TREX
#Thank you, <UNK>.
Before we begin, let me remind everyone that statements on this call regarding the company's expected future performance and conditions constitute forward-looking statements within the meaning of federal securities law.
The 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 1933 and other 1934 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 will turn the call over to Jim <UNK>.
Thank you, Bill, and thank you all for participating in today's conference call.
This was a strong quarter for Trex, representing our fifth consecutive quarter of record revenue and net income and a positive start to another growth year for the company.
First quarter of 2018 sales results reflect the expected high single-digit growth in Trex Residential Products.
In the December through March time period, we focus on stocking orders from our distributors and dealers to ensure that an adequate inventory is available in advance of the peak decking and railing season.
Our year-over-year residential organic demand for the first quarter and for the first 4 months of this year indicates a much stronger, low double-digit demand curve.
Economic forecast support our expectation for continued progress in 2018.
First, the repair and remodeling market is expected to grow at a high single-digit rate in 2018, and exterior property improvement, the subsector that most closely aligns with Trex Residential, is expected to capture 34% of the home improvement spending.
At the same time, consumer confidence is at its highest level since 2004.
This index historically correlated well with Trex Residential sales.
From a company perspective, our data analytics show that the North American consumer has been very active in the marketplace so far in 2018.
Despite the long winter that has persisted in parts of the country, we're seeing record activity on our website, and our trade partners continue to report positive point-of-sale data.
Also with lumber pricing increasing, the Trex value proposition for decking and railing has become even more attractive to consumers.
And it's not just a question of pricing.
The quality of certain wood species is not as good as it was in the past.
All of this underpins our conviction that the composite category will continue to gain share from wood.
As the undisputed category leader, we believe that Trex is capturing more than its share of the conversion from wood.
This represents an excellent return on the investments we have made in our targeted marketing programs that we rolled out over 3 years ago.
We also reported during the first quarter that Trex was honored with awards from the 2018 Builder Brand Use Study.
For the 11th consecutive year, Trex was named as the Brand Most Used and the Brand Most Used in the Past 2 Years for composite PVC decking category.
Trex also took the top position in quality category in this year's study.
Trex Commercial Products also had an improved first quarter and its performance was consistent with our expectations, reflecting a solid backlog as well as new project wins.
As you know, we're a leading provider in the domestic commercial railing market, which we estimate at approximately $1 billion.
We continue to be the market share leader for major stadium projects with about 85% of all major stadiums and arenas in North America.
A good example of a recently completed project is the Little Caesars Arena in Detroit, which is the home to the NBA Pistons and the NHL Red Wings.
The project included over 18,000 feet of Trex commercial railing.
The arena was designed to engage fans and features gondola-style seating that is suspended above the playing area, accompanied by several hundred feet of strong, secure glass track rail provided by Trex Commercial Products.
Our involvement in a project of this scope can last for several years from planning to final installation.
But we also bid for refurbishments of college stadiums and smaller athletic venues like soccer and tennis stadiums that have a much shorter project cycle.
We're pleased with our first quarter gross margin performance as it was in line with our expectations for continued expansion of our residential and commercial gross margin.
In residential, the drivers of high gross margin were similar to the prior quarters, which <UNK> will detail later.
One of our major manufacturing cost-savings initiatives, which I mentioned last quarter, involves improvements to our production lines that will provide a step change in the manufacturing process of our deck boards.
We began implementing the first phase of these manufacturing enhancements in the first quarter of 2018.
We will complete the retrofit to the remaining lines by the end of this year.
In the first quarter, we utilized one of our production lines for a significant number of trials, and the results of those trials of the first phase were outstanding.
When the first phase of this is completed in the fourth quarter of this year, available capacity will increase by at least 20%.
More to come on this as the year progresses.
The commercial gross margin recovered from the fourth quarter levels reflecting the roll-off of several legacy projects.
We continue to make progress on margin improvement with the execution of a number of cost-reduction initiatives and improved acquisition of estimating and project management.
We continue to be confident in our ability to drive margin improvement through the second half of this year.
I will now turn the call over to <UNK> <UNK>, our Chief Financial Officer, to provide further insight into our financial results for the period.
<UNK>.
Thank you, Jim.
Good afternoon, everyone.
We're pleased to report strong year-over-year comparisons driven by increased recognition of the Trex brand and operational performance.
First quarter 2018 consolidated net sales amounted to $171 million, representing an 18% year-over-year increase, as higher volumes in Trex Residential Products drove 7% sales growth to $155 million.
We're also pleased with Trex Commercial Products contribution of $16 million.
Consolidated gross margin was 44.8% compared to the 45% reported in the first quarter of 2017.
The impact of the inclusion of lower margin Trex Commercial Products was almost completely offset by the strength in Trex Residential, where gross margin expanded 260 basis points to 47.6%.
This significant margin expansion was due mainly to material cost advantages and manufacturing cost savings, which together accounted for approximately 80% of the year-on-year improvement and higher capacity utilization, which represented 20% of the increase.
Trex continues to benefit from the use of low-cost raw material streams, which provides a significant cost advantage.
Also, we're investing in R&D programs to develop processes that will allow us to use a greater variety of scrap material, including lower cost and harder-to-recycle sources.
Trex Commercial Products gross margin at 17.7% for the first quarter improved from the fourth quarter 2017 as lower-margin legacy contracts began to roll off.
As Jim mentioned earlier, we're confident in our ability to improve commercial gross margins this year.
The challenges we see in the commercial business are similar to the ones we faced at Trex a number of years ago.
And our teams are working together to deliver margin improvement by the beginning of this year's third quarter.
SG&A for the quarter totaled $29 million.
Brand-related expenses that drive market share gains, the inclusion of Trex Commercial Products, and $1.2 million in noncash amortization of intangible expenses related to our recent acquisition resulted in a $5.7 million increase in SG&A.
This represented 16.9% of sales compared to 16.1% of sales in the year-ago quarter.
Exclusive of amortization expense, SG&A was 16.2% of sales for the quarter, 10 basis points above the comparable quarter in 2017.
Net income amounted to $337 million or $1.25 per diluted share, representing year-over-year increases of 33% and 32%, respectively, from $28 million or $0.95 per diluted share reported in the last year's first quarter.
This increase was partially attributed to timing related to a lower tax rate of 22%, which resulted from reduced federal statutory rate and benefits realized in the quarter on divesting of stock compensation.
With respect to capital allocation, in the first quarter, we invested in a number of fast-return projects that will result in future manufacturing cost savings, process improvements and other operating efficiencies.
Additionally, we repurchased 50,000 shares of our outstanding common stock for a total outlay of $5 million as part of the share buyback program authorized by the Board of Directors in February 2018.
For financial modeling purposes, please note the following items: We expect consolidated incremental margin for the full year 2018 to be approximately 45% to 50%.
We project the improvement to be second-half weighted related to the manufacturing process enhancements noted by Jim and margin improvements in the Trex Commercial Projects (sic) [Products] segment.
Full year capital spending is projected between $20 million and $25 million.
SG&A is expected at approximately 17.5% of sales for the year.
The remaining intangible expense related to the SC acquisition is approximately $1.7 million and will be fully amortized by the end of the third quarter.
We expect the full year tax rate for 2018 to be 25%.
As Jim noted, the Board of Directors approved a 2-for-1 stock split of the company's common shares in the form of a stock dividend to be distributed on June 18, 2018, to the shareholders of record at the close of business on May 23, 2018.
Now I'll turn the call back to Jim for his closing remarks.
Thanks, <UNK>.
We're off to a solid start in 2018.
The environment for consumer spending on home improvement and for outdoor living, in particular, remained strong, and we are seeing positive comparisons in Trex Commercial.
At the same time, we have begun to benefit from the cross-product development between our residential and commercial operations.
While we're seeing some increased costs in transportation, metals and certain other categories, we have clearly been able to more than offset these increases with cost-reduction initiatives and favorable capacity utilization.
In the second quarter, we expect to report consolidated sales of $191 million.
We anticipate that Trex Residential sales will be $174 million and Trex Commercial Products will contribute $17 million.
This will represent a year-on-year growth of 10% for Residential and 21% on a consolidated basis.
Reflecting our positive long-term outlook, the Board of Directors has approved a 2-for-1 stock split to be distributed on June 18 to shareholders of record on May 23, 2018.
Operator, I'd now like to open the call to questions.
Yes, the guidance that we provided consistent with what we talked about a year end for the full calendar year 2018, we see very similar type benefits of what we've seen in the past couple of years.
We'll still have strong operational savings from our cost initiative programs.
We'll see utilization.
The raw material benefits won't be driven as much through pricing.
We've talked in the past about gradual decline in pricing in the marketplace.
But more so related to the efforts that we have from an internal perspective with R&D and operations to find different classes of material that can be used that may not be actively sought after today.
So we'd expect that the categorization of those savings to fall roughly into the same buckets and not too different of amounts.
Well, we've been able to service our customers within a 2-week lead time in season.
So it really doesn't expand our capabilities to handle more sales.
It's really 2 things.
It adds a buffer on our capacity that is something that we need to pay attention to as we go forward.
This is the first of at least 4 phases that we've identified.
So we see follow-on opportunities clearly beyond this first move.
There will be cost reductions that we'll start to see in the second half of this year, but the full benefit of this first phase won't be recognized until 2019.
They are for 2018.
So it was just really the catch up from the fourth quarter.
We were a little bit below where we expected to be in the fourth quarter and came in a little bit higher in the first quarter of this year.
As we said, these projects, as to exactly when the revenue gets booked, it can move from quarter-to-quarter.
We've got good visibility, but within a couple of million dollars, it can move from quarter-to-quarter.
So that was really the only dynamic that we saw in the first quarter.
You're referring to the poly, in particular, I think, right.
Yes.
We really look at this in 2 ways.
If you did a like-for-like on the poly, it seems to be a slightly weakening market.
We have been very focused at trying to qualify new materials, as Trex has been very successful with this approach in the past.
But we're trying to qualify these new materials that basically nobody else wants.
And what that means is, we can take materials that are lower price and being able to use those, maybe 25% or even 50% of what our material costs would be at these lower-price items that helps drive our overall cost profile to a lower level.
And that's something we've always done.
I think we're getting a little better at it.
And we've been pretty successful over the last 12 to 18 months, in particular.
Yes.
When we look out at our capacity requirements, we're basically going out 3 to 4 years and looking at our capacity requirements.
Before this 20% improvement, we did not have a need for an additional building for the next 3 to 4 years.
So this further pushes out the need for additional production facilities with this first phase.
And, again, I mentioned first phase.
We do have 4 phases of this process that we've identified.
And it's our belief that we can eventually push the requirements for an additional manufacturing facility out considerably further with the additional phases.
As with anything, you take a low-hanging fruit first with the lowest CapEx spend and the best bang for your buck and that's what we've done for 2018.
It starts to get more expensive as you go into 2019, '20 and beyond.
But at this point, we've ---+ we're basically doing the first phase as a straight add-on.
Second phase will be replace equipment that needs to be replaced anyway with better equipment that will enhance our throughput.
So part of this would be replacement capital, but with additional throughput capabilities on the replacement side.
Yes.
It\xe2\x80\x99s a tough number to come by.
The overall market change, I think when we end up this year, I wouldn't be surprised to see the wood market lose about 1 point of share.
That would be about $50 million.
Now that would be spread between us and other competitors.
We believe, because of our campaign that we've been very active on, the customers that we have, we think that we pick up a greater percentage of that wood add.
So I think the benefit there moves us certainly above the expected high single digit that ---+ of growth that the market is expected for composite material.
Well, basically, it's a retrofit of the production equipment.
So we're adding additional equipment in that gives us a better throughput profile, better quality than what we had before.
It's difficult to say how this is going to fall.
And I think other people on calls have brought this issue up.
But part of the issue that every company is running into right now is transportation.
And it tends to make the sales for everybody ---+ it's going to make the sales for everybody a little bit lumpy.
Things that you expect will drop in the second quarter may end up dropping in the third quarter.
We're playing heads-up ball on that.
We've seen this impacting us.
For example, in the first quarter where we had several million dollars\xe2\x80\x99 worth of orders that were scheduled to be shipped out, couldn't get wheels under it because of transportation.
That problem is going to be worse in June.
And so we're working to move orders so that we can do not have that bottleneck at the end of the quarter.
So I think it ends up being a little bit different mix than what we expected at the beginning of the year and being driven more by transportation than consumer demand.
Thank you.
We do not publicly give credit often enough to one of our greatest competitive advantages: Our people.
Our ongoing success would not be possible without the best team in the business.
We recently did an Employee Engagement Survey related to Trex and looked at our overall results.
It indicated 3-dimensional strengths.
That were, quality and customer focus; clear and promising direction; and employee engagement.
These were significantly above industry norms and underscores where our team has been so successful, not only with our operating results.
To all of our employees, thank you for your support of the company.
And to our shareholders, we thank you for your confidence in Trex.
Wish everybody to have a good evening.
