Jim Cline planned to retire in 2008 and do some consulting work on the side — a little boating, too — when he heard from a long-time colleague, Ron Kaplan, the very new president and CEO of Trex Co. Inc.
Kaplan had only been on the job for two days when he learned the composite wood deck maker had another problem on top of the lackluster product lineup, quality issues, manufacturing inefficiencies, and piles of surplus inventory.
The company also was facing bankruptcy. Despite good brand recognition, Trex had lost $80 million on sales of $329 million in 2007 and it was saddled with $134 million of debt. The high debt-to-earnings ratio violated bank covenants.
When creditors gave Kaplan a chance to right the sinking ship, he got a hold of Cline to serve as Trex's CFO. With help from others — barring four vice presidents who left and 30 salaried managers whose positions were eliminated — they got the company back on stable operational and financial ground.
Seven years later, it's Cline, 64, who's the new president and CEO. He succeeded Kaplan in August and the numbers tell a very different story of record-setting earnings. In 2014, Trex posted net sales of $392 million — up 14.3 percent from 2013 — and net profit was $41.5 million with no debt carried since 2012.
The streak has continued into 2015. With existing home sales on the rise and expected growth in the repair-and-remodel market, annual sales are projected to hit $437 million and operating profit $82 million.
Kaplan became CEO in January 2008 and after the debt woes came into full view he reached out to Cline to be CFO. Cline started attending board meetings in February.
“What I saw in the books was excessive inventories and receivables that were not being properly managed,” Cline said in a telephone interview. “I saw a company that was struggling in its manufacturing process. But it wasn't necessarily the numbers on the balance sheet that I focused on.”
Cline insisted on meeting people at all the different levels of Trex and found a good deal of mid-manager talent.
“They identified the problems and were concerned about them and they also talked about the solutions. And, I just saw dollar signs,” Cline said.
The signs pointed the way to chart a course for a comeback.
“I thought they know the solutions; they just don't know how to implement them. We can help them do that,” Cline said.
After his wife got on board with moving to Virginia near where Trex is based in Winchester, he took the job. He started in March 2008, first cleaning up the accounts receivables portfolio and looking at the so-called inventory of boards made of wood dust from flooring and cabinet makers and recycled polyethylene bags and film from retailers.
Trex's use of recycled PE over virgin PE gave it a competitive advantage. Production problems did not.
“Basically, they were manufacturing product in excess of their needs and they didn't have the quality of the product built into the manufacturing process,” Cline said. “They were inspecting it on the back end, which meant their yields were very low and you had a lot of scrap material sitting around. Some people thought you could use it. We looked and said you can't sell that. You need to grind it up and turn it back into raw material to manufacture decks. And, that's what we did with a large portion of the inventory.”
Putting operational controls into place and updating the product platform were on the front burner. So was a new factory bonus system to replace an incentive based on earnings per share.
“Most of the guys in the factory didn't know what EPS was and the once-a-year payment was so far removed from the activities they had performed there was no direct linkage,” Cline said.
By mid-2008, line workers could increase their income up to 15 percent by meeting goals for production costs and returns.
“I'm happy to say that over the years there haven't been many months they've missed achieving the bonuses,” Cline said. “They were driving the success of the company as we were early in the process and they benefitted directly from it. I think that's important.”
Cline worked in a fiber drum factory after graduating high school. A seasoned worker became his mentor in “how to work the system.” Cline said when he complained about a foreman assigning him an unpleasant job every week, the mentor told him he did the job better than anyone else. He offered two suggestions.
“I could either do a bad job the next time, or go to the foreman and ask if he could assign me the job every other week with the same good results and, during the off week, assign me to a job that had a high piece work bonus opportunity,” Cline recalled.
He chose the latter approach and the foreman agreed.
“There were a lot of politics on that factory floor that, without my mentor's advice, I never would have known,” Cline said. “The lessons I learned on that factory floor have proven as valuable to me over the years as my college education.”
Cline received his bachelor of science in business administration degree in accounting from Bowling Green State University. He spent the early years of his career with Huffy Corp., which manufactures lawn care and construction products. From 1994-2005, he served as vice president and controller of Harsco GasServ, where he met Kaplan. From 2005-07, he was president of the subsidiary of Harsco Corp. He considers the stint his first job in plastics. He oversaw a business unit that made ultra-lightweight, high-pressure vessels from aluminum cylinders wrapped with fiberglass or Kevlar fiber and impregnated with resins that provide strength.
Shell game changer
At Trex, the product platform got an infusion of innovation in 2010 with the launch of the Transcend deck line, which has an exclusive nine-element surface that protects against stains, scratches, mold, weather and foot traffic. Cline said that was a big piece of the turn-around puzzle.
“The product line was stale,” he said. “We hadn't kept up with what consumers were looking for, which was stain resistance, fade resistance and scratch resistance. We were able to provide all three of those with the Transcend technology. The technology is a dual-extruded board where you have a shell that's chemically and physically bonded to the core product.”
Clines said a look at the vast majority of the products on the market today shows competitors using similar shell technology.
Transcend won product awards and was seen as a bridge between the beauty of composite wood decks and the durability of PVC decks. The number of dealers carrying Trex products shot up with market share. At the same time, plant productivity increased and operational costs decreased.
In 2011, Trex regained financial stability. The debt was paid down substantially and the company ended the year with $41 million in cash. The focus switched to continued growth in sales, market share and profit.
Two new decking lines — Trex Select and Enhance — were rolled out in 2012 to give consumers good-better-best options of aesthetics and performance at different price points. New colors and railing were introduced, too, and licensing agreements put the Trex brand on outdoor furniture, pergola and later storage products.
Orders are up in all U.S. regions and the global footprint has grown. In 2008, Trex was in three countries. Today it's in 43 countries and 6,700 retail locations worldwide, including both Home Depot and Lowe's. Market share is up from 29 percent in 2008 to 40 percent of the wood-alternative market in North America.
Trex also has moved into specialty materials, producing and selling recycled PE pellets as a substitute for virgin PE and now also offering to blend them. Cline said Trex invented the technology to create the pellets for other manufacturers to save on costs and establish high recycled content in their products.
Three months into the CEO role, Cline said his first goal is to make sure the market and street recognize the talent at Trex.
“A lot of people were very heavily involved in the turnaround,” he said. “It's not one, two, three or four people driving the results. All employees are contributing. The depth of employee knowledge and experience is far beyond what I've seen in other organizations I've been involved with. Anyone who invests in Trex or any bankers can understand if something happened to Jim Cline tomorrow, someone else in the organization can step up and fill the role.”