Trex Company Inc (TREX) 2014 Q1 法說會逐字稿

Welcome to the Trex first-quarter 2014 conference call.

(Operator Instructions)

As a reminder this conference is being recorded today Monday, May 5, 2014. 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 Klein Senior Vice President and 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 first quarter of 2014. This release is available on the Company's website as well as under its financial website. 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'd 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 law. 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-Q's 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. With that introduction I'll turn the call over to Ron Kaplan.

Good morning. In Q4 2013 sales were $14 million higher than we had forecasted due in part to increase market share. In Q1 2014 sales were $15 million less than we forecasted due to extraordinarily poor weather that impaired the building trades across most of the country.

New orders between February 24 our last earnings call in March 31 were off 26% from the prior year. Since the beginning of April when the weather improved that trend has reversed. Accordingly we are forecasting sales of $125 million for Q2, a 27% increase year over year.

We believe that the full-year sales from the new distribution channels will be somewhat softer than the $40 million to $60 million previously forecasted because of the late start to the season. We've been focused on advancing our industry-leading market share. We have positioned our Company on the marketplace with product distribution, branding and pricing strategies that optimize our market share potential. We continue to be attentive to our commitment to product innovation.

We just launched another new category, landscape lighting, that's a natural fit to outdoor living projects. In March we were recognize with top honors in decking brand and greenest product categories by two distinguished Brands Survey and Reader's Choice Awards. This is a reflection of how we prosecute market share strategies.

On the international front we were awarded a 4.3 mile boardwalk in Dubai. This boardwalk is part of an elaborate public project that will span the beachside of six residential communities. Trex was selected for the project because we had the best aesthetics and performance features and the unrivaled ability to deliver on time.

We also received our first order from Belarus and India which brings our global presence now to 37 countries. We recently finished one of three major R&D projects which will be completed this year. Each of these projects will significantly lower the manufacturing cost of our core products starting in Q3.

I said in February that we would be entering a new industry that leverages the scope and depth of Trex's core competencies, recycling and extrusion. Well, we've entered it. Our output is a unique solution for a competitive polyethylene raw material alternative targeting various plastic manufacturing applications.

These applications are not related to outdoor products but to an industry that is non-seasonal and non-cyclical. The installation of the first line is complete and shipments have begun. This project will be accretive to sales, earnings and EVA this year.

Building the first production line for this new category was important for us. The line start up with smooth. The line will be at full production by the beginning of Q3 2014. We will then determine the number of lines that will be brought online through 2015. I will now turn the call over to Jim.

Thank you Ron. Good morning. As you know, the press release with the Trex's Company first-quarter financial results was issued this morning. The Company recognized net sales of $101 million in the first quarter 2014, a 7% decrease compared to 2013. The decrease in net sales was primarily driven by lower sales volume. The decrease was a result of strong demand from both new and existing dealers in late 2013 and unfavorable weather conditions in 2014 that delayed the start to the deck building season.

The Company recorded net income of $12 million or $0.73 per share in the first quarter of 2014 compared to net income of $22 million or $1.25 per share in 2013. The primary reason for the shortfall is a return to a normal tax rate that depressed earnings by $0.43 per share and a reduction in sales volume partially offset by reduced SG&A expenses. The effective tax rate for the first quarter of 2014 and 2013 was 37.3% and 0.9% respectively. The effective tax rate was substantially lower in 2013 due to the effect of a valuation allowance.

Gross margin was 37.9% in the first quarter of 2014, a 90 basis point reduction from 2013. The decrease in gross margin was primarily the result of lower sales and revised pricing strategy partially offset by favorable manufacturing efficiencies.

SG&A was $18 million compared to $20 million in 2013. The decrease was primarily related to branding and personnel expenses. The decrease in branding is related to timing of our branding spend which will be realized later in the year. This reduction in spending was partially offset by a $600,000 charge in 2014 related to our sublet office space in Dulles, Virginia.

Our free cash outflow for the first quarter was $85 million compared to an outflow of $68 million in 2013. The $17 million variance and free cash flow was due primarily to increased inventory and reduced earnings compared to the 2013 quarter.

Inventory was $30 million at March 31, 2014 a $15 million year-over-year increase. We carried a higher level of inventory into the second quarter in anticipation of strong demand early in the second quarter.

Capital expenditures for the first quarter of 2014 were $3.2 million a $1.3 million increase compared to the prior year. At March 31, 2014 the borrowing on our revolving line of credit was $80 million. Our net debt is currently about $40 million representing significant collections on the $116 million of accounts receivable at the end of March.

Finally I'd like to turn to the revenue guidance. Our guidance for the second quarter is for sales of $125 million an increase of 27% over 2013. We plan to reduce production in the second quarter to bring inventory down to a more normalized level.

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

Ladies and gentlemen. (Operator Instructions) Trey Grooms, Stephens

Hi.

Hi Trey.

The update on the sales guidance range for new distribution you mentioned to be somewhat softer than the $40 million to $60 million you were initially looking for due to the slow start so what would that new range be? How should we be thinking about that new 2014 range given what you mentioned there?

Well it's too early in the season to be more specific. We worded it the way we saw it so we're going to stick with the guidance that we've given and this will probably be the last time that we get specific about that particular segment of our business. And we will revert back to our traditional forecasting method of one quarter's sales guidance at a time. It is going to be -- we think it was prudent to suggest that it would be somewhat softer due to the late start, that's the extent of our guidance on that matter

Okay but just to be clear, is it within the range it's just that it could be softer than you guys initially had thought or is it that the range should be brought down, the entire range should be brought down, it should be lower than the initial range?

I think what I said was the $40 million to $60 million might be somewhat softer.

Okay. All right. And then the pricing changes that you implemented this year is that driving a more pronounced mix shift, you know I guess product mix shift than you would've expected or how should we be thinking about any impact on products mix in the top line?

It has worked out as expected so far. The select product is largely taken over for the accent product and so far so good in that regard.

Jack Kasprzak, BB&T

Thanks. Good morning guys

Good morning

Can you update us where you are in the buyback activity in terms of what you did in Q1 if anything and what you have left on your authorization?

Certainly. There were no shares repurchased in the first quarter and that means that we basically have $50 million available for repurchases that have been authorized by the board.

Okay. And with regard to your new product do you have any additional customers to report or are we still working with the first initial customer?

We are working with -- our shipments just began last week. We're still filling initial orders and we've got people in the wings for additional prospects but right now we're filling these orders.

We do have several customers, Jack, that have placed interest on the demand as soon as we have it available but as you can imagine the line was going into production just this past month so we haven't begun making shipments but they're very early in the process.

Keith Hughes, SunTrust

Thank you. Just in your comments I believe you said you're going to be slowing production down in the second quarter given the inventory build can you give us any kind of metrics of what production rates will look like in the second quarter versus prior year

The only metric I would point to is you know where our inventory was, you know what it is now and you know what our historical turnover rate has been. So those inner metrics that we would provide and we think you can reverse engineer it and figure it out.

You referred in the first quarter gross margin was helped by manufacturing synergies. Will we see more of those in the second quarter?

Well we certainly have manufacturing efficiencies that occurred in the first quarter. We expect that they will continue into the second. We are seeing a slight increase in raw material costs. Some of those savings will be slightly mitigated in the second quarter based on what we've seen

When you add this together if you hit the sales guidance for the year will we still see some pressure on gross margins as a result?

I don't believe so.

Okay. Thank you.

John Baugh, Stifel

Thank you. Good morning. I was curious on the orders reversing, care to quantify that number, number one, and number two as you look at the season and I know we've gotten off to a strange start, forgetting the market share gains how do you think about the business organically and/or market share gains above and beyond what you've already anticipated or told us?

Well I think the market share gains that are going to be the big announcement for the year. We've made those big announcements. So now it's up to the consumer and we won't know how that's happening until the end of the second quarter. And we see what's actually come off the shelf. So I don't anticipate adding new big distributors before the next buying season. I can tell you that orders in April and through the first couple of days of May, I'll stick with the adjective that we've already used that they have reversed. So you can draw your conclusions from that.

Ron, any color on a what a full line producing full out for this new venture will be rough crude revenue range?

Were looking at each other here. We've elected not to reveal that yet. The first line is running well. The first phase would be three to four lines. As I said in our previous call we would expect to within 36 to 48 months that it would be a very significant portion of Trex's overall sales and will change the complexion of Trex. We also have said this will be accretive to sales margins and EVA this year.

Alex Rygiel, FBR Capital Markets

Thank you. Could you expand a little bit more upon the Dubai boardwalk what's the timing of shipments, how long will that last and are there any other sizable bids outstanding for projects such as this?

It can tell you that it is a very sizable portion. I think that there will be the potential for follow-on orders potentially. Shipments will begin soon and will be completed this year. We seem to be quite popular in certain portions of the Middle East and there is aggressive building campaigns underway in that part of the world. So we're quite pleased with what we've achieved there so far and the remainder of the year will see the shipments going out the front door.

Thank you.

Morris Ajzenman, Griffin securities

Good morning guys.

Good morning, Morris

A handful of years Ron in coming out of the previous downturn we had mortgage rates come down dramatically and that clearly helped the new and more important existing housing market as it relates to you and clearly has benefited the industry by having more disposable income, lower interest rates, et cetera. About nine months ago or there abouts whatever mortgage rates started rising again have you seen either from your distributors or the actual consumer any sort of pull back based on what's been happening over the past three or four quarters? And just kind of comment that if you've seen any changes whatsoever

We haven't seen those kind of changes and we haven't heard that kind of talk from our distributors. We see that there's been pent up demand is a result of the slow start in the season that's been more readily apparent. But we've not gotten any feeling of a lack of robustness in underlying demand. The major macroeconomic factors that we watch are generally pointed north and have been for a while now.

Okay. On the new industry I think you said last quarter and just refresh me as we comes towards the end of 2014 you'll give us more detail on that new industry. Is that correct?

I did say it and I think I just gave you more detail about it. Were very -- Morris, I appreciate where you're coming from. We've got suppliers and customers listening to this phone call. There are people who want to buy what we've made and we put them in the queue and there are people who want to sell us raw material. We need to be very judicious as I have been since I've had this job about competitive information. So I know that's somewhat frustrating to you but I can tell you that we're in production, we're making shipments, we're making a profit and we've entered a new industry.

Kenneth Smith, Lenox equity research

Thanks. I wanted to ask further about the new distribution where you said sales of $40 million to $60 million might be a little softer this year. Are those distributors, can you give some color on how those distributors feel about the product at this point, how their own installers, dealers are receiving the product, how it's actually selling through?

We don't have any disappointing feedback from our customers, from our new distributors about the acceptance of our products. There haven't been any pushback on quality. There's nothing new to report there. They're happy with the decisions they've made. It's a question of catching up after a slow start to the season.

Okay. Thanks.

(Operator Instructions). Keith Hughes, SunTrust

Question on capital spending. Do you anticipate any capital spending on the new products machinery this year and/or next year?

We do expect that spending will creep up next year. We think that this year the amount that we've guided to the $50 million is probably okay at this point.

It could be higher next year is that correct?

That is correct.

Thank you

John Baugh, Stifel

Just curious Ron, I think Jim mentioned the slight increase in raw materials. Is there some market force there or are you having to buy more raw material in anticipation of this new commercial product or any color on where you're seeing the raw material pressure?

Well, it's a combination of the two things you just said. We are buying more and there is some upward pressure, PBC prices are rising as well. It doesn't affect us directly but it does affect our competitors. So we're buying more and there is some upward pressure. It's not major. But it is notable.

And then on brand spend for the calendar year I know you said the timing. Update us on roughly what your plans are there.

It's going to be roughly in line with prior years. We can see that the season was going to be delayed so rather than advertising to an empty showroom in the first part of the season when it was snowing we decided to pushback our advertising to coincide with the better weather. So it will be restored. We're not backing off our aggressive program.

Thanks. Good luck.

Thank you.

Jack Kasprzak, BB&T

Thanks. On international sales you said you're up to 37 countries now it seems like this is an area since you guys have come to Trex it's really changed and grown. I think when you came in it was a minimus of maybe two countries. Can you tell us about what percent of sales or a range where international is and should we be thinking about this in terms of a major untapped growth opportunity? Where could this be for Trex down the line if you have any color there

It is something that's very important to me personally. I'm quite proud of what we've done and we'll be adding some resources to that program. We do expect it to be material as time goes on. I'm not sure exactly how we define material I'll leave that for our CFO to define but it is becoming important to us. It is important, it's going to become increasingly important, we will add resources to it and we do think it's a major opportunity as time goes on. We're careful in the way in which we approach it so as not to make our margins vibrate by adding a lot of SG&A at once with the hopes that the sales come later. We're doing it in a very measured, balanced fashion. So we have grown from 2 to 37 countries. That's a fact. I'm not really focused on expanding countries we're focused on expanding the depth to which we are in those major countries. I hope that's sufficient.

Sure. Thank you, Ron.

Catherine Kavanaugh, Plastics News

Hi. Good morning. I was just curious as to whether you could say which of your manufacturing facilities will be or is making the new product?

The new product is presently being made in Winchester, Virginia. That may be modified as time goes on but that's where we're doing it now.

Okay. And are there any plans to use the Mississippi facility again?

We contemplate that. We haven't made any final decisions about that.

Thank you.

Trey Grooms, Stephens

Just one more here and sorry if I missed this but you guys are going to be bringing down inventory. There is some movement in raw materials and Jim, you had previously guided to kind of 45% incrementals this year is that still how we should be thinking about that in the short run?

Certainly as you bring inventories down that will challenge that 45%.

Right so I guess just in the near-term would that 45% more how to think about the entire year this year or so on a quarterly rate you could see some movement there? Is that the way to think about it?

Certainly there would be volatility in the quarterly rates. That was intended to be an overall year rate.

Okay. Got you. On dealers I know last quarter you gave us an update on how many dealers you guys had added in the quarter. Is there anything to talk about there as far as in the first quarter or since we spoke last?

We've seen good support from the dealers. We are just getting into the season in fact there are some areas of the country where the season really hasn't broken in earnest so until we see those dealers cycling their inventory I don't think we'll have too much more to say about the dealer presence that we have.

Okay. Good luck guys. Thanks

Thank you.

There are no further questions at this time. I would like to turn the call back over to management for closing remarks

Well thank you everyone for joining us. Weather-wise it was a slow start but we're making up ground fast. We've launched new products, are building on our expanded global footprint and are geared up for a powerful branding campaign. Before we close I'd would like to thank Paul Brunner who recently retired from our Board for his valuable insight and support during his tenure. We're looking forward to giving you an update this summer when we host our second-quarter earnings call. Take care. Thank you.

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