Harriet Fried - LHA, Investor Relations Ron Kaplan - Chairman, President and CEO Jim Cline - Senior Vice President and CFO Brad McDonald - Controller Brian Bertaux - Director, Financial Planning and Analysis.

Keith Hughes - SunTrust Trey Grooms - Stephens Inc. Jack Kasprzak - BB&T John Baugh - Stifel Alex Rygiel - FBR Morris Ajzenman - Griffin Securities.

Good morning. And welcome to the Trex Quarter Two 2014 Earnings 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, August 4, 2014.

I would now like to turn the conference over to Harriet Fried. 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.

The company issued a press release this morning containing financial results for the second 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.

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 these risks and uncertainties, please see the company’s most recent Form 10-K and Form 10-Qs, as well as its '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'd like to turn the call over to Ron Kaplan.

Ron?.

Good morning. It was a good quarter for Trex. Our second quarter sales were up 23%, considering a relatively flat composite market demand increase of 12% for our trailing 12 months sales indicates an increasing market share due to superior execution.

For 2014 we position Trex with product, distribution, branding and pricing strategies to optimize our market share potential. All of those strategies contributed to our robust sales. Our financial performance has been just as strong. For the quarter, underlying EBITDA was up 47% over last year. Year-to-date, it is up 14%.

We are completing the implementation of three major cost reduction initiatives plan for 2014, each of these projects will lower the manufacturing cost of our core products starting in Q3. In July, we won an American business or Stevie Award for Marketing Campaign of the Year. The award recognized our Engineered Artistry Campaign.

That campaign has garnered millions of media impressions and driven hundreds of thousands of consumers to our website. Supporting our decking and railing market share advancement initiatives, we expanded distribution in all channels this year. The transition period for one took longer than expected, that transition is now complete.

This channel will be more influential on our sales moving forward. Earlier this year we announced our entry into a new industry that leverages two of our core strengths, recycling and extrusion.

Over the last eight years, Trex developed a process that converts a wide variety of recycle polyethylene into a pellet that we use in a manufacture of our decking and railing. We have purchased more recycle polyethylene than we need and sold the access.

We are now converting that excess into a pellet that partially displaces virgin and off-spec resin in a manufacturer of plastic bags, film and sheets. The net result is that OEMs lower their cost of goods sold and Trex increases its profitability.

Trex has a competitive advantage, because of our extensive experience in the procurement and proprietary manufacturing and processes related to recycled polyethylene. Those competitive advantages provide Trex a unique opportunity to manufacture a product with strong financial performance.

Our entry into this new market is proceeding as planned and we have authorized the procurement of long lead time equipment for three additional production lines, these line will be completed in the first half of 2015. We expect our new commercial product sales will grow to $50 million to $80 million annually over the next three to four years.

I anticipated EBITDA margin is expected to at least equal our 2014 EBITDA margin. To support the commercial sales growth and our ongoing business requirements, we expect annual capital spending to approximate $20 million beginning in 2014. During the second quarter, we completed the $50 million share repurchase program authorized by our Board.

We do not anticipate further repurchases this year because of the new business expansion. Inbound orders have remained strong through the quarters so far. Accordingly, we are forecasting sales of $92 million for Q3, a 27% year-over-year increase.

Jim?.

Thank you, Ron. Good morning. As you know, the press release with the Trex Company’s second quarter financial results was issued this morning. For the second quarter the company recognized net sales of $121 million, a 23% increase compared to 2013.

The increase in net sales is primarily driven by higher sales volume due to pent-up demand caused by the whether related late start to the deck building season and our successful market share growth initiatives including dealer conversions. Pretax income was $24 million or 83% greater than the second quarter of 2013.

The company recorded net income of $15 million or $0.46 per share in the second quarter of 2014, compared to net income of $13 million or $0.38 per share in 2013. The company exited the tax valuation allowance at the end of 2013 resulting in a return to a normal tax rate in 2014. This reduced second quarter earnings by $0.27 per share.

Gross margin was 37.1% in the second quarter of 2014, a 40-basis point reduction from 2013. The decrease in gross margin was primarily the result of our 2014 pricing strategy. We reduced pricing on two of our decking product lines in support of our market share growth strategy. This was partially offset by favorable manufacturing efficiencies.

SG&A for the quarter was $20 million compared to $23 million in 2013. The decrease was primarily related to branding, personnel expenses and a non-recurring charge in 2013 related to the mold class action. The decrease in branding reflects a more efficient branding strategy, coupled with timing.

Net sales were $222 million for the first six months of 2014, 7.6% increase compared to 2013. The 2014 sales were positively influenced by strong demand from both new and existing distributors and dealers. Gross margin at 37.5% was 70 basis points lower than 2013.

The key drivers were consistent with those previously communicated for the second quarter. SG&A expense was lower than 2013 by $4.6 million due to reduced legal, branding and incentive compensation expense. Pretax income was $44 million, 25% increase over last year’s result. Net income of $27 million was 21% lower than 2013.

Earnings per share was $0.82, $0.18 per share lower than 2013. The return to a normal tax rate reduced 2014 year-to-date earnings per share by approximately $0.49. During the second quarter, we completed a share repurchase program of $50 million providing further return of capital to our shareholders.

In the last 12 months, our cumulative share repurchases have totaled $75 million. We generated $6.6 million of free cash flow in the first six months of 2014 compared to $18.3 million in 2013. The $11.7 million variance was due primarily to significantly higher income taxes in 2014.

Our inventory was $20 million -- $21 million at June 30, 2014, $6 million year-over-year increase. We carried a higher level of inventory into the third quarter in anticipation of strong demand. Capital expenditures for the first six months of 2014 were $4.9 million, which is comparable for the prior year.

Capital expenditures in 2014 were related to the new poly processing line to support our entry into commercial business application, process and productivity improvement and certain upgrades through our existing production line. At June 30, 2014, borrowing on our revolving line of credit was $35 million.

Claims under our mold class action were required to be submitted during the quarter. Based on the number of claims submitted and the estimated cost per claim, our maximum estimated cost was reduced from $10 million to $3 million. Finally, I’d like to turn to our revenue guidance.

Our guidance for the third quarter sales was $92 million, an increase of 27% over 2013. As season has enfolded, we have seen indication that the market growth for 2014 will only be flat-to-low single digit.

Our order demand early in the third quarter has been strong with every indication that seasonal peak which historically has occurred in the middle of June has extended to the middle of July.

Strong momentum that we have seen in the past four months reflects the positive reaction to our products in the marketplace, as well as a successful conversion of dealers and consumers. This level of sales growth reflects the continued expansion of our market share.

We expect our third party -- third quarter gross margin to be up modestly compared to the prior year and that SG&A expenses will increase compared to the third quarter of 2013 as a result of the timing of our branding spent. Operator, we would now like to open the call up for questions after which Ron will provide his closing statement..

(Operator Instructions) The first question will come from Keith Hughes with SunTrust. Please go ahead with your question..

Thank you. First, your commentary on the $60 million to $80 million from the plastic business, I believe you said three or so years.

How is that going to ramp five years? If you could give us any kind of rough view there?.

Relatively evenly. It will be a relatively slow start as we only have the one production line-up but as we start to kick in the new lines next year, it would be relatively even from that period..

Production lines, you have a relatively long lead time..

And to be clear, that would be a -- it would be a run rate of $50 million to $80 million business three or so years from now, is that correct?.

Correct..

Okay. Second question, on the gross margin, you had said it would be up, I guess, modestly from the third quarter.

What kind of production rates do you plan to be running in the third quarter versus the prior year?.

They will certainly be higher..

Okay. I would normally think it would be -- if you were running higher production, you would be getting higher gross margins.

Is there something else going on in the quarter that would be an offset to that?.

Well, I will tell you that our productivity continues to increase, but productivity increases by definition, utilization goes down. And just as a reminder we did make reference earlier to the pricing actions we took earlier in the year, we believe they will be slightly more impactful in the third quarter..

Okay. Thank you..

Our next question will come from Trey Grooms with Stephens Inc. Please go ahead with your question. Trey, your line is open..

Sorry, I was on mute. Sorry about that. So you guys pointed out three cost reduction initiatives.

Ron, could you maybe go into a little bit more color about that? I think you said it's going to start impacting 3Q, kind of, a little bit more detail on what's behind those initiatives and what the potential savings could look like?.

Well, Trey, I’d love to give you an exhaustive answer, but I can see that I’ve got competitors listening to this phone call. It is part of our vertical integration strategy, relatively little CapEx is involved and involves mainly changes to our process and procedures. It has been reflective of the innovative use to our engineers.

So Trey, it’s sort of a superficial answer, I know that, but as far as I can get into without competitive information..

I guess, just kind of following on to that, it's going to start impacting 3Q. But 3Q is only expected to be up slightly year-over-year, and you're going to have a little bit higher utilization rates. So I'm assuming that the impact in 3Q is going to be minimal from these three initiatives.

And going forward, it would be more of an impact?.

Yeah. Trey, we see that occurring throughout the quarter. So we get a little bit of boost to it, but if you recall, this is a quarter when your sales are higher in the beginning of the quarter and it ramps down. So you get less benefit throughout the quarter.

Also just again a reference to the cost or price reduction that we put in place earlier this year, we see that in season certain areas are being impacted more by the price reduction. And we believe the third quarter timing will be a little bit greater than what we saw in the second..

Got you. And then, I guess, my follow-up would be on the timing of these products that you're talking about with the price actions earlier in the year. Is that something where looking out over the next couple of quarters or into next year, I think earlier you had mentioned the 45% kind of incremental margin was the way to think about it.

And given the timing of the new products -- or not the new products, excuse me, but the new pricing and how that's rolled out, is that still your anticipation?.

Yeah. Trey, I think for the second half an average of 45 is there. Certainly it will be lumpy by quarter, based on the guidance we’ve just given you. For next year, we'd anticipate 45 still be the proper number to use..

Great. Thanks a lot. I'll pass it on from here and good luck. Thanks..

Thank you..

Thank you..

Our next question will come from Jack Kasprzak with BB&T. Please go ahead with your question..

Thanks. Good morning, everyone.

The first question is with regard to your Q3 guidance of $92 million, is there any impact or benefit from the new pellet business in that number?.

There is some but it is minimal..

Is that -- I think previously you guys had said the first line will be at full production in the beginning of Q4.

Is that still the case?.

Yeah. I would say, that will be in full production, recognized us, the analogy I use like, when you buy a new car -- when you buy a new car you don't drive it off the parking lot at 100 miles an hour, you break it in slowly. This is very similar to what we did when we launch Transcend.

We started out, we think big, we started small and we ramp up as quickly as we can. And so we don’t want any quality issues. So we’re operating the equipment much less than full steam or full capacity. But with each passing week, those numbers head north. But it would be a while before it's fully hitting its stride..

Okay. Great. The second question is on your first quarter call, I think you'd said that $40 million to $60 million of sales from three new distribution agreements you got late last year would be somewhat softer than you had thought than the $40 million to $60 million.

Has there been any change in that as the season has gone on?.

Well there's been no change versus the further modification I made, I guess, one or two quarters ago. I did make reference in this commentary that one of our -- it was actually four distribution channels, one of the four got a slow start. They’ve come up to speed and we expect that to be fully contributory in our next season.

So I don’t have anything further to say..

Okay. Thank you, Ron..

Operator?.

The next question will come from John Baugh with Stifel..

Good morning. Thank you.

Ron, I was wondering if you would comment on what you're seeing in terms of mix of deck board sales year-to-date with the pricing actions you took on the various product line? And then, comment as well on whether railing, any of the non-deck boards business is contributing?.

Well, the railing is holding steady as a percentage of our total sales. There have been no particular surprises in terms of mix. The bread-and-butter product line still continues to be Transcend. Though, we’re quite pleased with the way that it worked out.

There's been no cannibalization, which I think is what your concern might be, of our higher end products..

Great. And then…..

Transcend is still the mule, so to speak..

Okay. And do we -- it's a slight inventory build, certainly in dollars, it's not a lot. I'm curious as for the composition of that.

Is that plastics? Is that finished goods? I mean, do you build some inventory in plastics going forward versus history?.

Yeah. Its not plastic inventory, it is confined basically to finished goods. There is a raw material component of it, but we saw based on the incoming demand that early in the quarter the demand was going to be quite strong and we wanted to be able service that properly as we launched into the quarter..

As you guys know, we can control inventory as much little as we want to. So it represented our outlook on the market. We have managed the balanced very carefully and we can squeeze that inventory down to virtually nothing, should we so desire and I think we are well-equipped to serve the market right now..

Right.

And Ron, I know it’s early but the fourth quarter you -- last year you got some of the new distributor business and I’m wondering how you can size that up comparing this year -- year-over-year?.

Well, at this point, I don’t see any real changes to our program. Of course, I wanted to make sure, I told the distributor what the program is before we announced it to the public, but I am looking for a robust finish to the year..

Right. Thank you. Good luck..

Thank you..

Thanks..

Your next question will come from Alex Rygiel with FBR. Please go ahead with your question..

Thank you, and good morning, gentlemen..

Good morning..

Can you expand a little more on the new polyethylene product? First off, any chance you could quantify the sales in the current quarter? Secondly, could you quantify the number of customers today and possibly longer term over the next two years, this is a product that you are shipping to one or two or the product that you are shipping to dozens? And then lastly, could you be a little more specific on the capital investment program? I know you have mentioned your CapEx should be around $20 million for the next couple of years, but I wasn’t sure, if that was for the total company or for just the four lines?.

Of that $20 million was for the total company. So I think you are looking at incremental about $5 million. This was for the current forecast. In terms of the customers we are shipping to, right now there are proximately 10 customers, 10 end users that are using our products. We sell to both brokers and we sells from directly. That number will expand.

There are probably 500 or 600 potential customers. Right now we are serving about 10. We will not forecast our sales by quarter.

If I hit most of your questions or there were couple one answered?.

You did. That was helpful. Thank you very much..

Thank you..

The next question will come from Morris Ajzenman with Griffin Securities. Please go ahead with your question..

Good morning, guys..

Good morning, Morris..

I have a question on the macro here.

You talked by the industry be kind of a flattish trends? I guess most recently below past 12 months? I am just trying to get a better handle on, we understand the new and existence in housing market has weaken over the past year over some time period? But, I guess, the problem with your sales is to existing housing market.

I am just trying to get feel follow up on that, employment improving, consumer confidence efficiently improving, what is it on the industry level? Clearly, not for you, because you’ve gone into share, but if the industry was to pick up that could help? What is it that you can kind of pinpoint the sort of sluggish sales for the industry in this current environment and how do you think that plays out in the next few quarters?.

I think, certainly, the slow start for the season does impact the overall sales. We have looked at this, Morris, in talking with key retail point and everyone we have touched pretty much points to a fairly flat market, not only for wood plastic composite but also for pressure treated..

Good news, bad news. Bad news is we wish everything had a tailwind to it, the good news is, we can only imagine the extraordinary leverage that will occur when -- if and when the tailwind does occur.

But in the meantime Trex’s basic philosophy is that we don’t wait for an economic uplift, we make our own future and we are achieving great deal of success doing that. So we look at a combination of housing prices, existing sale -- sale of existing homes.

Remember, only 5% to 10% of our sales go into new home construction, remainder repair, remodeling. So we have got more points of sale and existing point of sale are selling more to the customers that walk through the front door. So we are not economist but we do see there are number of trends.

They are generally ahead at north but they are doing it in fits and starts..

Thank you..

That’s the best I can do for you, Morris..

Thanks..

At this time, I would like to turn the conference back over to management for any closing remarks..

Well, first of all, I would like to thank everybody for joining us today and I particularly like to thank the Trex team. This is in my experience more switched on, high energy innovative team in the building industry and I am proud to be associated with them and they are the key to our success.

So, thanks everybody for what you do and that concludes the call. Thank you..

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