Ron Kaplan – President & Chief Executive Officer Jim Cline – Senior Vice President & Chief Financial Officer Bill Gupp – Chief Administrative Officer & General Counsel Brad McDonald – Controller Brian Bertaux – Director of Financial Planning and Analysis Harriet Fried – LHA (IR).

Trey Grooms – Stephens, Inc. Keith Hughes – SunTrust Robinson Humphrey Jack Kasprzak – BB&T Capital Markets Glenn Wortman – Sidoti & Company John Baugh – Stifel, Nicolaus & Company Alex Rygiel – FBR Capital Markets.

Welcome to the Trex Q3 2014 Earnings Conference Call. (Operator instructions.) As a reminder, this conference is being recorded October 27, 2014. I would now like to turn the conference over to Harriet Fried of LHA. Please go ahead, ma’am..

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 Q3 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(q)s 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. Things have gone well since our last call. We set records in both sales and earnings for the quarter and year-to-date. These results reflected continued focus on our guiding principles for increasing shareholder wealth.

We have the best outdoor living products, unparalleled distribution, unmatched brand recognition, and lower cost structure. We have been executing in all of these areas – the numbers prove it. Despite a relatively soft market the demand for Trex products was strong through the quarter. This strong demand has continued through the month of October.

In 2014 we revamped our pricing strategy to ensure that we were optimally priced at retail across our good-better-best product platform. This balanced pricing strategy is contributing to our market share growth. We’re looking forward to next month’s Distributor Meeting where we will unveil our 2015 sales strategy.

We’re very excited about our strategy and believe the market will be very receptive to our programs. In September we expanded our distribution channels by entering the ecommerce marketplace with the launch of our outdoor lighting collection on Amazon.com.

Ecommerce opportunities like this provide additional awareness of Trex and will drive incremental sales opportunities in all of our channels. We’re also launching a new branding campaign in 2015 to not only generate increasing awareness of our products but to further influence the pricing decisions.

On a cost reduction side, in Q3 we began to realize the benefits from three cost reduction initiatives. The full impact will be realized in Q4. Turning now to our recent entry into commercial business applications, last quarter I described our new poly pellet initiative which leverages Trex’s core recycling and extrusion strengths.

We are one of the nation’s largest buyers of recycled polyethylene film. Providing processed pellets to manufacturers of commercial products is an extension of what we already do in our decking operation and offers entry into a large, noncyclical market.

We have been continuing the ramp-up of our first manufacturing line and we’ll begin the build out of three additional lines through the first half of next year. We’ve now firmly established our skill at bringing new technologies to the market profitably. Since the end of Q3 inbound orders have remained strong.

Accordingly we are forecasting sales of $70 million, a 10% year-over-year increase. We’re on track for record sales for the full year, close to $390 million or 13% more than our prior high set last year. Regarding our use of cash, our first priority will be to use our free cash flow to execute on the strategic initiatives I’ve just described today.

Our second priority is share repurchases. The Board has authorized an additional purchase of 2 million shares of our common stock. This authorization will position us to pursue opportunistic share buybacks to deliver further value to our shareholders. Folks, at the end of the day we measure our success based on winning.

We are proud of our winning streak over the last seven years and our growth in shareholder value bares witness to that.

Jim?.

Thank you, Ron, good morning. Our Q3 and year-to-date 2014 financial results reflect record sales and record earnings for the company. We recorded net income of $9 million or $0.28 per share in Q3 2014 compared to a net loss of $15 million or $0.45 per share in 2013.

We recorded net income of $36 million or $1.10 per share for the nine months period in 2014 compared to net income of $20 million or $0.56 per share in 2013. The company recognized $23 million of charges in Q3 2013 and $25 million for the nine-month period.

Both 2013 periods included a $20 million charge to the warranty reserve and other charges related to our corporate office sublet and the mold class action. In the following overview I will speak to the financial results on an underlying basis excluding these charges. For Q3 we recognized net sales of $96 million, a 29% increase compared to 2013.

We had strong order demand in Q3 reflecting stronger demand from our existing distributor and dealer network and our successful market share growth initiatives including dealer conversions. Gross margin improved 220 basis points to 31.8% in Q3 2014.

The increase in gross margin was primarily the result of favorable manufacturing efficiencies, capacity utilization and sales mix. This was partially offset by our 2014 pricing strategy in which we reduced pricing on two of our decking products. SG&A for the quarter was $16 million compared to $14 million in 2013.

The increase was primarily related to branding. The increase in branding reflects timing due to a late start to the decking season. As a percentage of net sales SG&A expenses decreased to 17% in the quarter from 19% in 2013. Earnings before taxes for the 2014 quarter were $14 million, a $7 million increase over last year’s underlying results.

Q3’s effective tax rate was 37.7% compared to essentially no taxes recorded in 2013. Moving to a normal tax rate in 2014 reduced Q3 earnings by $0.17. For the first nine months of 2014 net sales were $318 million, a 13% increase compared to 2013.

The sales were positively influenced by a strong demand from both new and existing distributors and dealers. Our gross margin at 35.8% was comparable to the 2013 underlying margin of 35.9%. Favorable manufacturing efficiencies and higher capacity utilization were offset by the effect of our 2014 pricing strategy mentioned previously.

SG&A for the 2014 nine-month period was $55 million compared to $56 million in 2013, a decrease of $1 million. The decrease primarily related to branding and incentive compensation. As a percent of net sales SG&A expenses decreased to 17% in 2014 from 20% in 2013.

2014 earnings before taxes were $58 million, a 31% increase over last year’s underlying results. The 2014 effective tax rate was 37.6% compared to 1.5% in 2013. Moving to a normal tax rate in 2013 reduced the nine-month earnings by $0.64. We generated $37 million of free cash flow for the first nine months of 2014 compared to $45 million in 2013.

The $8 million variance was primarily related to increased taxes paid in 2014. Inventory was $15 million at September 30, 2014, a $4 million year-over-year increase. We carried a higher level of inventory into Q4 to support strong early Q4 demand.

Capital expenditures for the first nine months of 2014 were $9 million which was comparable to the prior year. Capital expenditures in 2014 are related to the new poly processing lines for our entry into commercial businesses, and continued retrofit to our current production lines to support the manufacturing of our high-performance production lines.

Finally, our guidance for Q4 is sales of $70 million, an increase of 10% over 2013. The effective tax rate for Q4 of 2014 will be consistent with the first nine months of 2014. Operator, we would now like to open the call up for questions after which Ron will provide his closing statements. .

(Operator instructions.) One moment please for the first question. Your first question comes from Trey Grooms with Stephens..

It’s Trey with Stephens, thanks. Good morning, guys. Can you talk a little bit about the pellets business so far this year? I know you’re up and running selling a little bit.

Can you give us any color on what kind of impact that had in Q3 or into the Q4 guide?.

I would say at this point it’s not moving the needle materially. It’ll start to move the needle in the second half of 2015. I can tell you that the line is fully operationally, we’re selling everything we’re making and we’re producing it at the rates and yields that we expect.

So right now it’s a question of waiting for the additional equipment to get here and getting it installed, and if all goes according to plan you’ll see it move the needle in the second half of next year..

And then if I remember right, Ron, you’d mentioned $50 million to $80 million revenue.

Was that range for ’16 or is that the best way to think about that, 2016?.

No, that was three to four years out from when we initiated..

Okay, so it’d be kind of a gradual increase up to that rate maybe in ’17 then..

Yeah, a lot of it will depend on how fast we can get the second batch of equipment..

Okay. Thanks for that. And then you guys I think inter-quarter increased the price on the monochromatic Transcend line. Can you talk a little bit about the timing there? I don’t recall seeing you guys increase pricing this time of year before, and just any thoughts on that or any commentary you can give us on any additional pricing..

Actually we did increase last year the price on the exotic Transcend line about the same timing so it’s not all that unusual for us. We just felt now was the right time and brought that price increase through..

The important thing is that there was essentially market acceptance, there was no extraordinary pushback and it flowed through the system pretty well..

Okay, great.

And then there’s been some news recently surrounding California banning plastic bags in that state and that sort of thing, and I know we’ve kind of seen that coming for a while but can you give us a sense of at least your thoughts on any impact we should be expecting there from something like that coming out of California?.

We haven’t seen any impact coming from that particular move. Plastic bags as one of our inputs gets a publicity because everybody’s familiar with plastic bags. Plastic bags in total represent a mid-single digit portion of our input and if you then reduce it by what we get from California it reduces it much further than that.

The primary source of our raw materials is stretch wrap, and so while California gets a lot of publicity I don’t expect a material impact on our prices..

Great. Thanks a lot, guys, and good luck. I’ll jump back into queue..

Thank you..

Your next question comes from Keith Hughes with SunTrust..

first, heading for the ’15 season have you put the details out for the early buy, what the terms and conditions of that are going to be?.

No, we’ll do that on approximately November 4th I believe..

Okay, and second question on production for Q4 it looks like you’re off to a strong start.

Would you expect substantially higher production rates in Q4 versus last year?.

Yeah, I think we would..

Okay, so I assume gross margin would follow along with that, is that correct?.

Yes. .

Okay. Alright, that’s all from me. Thank you..

Thank you..

Our next question comes from Jack Kasprzak with BB&T..

Thanks, good morning guys, hi. First question is just on the share buyback you authorized 2 million shares but to this point you’ve been doing your buybacks in dollar terms – I think $25 million and $50 million.

I’m just curious why the change there – is it just an issue of flexibility?.

Just the Board undertook an offering that fell within certain Safe Harbor provisions. We felt it was easier to communicate in a share basis. As you’re aware the price on the stock does fluctuate quite a bit so we measure it in share internally. We always have because we need to to fall under those Safe Harbor provisions. .

Okay. And secondly I’m just curious about your thoughts on the marketplace. You’ve indicated your orders are strong here even as Q4 begins and your guidance is for sales to increase, and you’re taking market share.

But is the season lasting a bit later this year given the late start we had due to the harsh winter weather? What’s your sense on the underlying marketplace?.

My sense is, as I just got back from one of the trade shows, is that the season is extending a little bit. I’m not sure if it’s because of the slow start in Q1 or the weather that’s good right now but the season does seem to be expanding.

But the majority of our increase of sales come from a combination of market share increases plus we’ve got a lot of things going on here collectively between our licensing, our lighting, our elevations, our international. There’s a lot going on here..

Okay, great. That’s it from me, thank you..

Our next question comes from Glenn Wortman with Sidoti. Please go ahead with your question..

Yeah, good morning guys.

Do you have a sense of how composites performed versus wood in the marketplace for Q3 and then your expectations going forward?.

Well I think the entire decking market is probably rising low- to mid-single digits. So we’re clearly outpacing the market in general. Every year composites gains a little bit on wood; its march continues northward by a percentage point or two. Don’t forget, back in 1999 composites represented only 3% of the decking market.

Right now it’s probably approaching 35%..

Okay. And then just thinking about the gross margin heading into Q4, it’s a seasonally weaker quarter but you expect to realize additional benefits from your cost reduction initiatives.

Should we expect the gross margin to be up sequentially or I don’t know if you get that in particular?.

We really don’t bring it down to that level. What I did in the previous conference call is for the second half of the year we would expect the incremental margin year-over-year to approximate 45%. So if you use that guidance you should be in pretty good shape..

Okay, thanks for taking my questions..

Thanks..

Our next question comes from John Baugh with Stifel. Sir, you may ask your question..

there was a pretty high accounts receivable balance.

Was that due to the late surge of orders in September?.

Yeah, it was basically heavy demand in the latter part of the quarter, nothing past due or anything like that. It’s just heavy demand at the tail end of the quarter..

Okay. And so I presume a lot of that’s shipped here in October..

Well that all shipped in September..

Okay, it all shipped in September, super.

Okay, and I guess we’ll learn November 4th, Ron, about any new product thoughts for next year?.

Yes..

Okay, and then on the cost initiatives that are cryptically thrown out there, how does that effect, Jim, the 45% gross margin contribution going forward?.

Well if you look at the first half of the year obviously we were not at a 45% incremental margin. Q3 was clearly a little bit lower. The guidance I’ve given is that Q4 would be a little bit higher than Q3 which would get us to a second half incremental margin of 45%.

We’ve also communicated that we anticipate for 2015 that 45% incremental margin should hold..

Okay, so the combination of the cost initiatives you’re doing, the price actions you’ve taken should still put us in that 45% area for next year?.

Correct..

Okay. And then for the additional lines that are coming on, if I recall you don’t need additional polyethylene purchasing to get the first four lines running. First of all is that still correct and secondly, when would you start acquiring additional volume to feed the next four lines? Thank you..

Well, you are correct that the first four lines don’t require any additional bricks and mortar. In fact, the second four lines don’t require any additional bricks and mortar either. We don’t expect to have to buy any additional plastic for the first four lines; we would for the second four lines and that would probably be occurring in probably 2017..

Okay.

And current cost trends across the board but mainly obviously polyethylene?.

It’s trending upward. It’s trending a little faster than inflation, not nearly as fast as PVC is going up. But a lot of these cost increases are being offset by other manufacturing changes that we’re making..

Great. And then my last question quickly on SG&A for next year, you mentioned a new brand campaign. It sounds like you’re going to emphasize in the messaging the cost element as well. How do we think about SG&A dollars or percent of revenue going into next year? Thank you..

Well it is going to go up.

Jim, do you want to comment on it?.

Yeah, I think we can say the branding campaign, we’ll go up several million dollars over 2014. And if you listened to the commentary we just had we said branding was down slightly. But you can expect several million of increased branding spend for next year..

Great, thank you. Good luck..

Thank you..

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

how many market share points do you think Trex has gained in 2014 and how should we think about that translating into incremental revenue or sales rollover into 2015 that you didn’t capture this year?.

We’re thinking about how we want to answer that question or if we want to answer it. Our market is up low- to mid-single digit numbers. We’re growing at 2x to 3x that rate and so it’s obviously coming at the expense of someone else in the marketplace.

What was the second part of your question?.

What’s the incremental sales rollover into 2015 that you picked up this year but didn’t necessarily capture full twelve months of in sales?.

I’m not sure I can answer that question.

Do you want to try that?.

I don’t think we want to talk about that. It’s been substantial. Until we get through Q4 we won’t know the full effect of the additional adds to distribution that we’re going to realize. Part of the change that took place over the last twelve months will continue to show benefits into 2015 and to a much lesser extent in 2016.

So we do expect to continue to have that market share growth. Your original question is how much growth did we see? It’s at least several points of market share that we picked up this year..

Thank you..

You’re welcome..

(Operator instructions.) Our next question comes from Keith Hughes with SunTrust..

are you willing at this point to use borrowed money to buy back shares or is it just going to come out of free cash flow?.

Well, if you look at what we’ve done this past quarter we’ve stayed in the revolver longer than we had in the past so we’re not concerned about going into the revolver to do the buyback. But it is our second priority. Our first priority is strategic initiatives that Ron mentioned earlier..

So I understand going into the revolver for timing aspects but I guess my question is would you be willing at the end of a period, end of the year to carry more debt via share repurchase?.

That is a function of a spirit of an ongoing and active debate. We don’t have any announcements to make at this time but it is something that we would consider..

Okay. Thank you..

Our next question comes from Trey Grooms with Stephens. .

Hey sorry, just one follow-up and really just for some clarity, Ron, on some of your other commentary.

Earlier you said that you will probably have to start buying additional poly for the second four lines when you guys get those up and running, and did I hear you right that that would be 2017? So that’s basically implying that you’ll start those second four lines up and running at full steam basically in….

Upon further reflection I’ll say 2016 they’ll be ramping up..

Okay, thanks for the color. That’s all..

Thank you..

There are no further questions at this time. Please proceed with your presentation or closing remarks..

As we move towards closing out this record-breaking year we’re energized with our prospects going into 2015 and forward. We are committed to advancing our industry-leading market share and complement this with other value-enhancing strategic initiatives.

It goes without saying that our winning strategy would not be achievable without superior execution by all of our talented employees. To them I give my thanks and best wishes on the way forward. Thank you for joining us today and take care..

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