Net sales for Trex Co. Inc. set another record — up 11 percent to $351.6 million — for the first nine months of 2015, and company officials expect to stay on that double-digit growth track as composite wood decks take share from pressurized lumber.
The Winchester, Va.-based company is expanding manufacturing operations with $15.4 million in investments at two sites, and it is rolling out specialty products to boost demand for its new recycled polyethylene pellets, which grew at a slower rate than projected for applications, such as bags, bins, totes, and rigid and flexible tubing.
Coupled with the drop in virgin PE prices, which fell from about $1.09 a pound in September 2014 to 65-70 cents this year by the company's calculations, Trex is turning to blending its PE pellets with other recycled materials, such as rubber, and virgin materials.
“A few months ago we identified an opportunity to start blending other polymers with our recycled pellets making it more a unique product, a more specialty product, and enabling us to potentially move into a higher margin product,” Trex Vice President and Chief Financial Officer Bryan Fairbanks told analysts Oct. 27 during a quarterly conference call. “We believe that opportunity exists. We have interest from a number of companies and we're beginning to run trials on that, which will expand our product offering to differentiated products.”
Trex completed four pellet lines in the first half of the year at a cost of about $6 million and recently launched a public relations campaign to generate enough demand to run them all in 2016.
“We are continuing to enhance our capabilities and will begin to utilize our compounding expertise to combine our recycled pellets with other polymers,” President and CEO Jim Cline said. “This will provide a greater added value to our product offering.”
During the third quarter, Trex also took back $1.1 million of decking material produced in prior periods because Fairbanks said it “didn't meet our heightened aesthetics standards.
“In response to this we adjusted our plant operating parameters to meet the higher standard, which resulted in slightly lower operational efficiency during the quarter,” he added. “These inefficiencies have been resolved and won't carry over to future periods.”
The aesthetic problem affected the Transcend tropical line and was caught before products hit the consumer level — unlike flaking issues related to material produced at Trex's Nevada plant prior to 2007. Warranty payments for the flaking have come to $7.8 million so far this year, which Fairbanks said is down $1.4 million compared to the first nine months of 2014.
Trex also has undertaken several growth initiatives, such as expanding its sales team and manufacturing operations with a $12.3 million investment in Winchester and $3.1 million in surrounding Frederick County. And, it is leasing space in the county for a training facility — 89 new jobs will be created in coming years — as well as a plastics recycling center and distribution center for deck railing.
“We just announced the consolidation of our railing and poly-warehousing operations as well as a new Trex university for training into two new leased facilities in the Winchester area,” Cline said. “These two new facilities will provide us with the ability to more efficiently meet the demand of our markets.”
The railing warehouse will open in December and the poly-warehouse in mid-2016, Cline added.
Price increase
In addition, Trex is raising the price of its monochromatic colored decking by 6 percent. The reduced PE prices aren't driving retail prices down for the company or its competitors.
“I believe in the last several years there have been very few price increases,” Fairbanks said. “I think it's a point in time when competitors are using that to strengthen their margins back.”
Overseas, Trex has a presence in more than 45 countries and the company's international sales are reaching a point where they will be disclosed. For now, the company is focused on the United Kingdom, France, Germany and some Scandinavian countries.
“If you look at the overall world-wide market, about half of the composite decking sales are outside North America, and when you break that apart from there, about 50 to 60 percent falls within continental Europe,” Fairbank said.
Trex's big opportunity though will come from dealers and customers making the switch from pressure-treated lumber to wood-plastic composites. Hints of the conversion started last year, Fairbanks said, and he expects the trend to continue throughout the U.S. and not just the northeast, where the company added distributors.
“We're pretty excited about the growth we've seen and where we're growing compared to our competitors,” the CFO said. “We have outstanding products .... and we're being rewarded for putting those good products on the market.”
For the fourth quarter, Cline said he expects net sales of about $85 million, which represents a 15 percent increase over the prior-year period.
“This will also set a new company record for annual revenue at approximately $437 million and 11 percent growth over fiscal year 2014,” Cline said.
The company has strong free cash-flow generation, the CEO added, which enabled it to purchase a total of $120 million shares since 2013. Cline announced that the Board of Directors approved a new 3.15 million share repurchase program.
