be more driven by the net income improvement, the EBITDA improvement, than what you saw in 2010.

Fair enough.

It should be a fairly strong cash generation year for us.

Thank you.

Your next question comes from the line of Kenneth Smith with Lenox Equity Research.

Thanks. Ron, I wanted to ask you, on your comments on the international sales I know you talked about it, but what is that market like compared to the US? Is it primarily a residential market like it is here?Or is it more of a commercial? Just -- can you give a little more color on it?

I think it is primarily residential, like it is here. As you go around the world, decks are of varying popularity, varying designs and varying sizes. But I liken it to probably what the US was like 10 to 15 years ago. It's an emerging market. What I've noticed, as you travel around, is that people know what Trex is. I've started to explain what Trex is and they sort of stop me in mid-sentence and they say, we know what Trex is, we just don't know how to buy it.

And so, really, it's more of an issue of setting up distribution channels than it is trying to educate the population about the nature of a wood plastic composite. In Europe, there are dozens and dozens of WPC deck makers. Let me take a drink of water here. Excuse me. But there's no brand. It's a very fragmented market and there's no brand. One guy with an extruder says he's in the business, but still we're now in a major retailer in Europe that's serving several different countries and there is a yearning over there for a brand, for a brand identity. So, we provide that.

If you go to China, I mean, there are lots of manufacturers in China, but none of them -- we've tested their boards, none of them pass the Trex internal quality tests that we go through which are quite rigorous. So, it's a fragmented market, it's a diverse market. The strategy they use in Australia has got to be a different strategy than the one they use in Europe. But we're picking away at it and we're making progress and we got the orders to prove it.

Okay. And then a second question, back in the fourth quarter you announced a couple of new colors for the Transcend line which, from looking in the field, I thought those were getting right at the strength of your competitors. I just wonder if you could talk about how those products, those colors in particular, have been received by the market?

Yes, they've been, I think you're talking about spiced rum and lava rock, two of my favorites. They are very popular. And they're priced even higher than regular Transcend. And they're -- we're quite pleased with their market reception.

Were you selling those in the fourth quarter or did they start this quarter?

They started this quarter.

Okay. Thank you.

Your next question comes from the line of Alan Mitrani with Sylvan Lake Asset Management.

Hi. Thank you. Jim, you said your CapEx was 42% for the year, if I heard you correctly, roughly. Does that include or exclude the Olive Wood -- Branch?

It excludes Olive Branch.

Excludes olive branch. And what was it if it included Olive Branch?

The Olive Branch -- it'd go up a few percentage points. The Olive Branch is really mothballed. We have no plans to reopen that facility. So, I think it's best to look at the business without that. We continue to improve throughput of our production lines and with that, it becomes less and less likely every year that, that facility would be reopened.

Okay. And so 42%, you said excluding Olive Branch, correct?

That's correct.

And so then why -- in your commentary, I thought I heard you said -- you say for this coming year, in response to a question obviously, that in your mind the starting point for gross margin would be mid-30%s or 34%, wherever it was ex the charges in 2010 and then you said that it may be impacted by capacity utilization being down in 2011. Why would capacity utilization be down in 2011 if there's good demand, you're rolling out new products and you have a geographic expansion potential?

Well, two things. Number one, the throughput related to the product mix is different than what we utilized. We are bringing more production in-house to be able to support the market from outside processors. Those new lines will start up a little bit slower, but they will have a slight drag during the year. But should long-term be a strong move for Trex from profitability standpoint. That's the primary reasons.

I will have to talk to you yet, offline. I'm not sure I fully understand that. Okay. And then CapEx for this year?

CapEx for this year should be around the double-digit benchmark.

So the $11 million, or $10 million, $11 million maybe depending on how the year goes?

No. Figure around $15 million would be a more appropriate number to look at.

And where's the extra money going that you versus this past couple years?

It would go to number of areas, new product development. It would go to expansion of our number of lines of Transcend through retrofitting existing lines. Those would be the primary areas where you'd see increases.

Okay. And then R&D expense, I think you referenced in the press release saying it's going to go up a little bit. R&D, seemingly is only about a percent or two of revenue, correct?

Yes.

Okay. So branding stays flat, R&D goes up a bit, but all in all you're talking about a fairly flattish to slightly up SG&A on the year. That's what it seems like. Is that fair?

I think that's a reasonable characterization.

So then, just finishing it up. If tax rate's around 0%ish, shares won't change, SG&A is flattish, it all comes down to the margin and revenues and you're telling us the margin's going be basically a starting point of almost 400 or 500, 600 base -- 600 basis points higher. How are we not going to generate almost a couple bucks or more of free cash flow this year?

We aren't going to get into the forecasting of full-year cash generation or income. Just something this Management team has elected not to do.

Okay. Great. One last question. I'm sorry. The orders -- you were referencing that January and February orders were pretty good. Were they up year-over-year? Because I know your first quarter 2010 had a very strong order period.

We're not going to talk about the orders January to February. We'll talk about the orders at the end of the full quarter.

Great. Thank you.

Thank you. Are there any more questions?

Not at this time.

Let me just make a comment that's not in my script. This past year, as I look back at my 36 years of manufacturing experience, this getting Transcend out of the starting blocks and to have achieved the gross margins we did by the end of the year and have it be equal to or better than Accents, is probably one of the most extraordinary operational achievements I've ever participated in. And we may -- had a choice to make that we wanted to get to the market as quickly as we could. So, we took significant operational risks and created operational challenges which this team overcame. So, I want the market to be aware that what I consider to be an extraordinary operational achievement and I want the employees who are listening to this to know that my hat is off to them. The men and women of Trex really performed, not only in terms of sales and market penetration, but in terms of operational excellence and managerial oversight, cost controls, the things that were within our control were well-controlled. So, I want to thank all of them.

So, thank you to everyone who is listening today. Clearly, the Trex team delivered a strong year in 2010 with our expanding range of products, a good stocking position, more stable economy. And with the Transcend start up behind us, we're looking forward to an even better year in 2011. I hope you'll join us for an update when our first quarter results are in. Thank you very much.

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