Trex Company Inc (TREX) 2013 Q4 法說會逐字稿

Welcome to the Trex fourth-quarter 2013 earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded today, February 24, 2014. I would now like to turn the conference over to Ms. Harriet Fried 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, Senior Vice President and Chief Financial Officer. Joining Ron and Jim are Brad McDonald, Controller; Bryan 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 2013. 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.

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 Form 10-Qs, as well as our 33 and other 34 Act filings with the SEC. 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 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.

We had a very strong year for Trex, posting one of the best fourth quarters in our history. Sales were up 38% versus the 2012 quarter.

Our strong sales performance resulted in solid earnings. Underlying income was $3.9 million or $0.23 per diluted share. We continued to focus on advancing our market share. Our complete best-in-class product platform was instrumental in capturing market share.

As you know, we revolutionized the industry in 2010 when we introduced Transcend, our first high-performance cap deck board. In 2012, we launched additional high-performance decking and railing products so that we could bring the benefits of our cap technology to a wider range of customers.

Now we only offer high-performance decking and railing products. We lead the market with innovation. Every decking product we make did not exist four years ago.

The expansion of our distribution footprint was critical to our success. Our best-in-class products and distinctive sales programs were influential in adding distribution in all channels.

We said in our third quarter earnings call that we expected sales growth from our expanded distribution footprint to benefit us by $40 million to $60 million on an annual basis. We started seeing the gains in Q4. Orders were up in all regions versus last December, even though the terms of the program were the same.

We have also been successful with adding new dealers, who are either leaving our competitors or reducing their commitment to them. Dealer shelves are stocked with more Trex than last season.

The new pricing strategy we implemented in 2014 is also facilitating our market share strategy. Trex Select, for example, has received a favorable reception, both within the industry and among consumers for its superior durability, great looks, and affordable price. We are now addressing all consumer segments with our wide variety of high-performance products.

We continue to expand our global branding reach with efficient marketing programs, including digital marketing, allowing us to be more concentrated in our messaging across different consumer segments. The financial performance we posted for the quarter and the year clearly indicates that our strategies continue to prove successful.

Last August, we implemented Trex's first share repurchase program and returned $25 million to shareholders. We believe that returning capital to our shareholders, while providing sufficient capital for internal growth, to be appropriate.

Because our stock performance has posted strong returns over the last several years, we're also implementing the first stock split in our history. The two-for-one split will provide more trading liquidity by appealing to all investor classes. And it shows our confidence in our strategy.

There's more. In past calls, we've told you that in addition to working to increase our market share in decking, railing, and other outdoor living products, we've been exploring new industries. One of our goals has been to leverage the scope and depth of Trex's core competencies in recycling and extrusion.

Today, I want to go a step further and tell you that the funds have been committed, designs completed, and equipment is being installed for the start-up of the first phase of a capacity expansion into an innovative reprocessing technology. The output is a unique solution for a competitive polyethylene raw-material alternative targeting various plastic manufacturing applications.

This is the first of several new products that have been in development for about a year and a half that will be focused on commercial applications in markets not related to outdoor products. We expect that the first line will be at full production by the third quarter of 2014, and its output has been presold.

For the first quarter we are expecting net sales for the period to be $115 million, which represents a gain of about 7% over last year's quarter.

I'd also like to welcome Jerry Volas to Trex's Board of Directors. Jerry is a group executive with a Company you all know well, Masco Corporation.

Jerry has been with Masco since 1982, has extensive experience in every aspect of the home improvement sectors, and knows leadership brands through and through. He will be a great addition our Board.

Finally, I'd like to thank all of the employees of Trex Company, our distribution partners, and our customers. By working together we were able to produce record income in 2013.

Jim?

Thank you, Ron.

Good morning. As you know, the press release with Trex's fourth-quarter and FY13 financial results was issued this morning.

First, I'd like to review our fourth-quarter financial results. Sales for the fourth quarter were $64 million, a 38% increase compared to 2012. Demand for dealer-direct shipments was the primary driver.

Our 2014 sales programs were unchanged from the prior year. However, the combination of our new distribution footprint, revised pricing model, and superior product lineup provided earlier traction than we had anticipated across all North American regions.

The Company recorded net income of $15 million, or $0.90 per share, in the fourth quarter of 2013 compared to a net loss of $3.6 million, or $0.22 per share, in 2012. The Company's results for the 2013 quarter included a $10.9 million non-cash tax benefit.

The Company's results for the fourth quarter of 2012 included a $1.5 million provision for costs related to the mold class action. Before giving effect to these charges, our fourth quarter 2013 net income was $3.9 million, or $0.23 per share, and the fourth quarter of 2012 net loss was $2.1 million or $0.13 per share.

Gross margin was 30.8% in the fourth quarter of 2013, which was 170-basis-point increase compared to the prior year. Excluding a favorable $3.1 million LIFO inventory liquidation recognized in the fourth quarter of 2012, gross margin increased 840 basis points.

The increase in gross margin reflects lower sales-related costs, increased capacity utilization, and continued gains from manufacturing efficiencies.

SG&A for the fourth quarter was $15.4 million compared to $16.6 million in 2012. Included in the 2012 SG&A was a $1.5 million charge related to the mold class action.

Our full-year 2013 financial performance showed considerable improvement compared to 2012. 2013 net sales were $343 million, an 11% increase over 2012.

Our 2013 sales were positively influenced by the launch of the three new product lines at the beginning of the year that rounded out our good/better/best high-performance decking and railing lines. The new product lines, our pricing strategy, and the expanded distribution network all had a positive impact on our 2013 sales.

Our underlying gross margin of 34.9% was 0.4% better than 2012. Excluding the full-year $4.5 million LIFO inventory liquidation, recognized in 2012, gross margin increased by 2%. Gross margin improvement reflects lower sales-related costs, increased capacity utilization, and continued progress on manufacturing efficiencies and cost-reduction initiatives.

Our 2013 underlying net income was $48 million, or $2.81 per share, and showed significant improvement, comparing favorably to our underlying net income of $26 million, or $1.55 per share, in 2012. 2013 free cash flow was $33 million compared to $53 million in 2012.

The favorable net income recognized in 2013 was more than offset by increased accounts receivable, inventory, and capital expenditures. The higher receivables and inventory resulted from the strong demand by dealers in the fourth quarter and the anticipated strength of demand in the first quarter of 2014. The increased capital expenditures were focused on our cost-reduction and market-growth initiatives.

As a result of our strong free cash flow in 2013, we were able to effect a $25 million share buyback. This marked the first time in the Company's history that this type of return on capital to our shareholders was completed. At December 31, 2013, the Company had no outstanding debt.

Finally I'd like to turn to our revenue guidance. I'd like to reaffirm the first quarter revenue guidance at $115 million. This represents a 7% growth over the first quarter of 2013 but, more importantly, reflects a 16% growth for the trailing six-month period ending on March 31, 2014.

While the timing of the order demand came earlier than we anticipated, the total order demand for the early-buy season has been consistent with our expectations.

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

(Operator Instructions)

Trey Grooms, Stephens.

Great quarter.

Thanks, Trey.

Ron, on the commentary about getting into or expansion of your reprocessing poly, so doesn't sound like it's tied to housing. Could you give us a little bit more color on what the end markets are that, that would be primarily going into? And now that you have this first-line output already presold there, can you give us any indication of how to think about a revenue opportunity with this new expansion that you're going into here?

Well, Trey, we anticipated your question. Let me preface by saying that we're going to be very careful about the information we put into the stream of commerce because we're still assessing the competitive nature of that -- of the market. But I can tell you it has nothing to do with construction, building materials, or housing. This is a commercial product, this will be business-to-business. It will displace other technologies that are currently serve the market. But this is a complete departure from the markets that we traditionally have served.

Now, we will ramp up over a period of 36 to 48 months, somewhere in that window. There will be revenues recorded in Q2. And the revenues that you should expect in Q2 would be minimal. And they will ramp up over a period of 3 years -- 3 to 4 years. At the end of that 3 to 4 year period, we expect it to be very significant.

I think that's about the extent of the color commentary I can give. Without screwing up our competitive position. We want to make sure we get into the market successfully before our competitors have figured out what we've done.

Okay. But it's fair to say, though, looking into next year, granted the revenues would be minimal in Q2, but looking into 2015 we would expect something more significant and then it would continue to grow over a three or four year period?

That's a good reflection.

Okay, and then my second question would be on the $40 million to $60 million of incremental revenues that you guys are expecting from the new distribution, there seems to be some confusion maybe or skepticism out there by some that this is -- how you're going to reach that. And you touched on it and it sounds like you're already starting to see some of that benefit in the 4Q. Can you -- you're reiterating that $40 million to $60 million, I guess is the way to take it? And then secondly, can you give us a little color on it's early stages, does that give you more confidence in that range? Less? About the same? Any commentary on that at all?

Well, we reaffirmed our outlook that it's $40 million to $60 million of incremental business versus if we hadn't made these distribution changes. I can tell you that our existing dealers bought 30% more during the beginning seasons of early buy than they did last year in terms of dealer direct truckloads and we did ship to 91 new dealers. So that should give you a sense.

Great. Thanks a lot, Ron. And good luck.

Thank you.

Jack Kasprzak, BB&T.

Jim, do you still expect 2014 results will reflect a full tax rate?

Yes, I do.

And with regard to future uses of cash flow, obviously you've mentioned the share buyback and have executed one already. So you have very good credence there with your actions on the share buyback. What would be, Ron, your attitude toward instituting a common dividend potentially at some point?

Well, we have regular discussions about that. And I can tell you at this point, we have nothing further to announce. But clearly that represents a viable alternative that will be discussed with some regularity. That's about as deep as I can get into that.

Okay. Thank you.

Keith Hughes, SunTrust.

Ron, on the new product line, are you producing a finished product for a customer, or is this a raw material component type of thing?

It's a raw material component.

Okay. And then on the first quarter, you've given us the revenue guidance. In terms of production rates, what are you going to be looking to run in the first quarter particularly in light of all the weather discussions over the last month or so?

Well, there's been a lot of discussion about the weather component, it probably has had some effect. But our weather forecast for the heavy part of the buying season is still favorable. That's about all I can say about that.

Do you think your production rates are going to be up or down versus the first quarter last year?

Versus last year, they'll be up.

Thank you.

Robert Kelly, Sidoti.

Question on the contribution margin for 4Q. You had talked about the 2014 incremental gross margin being around 45%. We were south of that for 4Q. Why the disconnect for 4Q and can we still count on the 45% flow-through for this year?

Yes in the fourth quarter, we did see some drag related to some marketing programs to support the new distribution that we've got. And that did have a negative draw on the contribution margin.

With regard to 2014, as we mentioned the last call, we do see that, that contribution margin is declining. And we told you on the last call, we had expected 45%. We have not updated those numbers at this point. So I think at this juncture, you should continue to use the 45%.

Okay. Fair enough. And then just as far as the new product, the capacity expansion, what's the cost there? And the timing of the spend?

Well, we've not revealed the amount of the spend. But it will come in, in some irregular fashion over the next 36 to 48 months. So it won't be ratable, there will be some spend. When we have -- I'll provide more color on that in the next quarterly call.

We do expect our 2015 CapEx spend to be approximately $15 million. 2014, sorry.

Thank you.

2014.

Got it. Thanks.

John Baugh, Stifel.

Congratulations on a good year. I was wondering first on, actually I guess it relates to not just the expansion of this commercial product, but also the strength you're seeing in your core business, the availability of raw material, which is in years gone by was an issue, and the cost of that raw material.

We don't see a problem with that for the foreseeable future. There's plenty of availability and we seem to be in pretty good shape in that regard, so at this point it is not a worry card. It is something we're quite confident in. And the prices have been very stable.

And Ron, just to be clear, the new product you're talking about, that will or will not run any of your existing extrusion capacity?

It will not utilize any of the existing extrusion capacity.

Okay. I apologize -- I'm on the road and just looking at some things here, but what was the contribution margin to the gross margin in the fourth quarter adjusting for abnormalities like LIFO, et cetera?

Bryan, have you got that?

Give us one second here.

And then I was curious, did the pricing changes that were implemented go through for all, some, none of the fourth quarter shipments?

They went through all. They all went through.

Okay. And just so I think about the $40 million to $60 million you talked about, we probably should be thinking that you picked up $10 million or so of that? Maybe more, I don't know, in the fourth quarter of 2013 should so we shouldn't be adding another $50 million for calendar 2014 given what you did in Q4 2013. Would that be correct?

John, the $40 million to $60 million would be on top of the 2013 sales. So yes, we did pick up an earlier amount in the fourth quarter than we anticipated but we think that $40 million to $60 million will be on top of the sales for 2013.

Great. Thank you for the color.

Thank you.

(Operator Instructions)

Morris Ajzenman, Griffin Securities.

Questions pretty well picked over, but on this pricing -- new pricing strategy. Can you articulate or give us some sort of sense of what pricing overall over different categories are going to be up year-over-year and what was pricing up for 2013?

We're not going to get into pricing by product line. We did lower the pricing on some of our products and raised it on some other products. But we're still actively involved with distribution for the first quarter. And I don't want to talk about pricing.

Pricing last year, Morris, was pretty much flat.

And how does that compare to your costs for last year?

Pretty much flat. As you know, Morris, with recycled polyethylene which is a primary driver of our cost structure, it does not move with petroleum products. It really moves with general economic conditions, but we've been relatively successful in finding new sources of material which helps contain cost increases in the polyethylene. So that's really the primary driver we look to. And we've been as I said, very successful in containing that.

Actually on a net-net basis the price of our polyethylene has actually fractionally gone down. A very slight amount.

One last question. I always asked this in the past, but where do you think it came out in your market share? At the end of this year versus last year? And what do you think your market share can be exiting next year?

We think it went up and we think it can go up further still.

Mid to upper 30% share-range? Is that fair at this point, or not?

It's higher than that.

Okay. Thank you.

Thank you, Morris.

(Operator Instructions)

Kenneth Smith, Lenox Equity Research.

Jim, what's your expectation for SG&A expense for 2014? And will be affected at all by this new segment of business that Ron was talking about?

The answer to the second question is, it will have a minimal impact on the SG&A. And from an overall standpoint, we would expect the SG&A expenses for 2014 to be about the same or slightly less than 2013.

And that will be against adjusted 2013 or actual -- I'm not sure there's actually much of a difference, but --

It would be adjusted.

Okay. Thank you.

You bet.

Trey Grooms, Stephens.

Just one more. So on the last call, the Q3 call when you really introduced this new distribution and the impact there, you said that it would take two or three years for this to fully rollout. Can you talk about how we should be thinking about that year two or year three?

And how to think about how much that could $40 million to $60 million base in 2014 could grow over that time period? Any color on that you could give us?

I think the majority of the increase will be experienced in 2014. We're not going to go -- we're not going to give out any numbers beyond 2014. And frankly, to be clear about it, Jack --

Trey.

I'm sorry, Trey, Jack is the next guy. When we gave out, that was an exception of our normal policy of just giving out one quarter's sales guidance, but when this year is over we're going to stop giving out annual guidance. But it will take two to three years to fully commercialize, majority of which will be in year one.

Okay. And then I guess one follow-up for Jim, on the taxes, you said 2014 full-year taxpayer but in the 1Q does that -- if I missed it I'm sorry, but do you start paying full taxes this quarter?

Yes. From a GAAP standpoint we will be paying full taxes every quarter in 2014. From a cash perspective, you could assume that we'd be averaging about 25% for 2014.

Okay. And then one last one, on this new opportunity, new product, so you guys are I think one of the largest purchasers now of recycled poly. And then you resell a lot of that into the secondary market. Are you guys just going to utilize the material you're already purchasing any way? And just repurpose it into this new category? Is that the way to think about that?

In part, that's true, but we will have expanded purchases of polyethylene. We are one of the largest buyers of recycled polyethylene as you're well aware. We sell off a significant portion of that polyethylene. Some of that will be diverted and we will also be expanding our purchases.

Okay.

Just to be clear, this is a departure from our normal customer base and it is a new product that will go to new customers utilizing the expertise that we already have in-house, the supply chain that we have in-house, and the equipment that we've got and that we'll acquire.

Okay. And it is still all polyethylene-based, recycled polyethylene-based?

Yes.

Great. Thanks for the color, guys. Good luck.

Thank you.

Jack Kasprzak, BB&T.

Thanks for the heads-up Ron that I was next (laughter) we might have to institute that as a policy. The press, I think John referenced it earlier, but the press release does reference an improving economy. There's been a lot of talk about your execution, which is stellar, and your market share gains, but what are you seeing, or hearing, or feeling out there from the customers? Do you feel like the macro wind is shifting to your back in terms of consumer organic spending trends if you will?

I just got back from the International Builders Show in Las Vegas and the activity in our booth, the discussion with contractors, dealers, and distributors is all fairly robust as compared to the six prior years that I've been here now, 2008. Contractors are quoting longer lead times and generally felt pretty good about things. You've got more quantitative numbers available to you than I probably have to me, but the feel of the market seems to be better than it has been certainly since 2008.

Okay, great. And one last question, on the new product, what sort of incremental margin opportunity is there? I know you won't give a number but will it be similar the existing or traditional Trex business? Any way to think about that?

We're just, Jack we're just not going to go there just yet.

Okay. Thank you very much.

Thank you.

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

As always the pace of business at Trex is moving rapidly. We had an outstanding finish of the year and we want to make 2014 just as rewarding for our customers, shareholders, and employees.

We expect to benefit from the economic recovery that's been picking up steam. We're putting in initiatives in motion to keep our momentum going for the next several years. As always, we're looking at enhancements to our product line, and we will continue to expand our commercial products, building on our process and manufacturing expertise. We've got the talent, technology, financial resources, and the will to get it done.

Thank you for joining us today. Goodbye.

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