Ronald Kaplan - Chairman, President & Chief Executive Officer James Cline - Senior Vice President & Chief Financial Officer Brad McDonald - Controller Brian Bertaux - Director of Financial Planning & Analysis William Gupp - Senior Vice President, General Counsel & Secretary Harriet Fried - LHA [NYSE:IR].

Trey Grooms - Stephens, Inc. Glenn Wortman - Sidoti & Company Rohit Seth - SunTrust Robinson Humphrey Paul Betz - BB&T Capital Markets Jacob Meier - C.L. King & Associates Dillard Watt - Stifel, Nicolaus & Company.

Welcome to the Trex Fourth Quarter 2014 Conference Call. [Operator Instructions] As a reminder, this conference is being recorded February 24, 2015. 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, Senior Vice President, General Counsel and Secretary. The company issued a press release this morning containing financial results for the fourth 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. We are pleased with our record sales performance for 2014. We finished last year and started this year with strong momentum. This gives an early indication that our 2015 Early Buy Program is working effectively. Our 2014 sales were up 14%. This demonstrates our market share is growing.

Our record financial results reflect strong execution across each of our guiding principles for increasing shareholder wealth. A great product line-up, unparalleled global distribution, unsurpassed brand strength and superior manufacturing process. Let me speak further on these.

Regarding global distribution programs a few key drivers to advance our domestic market share in 2014 included, one, implementing a balanced pricing strategy to ensure that we were optimally priced in all key consumer segments, two, our new distribution footprint in the northeast, three, a very successful dealer conversion campaign.

Our success in the domestic market was match with equal success in the international market. In addition to expanding our presence in existing and new markets, earlier in the year we were selected for our very high profile four-mile public boardwalk in Dubai. This boardwalk spans the beach side of six residential communities.

Trex was chosen because we have the best aesthetics and performance features and an unrivaled ability to deliver on time. Regarding branding, we received considerable third-party branding recognition during 2014.

In Q1 we were recognized with the top honors in the greenest product in decking brand categories by Green Builder Media 2014 Readers Choice Awards. In Q2 we won an American business Stevie Award for Marketing Campaign of the Year. Our campaign garnered millions of media impressions and drove hundreds of thousands of consumers to our website.

And recently we received the number one ranking in Builder Magazine Brand Study for 2015.

In this study we achieved the category sweep in all four categories; brand familiarity, brand used most, in the past two years, brands used most in 2014 and overall quality, sweeping in this category marks an extraordinary accomplishment and is a testament to our brand and quality.

Regarding manufacturing, the three major material cost reduction initiatives completed in the second half of 2014 are now contributing to our bottom line. Regarding our entry into specialty material applications, we have one production line in operation today which contributed to our Q4 revenue.

As we work through the startup phase on line one, we will commence installation of three additional production lines during the first half of 2015. We expect all four lines will contribute to sales in the second half of 2015. This is a promising extension of our recycling and extrusion expertise. We expect further extensions of our technology.

Looking forward, we expect 2015 to be a banner year. In January we launched a new licensed collection of high-performance waterproof outdoor storage products. The new branding campaign I mentioned in our last earnings call is being launched this spring.

It exemplified our passion for meeting consumers' evolving desire for building unique outdoor live-in spaces. We are very pleased with the strength of our sales volumes thus far in Q1. Accordingly we are forecasting sales of $120 million for Q1 a 19% increase over last year's period. This marks a great start to the year.

Jim?.

Thank you, Ron. Good morning. First I would like to review our fourth quarter financial results. Sales for the fourth quarter were $74 million or 16% increase compared to 2013 reflecting strong organic sales growth throughout the quarter. Gross margin was 35.9% in the fourth quarter of 2014 a 510 basis point increase compared to the prior year.

The increase in gross margin was the result of our third quarter cost reduction initiatives, favorable manufacturing efficiencies and increased capacity utilization. The year-over-year underlying incremental gross margin in the quarter was 68%. SG&A for the fourth quarter was $17.9 million compared to $15.4 million in 2013.

The increase was primarily related to branding which reflects increased spending to support our 2015 season. In addition we recorded a one-time charge of $600,000 for expenses and breakage fees related to a terminated transaction and $500,000 related to the Dallas office lease.

Earnings before taxes for the 2014 quarter were $8.6 million a 103% increase over the prior year's results. The company recorded net income of $5.2 million or $0.16 per share in the fourth quarter of 2014 compared to net income of $15.1 million or $0.45 per share in the fourth quarter of 2013.

In 2013, the company recognized the favorable effect of a tax valuation allowance. Excluding that favorable adjustment, the earnings per share in the fourth quarter of 2013 would have been $0.08. Our full-year 2014 revenue and earnings set new records for the company. The 2014 net sales were $392 million a 14% increase over 2013.

Our 2014 sales were positively influenced by the strong demand from both new and existing distributors and dealers. This highlights the success of our 2014 pricing strategy and other market share advancement initiatives.

The company recorded net income of $41.5 million or $1.27 per share in 2014 compared to net income of $34.6 million or $1.01 per share in 2013.

During 2014 the company recognized $2.1 million of non-operating charges consisting of a $1.5 million charge related to sublease office space in Dallas, Virginia and a $600,000 one-time charge for expenses and breakage fees related to a terminated transaction. During 2013 the company recognized $24.5 million of non-operating charges.

The underlying gross margin was 35.8% in 2014 which was a 90 basis point increase compared to the prior year. The increase in gross margin was primarily the result of favorable manufacturing efficiencies, cost reduction initiatives and increased capacity utilization which were partially offset by the effect of our 2014 pricing strategy.

The company's full-year underlying incremental gross margin was 42%. Underlying SG&A was $70 million for 2014 compared to $71 million in 2013. As a percentage of net sales selling, general and administrative expenses were 17.9% in 2014 a 270 basis point decrease compared to 2013.

Underlying earnings before taxes for 2014 were $69 million a 42% increase over the prior year's underlying results. The company's underlying net income was $43 million or $1.31 per share in 2014 compared to the underlying net income of $30 million or $0.86 per share in 2013.

The company's 2013 net income included $24.5 million of pretax non-operating charges and a favorable effect of $19.9 million tax valuation allowance reversal. 2014 free cash flow was $46 million compared to $33 million in 2013.

Favorable net income recognized in 2014 was complemented by favorable working capital Capital expenditures for 2014 were $13 million which is comparable to the prior year. Capital expenditures in 2014 are primarily related to new recycled pellet processing lines and continued upgrades to our decking and railing production lines.

As a result of our strong free cash flow in 2014 we were able to affect a $50 million buyback in the second quarter of 2014. During the fourth quarter we completed a refinancing of our revolving line of credit.

We now have a five-year seasonal credit facility providing $150 million of borrowing capacity during peak season and a $100 million capacity during the remainder of the year. The new facility will strengthen the company's capital structure, reduce our borrowing costs and expand our borrowing capacity throughout the year.

Finally, I would like to turn our revenue guidance. I would like to reaffirm the first-quarter revenue guidance at $120 million. This reflects the 19% growth over the first quarter of 2014. Our continued guidance for the incremental margin in 2015 is 45%.

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

[Operator Instructions] Your first question comes from the line of Trey Grooms with Stephens. Please go ahead with your question..

Hey, good morning guys. Congrats on a good quarter..

Good morning..

Thank you..

Couple of questions from me, Jim, you mentioned 68% incremental in the quarter. Can you help me kind of bridge that? I'm sure there were some one-time things in there that I'm not accounting for, but I'm kind of getting something a little bit lower than that.

Could you kind of go through some of the adjustments we should be making to the prior year and this year's quarter to make sure whether we're accounting for everything there?.

Certainly, the number was 68% for the quarter. There was a small adjustment in the fourth quarter of last year to net sales related to business expansion expenses. I think that number was $350,000. I think that's the only adjustment you need to make..

Okay, all right, thank you.

And the one-time items you were talking about, the $600,000 one-time charge and then another $500,000 that's in SG&A then I suppose?.

Yes, both of those hit SG&A..

Okay great. And you mentioned that you were still targeting approximately 45% incremental margins for 2015.

Is there any difference in the way that we should be thinking about the seasonality of that number, I know it can move around a little bit quarter-to-quarter as evidenced in the third and fourth quarter of 2014? Is there anything unique about 1Q we should be thinking about?.

There is nothing unique about 1Q as compared to what it would have been last year..

Okay, and then lastly, on the guidance, if I'm doing the math right, I think using kind of the typical seasonality off of the 1Q guidance you gave implies a full-year 2015 kind of core decking growth of mid to high single digits.

Is that about the right way we should be thinking about it or is there other things that might be playing a role this year we need to take into consideration?.

Well, we believe that the market will grow about mid single-digit and as you are aware we don’t give guidance on full-year sales. We have advised the Street that we would be expanding the production of the new sale of pellets beginning in the second half of the year, the second quarter, I'm sorry, third quarter.

That's the only unusual impact that I would throw out there for you..

Okay, thanks a lot. I guess I'm going to slip one last one in that is model related.

The SG&A in the quarter it was a little bit higher and you named out a few things, but in the past you've given us some color on how to think about SG&A for the upcoming year as we look at it compared to '14 could you give us any color on how we should be thinking about that?.

Sure, I think what you ought to do is you are to consider the fact we advised in the last call specifically that we would be expanding our branding by several million dollars. So, number one start with that. You will need to expand for inflation.

So a lot of those costs will be directly impacted by the inflation index and to a small extent I think it's probably in the 4% to 5% is impacted by sales change year-over-year, because they are directly going to sales. Those are the primary changes that I would identify..

Okay, thanks for that and I'll get back in queue. Thanks a lot and good luck..

Thanks Trey..

Your next question comes from the line of Glenn Wortman with Sidoti. Please go ahead with your question..

Yes, good morning everyone..

Good morning..

Yeah, with the price of oil coming down, can you just talk about the pricing environment for decking it is presumably input cost for some of your competitors have come in?.

Pricing is they are relatively stable. Pricing usually doesn't change more than once a year. There will be some exceptions to that, but the change in input cost has not yet been reflected in any pricing that we've seen and frankly, I don’t expect it to be..

Okay and then just on share gains, last year you provided some guidance around the expected impacts from increased market share, can quantify any expectations throughout 2015?.

We're not going to quantify expectations. I'll just say that we're somewhere in the low 40s now..

Okay, all right. Thank you very much..

Thank you..

Your next question comes from the line of Rohit Seth with SunTrust. Please go ahead with your question..

Hey, good morning.

Could you quantify or provide some color around capacity utilizations you expect to run in the first quarter?.

Well, we're less than, we're operating at less than half capacity utilization and that's about as fine as I can predict..

Okay, great. Thanks, that's helpful..

[Operator Instructions] Your next question comes from the line of Paul Betz with BB&T Capital Markets. Please go ahead with your question..

Hello, good morning everyone.

I know be in the 10-K, but do you have your branding expense, total branding expense for 2014 with you?.

It could be a shade under $21 million..

Okay, that's all I had. Thank you..

Thank you..

Next you have a followup question from the line of Trey Grooms with Stephens. Please go ahead with your question..

Thanks.

Just one, I guess is kind of housekeeping question here, on the warranty reserve, it looks like the accrued warranty non-current accrued warranty came down by a couple million dollars there, is there anything, it's a little higher than where it had been running in the last couple quarters here, is there anything unique about that or just typical seasonality?.

On the warranty reserve we came into this year with a fairly high open claim balance. As we ended this year that claim balance declined significantly. So, I think part of it relates, the difference relates to the fact that we have been closing out on accumulation of claims that came in from the prior year..

Got you, okay and so that just explains the slight bump there. Okay, got you..

That's right..

And then….

Just there's another issue on that I'll mention. We have seen a fairly substantial decline in the inbound claims. So we've seen declines in each year since 2009 and this year has been no exception..

Okay, got you. Thank you.

And then was there any impact there from that adjustment on the margin around the P&L from the quarter?.

Which adjustment as you talking about?.

The $2.5 million..

The $600,000 and the $500,000 related, $500,000 was in the fourth quarter and the $600,000 related to the expenses and breakage fees were in the fourth quarter also..

Right, okay and looking at some of the commentary, I know Jim, you mentioned that you know, the early buy was very successful, you guys put up a strong 1Q guide.

Can you give us a sense for your take on what the channel is looking like here as we're entering the spring season, is it about like last year or is it above or can you comment on that at all, do you have any sense?.

Yeah, I have a sense of it, we just got back from our contractors meeting and I can tell you that the feeling in the room is very robust. I took a poll of our contractors as to what percentage increase they thought sales were going to go up. It left me feeling quite confident.

The inventory in the channel is relatively flat, but the lead time to get a deck built is expanding and consumer confidence seems to be high. So, all-in-all we're feeling quite robust about the outlook..

Your next question comes from the line of Jacob Meier with C.L. King & Associates. Please go ahead with your question..

Good morning guys. Just had a quick question looking at with regard to whether this year particularly in the Northeast, I know last year the end of the quarter really hit your results.

So I just wanted to seek what you're getting from dealers in the Northeast and if there's any delay with regards to ordering, you got any comments about that?.

Well, there is some delay in the Northeast. Our dealers were on the Boston area just don’t have any room in their yard to accept any additional shipments. They need some snow to melt, but across the United States all-in-all weather has not yet manifested itself as an issue. There's still time for it to do that.

What we really watch is the duration of the winter more than the intensity of the winner. So right now we don’t have a red flag..

Great, thanks..

Thank you..

Your next question comes from the line of Dillard Watt with Stifel. Please go ahead with your question..

Thanks, good morning. Congrats guys.

Wondered if you might help us in any terms of quantification of what the pellet business did in the fourth quarter and what maybe your obviously second half load is for '15, but any help in terms of maybe what, how much of the $120 million for the first quarter might be from the commercial business?.

Well, sales in Q4 are immaterial, all things considered in the grand scope of Trex. We're using our production line to meet current demand as well as refine the manufactured process, formulation and so on. We want to make sure by the time we have three lines steadier we've got this thing dialed in. So we're not going to predict sales for 2015.

We've said that this will be a $50 million $80 million business three to four years out from the time we started. Right now we're running consistent with our internal plan..

So, fair to say that, still fairly immaterial in terms of the $120 million for the March quarter?.

Yes..

Okay. Thank you very much..

Thank you..

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

As we close out a record-breaking year, we're invigorated with our prospects for 2015 and beyond. Everyone at Trex has contributed to our company's winning track record and we're committed to carrying the torch forward. It's our expectation that 2014 is just a springboard to what our future holds.

I look forward to seeing many of you at our Analyst Day in New York on Wednesday, afternoon March 11th. Our executive management team will be on hand, as well as some of the folks who head up our international, R&D and new specialty materials efforts.

If you have any questions about the event, please get in touch with Harriet Fried at our Investor Relations firm, LHA. Thank you for joining us today and we look forward to talking to you again soon..

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