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Deck Maker Triples Quarterly Profit

By Simone Baribeau
Washington Post Staff Writer
Thursday, July 31, 2008

Trex, the decking manufacturer slammed with quality problems last year, yesterday reported a large increase in second-quarter profit.

The Winchester, Va., company, which makes decks, rails and fences out of recycled wood and plastic, said revenue slid 20 percent, to $95 million from $118.8 million in the corresponding period last year. But profit more than tripled to $7.9 million, as investments in technological improvements allowed the company to use less expensive materials.

"Trex delivered our second consecutive quarter of solid profitability and increased cash flow despite soft macroeconomic conditions as we continued to execute our business turnaround strategy," chief executive Ronald W. Kaplan said in a statement. The company in previous quarters had said the housing downturn was affecting sales.

Trex said it drew down inventory by about 30 percent and also slashed production, running at 48 percent capacity, compared with 86 percent in the year-earlier quarter.

"It's pretty amazing to be able to have those kind of margins with that kind of utilization," said William Gibson, analyst at Nollenberger Capital Partners.

Peeling decking and other quality problems cost the company about $94 million in 2007, leaving it with a $75.9 million loss for the year. Trex cut about 30 employees this year, which the company expects will save it $3.5 million a year.

But the biggest boost to Trex's bottom line came from improving productivity and buying lower-quality recycled plastics, the company said.

"They've invested quite a bit in equipment to allow them to go into those low-cost, dirtier, cheaper streams of plastic, rather than pay the $1 a pound that their competitors are paying," said Robert J. Kelly, equity analyst with Sidoti & Co.

Both the company and analysts said the new plastics will not hurt the quality of Trex decking.

Trex introduced two products this year, a house trim and a new decking product; and fencing contributed a larger percentage of revenue than in previous quarters.

Kaplan said it was too early to declare victory in the company's turnaround efforts, but Trex did say it expects third-quarter sales to increase 12 to 21 percent over last year.

Given the current economic conditions, the outlook is a positive sign, analysts said. "They're taking share," Gibson said.

Investors responded well to the report; Trex closed up 26 percent yesterday, at $14.48 a share.

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