Trex Co. Inc. posted an 11th straight quarter of record sales thanks to a strong remodeling market, the growing acceptance of composite wood decking, and on-going production plant efficiencies.
Second-quarter sales increased 31 percent to $207 million compared to a year ago with residential decking making up about $189 million of the total and commercial railing about $17 million. Net profit was $43 million.
The Winchester, Va.-based company diversified its end markets last year with the acquisition of decorative railing maker Stadium Consolidation LLC.
Trex also has been targeting the wood decking market for three years and touting the maintenance and performance advantages of composites in general and the company's brand in particular.
Made of reclaimed wood fibers and recycled polyethylene film, mostly from shopping bags, Trex decking should look good for a long time with little effort. The company says it ultimately costs less than wood over the life of the product because it requires no sanding and sealing, no chemical treatment against rot and insects, and its resists moisture, fading and surface staining.
With annual sales of $565.2 million in 2017, Trex ranks seventh among North American pipe, profile and tubing extruders, according to Plastics News data.
About 83 percent of Trex decking goes to the residential repair-and-replace market, which CEO Jim Cline said in a July 30 conference call is expected to increase in the high-single digits – 7.1 percent by one estimate -- for 2018. Higher lumber prices for cedar and redwood also is improving Trex's value proposition in the west.
Wood still dominates the decking space but composite products are taking share. Cline says every 1 percent gain is equivalent to about $50 million. Between 2014 and 2016, composites picked up a point in a market estimated to be 17 percent composite and 83 percent wood. The gain seems to have accelerated.
“Given the strong demand that we're seeing, we expect the 2018 data will show conversion from wood, increasing by 1 percentage point in a single year, a milestone that took two years to achieve in prior years,” Cline said. “The third-party data will not be available until mid-next year so we'll have to wait a bit for the independent statistics.”
A lot of the composite decking market gains have gone to Trex, which increased its share from 36 percent in 2012 to 45 percent in 2016, according to a June investor presentation.
Trex's bottom line also has benefited from lower PE material costs “due in large part to product substitutions along with manufacturing efficiencies and higher capacity utilization,” CFO Bryan Fairbanks said.
“The benefits were partially offset with additional expenses related to the improvements to our production lines that are underway to significantly increase throughput, increased product innovation costs and higher freight costs,” Fairbanks added.
Capital expenditures for the first half of the year were $18 million, primarily for cost-reduction initiatives and production improvements. Trex is undertaking “a step change” in its manufacturing process for deck boards, according to Fairbanks.
“In the first quarter of 2018, we began to implement production line enhancements and we will complete this phase by the end of this year,” he said. “This retrofit not only provides an expansion of our decking capacity, but will drive further utilization cost savings in the future. This is the type of high return and high impact initiative that our operations and R&D teams are focused on.”
In addition to “higher throughput projects,” the team has been working on “product development trials” at manufacturing plants, Fairbanks said. And, along with the material sourcing team, the research and development staff is trying out “alternative streams” that could lower production costs, the CFO added.
The positive momentum should continue, according to Cline, who said he expects consolidated sales of $173 million in the third quarter, which represents a 23 percent increase from 2017.
“Outdoor living remains an important growth category that aligns with lifestyle trends and adds value to the home,” Cline said.