Harriet C. Fried - SVP - New York Office Ronald W. Kaplan - Chairman, President, and CEO James E. Cline - SVP and CFO William R. Gupp - Chief Administrative Officer, General Counsel and Secretary.

Trey Grooms - Stephens Inc. John Kasprzak, Jr. - BB&T Capital Markets Keith Hughes - SunTrust Robinson Humphrey John Baugh, Jr. - Stifel, Nicolaus & Company Alex Rygiel - FBR Capital Markets & Co. Morris Ajzenman - Griffin Securities Equity Research Kenneth Smith - Lenox Equity Research Catherine Kavanaugh - Plastics News.

Welcome to the Trex First Quarter 2014 Conference Call. At this time, all participants are in a listen-only mode. Following management's prepared remarks, we will hold a Q&A session. (Operator Instructions). As a reminder, this conference is being recorded today, Monday, May 5, 2014. I would now like to turn the conference over to Harriet Fried of LHA.

Please go ahead..

Thank you, everyone, for joining us today. With us on the call are Ron Kaplan, Chairman, President and Chief Executive Officer; and Jim Cline, Senior Vice President and Chief Financial Officer.

Joining Ron and Jim are Brad McDonald, Controller; Brian Bertaux, Director of Financial Planning and Analysis; and Bill Gupp, Chief Administrative Officer, General Counsel, and Secretary. The company issued a press release this morning containing financial results for the first quarter of 2014.

This release is available on the company's website as well as on various financial websites. The call is also being webcast on the Investor Relations page of the company's website, where it will be available for 30 days. I'd now like to turn the call over to Bill Gupp.

Bill?.

Thank you, Harriet. Before we begin, let me remind everyone that statements on this call regarding the company's expected future performance and condition constitute forward-looking statements within the meaning of federal securities law.

These statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those expressed in the forward-looking statements. For a discussion of such risks and uncertainties, please see our most recent Form 10-K and Form 10-Qs as well as our '33 and other '34 Act filings with the SEC.

The company expressly disclaims any obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise. With that introduction, I'll turn the call over to Ron Kaplan..

Good morning. In Q4 2013, sales were $14 million higher than we had forecasted due in part to increased market share. In Q1 2014, sales were $15 million less than we forecasted due to extraordinary poor weather that impaired the building trades across most of the country.

New orders between February 24, our last earnings call, and March 31 were off 26% from the prior year. Since the beginning of April when the weather improved, that trend has reversed. Accordingly, we are forecasting sales of $125 million for Q2, a 27% increase year-over-year.

We believe the full year sales from new distribution channels will be somewhat softer than the $40 million to $60 million previously forecasted because of the late start to the season. We have been focused on advancing our industry-leading market share.

We have positioned our company in a marketplace with product, distribution, branding and pricing strategies that optimize our market share potential. We continue to be attentive to our commitment to product innovation. We just launched another new category Landscape Lighting that's a natural fit to outdoor living projects.

In March we were recognized with top honors in decking brand and greenest product categories by two distinguished Brand Survey and Reader's Choice Awards. This is a reflection of how we prosecute market share strategies. On the international front we were awarded a 4.3 mile boardwalk in Dubai. This boardwalk is part of an elaborate public, private.

It will expand the beachside of six residential communities. Trex was selected for the project because we had the best esthetics and performance features and the unrivaled ability to deliver on time. We also received our first orders from Belarus and India which brings our global presence now to 37 countries.

We recently finished one of three major R&D projects which will be completed this year. Each of these projects will significantly lower the manufacturing costs of our core products starting in Q3. I said in February that we would be entering a new industry that leverages the scope and depth of Trex's core competencies; recycling and extrusion.

Well, we've entered it. Our output is a unique solution for a competitive, polyethylene raw material alternative targeting various plastic manufacturing applications. These applications are not related to outdoor products but to an industry that is non-seasonal and noncyclical. The installation on the first line is complete and shipments have begun.

This project will be accretive to sales, earnings and EVA this year. Building the first production line to this new category was important for us. The line start up was smooth. The line will be at full production by the beginning of Q3 2014. We will then determine the number of lines that will be brought online through 2015.

I will now turn the call over to Jim..

Thank you, Ron. Good morning. As you know, the press release with the Trex Company's first quarter financial results was issued this morning. The company recognized net sales of $101 million in the first quarter of 2014, a 7% decrease compared to 2013. The decrease in net sales was primarily driven by lower sales volume.

The decrease was a result of strong demand from both new and existing dealers in late 2013 and unfavorable weather conditions in 2014 that delayed the start to the deck building season. The company recorded net income of $12 million or $0.73 per share in the first quarter of 2014 compared to net income of $22 million or $1.25 per share in 2013.

The primary reason for the shortfall is a return to a normal tax rate that depressed earnings by $0.43 per share and a reduction in sales volume partially offset by reduced SG&A expenses. The effective tax rate for the first quarter of 2014 and 2013 was 37.3% and 0.9% respectively.

The effective tax rate was substantially lower in 2013 due to the effect of a valuation allowance. Gross margin was 37.9% in the first quarter of 2014, a 90 basis point reduction from 2013. The decrease in gross margin was primarily the result of lower sales and revised pricing strategy, partially offset by favorable manufacturing efficiencies.

SG&A was $18 million compared to $20 million in 2013. The decrease was primarily related to branding and personnel expenses. The decrease in branding is related to timing of our branding spend which will be realized later in the year.

This reduction in spending was partially offset by $600,000 charge in 2014 related to our sublet office space in Dulles, Virginia. Our free cash outflow for the first quarter was $85 million compared to an outflow of $68 million in 2013.

The $17 million variance in free cash flow was due primarily to increased inventory and reduced earnings compared to the 2013 quarter. Inventory was $13 million at March 31, 2014, a $15 million year-over-year increase. We carried a higher level of inventory into the second quarter in anticipation of strong demand early in the second quarter.

Capital expenditures for the first quarter of 2014 were 3.2 million, a $1.3 million increase compared to the prior year. At March 31, 2014, the borrowing on our revolving line of credit was $80 million. Our net to debt is currently about $40 million representing significant collections on the $116 million of accounts receivable at the end of March.

Finally, I would like to turn to the revenue guidance. Our guidance for the second quarter is for sales of $125 million, an increase of 27% over 2013. We plan to reduce production in the second quarter to bring inventory down to a more normalized level.

Operator, we would now like to open the call up for questions after which Ron will provide his closing statement..

(Operator Instructions). Your first question is from the line of Trey Grooms with Stephens..

Hi, Trey..

Ron, the update on the sales guidance range for new distribution you mentioned to be somewhat softer than the 40 million to 60 million you were initially looking for due to the slow start.

So what would that new range be? How should we be thinking about that new kind of 2014 range given what you mentioned there?.

Well, it's too early in the season to be more specific. We worded it the way we saw it, so we're going to stick with the guidance that we have given and this will probably be the last time that we get specific about that particular segment of our business.

And we will revert back to our traditional forecasting method of one quarter sales guidance at a time. So, we think it was prudent to suggest that it would be somewhat softer due to the late start. That's the extent of our guidance on that matter..

Okay.

But just to be clear, within a range it's just that it could be softer than you guys initially had thought or is it that the range should be brought down, the entire range should be brought down, it should be lower than the initial range?.

I think what I said was the $40 million to $60 million maybe somewhat softer..

Okay, all right.

And then the pricing changes that you implemented this year, is that driving a more pronounced mix shift – I guess product mix shift that you would have expected or how should we be thinking about any impact on product mix…?.

It has worked out as expected so far. The Select product is largely taken over for the Accents product and so far so good in that regard..

Your next question is from the line of Jack Kasprzak with BB&T..

Thanks. Good morning, guys..

Hi. Good morning..

Can you update us where you are on the buyback activity in terms of what you did in Q1 if anything and what you have left on your authorization?.

Certainly. There were no shares repurchased in the first quarter and that means that we basically have $50 million available for repurchases that have been authorized by the Board..

Okay.

And with regard to your new product, do you have any additional customers to report or are we still working with the first initial customer?.

I mean our shipments just began last week. We're still filling in initial orders and we've got people in the wings for additional prospects, but right now we're filling the initial orders..

Yes, we do have several customers, Jack, that have placed interest on the demand as soon as we have it available, but as you can imagine the line was going into production just this past month so we have begun making shipments but they're very early in the process..

Your next question is from the line of Keith Hughes with SunTrust..

Thank you. Just in your comments that I believe you said you're going to be slowing production down in the second quarter given the inventory build.

Can you give us any kind of metrics of what production rates will look like in the second quarter versus prior year?.

The only metric I would point to is you know where our inventory was, you know what it is now, you know what our historical turnover rate has been, so those are in the metrics that we would provide and that we think that you can reverse engineer it and figure it out..

You referred in the first quarter gross margin was helped by manufacturing synergies.

Will we see more of those in the second quarter?.

Well, we certainly had manufacturing efficiencies that occurred in the first quarter. We expect that they will continue into the second. We are seeing a slight increase in raw material costs, so some of those savings will be slightly mitigated into second quarter based on what we've seen..

When you add this together – if you hit the sales guidance for the year, will we still see some pressure on gross margins as a result?.

I don't believe so..

Okay. Thank you..

Your next question is from the line of John Baugh with Stifel..

Thank you. Good morning. I was curious on the orders reversing, care to quantify that number? Number one.

And number two, as you look at the season and I know we've gotten off to a strange start, forgetting the market share gains, how do you think about the business organically and/or market share gains above and beyond what you've already anticipated or told us?.

Well, I think the market share gains are going to be the big announcement for the year. We've made those big announcements. So now it's up to the consumer and we won't know how that's happening until the end of the second quarter and we'll see what's actually come off the shelf.

But I don't anticipate adding new big distributors before the next buying season. I can tell you that orders in April and through the first couple of days of May, I'll stick with the adjective that we've already used that they have reversed so you can draw your conclusion from that..

Ron, any color on what a full line producing fallout for this new venture will be rough crude revenue range?.

We're looking at each other here. We've elected not to reveal that yet. The first line is running well. The first phase will be three to four lines. As I said in our previous call, it would expect that we'll have 36 to 48 months that it would be a very significant portion of Trex's overall sales and it will change the complexion of Trex.

We also have said this would be accretive to sales margins and EVA this year..

Your next question comes from the line of Alex Rygiel with FBR Capital Markets..

Thank you.

Could you expand a little bit more upon the Dubai boardwalk? What's the timing of shipments? How long will that last? And are there any other sizable sort of bids outstanding for projects such as this?.

I can tell you that it is a very sizable portion. I think that there will be a potential for follow-on orders. Potentially shipments will begin soon and will be completed this year. We seem to be quite popular in certain portions of the Middle East and there is aggressive building campaigns underway in that part of the world.

So we're quite pleased with what we've achieved so far. And the remainder of the year, we'll see shipments going out the front door..

Thank you..

Your next question comes from the line of Morris Ajzenman with Griffin Securities..

Good morning, guys..

Good morning, Morris..

Good morning, Morris..

A handful of years, Ron, and coming out of the previous downturn, we had mortgage rates come down dramatically and that clearly helped the new and more important existing housing market as it relates to you and clearly had benefited the industry by allowing more disposable income, lower interest rates, et cetera, et cetera.

About nine months ago or thereabouts whatever, the mortgage rates started rising again or has come in the low again. Have you seen either from your distributors or the actual consumer any sort of pullback based on what's been happening over the past three or four quarters? And just kind of comment on that if you've seen any changes whatsoever..

We haven't seen those kind of changes and we haven't heard that kind of talk from our distributors. We see that there has been pent-up demand as a result of the slow start in the season. That's been more readily apparent, but we've not gotten any feeling of a lack of robustness and underlying demand.

The major macroeconomic factors that we watch are generally pointed north have been for a while now..

Okay. On the new industry, I think you said last quarter and just refresh me, as we come towards the end of 2014 you'll give us more detail on that new industry.

Is that correct?.

I did say it and I think I just gave you more detail about it. Morris, I appreciate where you're coming from. We've got suppliers and customers listening to this phone call. There are people who want to buy what we've made and we've put on the Q and there are people who want to sell us raw material.

We need to be very judicious as I have been since I've had this job about competitive information. I know that's somewhat frustrating to you but I can tell you that we're in production, we're making shipments, we're making a profit. We've entered a new industry..

Your next question is from the line of Kenneth Smith with Lenox Equity Research..

Thanks. I wanted to ask further about the new distribution where you said sales of 40 million to 60 million might be a little softer this year.

Are those distributors – give some color on how those distributors feel about the product at this point, how their own installers, dealers are receiving the product, how it's actually selling through?.

We don't have any disappointing feedback from our new distributors about the acceptance of our products. There haven't been any pushback on quality, so there's nothing new to report there. They're happy with the decisions that they've made and it's a question of catching up after a slow start to the season..

Okay. Thanks..

(Operator Instructions). Your next question comes from the line of Keith Hughes with SunTrust..

A question along capital spending, do you anticipate any capital spending on the new products, machinery this year and/or next year?.

We do expect that spending will creep up next year. We think that this year the amount that we've guided to, the 15 million, is probably okay at this point..

But that could be higher next year if you put this capital to work.

Is that correct?.

That is correct..

Okay. Thank you..

Your next question is from the line of John Baugh with Stifel..

Just curious, Ronald, I think you had mentioned the slight increase in raw materials. Is there some market force there or are you having to buy more raw material in anticipation of this new commercial product or just any color on where you're seeing the raw material pressure? Thank you..

Well, it's a combination of the two things you just said that we are buying more and there is some upward pressure. PVC prices are rising as well. It doesn't affect us directly but it does affect our competitors. And so we're buying more and there is some more upward pressure. It's not major, but it is notable..

And then on brand spend for the calendar year, I know you said the timing, update us on roughly what your plans are there?.

It's going to roughly be in line with prior years. We could see that the season was going to be delayed, so we ran an advertising to an empty showroom. On the first part of the season when it was snowing, we decided to pushback our advertising that coincide with the better weather. So it will be restored. We're not backing off our aggressive program..

Thanks. Good luck..

Thank you..

Your next question comes from the line of Jack Kasprzak with BB&T..

Thanks. So on international sales you said you were up to 37 countries now and it seems like this is an area since you guys have come to Trex that's really changed and grown. I think when you came in it was de minimis, maybe two countries.

Can you tell us about what percent of sales or a range where international is? And should we be thinking about this in terms of a major untapped growth opportunity? I mean where could this be for Trex down the line, do you have any color there?.

It is something that's very important to me personally and I'm quite proud of what we've done and we'll be adding some resources to that program. We do expect it to be material. As time goes on – I'm not sure exactly how we define material; I'll let that though our CFO to define, but it is becoming important to us. It is important.

It's going to become increasingly important. We'll add resources to it and we do think it's a major opportunity as times goes on. We're careful in the way in which we approach it so as not to make margins vibrate by adding a lot of SG&A at once with the hopes that the sales come later. We're doing it in a very measured, balanced fashion.

So we have grown from two to 37 countries. That's a fact. I'm not really focused on expanding countries. We're focused on expanding the depth to which we're in those major countries. I hope that's sufficient..

Sure. Thank you, Ron..

Your next question is from the line of Catherine Kavanaugh with Plastics News..

Hi. Good morning.

I was just curious to whether you could say which of your manufacturing facilities is making the new product?.

The new product is presently being made in Winchester, Virginia..

Okay..

That maybe modified as time goes on, but that's where we're doing it now..

Okay.

And are there any plans to use the Mississippi facility again?.

We contemplate that. We haven't made any final decisions about that..

Thank you..

Your next question is from the line of Trey Grooms with Stephens..

Just one more here and I'm sorry if I missed this, but you guys are going to be bringing down inventory. There is some movement in raw materials and Jim, you had previously guided to kind of 45% incrementals this year.

Is that still how we should be thinking about that in the short run?.

Certainly as you bring inventories down that will challenge that 45%..

Right. And so I guess just in the near term, was that 45% more how to think about the entire year this year or – so in a quarterly rate you can see some movement there.

Is that the way to think about it?.

Certainly there would be volatility in the quarterly rates. That was intended to be an overall year rate..

Okay, got you. And on dealers, I know last quarter you gave us an update on how many dealers you guys had added in the quarter.

Is there anything to talk about there as far as in the first quarter or I guess since we spoke last?.

We have seen a good support from the dealers. We are just getting into the season. In fact there are some areas of the country where the season really hasn't broken an earnest. So until we see those dealers cycling their inventory, I don't think we'll have too much more to say about the dealer presence that we have..

Okay. Good luck, guys. Thanks..

Thank you..

Thank you..

There are no further questions at this time. I would like to turn the call back over to management for closing remarks..

Well, thank you everyone for joining us. Weather-wise, it was a slow start but we're making up ground fast. We launched new products, are building on our expanded global footprint and are geared up for a powerful branding campaign.

Before we close, I'd like to thank Paul Brunner who recently retired from our Board for his valuable insight and support during his tenure. We're looking forward to give you an update this summer when we host our second quarter earnings call. Take care. Thank you..

Ladies and gentlemen, that does conclude your conference call for today. We thank you for your participation and ask that you please disconnect your lines..