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Trex expanding with new material, new regions

By: Catherine Kavanaugh

April 3, 2014

On a trek to increase its global market share, Trex Co. Inc. has opened sales and distribution centers for its decks and rails made of recycled wood and polyethylene in five more countries in the last year.

With the addition of Brazil, Colombia, Turkey, the Cayman Islands and South Africa, the Winchester, Va.-based outdoor products manufacturer has a presence in 35 countries — and some iconic destinations from Mount Rushmore in South Dakota to the Dubai JW Marriott Marquis, a world record-tall hotel at 1,164 feet in the United Arab Emirates.

The wider distribution footprint contributed to a 38 percent increase in sales in the fourth quarter of 2013 for the world’s largest manufacturer of wood-alternative decks.

In 2014, Trex will foray into other new territory and it has nothing to do with market reach for building materials. The company will be making an alternative to virgin PE with the first sales of this raw material expected in the second quarter.

In a recent conference call about earnings, Trex CEO Ronald Kaplan said the company is installing equipment for an innovative reprocessing technology that will leverage its core competencies in recycling and extrusion.

“It will displace other technologies that currently serve the market,” Kaplan said. “This is a complete departure from the markets that we traditionally have served.”

Kaplan said he had to be careful about giving too many details about Trex’s pending business-to-business, commercial product because of the competitive nature of the market. However, the initial customers know about it and have placed orders.

“The output is a unique solution for a competitive polyethylene raw material alternative targeting various plastic manufacturing applications,” Kaplan said. “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 and markets now 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.”

Kaplan didn’t say where the PE alternative would be produced but he did say it wouldn’t utilize any of the existing extrusion capacity. He also said the company has budgeted $15 million for capital expenditures in 2014.

Trex has manufacturing facilities in Winchester and Fernley, Nev., as well as a dormant 200,000-square-foot facility in Olive Branch, Miss., where the company suspended operations of two extrusion lines in 2007.

Trex will slowly ramp up production of its raw material over a 36- to 48-month period. The company also will continue to be one of the largest buyers of recycled PE, added James Cline, chief financial officer.

“We sell off a significant portion of that polyethylene,” he said. “Some of that will be diverted and we will also be expanding our purchases.”

Going global

Trex has been expanding its reach, too, for its deck and rail products and it’s starting to show in their bottom line. The company had one of the best fourth quarters in its 20-year history.

Trex posted net sales of $63.8 million in the last three months of 2013, which was a 38 percent increase over the same period in 2012. Net sales for 2013 totaled $343 million and that was up 11 percent compared to the previous year.

For the first quarter of 2014, Trex officials expect net sales of $115 million, which represents a gain of about 7 percent over last year’s quarter, and yearly sales growth is projected to be $40 million to $60 million.

“Our international presence is definitely a contributing factor but we also had distributors that we’ve added and other business lines going into 2014 within the U.S. economy,” said Bryan Fairbanks, Trex’s executive director of supply chain and international business development, in a telephone interview.

Overall, Trex is stocked in 6,700 locations, including both The Home Depot and Lowe’s Home Improvement, and many lumber yards. Then, there’s the growing presence in Europe, Australia, Asia and the Middle East.  The deck maker began doing business overseas in earnest in early 2011, starting with Europe and Australia.

“Our primary focus was to look for countries where there was a sizeable economy, a general awareness of composites and its benefits, and where we could capture market share over local materials like the natural hardwoods and some of the locally produced composites,” Fairbanks said.

Trex lined up distribution partners that emphasize eco-friendly, high-performance products and would put a focus on its premium Transcend collection.

The Transcend cap-deck board launched in 2010 and tops a trio of collections that the company describes as good, better and best to simplify prices and performance for consumers. The Select line is the most affordable at about $2.20 a linear foot, the Enhance line is the mid-point offering at about $2.50 a linear foot while Transcend sells for $3.25 to $3.80 a linear foot for decks.

Fairbanks said Trex is working hard to improve its brand recognition abroad and educate shoppers about its products made of reclaimed wood from flooring manufacturers, cabinet makers and lumber mills and reclaimed polyethylene from grocery store bags, newspaper sleeve, and the stretch wrap used around pallets.

“Composite decking in general had earned a reputation for looking fake or having problems with maintenance,” Fairbanks said. “These attributes aren’t true of the Trex product. We offer high-performance, low-maintenance beautiful materials for the homeowner. Getting it in front of them, having the right partnerships with distributors and their resellers, to show the product to consumers and explain to them why Trex over wood or why Trex over other locally produced composites is very important.”

Stock split coming

The plan seems to be working. Trex market share increased from 30 percent in 2008 to 37 percent in 2011, according to a March 2013 company presentation. And, in the Feb. 24 earnings call, Kaplan said the company has 91 new dealers with some abandoning Trex competitors or reducing their purchases from them.

Kaplan also announced a 2-for-1 stock split that day and Trex hit an all-time high price of $86.85 per share, but recently has been trading at closer to $74 per share.

The plans to cater to a new industry fed the frenzy on Wall Street, said Morris Ajzenman, a senior research analyst at Griffin Securities in New York.

“That’s why the stock ultimately popped from $70 to like $85 but they gave it all back,” Ajzenman said. “The stock ran up on the potentiality that it could be another growth area for the company to sell their recycled PE and recycled wood fiber into another industry using the same technology. People bought into that.”

Trex has a lot of excess capacity excluding the idled plant, Ajzenman added. He expects it will take a while before the effort to gain market abroad factors into production and sales figures.

“It’s very early stages,” Ajzenman said. “Expanding overseas will probably take three or four years before it has a meaningful impact on revenue or profitability.”

Still, he said he thinks $40 million to $60 million in sales growth is possible, noting that Trex doesn’t give much guidance “but when they do it’s usually in the ballpark.

“Their market share is probably pushing close to 40 percent at this point,” Ajzenman said. “That’s my best guess and it will continue to rise.”

Trex’s stock split is scheduled for May 7 and all shareholders at the close of business on April 7 are eligible.

The company also plans to repurchase $50 million of its outstanding common stock in 2014 after completing a $25 million share repurchase in the third quarter of 2013.

Also in that quarter, Trex saw an increase in claims related to a 2009 class-action lawsuit about deck surfaces flaking apparently caused by the use of a “suspect material” at its Nevada facility prior to 2007.

The elevated claims activity was attributed to a Trex letter going out to 10,000 customers about flaking. The number of unresolved claims rose from 4,073 at the end of 2012 to 4,249 in late 2013 with an average settlement cost of $2,265.

Trex was founded in 1996 through the buyout of Mobil Oil Co.’s composite product division.