Trex Company Inc (TREX) 2012 Q4 法說會逐字稿

Welcome to the Trex fourth-quarter 2012 earnings conference call. At this time all participants are in a listen-only mode. Following management's prepared remarks we will hold Q&A session. (Operator instructions). As a reminder, this conference is being recorded February 19, 2013. I would now like to turn the conference over to Harriet Fried of LHA. Please go ahead.

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, Chief Administrative Officer, General Counsel and Secretary.

The Company issued a press release this morning containing financial results for the fourth quarter of 2012. 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 will be available for 30 days.

I would now like to turn the call over to Bill Gupp. 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 federal securities laws. These statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those expressed in the forward-looking statements. For a discussion of such risks and uncertainties, please see our most recent Form 10-K and 10-Q as well as our '33 and other '34 Act filings on file with the SEC. The Company expressly disclaims any obligation to update or revise publicly any forward-looking statements, whether as 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 provided in the tables at the end of this morning's press release.

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

Good morning, everyone, and thanks for joining our call today. As you have seen from the numbers in this morning's press release, we turned in a solid fourth quarter, capping a successful year. Sales surpassed the guidance we provided in November. Gross margin was near 30%. Productivity levels set a new high and, equally important, we positioned ourselves well for the upcoming decking season, during which we expect to benefit from the housing recovery that has been picking up steam.

As we move into the new decking season, I would like to give you an update on our key strategic initiatives so you can fully appreciate why we expect 2013 to be a strong year for Trex. First and most important, we are now offering a complete best in class product platform. We revolutionized the industry in 2010 when we introduced our first high-performance cap deck board, Transcend, the first product we could guarantee wouldn't stain or fade.

Recently, we filled out our high-performance decking line by adding two new options, enhance and select, at different price points. We also completed our good, better, best high-performance railing lineup by launching an entry price point railing and an aluminum railing, doubling the size of the railing markets in which we participate. We see railing as a big opportunity for Trex. Our expanded product lineup enables us to increase the attachment rates for our decks.

All in all, we now have the most comprehensive product platform in the Company's history, and I'm happy to report that our products have been well received in this year's early buy period.

Another goal, of course, is to improve profitability. Not only did we increase revenue by 15% in 2012, but by continuing to focus on manufacturing efficiencies, we increased our margins. Using lean and Six Sigma manufacturing practices, we have driven continuous productivity improvement since 2008. We will continue fine-tuning our processes and searching for low-cost materials.

We are also using our superior products and aggressive sales programs to expand the number of dealers and contractors that use Trex. This is an important contributor to our goal of gaining more market share. In addition, we have found in the past that some dealers carry products other than Trex because we didn't have a full lineup. That is changing this year, which should also help us gain market share.

Finally, we have made good progress in developing our global footprint. We started off as a three-country presence in 2008. Now, we encompass 29 countries.

Another initiative is to use multiple branding avenues to expand our global reach. People are already aware of Trex, so we have been working to really engage customers in the deck design process. The consumer segmentation study we undertook in 2012 is helping to sharpen our brand message. We have targeted and customized our communications to encourage the whole spectrum of consumers to engage with Trex and create a unique outdoor space tailored to fit their particular home and lifestyle. We are especially energized with our new multifaceted campaign called Engineered Artistry. You can learn more about this campaign on our website, where we describe its key features.

Our licensing agreements which create the Trex brand name include outdoor furniture, RainEscape, Pergola, CustomCurve and saw blades. These products are all helping raise our profile and enhance our standing as the premier destination for comprehensive outdoor living options.

Finally, in 2012 we were very successful in strengthening our financial profile. We signed a new, more advantageous credit agreement with our lender and repaid our $97 million of convertible bonds, mostly with cash on hand. Over the last five years, we have generated enough free cash flow that we ended 2012 virtually debt-free.

With all these initiatives underway topped off by lean inventory in the channel and improving market conditions, we are very confident about our prospects for 2013. In the first quarter, we are expecting that sales of approximately $107 million, or about 11% year-over-year sales growth.

During the quarter, we will benefit to some extent from boardwalk rebuilding in the Northeast to repair damage caused by Hurricane Sandy. In fact, we were just selected by the city of Belmar, New Jersey to provide Transcend decking for its 1.3 mile-long boardwalk. Trex's durability, good looks and environmental benefits were also key in our selection for three other coastal boardwalks in Atlantic Beach, Point Pleasant and Sea Girt.

Before I turn the call over to Jim, I would like to thank our Director, Bill Andrews, who has been on the Company's board since its IPO in 1999 and is retiring in may. He has provided exceptional service to Trex. I would also like to welcome our new Director, Michael Golden, who I know will also be a great asset. Jim?

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

The Company recognized that sales of $46.2 million in the fourth quarter of 2012, a 10% decrease compared to 2011. This decrease in net sales was primarily driven by lower sales volume. Purchases under our 2013 early buy program will be weighted more towards the first quarter of 2013 rather than December of 2012, due to the influence of our previously announced January new product launches.

The Company recorded a net loss of $3.6 million or $0.22 per share in the fourth quarter of 2012 compared to a net loss of $18.3 million or $1.18 per share in the 2011 quarter. The Company's results for the 2012 quarter included a $1.5 million provision for costs related to the mold class action. The Company's results in the fourth quarter of 2011 included a $10 million charge related to the increased in the surface flaking warranty reserve.

Before giving effect to these charges, the 2012 net loss was $2.1 million or $0.13 per share, and the 2011 net loss was $8.3 million or $0.54 per share.

Gross margin was 29.1% in the fourth quarter of 2012, a significant improvement from the fourth quarter 2011 underlying gross margin of 17.3%. The increase in gross margin reflected favorable sales mix, improved manufacturing efficiencies, higher capacity utilization and a $2.7 million favorable inventory valuation adjustment, due mainly to a significant reduction in inventory.

SG&A for the fourth quarter was $16.6 million compared to $13.6 million in 2011. The increase in SG&A expenses in 2012 was primarily driven by increased sales commissions, incentive compensation and the $1.5 million provision related to the mold class action.

Net interest was $100,000 in the quarter, a $3.5 million decrease from 2011. This decrease was primarily the result of the retirement of our convertible notes earlier this year.

Our fiscal year 2012 financial performance showed considerable improvement compared to 2011. The 2012 net sales were $307.4 million, a 15.2% increase due primarily to favorable weather conditions in 2012 and the execution of our market share growth strategy.

Our underlying gross margin at 34.5% was 7.2% better than 2011. Margin was positively impacted by continued gains in manufacturing efficiency, improved sales mix and a $4.1 million favorable inventory valuation adjustment. This was partially offset by $2.5 million of start-up expenses related to shelled products.

Underlying net income showed significant improvement. Underlying net income in 2012 was $26.4 million or $1.55 per share compared to -- compares favorably to the underlying net loss of $3.9 million or $0.25 per share in 2011.

Our net debt position was $3 million at the end of the year. This is a significant improvement compared to our net debt position of $45 million at the end of 2011, reflecting a notable delevering of our financial profile.

Inventory was $17.5 million at year end, and an $11.4 million year-over-year decrease. Improvements in our integrated business planning and manufacturing performance now allow the Company to meet a greater level of demand while carrying less inventory.

2012 free cash flow was $53 million, a $28.5 million increase compared to 2011. Earnings improvement and the reduction in inventory were the key drivers to the year-over-year improvement.

We will be signing an amendment to our $100 million credit facility, which will provide a seasonal increase to our credit line of $25 million for the first half of 2013 and a reduction of the interest rate by 25 basis points. This modification is being made to support the stronger-than-expected seasonal demand.

Finally, I would like to turn to our first-quarter revenue guidance. I would like to reaffirm the first-quarter revenue guidance at $107 million. This guidance reflects an increase in sales of approximately $61 million over the fourth quarter of 2012. The first quarter 2013 SG&A expenses will be about $2 million higher than the first quarter of 2012 primarily due to the timing of our branding spend related to our new product introductions.

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

(Operator instructions) Trey Grooms, Stephens.

The first question is, I guess, Jim, on the SG&A, you mentioned that it's going to be a couple million dollars more than the first quarter of 2012. If I remember right, it seems like 2013 was expected for the full year to be quite a bit lower than 2012 as you guys had more compensation and expenses there, bonuses and so forth. Is that still your thought, is that, as we look at 2013 for the full year of SG&A, that it would still be lower than 2012? Can you give us an update there, please?

Sure. The guidance we've provided before was the 2012 was probably a high water number for that level of sales, in particular because of the higher sales commissions and incentive compensation. 2011, on the other hand, was probably the low water mark at about $60 million.

So, the guidance we've given before was, if you average those two, add inflation, that would approximate what 2013 would look like. We do expect that our SG&A spending will be below the 2012 number.

Okay, thanks for that. I guess it's just more front-end loaded just due to the timing of your marketing and branding and that sort of thing?

Yes. With new product introductions, bringing those into focus early in the season reporting to us, and that is why the branding spend is forward focused.

Okay, and then on the topic of new products, can you give us some color on how the reception has been out there for the new product lines; how dealers and distributors are looking at their inventory and how to position themselves there as far as given the new product mix you guys have?

We have been very encouraged by the reception for the new products. We gave our distributors enough of a heads-up so they could get themselves properly in line with their inventories. So, between the decking and the railing new launches, we are very encouraged.

Okay. And, Jim, on the gross margins, very strong gross margins in the quarter. The last few quarters you guys had been out-performing, I guess, my expectations and what some of the longer-term guidance you guys have given us on how to think about incremental margins. You have pretty consistently exceeded that. Do you think, looking forward, is that still the number that we need to be thinking about as far as incremental margins, or has something changed? I know you have talked about efficiencies and things like that, that could help with that. Is that something -- a long-term change where we should start thinking about the incrementals a little bit differently? That's all I've got, thanks.

Well, as I mentioned before, when you look at your comparatives, a lot of times, people will compare back to the prior year. If you do that, you don't really see the efficiencies that have been accumulated over the prior 12 months. And I think, looking at the improvements that occurred in the most recent quarter certainly should be baked into your forecasts, beginning in 2013.

We continue to be very impressed with what our manufacturing teams are able to deliver from the standpoint of efficiencies and productivity. The new product introductions have been going extremely well and we believe the combination of those two will continue to enhance the gross margin.

Alright, thanks a lot, guys, great quarter.

Keith Hughes, SunTrust.

-- give us any sort of view you are getting from your distributors and dealers for the beginning of this season and where inventory stands in the channel right now?

A couple remarks. We know that the sales out of our distributors is quite healthy as compared to last year, and we know that the inventory in the channel is leaner than it was last year. So the combination of those two give us some reason to be encouraged.

Second question -- on the mold costs in the quarter, the $1.5 million, is that $1.5 million to settle claims? Is that legal expense? Can you give any more details on that?

Yes, it's really a combination of expenses, some legal and some claim cost.

Is there a program set up to pay those in the future, or is there still litigation surrounding that?

Well, we have ongoing litigation via the class action. We believe that the expenses that are noted here and also in our 10-K will further clarify that issue for you.

Okay, thank you.

Jack Kasprzak, BB&T.

With regard to Sandy rebuild effect and your positive comments about the market in general, would your sales, would your Q1 sales still be up, even without the effect of Sandy?

Definitely, yes.

Great. And then with regard to price increases -- and I know this may be tough to generalize, given the wide array of products you have now -- but what can you tell us about pricing initiatives for 2013?

Well, we only implemented one price increase in 2013. It relates to our Accent product. The Accent product line is one of our smaller decking lines now compared to all of the shelled products. We did expand some discounting, so on a net effect you are probably looking at maybe a couple points of improvement on the Accent line related to that.

And that's it for -- okay, great, thanks very much.

Just to be clear, Jack, we haven't seen cost increases over the year. If you looked at our net cost year over year, it actually would have been a decline. So we are able to control costs quite effectively.

John Baugh, Stifel Nicolaus.

Good morning, Ron and Jim, nice year. A couple things -- first of all, could you comment on the utilization rate in Q4? And then comment on both the quarter Q1 and 2013 as just sort of a rough expectation given that inventories are so low and you expect sales to ramp?

Let me just talk about Q4. Q4, our capacity utilization was 27%. And, John, we have taken the decision here at Trex that that will be the last time that we give out capacity utilization. We see it as a competitive issue.

You can be assured that we are not going to build inventory that we don't need. Inventory is lean. The orders are robust. We will manufacture to respond to the market demand. But we think from this point forward, it would be inappropriate and anti-competitive for us and not consistent with our competitive needs to continue to give out that number of capacity utilization. You know where it is; you know where it has been; you know where our inventory levels are; you know what our philosophy is about building inventory. I think you will be able to easily to figure it out and get to the same place you need to be.

So let me try it another way. Your inventories -- I can't remember where they peaked at, they were so high. It was kind of scary. But they are very lean and, obviously, we expect sales to grow this year. So one can assume, I assume, the utilization rates will improve year-over-year?

I would think so.

Is there any color you can give us on the marketplace in general, first, I guess, on pricing, what you saw out of any competitors? And then whether or not you have seen any benefit, do you think, from the recent merger of TimberTech and Azek?

The recent merger between TimberTech and Azek has caused some turbulence in the distribution channel. That turbulence has yet to resolve itself. Everybody is waiting to see how the new company allocates their product between the existing distributor base, but there is a lot of jockeying for position.

I think it creates market share opportunities both for TimberTech/Azek, and for Trex. As the market consolidates around the big two or the big three, there are a lot of companies out there that handle these what I will call off brands. They are going to be very nervous about whether or not their suppliers are going to remain in business and they are going to get stuck with obsolete inventory.

So there's going to be market share that falls off. We are seeing some evidence of that.

Okay. And any commentary, I guess, for the calendar year 2013 on -- for branding or ad spend?

Branding should be about consistent with last year. We are changing the way in which we spend some of the money, but the overall number should approximate the prior year.

Okay, and then lastly, Jim, just some financials -- tax rate, reported tax rate. I don't think you have to pay much, if any, in cash tax this coming year. CapEx and I guess interest expense seasonally will go up a little bit. But any color on any of those metrics?

Sure. The tax rate should be de minimis for the year, similar to what you saw in 2012. With regard to interest cost, yes, it will go up seasonally, but we are talking a few hundred thousand dollars, not millions of dollars per quarter. We will be into the revolver at the end of the first quarter. We will be out of the revolver at the end of the second quarter. So from that standpoint, the revolver is just a timing issue for us. It tracks directly with our programs that we offer and the extended terms that we do offer to our distributor channel partners, as well as the inventory levels that we need to carry.

And then the CapEx and D&A for 2013? Thank you.

Yes, the CapEx will be in the $10 million to $15 million range, consistent with what we have guided in the past. And depreciation would be similar to 2012.

Thank you.

Richard Paget, Imperial Capital.

I wanted to talk a little bit more about revenue guidance. I realized there was some Sandy impact there. Last year, you guys did about 15%. But if I try and do a little bit more apples-to-apples comparison for the change with the early buyer program and look at first quarter and fourth quarter combined and compare it to a year ago, it's about mid-single-digit growth. Is that how we should think about 2013 going forward?

I don't think that that would be a fair representation. One of the things I would like to emphasize, that when customers are buying this time of year, it's the initial stocking so that they begin to stock both the dealers in the marketplace as well as getting their stock ready for the sales year. And you really don't see that take-away beginning until roughly the middle of March, you start to see the sell-through beginning to take place. So I don't think that what you see in the combination of fourth and first quarter would be representative of what you would see across the selling season.

And then getting back to Sandy, those four projects that you guys were naming, are all those sales occurring in the first quarter? And then are there any other related opportunities for boardwalk rebuild?

The answer is yes to both questions. The four that I mentioned will be in the fourth -- in Q1. And there are other opportunities, particularly when the deck itself starts in earnest, which we don't believe will happen until Q2.

And then finally, this is a question for Jim. With that tax rate, how should we start thinking about 2014?

2014, you ought to assume a full tax rate of 39%, roughly.

Alright, thanks, that's all I've got.

Morris Ajzenman, Griffin Securities.

A quick follow-up here -- you talked about your overall 2% increase for 2013. I don't know if you meant overall for the Company or overall for the Accent line. I'm just curious, would it be overall for the Company?

The price increase on Accents was about a 5%, Morris. Accents has become a much smaller piece of our business with the production of the shelled products. The net impact is the Accent net impact of about 2%.

And you said earlier during the call net cost on year-over-year. Can you just put a little more meat on that? What was the final cost year-over-year?

We really aren't in a position to disclose that, Morris. That's competitive information, but it was low-single-digit reduction.

Great. Market share, any guess, Ron, where you think you would exit market share 2012?

Well, we think it continues to march north. We're going to not give out specific numbers until the next third-party study comes out later this year. But we continue to add dealers and the dealers continue to add SKUs, and the dealers continue to drop competitive SKUs. So we think we are making progress, but we'll wait for third-party confirmation to come out before we start quoting numbers.

Okay. And, again, during the call, you talked about expanding your dealer count. Can you give us what that count is now versus a year ago?

I've got competitors sitting on the line listening to this. I'd love to give you that, but we are not going to.

Okay. And the last one there, cash flow -- I think you said about $53 million of free cash flow for 2012. I presume that's after CapEx.

Any discussion you want to do for 2013, just broadly speaking, and how that plays out? Will working capital improve? Will inventories rise working out (inaudible)? How does that play out for 2013 as far as the $53 million number in 2012?

Morris, first of all, that $53 million is after the CapEx, so that's operating cash flow minus capital expenditures.

As you are probably aware, as sales grow, we do have our inventories in a very lean position. So we do anticipate that there will be some growth required to support expanded sales during the year, but that is probably the biggest change that would take place. Receivables would not be changing appreciably. So I would expect that the cash flow would be reduced from 2012 somewhat because we will not have the large inventory reduction.

Thank you.

Robert Kelly, Sidoti.

I just had a question on Q4. I believe, Jim, you said that low-cost inventory was a $2.7 million benefit. Did I hear that right?

That's correct. We had a valuation adjustment that occurred in the fourth quarter (multiple speakers) $2.7 million favorable P&L impact.

What was that number for the full year, please?

$4.1 million.

So with utilization going higher, inventory building, that is behind you as far as inventory valuation benefits?

Yes. Basically, the primary driver of that -- those two numbers were reduced inventory. I think it would be difficult to see a reduction in inventory for 2013.

Okay, and then just going back to one of the earlier caller's questions, you kind of implied that we should do the incremental analysis for gross margin almost on a quarter-on-quarter basis. If we are thinking about 1Q, is it best to remove that $2.7 million benefit if we are going to look at gross margin that way?

Exactly right. You don't want to include that in the first quarter because that would be non-repeating in the first quarter.

Okay, fair enough. And then just one question on the projects for the rebuild. Do these come at a normal margin for the Company, or is this a brand-building effort where you give a little bit of a discount? I'm just trying to think about what the impact to profit from the rebuild of the coast is going to be.

Essentially, they were maybe a smidgen off our normal margins, but not a significant amount.

Okay, thanks, guys, good work.

(Operator instructions) Keith Hughes, SunTrust.

Thank you.

At this time, there are no further questions.

Okay, well, thanks again for joining us today. 2012 was a good year, which is a testament to the talent and hard work of all of our employees, and we have many more exciting things on our plate for 2013. I'm especially pleased with the enthusiasm that we are seeing for our expanded product lineup.

I look forward to seeing many of you at our analyst day in New York City on Monday afternoon, March 11. We will show you our new products and our whole executive management team will be on hand. If you have any questions about the event, please get in touch with Harriet Fried at our investor relations firm, LHA.

Lastly, Phil Andrews, if you are on the line and you are listening, thanks so much for everything and we wish you well. Good bye.

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