The first phase of production line improvements for composite decking maker Trex Co. is expected to increase throughput at its facility in Winchester, Va., where it is based, by more than 20 percent in 2019.
Even though the company is "still working through opportunities" related to the expanded capacity, company officials said they will accelerate a similar second phase of what it called a "throughput enhancement project."
"As a result we will be expanding our capital spent in 2018 to $30 million to $35 million," Trex President and CEO Jim Cline told investment bankers during an after-hours quarterly conference call Oct. 29.
So far in 2018, Trex's capital spending has totaled $22 million with $13 million for general plant cost-reduction initiatives and production improvements and $6 million "for certain internet domain related investments," Chief Financial Officer Bryan Fairbanks said.
Although Trex is looking at some long lead times for installation of the second phase of equipment, several of those lines will be running in the first quarter.
"We're pretty excited about what it is going to do for us," Cline said. "It's really twofold. It gives us a better product and it will reduce cost, but more importantly it gives us additional throughput."
As far as a better product, Trex is introducing a second-generation decking called Transcend 2.0 for one of its brands.
"Basically what you see with that product is an improved aesthetic. It is not to be substitutable for the old Transcend monochromatic," Cline said, noting it will sell at the same price as the decking it is replacing.
For the third quarter, Trex saw record net sales of $166 million, which represents a 19 percent increase compared to the prior year. The growth would have been greater but Cline said the company took a one-time hit of $6 million to expand its stocking positions in residential sales channels.
"A portion of this charge is related to our announced strengthening of our distribution footprint in the central region," Cline said. "We would not incur a charge of this magnitude if we did not believe it carried a strong multi-year benefit to sales and earnings. In addition, we see this is a significant opportunity to expand our relationships with our residential business partners. We expect growth from these expanded relationships to begin being realized in the second quarter of 2019."
The residential sector accounted for 83 percent of sales in the first nine months of 2018, Cline said.
For the third quarter, sales of Trex Residential Products were up 12 percent to $147 million from organic growth, while sales of Trex Commercial Products, which includes ornamental rail systems, generated $19 million.
"We continue to benefit from ongoing manufacturing cost saving initiatives, higher utilization and lower recycled polyethylene input cost. Each of these benefits accounts for approximately a third of the improvement," Fairbanks said.
Trex didn't lower its polyethylene costs solely through negotiations, he added.
"It's going out and finding different sources of material that may not necessarily be in the recycling stream and, through our technology, the know-how to be able to introduce it into our systems," Fairbanks said.
Trex posted a quarterly profit of $29 million with the CFO attributing about two-thirds of the growth to stronger operating performance and the remainder to a lower tax rate.
Overall sales for the first nine months of 2018 hit $544 million, which is up 23 percent compared to last year.
In 2019, Trex will be focused on going after a greater portion of the wood decking market, according to Cline.
"With approximately 8 percent of the lineal feet sold in North America, residential decking and railing market, Trex clearly has a significant runway for continued growth," he said.
To that end, Trex picks up a new distributor on Dec. 1 with the addition of Minnesota-based Midwest Lumber, which should broaden its reach into that state as well as parts of North Dakota, South Dakota, Nebraska, Iowa and Wisconsin.
