Trex Company Inc (TREX) 2011 Q4 法說會逐字稿

Welcome to be Trex Company fourth-quarter 2011 conference call. At this time all participants are in a listen only mode. Following management's prepared remarks we will hold a question-and-answer session. (Operator Instructions). As a reminder, this conference is being recorded today, February 27, 2012.

I would now like to turn the conference over to Ms. Harriet Fried of up of LHA. 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 2011. 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' General Counsel.

Thank you Harriet. Before we begin let me remind everyone that statements on this call regarding the Company's expected future performance and condition constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.

These statements are subject to risks and uncertainties that could cause the Company's actual operating results to differ materially. Such risks and uncertainties include the extent of market acceptance of the Company's products; the 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 relation expenses related to product quality in the highly competitive markets in which the Company operates.

Documents filed with the Securities and Exchange Commission by the Company, including in particular its latest annual report on Form 10-K and quarterly reports on Forms 10-Q 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, Reconciliations of Pro Forma Results of Operation Measures to the Nearest Comparable GAAP Measures Three Months Ended December 31, 2011, and Reconciliations of Pro Forma Results of Operations Measures to the Nearest Comparable GAAP Measures 12 months ended December 31, 2011.

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

Good morning everyone. Our sales in the fourth quarter were right in line with guidance. As I described in our October earnings call, we implemented a change to our pricing policy for 2012, and as expected, this change impacted year-over-year comparisons in the fourth quarter.

This season we didn't have a pending Transcend price increase, which in the prior year moved sales into the fourth quarter of 2010. Instead we kept prices constant, and with that more orders have been shifting into this year's first quarter. So far our early-buy sales program for 2012 has been progressing as planned, and we're very pleased with the way the quarter is shaping up.

As we enter 2012 I would like to remind you of our key strategic initiatives and highlight how they are contributing to what we expect to be a strong year for Trex.

Goal number one is to have the best-in-class product platform and a continuous stream of strategic new product introductions that enhance Trex' standing as the premier destination for comprehensive outdoor living options.

Last year we expanded into decking substructures, a whole new $2 billion market through our acquisition of Iron Deck and subsequent offering of Trex Elevations, our lightweight, easy to install, steel deck framing which increases the lifetime of any deck. It is now in production at both plants.

Last year we also entered the $1 billion porch market, introducing Transcend Porch Flooring and Railing System, the first fully packaged porch system on the market. The combination of Elevations and Porch illustrates how we have transformed Trex into a manufacturer of complete outdoor systems with decking, railing, lighting, porch flooring and steel substructure that all fit together.

Our most recent introduction, launched just last October, is Trex Enhance. Trex Enhance, which utilizes Trex' Shell technology is a high-performance floor that carries the middle position of our good, better, best decking lineup. It combines Transcend technology with a 20-year fade and stain warranty, scratch resistance and two great colors.

Although it is still early, I'm happy to report that Enhance is getting solid traction in the marketplace. In fact, we expect all of these initiatives to contribute nicely to our year. And we're looking forward to future years as well. We continued to invest in R&D efforts to further strengthen our product lineup, increase design flexibility and reduce production costs.

Goal number two is to continue to grow our market share. We are working hard to increase our industry-leading share by expanding our distribution network and boosting sales to existing distribution customers. Industry data for 2011 isn't available yet, but our own indicators lead us to conclude that we have again grown market share.

The cornerstone of this growth was our focus on expanding our dealer presence. We expanded the number of new stocking dealers significantly. We also expanded our SKU count within existing dealers.

As we enter the 2012 season we continue to expand our market share by gaining additional commitments. Over the last two years this management team has more than tripled the number of Trex dealers that now carry Trex exclusively, and we continue to march toward our 50% marketshare goal.

Also, in late 2011 another competitor exited the marketplace, providing opportunity to further expand our market share. Trex' strong brand and balance sheet during the sustained down economy have enabled us to gain share as less fortunate competitors have fallen.

Goal number three is to achieve further cost reductions by implementing world-class manufacturing methods and new technologies. The increased warranty reserve we announced today, a legacy issue we have been confronting since this management team arrived at Trex, demonstrates the importance of the manufacturing and quality improvements we have made.

Since 2008 we have completely overhauled Trex' manufacturing practices significantly enhancing the manufacturing discipline and control, while driving throughput and yields to record levels. We now have collective team accountability from the shop floor to the top floor, and we have pay-for-performance incentives for our line workers.

Since 2008 we have increased productivity by 17%, and we think we can go further still by continuing to implement lean and Six Sigma practices.

Goal number four is to expand internationally. We are now selling Trex in 22 foreign countries covering Europe, South America and Asia. And we aren't going to stop there. We have dedicated sales and marketing resources focused on this growth opportunity and plan to increase our overseas branding effort this year.

We won't see big results overnight, but the seeds we are planting are beginning to grow. We are methodically building the infrastructure for this Company's global market leadership.

Goal number five is to continue expanding our ability to win increased sales at our desired pricing through efficient branding programs. As all of you know, Trex has a highly valuable brand identity. We lead the market in brand awareness, and we will continue building on that advantage. We are implementing a research-driven complement of consumer and trade advertising in 2012, including a TV ad that will be shown on five different networks this spring. We measure the return on these investments constantly, and continue to see its value.

In addition to TV, radio and print we have been expanding our online marketing programs, which have proven an efficient way to extend our reach.

Goal number six is to keep strengthening our financial position. Since 2008 we have generated $87 million of free cash flow, enabling us to pay down our debt substantially and still end 2011 with $41 million in cash. In January we completed a new credit facility that reduces overall borrowing cost, gives us additional borrowing capacity, and provides the capital structure to meet our business objectives.

We keep these goals in mind every day. We measure them, and we measure ourselves against them.

Finally, I will comment on our outlook for the first quarter. Based on results to date I expect net sales to be approximately $90 million, a 30% increase over last year's first quarter. This also represents an increase over the first-quarter guidance we gave at the end of October and reflects the fact that sales demand has been even stronger than we expected. Jim.

Thank you, Ron. Good morning everyone. As you know, the press release with Trex' fourth-quarter and full-year financial results was issued this morning. First I would like to review our fourth-quarter results.

The Company recognized net sales of $51.5 million in the fourth quarter of 2011, a 32% decrease compared to 2010. As Ron noted, the December contribution to our early-buy sales program was much lower this year due to a change in our pricing strategy.

We informed our distributors in the fourth quarter of 2011 that we would not be increasing prices. The very strong fourth-quarter 2010 sales were heavily influenced by the announced January 1, 2011 price increase of 12% on Transcend.

The Company recorded a net loss of $18.3 million or $1.18 per share in the fourth quarter of 2011 compared to a net loss of $500,000 or $0.03 per share in 2010. The Company's results for the fourth quarter of 2011 include a $10 million charge related to an increase in our warranty reserve. The Company's results for the fourth quarter of 2010 included $4.1 million of charges. Before giving effect to these charges our fourth-quarter 2011 net loss was $8.3 million or $0.54 per share, and our fourth-quarter 2010 net income was $3.6 million or $0.23 per share.

We recognized a loss at gross profit of $1.1 million in the fourth quarter of 2011. Gross profit on an underlying basis was $8.9 million. Our underlying gross margin was 17.3% compared to an underlying gross margin of 30.1% in 2010. The decline in underlying gross margin was driven by lower sales volume and reduced capacity utilization, which negatively impacted margins by 11.6% and 4.6%, respectively.

In addition, the Company recognized an unfavorable inventory valuation adjustment compared to the prior year of 4.9%. The 2011 negative impact of reduced sales and capacity utilization was partially offset by the elimination of the 2010 Transcend startup earnings drag of 7.8%.

SG&A for the fourth quarter was $13.6 million compared to $15.5 million in 2010. The decrease of $1.9 million was primarily related to lower incentive compensation.

Net interest in the quarter was $3.6 million in 2011, a $100,000 decrease from 2010. The Company's results for the fourth-quarters of 2011 and 2010 included $3.4 million and $2.1 million of non-cash interest expense, respectively, related to our convertible bonds.

The fourth quarter of 2011 effective income tax rate remains low as a result of the valuation allowance against the deferred tax assets.

Turning to our full-year 2011 results, net sales where $266.8 million compared to net sales of $317.7 million for 2010, a decrease of 16%. The decrease in net sales was attributable to a 22% decrease in sales volume, which was partially offset by an 8% increase in the average price per unit.

The increase in average price per unit was driven by the 2011 price increase for Transcend decking products and a shift in sales mix toward higher-priced products. We believe the decrease in sales volume was a result of poor weather conditions during the deck building season in the northern regions of the United States; reduced consumer spending due to lower consumer confidence, and the shift of Transcend sales from early 2011 into late 2010, as customers purchased Transcend ahead of the announced 2011 price increase.

The Company recorded a net loss of $11.6 million or 75% -- $0.75 per share for 2011 compared to a net loss of $10.1 million or $0.66 per share for 2010.

The 2011 results include unusual charges of $7.7 million, including the $10 million increase in warranty reserve and a $300,000 non-cash charge for the extinguishment of $5.6 million of our convertible notes in the third quarter. These non-cash charges were partially offset by a favorable resolution of uncertain tax positions in the first quarter that positively impacted income taxes by $2.6 million.

Before giving effect to these adjustments, the net loss for 2011 was $3.9 million or $0.25 per share. The Company's results in 2010 included $21.3 million of charges. Before giving effect to these charges, our net income for 2010 was $11.3 million or $0.72 per share.

Gross profit as a percentage of net sales increased to 23.5% in 2011 from 22.9% in 2010. The gross profit in 2011 was adversely affected by the $10 million increase to the warranty reserve. Gross profit in 2010 was adversely affected by $18.9 million worth of charges, including a $15 million increase to the warranty reserve and $3.9 million for minimum purchase penalties.

Underlying gross margin in 2011 was 27.3%, a 1.6% decrease compared to the underlying gross margin in 2010 of 28.9%. The Company recognized a combined 8.5% margin improvement from the elimination of the Transcend startup earnings drag from 2010 and improved manufacturing efficiencies. This 8.5% margin improvement was fully offset by the impact of reduced sales, which decreased margins by 5%, operating at reduced level of capacity utilization, which resulted in a 3.6% lower margin and an unfavorable inventory valuation adjustment of 1.3% compared to the prior year.

SG&A for the full-year of 2011 was $60.6 million compared to $67.8 million in 2010. SG&A in 2010 included a nonrecurring $2.4 million non-cash charge related to our joint venture in Spain. The remaining decrease of $4.7 million was primarily related to lower incentive compensation.

Net interest was $16.4 million for the full year 2011, a $1.1 million increase from 2010. The Company's results for full year 2011 and 2010 included $10.5 million and $8.1 million of non-cash interest expense related to our convertible bond.

As a reminder, the convertible bonds will be paid off in July, and we expect 2012 interest expense to decrease by approximately $7 million year-over-year.

The effective income tax rate for the full year of 2011 remained low as a result of the valuation allowance against the deferred tax assets. In addition, earlier this year we recorded a $2.6 million favorable non-cash adjustment to taxes related to the resolution of uncertain tax positions. We expect the effective tax rate to continue to be low through 2012. In addition, our loss carry forward at the end of 2011 was $65.3 million.

At December 31, 2011, the Company had $41.5 million of cash on hand, and no borrowing on our revolving line of credit. Our only borrowing was the remaining $92 million of convertible notes. Net debt to total capitalization at December 31, 2011, was 33% compared to 36% at December 31, 2010.

Inventory was $29 million at December 31, 2011, which is slightly below the balance of the prior year.

The Company had free cash flow of $24.5 million for the full year of 2011, a $15.3 million year-over-year increase. Free cash flow during the full year of 2010 benefited from a $7.5 million one-time tax refund.

Cash flow from operations in 2011 was possibly impacted by the change in Accounts Receivable, as we ended the year with a significantly lower Accounts Receivable (technical difficulty) in 2010.

The cash used in investing activities was $9.4 million, a $400,000 decrease versus the prior year.

In this morning's press release we communicated that we recorded a $10 million addition to our warranty reserve related to certain production at our Nevada facility that occurred prior to 2007. Since 2007 we have seen a decline in the number of warranty claims in every year, with the exception of 2009, when we publish the national settlement notice.

The settlement of the class-action suit and the related publication of the national settlement notice had a significant impact on the warranty reserve. However, since 2007 cash payments for claims declined from $18 million in 2008 to $8 million in 2011.

The 2011 year-over-year decline was over 20% for both the number of claims and cash paid for claims. While we expect these claims and related payments will continue to decline significantly over the next few years, we also expect a longer tail claims than previously anticipated. Due to this longer tail claims and our estimate that the cost per claim will be approximately 10% higher, we increased the warranty reserve.

I would like to summarize several significant achievements that we have accomplished during 2011. We have eliminated the earnings drag related to the 2010 Transcend startup. Our continued focus on generating free cash flow resulted in paying down $8.1 million in debt this year while ending the year with $41.5 million of cash to support ongoing operations and to pay off the convertible debt in July.

We replaced our $55 million line of credit with a $100 million credit agreement in early 2012 that provides us with greater borrowing capacity at lower cost. This facility, coupled with our continued free cash flow generation, provides more than adequate liquidity to handle the mid-2012 maturity of our convertible notes.

Finally, turning toward guidance, I would like to reiterate the first-quarter sales forecast of $90 million, a 30% increase over 2011. Second, we believe that our capacity utilization for the first quarter will be approximately 35% compared to 18% in the fourth quarter of 2011.

Finally, I want to remind everyone the face value of the convertible debt of $92 million will be paid off in cash in early July of this year, significantly reducing interest expense in the second half of 2012.

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

(Operator Instructions). Keith Hughes, SunTrust.

Questions on the season so far. I know you're going to have a good quarter -- of course, your push forwards and demand with the pricing. What are you hearing in the channel; how is it beginning?

My sense is from listening to the channel and watching the numbers is that there is some increasing strength in the marketplace. It seems to be across the country. To what extent it is attributable to the weather versus the underlying economy, I can't really say. But clearly there is more optimism now than there was a year ago.

Are you or the channel willing to carry more inventory than has been in past years with that sort of view?

Well, I think the channel probably is. We are working very hard to make sure that our inventory turnover is exceptionally clean as we can make it. So we do strive for return on capital employed and we are going to manage our inventory very closely. Nevertheless, we have had to ramp up production, as Jim indicated, quite significantly this quarter.

And, final question on the warranty reserve. This is all still related to the issues in Fernley from, I think it was about six years ago, when it was first identified. Is that correct?

Yes, it is correct.

All right, thank you.

Trey Grooms, Stephens.

So, Jim, on -- I just want to make sure -- you broke out some of the percentages or impact, I guess, to margin from reduced sales and lower utilization. I just want to make sure I understood those numbers correctly. I think you said 11.6% impact to margins as a result of those things. Did I hear that correctly?.

If you're looking at the quarter it was 11.6% related to the lower sales volume and 4.6% related to the capacity utilization.

And that is relative to last year's 4Q?

That is correct.

And could you remind us where utilization was in last year's 4Q?

The capacity utilization last year was 29% versus the 18% this year.

All right, so we should assume, obviously, with utilization rates improving quite a bit in 1Q there should be a sequential -- a pretty significant sequential increase in margin, I would suspect.

Compared to the fourth quarter that would be correct.

Okay, perfect. And so in the past -- Jim, also, this one is for you. You guys have mentioned ex a lot of the costs that have been -- that went on in 2010 with Transcend, kind of looking into 2011 I think the assumption was if you saw flat volumes in 2011, which obviously didn't happen for the obvious reasons, that you could have had margins -- and I believe that you said that 2010 margins would have been, ex a lot of the costs, kind of in the maybe 33%, 34% range, I think was the quote. And then looking at flat volumes for 2011, you thought that could've also been the case.

But where we stand today is that still a rough number that we could see if we see sales numbers back to that 2010 range, or at least volume numbers back to that 2010 range?

We really don't want to get in a position where we're forecasting gross margins. I have in the past given guidance on how to understand change in sales volumes and the effect of capacity utilization, and that is really unchanged.

So if you were to roll forward, for example, the first quarter, an increase in sales would generate -- every dollar of increased sales would generate about $0.50 of increased gross profit. And every percentage point of capacity utilization would generate $850,000 on an annualized basis.

That is perfect. I appreciate the clarity on that, it is real helpful. Then, I guess, lastly on costs, you guys -- any change on your thought for raw material costs? I know they stayed pretty flat, but looking into 2012 are you anticipating any change there?

And then also with some of your competitors realizing -- I am sure realizing some cost increases over the last year or so are you hearing of any of your competitors having to come out and raise prices as a result? Thanks.

There have been a lot of price increases from miscellaneous competitors over the past year or so. We can all watch the price of gasoline and the price of a barrel of oil and draw our own conclusions about where resin prices are headed. But I can tell you that our price of polyethylene that we buy is actually slightly down from Q4 of 2010, and I don't expect it to move significantly one way or the other. So those are the facts.

Thanks a lot, guys. Good luck.

John Baugh, Stifel Nicolaus.

Could you talk -- I know it is early, but how is Enhance impacting the good and the best product lines to date?

It really is too early. We know that it is selling, but our sales are pretty good across the board right now, I mean, consistent with the forecast that we just gave.

So I just can't tell you to what extent it is moving the needle in terms of the share of -- versus our other products. What we do know is that people are filling the shelves right now with a lot of Enhance. What we don't know is how that is all going to come off the shelf. The rate at which the various products are going to come off the shelf is going to tell the story, and we don't know that yet. We will know that probably around the middle of Q2.

And I appreciate that. I am just curious, Ron, what would then be your expectation, or what do you think is going to happen once we get to say the end of Q2 -- what do you think you're going to see?

You mean in terms of market -- you mean mix?

Yes, that same question.

I hate like hell to really get into that. I have got two competitors listening to me on my screen here. I really don't want to tell them what to expect in terms of which way the market is moving.

But you still hope that you pull off more to the good then you steal from the bad?

I think we have talked to the advantages of the Transcend product with the matching railing. The aesthetics are better with the Transcend product. Our belief is that people will trade up and continue to trade up, so the Enhance really will focus more on the accent type product and we will see more displacement there.

Let me ask the question this way. As investors do we care if we sell Enhance versus Transcend or is the margin fairly similar?

I think you care. The margins are similar, but I think you care because the price on Transcend and related dollar margin per linear foot is higher the higher level of product you sell. So we clearly like to sell Transcend to everybody, and not sell anything else from a profit per linear foot basis. I think that would be true for any of our competitors' products also.

Another thing is that people who are more susceptible to buying Transcend are also more likely to buy steel infrastructure and really want some of the more expensive things that we sell.

Is there a way to quantify or think about the revenue impact, and you could start with 2011, from everything else -- substructure, international, porch, whatever else you want to throw in that bucket? And how do we think about what you expect the revenue benefit in 2012 versus 2011 to be for that other bucket?

We get asked that question quite regularly, and it has been our principle since this administration came together that we're just not going to break out where our sales are coming from. And I know it is frustrating for you guys. I am sorry for that, but we think it would be competitive information that we just don't want to --.

I didn't ask you to break it out. I put it all in one bucket.

Well, it is just chipping away at that principle.

Okay. Then do I understand, Jim, right, that your total warranty reserve now is what, $16 million if that is -- first question? Then, secondly, how would you expect the cash component that you have to pay in the future to roll out?

It is a little bit north of $16 million, $16.3 million, $16.4 million, something like that in total. I would expect that this past year we paid out roughly $8.1 million. I would expect that we would see a significant decline from that, but we would probably still be looking at between $6 million and $6.5 million of payout in this year.

I think each year over the next couple of years we will see fairly significant declines, and by the time we're three years down the road it probably won't even be a subject of conversation for us.

And the last question, Ron, you referenced a competitor going out. Any feel for what they were selling into the marketplace in volume either 2010 or 2011?

It was a single-digit percentage, probably less than 5%.

Market share?

Yes.

Thank you. Good luck.

Morris Ajzenman, Griffin Securities.

Hypothetically you stated that the CapEx -- excuse me -- capacity utilization in this current quarter is going to be approximately 35%, and that equates to $90 million in revenues. So if you did the math, which I am sure is not realistic, but if you operate at 100% you would be doing $255 million, $257 million in revenues.

Help us -- and again, understand where should capacity utilization be in the optimal times and -- capacity utilization -- and is there excess capacity at this point still where things are picking up but your utilization is so low?

Just help me understand how this all plays out ultimately over the next few years.

Let me -- I will answer part of that question; Jim can answer the other part. But our philosophy is we don't make inventory unless we need it. And we have a two- to three-week delivery cycle that we work to. And we can turn these lines on and off very, very quickly. We can turn the factory pretty much on a dime now.

So we have striven to increase our turnover rate for inventory since we came on board, and we have done that. What the capacity utilization would be under optimal use would probably be somewhere around 85% or 90%. That would be optimal and we got a long way to go, obviously.

But you could essentially collapse the entire composite market into our two factories and have -- probably have room left over because of the efficiencies that we have achieved.

Now what else can I tell you?

I am just trying to get -- just to get a handle on is 85% to 90% realistic -- I don't know how far down the road based on capacity -- current utilization? I'm just trying to get a handle of where we can go to assuming things improve over the next couple of years. I am just trying to get a longer-term picture that the capacity that is currently in place is capacity you want to keep and there is no sort of focus of further ratcheting, becoming more efficient by reducing capacity, therefore leveraging profitability, margins higher.

There is no more analysis being done on lowering additional capacity. We have got two plants plus one in mothballs. We have actually examined whether we should be a one plant operation, and the numbers don't work. We are better off with two plants because of the geography, the country and the cost of the -- incurred to move inventory around and ship it across the country.

We think we are best suited with our present amount of capacity. We turn lines on and off as we need them. And so the number of 35% just reflects the number of lines that we have operating.

So if you ask me, is it likely -- if we're operating at 30% capacity and we're generating -- that means that the market is about $800 million to $900 million in sales is it likely that the market is going to go to $2 billion in sales? Well, I think that is probably several years off.

But we could easily -- if we keep increasing our market share, the market keeps expanding, I wouldn't say that it is not unreasonable to think that we could get to 40% to 50% capacity utilization at some point.

I think the other thing to remember, Morris, is in 2010 we gained roughly 5 percentage points of market share, in 2011 that we also gained a few points of market share. And we have really positioned ourselves for 2012 to again very aggressively go after market share.

When the economy does turn, it is much easier when you're on the high ground to maintain that market share. So I think that the ability to utilize that capacity in a more robust economy is certainly there.

One last question, and I will pass on the baton to others. You spoke about this year no price increase because your raw material costs are basically flat and down modestly versus the competition having pressures on the upside. Would you venture to guess what the average price increase -- if you look at the bulk of your competition, what the average price increase is right now for this coming year -- the current year?

Between 5% and 10%.

Thank you.

(Operator Instructions). Keith Johnson, Morgan Keegan.

Just a couple of quick questions. I may have missed it earlier in the prepared remarks, but what was the price mix and volume year-over-year during the fourth quarter?

Fourth-quarter sales volume was roughly 12%. That was the biggest driver (multiple speakers) sales volume.

And then, could you comment on how sales trends were as you moved through the fourth quarter, I guess, just with the mild weather in parts of the country allowing outside work to continue a little bit longer?

Normally contractors put their hammers down in the October time frame. This year they were hammering nails -- and this is anecdotal information -- but right through Christmas. So there is a rather robust level of acuity happening on the contractor level. It is across the country, and it is continuing and is expected to continue. The weather certainly has helped us.

Did you guys get the sense that during the fourth quarter that contract activity continued, that it was -- the distributors have an inventory pulled out and just not reordering at the time and waiting for the move over into the first quarter with these early-buy programs. Is that where the product flow was happening and not necessarily at the manufacturer level during the fourth quarter?

The orders really started to come in January, pursuant to the early-buy program. And there were a lot of direct to dealer shipments, which may reflect the rate at which it is coming off the shelf in Q4 from contractors. I don't have a specific number, but the direct to dealer shipments were quite robust.

Is there any color you could give us regarding how you're looking at SG&A in 2012 relative to 2011, as we think about our modeling going forward, branding expense, those type of things?

Well, we always have an option -- and the biggest part of our SG&A is compensation and branding. And at the present time I don't see any big changes planned for either one.

One thing I will mention, Keith, is maybe a slightly different quarterly mix. I think for SG&A in the first quarter you ought to plan on that number being up a few million dollars year-over-year.

Then final question for me, just from a CapEx standpoint looking at 2012, what are you guys targeting?

Between the $10 million to $15 million range.

Great, thanks a lot. Good luck.

Robert Kelly, Sidoti.

You touched on it with the last caller's question, about the number of shipments going dealer direct. I imagine that has a pretty progressive theme over the past couple of years. So as far as the outlook you give, how real time with all the direct dealer shipments that you're seeing, how real time is that?

You mean real time in terms of my ability to forecast versus the number of shipments that are going out the door?

Yes.

I mean, I know every morning at 7 AM, I know what the shipments were for the day prior. We discuss it and track it. The first thing we look at when we come in the morning and turn the lights on is look at our computer screen and we know what the shipments have been and we know what the orders have been. So I guess it is pretty real time.

Then does that -- on the flip side, if demand were to halt or this proves to be another head fake -- I am not saying that it is, but it has happened in the last couple of years, does that give you better visibility to slow down the factory?

Yes, absolutely, we can do that. We measure our capacity utilization -- or at least it gets to my level every Friday afternoon, I know what our capacity utilization has been, and how many lines are on and how many lines are off. I got a pretty good feel for that.

As far as what you are seeing sales-wise and then utilization-wise 1Q versus 4Q, it is a pretty big jump on the utilization front. Are we to expect any startup hitches or issues as you go from 17% to 18% to 35% utilization, or at this point in time are you already at 35% utilization?

As we speak, we are there already. That is not a big change for us in bringing up those additional lines. Again, it is not starting factories, it is putting additional lines into service, and it is not a big deal to do that.

This is a dramatic difference from four years ago, when turning on a line was sort of a fire drill. Those days are behind us.

Just one final one on the convertible. Do you plan to settle that out as it comes due in July? But you're talking -- it is a $9 million decrease year-on-year for 2012 on the interest expense line?

It is $7 million year-over-year roughly, and --.

So you jump to a $9 million full-year 2012 interest expense?

It is a $7 million decline year-over-year, and it will be weighted heavily in the second half. If you looked at the first half, the first half is probably going to be up $1 million because of the accounting treatment that we have to utilize.

I see. Okay. I guess the next question was, was your cash interest expense going to drop significantly in 2012?

Yes.

Okay, thanks.

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

Thank you. Just one final thought. Over the past couple of years we have often mentioned how well-positioned Trex is to exploit the opportunities in outdoor living when the economy gets back on its feet. With that finally beginning to happen, our order rate for the first quarter looking very solid and production ramping up to meet the demand, I am confident that 2012 is going to be a very good year for Trex.

I look forward to discussing our Q1 financial results with you in April. Thank you and goodbye.

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