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Executives

Harriet Fried - Lippert/Heilshorn & Associates

William R. Gupp - Vice President and General Counsel

Ronald W. Kaplan - President and Chief Executive Officer

James E. Cline - Vice President and Chief Financial Officer

Analysts

Keith Hughes - SunTrust Robinson Humphrey

John F. Kasprzak, Jr. - BB&T Capital Markets

John Baugh, Jr. - Stifel, Nicolaus & Company

Eric Glover - Canaccord Adams

J. Keith Johnson - Morgan Keegan & Company

Kenneth Smith - Lennox Equity Research

Trex Company, Inc. (TWP) Q4 2008 Earnings Call February 27, 2009 10:00 AM ET

Operator

Welcome to the Trex Company Fourth Quarter and Full Year Earnings Conference Call. At this time, all participants are in a listen-only mode. Following the managements prepared remarks we will hold a Q&A session. (Operator Instructions).

I would now like to turn the conference over to Harriet Fried. Please go ahead ma'am.

Harriet Fried

Thank you everyone for joining us today. With us on the call are Ron Kaplan, President and Chief Executive Officer; and, Jim Cline, Chief Financial Officer. Joining Ron and Jim are Brad MacDonald (ph), Controller; Brian Burtow (ph), Director of Financial Planning and Analysis; and Bill Gupp, General Counsel.

The company issued a press release this morning containing financial results for the last quarter of 2008 and for the full year. 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 for 30 days.

I would now like to turn the call over to Bill Gupp, Trex's General Counsel. Bill?

William R. Gupp

Thank you, Harriet. Before we begin, let me remind everyone that statements on this call regarding the company's expected future performance and condition constitutes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.

These statements are subject to risks and uncertainties that could cause the company's actual operating results to differ materially. Such risks and uncertainties include the extent of market acceptance of the company's products; the sensitivity of the company's business to general economic conditions; the company's ability to obtain raw materials at acceptable prices; the company's ability to maintain product quality and product performance at an acceptable cost; the level of expenses associated with product replacement and consumer relations expenses relating to product quality, in the highly competitive markets in which the company operates.

The company's report on Form 10-K filed with the SEC in March 2008 and its subsequent filings on Form 10-Q and Form 8-K discuss some of the important factors that could cause the company's actual results to differ materially from those expressed or implied in these forward-looking statements. 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. To supplement the company's consolidated financial statements, the company uses certain measures to find its non-GAAP financial measures by the SEC. A reconciliation of these results to GAAP is attached to today's earnings release.

With that introduction, I will turn the call over to Ron Kaplan.

Ronald W. Kaplan

Thanks Bill and thanks to everyone for joining us on our call. The fourth quarter wrapped up a very successful year for Trex Company. And I would like to go over to some of the many factors that contributed to the success.

First I'd like to review the financial results that we released this morning. Net sales for the full year totaled $329.2 million slightly above 2007 sales despite the very tough market that existed throughout the year. More importantly, we recorded net income of $13.6 million or $0.90 per diluted share for 2008, compared to a net loss of $75.9 million or $5.10 per diluted share for 2007.

In the last three months we did feel the impact of the rough economy, but the quarter unfolded essentially as we expected.

I will now turn the call over to our CFO Jim Cline for a more in-depth look at our numbers and then I'll comeback on to give you more details on our progress and the quarter result for 2009.

James E. Cline

Thank you, Ron. Good morning everyone. As Ron mentioned, our press release was issued this morning, the numbers I will reference are contained in the table set as condensed consolidated statements of operation, balance sheet and status of cash flow.

In addition, due to the magnitude of the non-recurring charges recognized in the fourth quarter of 2007 and fiscal year 2007 results, we have provided pro forma profit loss statements to provide an enhance clarity of the company's underlying financial performance.

First, I would like to review our fourth quarter financial results. In the fourth quarter of 2008, net sales were $29.3 million, compared to net sales of $30.3 million in the fourth quarter of 2007, a decrease of 3%. When excluding the unusual charges that impacted sales in 2007 the decrease was 31%. This reduction was primarily driven by the macroeconomic conditions affecting North America.

The fourth quarter net loss of $10 million or $0.67 per share was a significant improvement over last year's fourth quarter in which the company reported a net loss of $41 million or $2.75 per share. Our business is highly seasonal due to the nature of outdoor improvement. And a loss for our business is normal in the fourth quarter.

The fourth quarter of 2008 pro forma gross profit was $6.5 million, a 13% decline as compared to the fourth quarter 2007 pro forma gross profit. The fourth quarter of 2008 pro forma gross profit was 22.2% a 480 basis point improvement compared to pro forma, gross profit for 2007. We continue to enhance gross profit margins on a year-over-year basis through a combination of improved productivity and reduced costs despite operating at significantly reduced levels of sales and capacity utilization.

During the quarter, we continue to optimize our proprietary manufacturing process and manage costs throughout the organization. The price of our purchase polyethylene material in the fourth quarter of 2008 was lower than the fourth quarter of 2007. The company operated at a 40% lower level of capacity utilization in the fourth quarter of 2008 compared to 2007 due to our focus on cash generation and reduced demand.

Fourth quarter 2008 pro forma SG&A expenses totaled $12.8 million, a 37% reduction compared to the pro forma SG&A expenses in the fourth quarter of 2007. This reduction was due mainly to lower branding expenses and staffing costs. The fourth quarter of 2008 pro forma loss from operations was $6.3 million. This was one half the pro forma loss from operation for quarter-end 2007.

For the full year 2008 net sales were $329.2 million compared to net sales of $329 million in 2007. When excluding unusual charges from 2007, sales decreased by 10%. Net income for fiscal year 2008 was $13.6 million or $0.19 per share compared to a net loss of $75.9 million or $5.10 per share in 2007.

Fiscal year 2008 pro forma gross profit was $95.8 million or 29.1%, a 500 basis point improvement compared to the pro forma gross margin for 2007. The company executed soundly on its process improvement and cost reduction initiatives. The positive effect of these efforts on 2008 gross profit was partially mitigated by reduced levels of capacity utilization. The negative impact of operating at this reduced level of capacity was approximately 560 basis points compared to the pro forma 2007 full year results.

Fiscal year 2008 pro forma SG&A expenses totaled $59.7 million, a 22% reduction to pro forma SG&A expenses of 2007 due to a reduction of branding expenses and staffing cost. On a pro forma basis SG&A expenses represented 18.1% of revenue in 2008 which is a 270 basis point reduction compared to the pro forma 2007 period. Fiscal year 2008 pro forma income from operations was $36.1 million or 11.11% of net sales. This represents a 770 basis point improvement compared to 2007 pro forma operating margin.

The company recognized an income tax benefit of $800,000 and $1 million for the 2008 fourth quarter and fiscal year results respectively. As a result of recognizing a decrease valuation allowance against the deferred tax asset and other favorable tax adjustments. The combined effect of the 2008 effective tax rate as compared to 2007 effective tax rate accounted for $0.19 of the increased earnings per share for the 2008 fiscal year.

As of December 31, 2008, total net debt amounted to $111 million which represents a $23 million reduction from December of 31st of 2007. Total net debt-to-total capitalization at December 31, of '08 was 50% compared to 59% at December 31, of 2007.

Inventory was $69 million at the end of December 31, 2008, a $23 million year-over-year reduction or 25% lower than 2007. Free cash flow was $25.2 million for the fiscal year 2008 compared to a negative $25.2 million for 2007, a $50 million improvement. The improvement was primarily the result of improved earnings, reduced capital spend, inventory reduction and other working capital management.

Capital expenditures for the fiscal year 2008 were 7.8 million, a $15.2 million reduction compared to fiscal year 2007. Our 2008 investment strategy was primarily focused on lower spend projects that supported our productivity and cost reduction initiatives while improving our return on invested capital. There are two financial reporting topics that will impact 2009 results that I would like to make you aware of.

First, Trex will adopt an accounting pronouncement which relate to embedded interest on convertible debt. This will increase non-cash interest expense in 2009 by approximately $2 million. In addition, we anticipate that our income statement will continue to benefit from our deferred tax valuation allowance through the end of 2009 and expect our effective tax rate to be under 2% for the year.

Finally, I'd like to summarize several achievements for 2008. The pro forma gross profit for 2008 was to 29.1%. The strong improvement was achieved inspite of a significant reduction in capacity utilization compared to 2007. In 2008 capacity utilization declined from 73% in 2007 to 47% in 2008, adversely impacting gross profit margin by approximately 5.6%. While significantly reduced inventory in 2008, our service levels compared to 2007 improved slightly to 90% in 2008.

Management believes that we can achieve our service level goal of 95% while continuing to make significant reductions in inventory. Since the first quarter of 2008, we have been in compliance with all of debt covenants and have eliminated the occurrence of unfavorable surprises to our vendors. Trex has not needed to utilize its revolver since May of 2008 and currently has in excess of $20 million of cash on deposit. Ron?

Ronald W. Kaplan

Thanks Jim. As most of you know when I joined the company a year ago, Trex faced both internal and external challenges, Trex's brand strength, distribution channels, sales momentum and product design were all sound, but the company's operational execution and financial performance needed substantial improvement, especially given the challenging environment we've all been operating in.

I am proud say that with the contributions of a very capable new management team as well as the expertise and support of the company's employees and Board of Directors, we have restored Trex's financial health, boosting earnings and free cash flow. I feel that our business turnaround is well underway. We continue to implement further process improvements, which should allow us to realize further benefits in 2009 and include significant efforts on cost reduction and working capital management.

Throughout the year, we focused on growing shareholder value based on the guiding principles of providing a best in class product offering; expanding our distribution presence; increasing our brand leadership and advancing our low cost competitive advantage. We also focused on gaining creditability with our key constituents including our customers, banks, shareholders and employees.

As you can see from our financial results, we have been successful in advancing our position in all of these areas. I want to highlight some of the core accomplishments during 2008; they contributed the Trex's enhanced performance and positioned us for the future.

When I joined the company we were not compliant with certain debt covenants contained in our banking agreements. We move quickly to rectify the situation and restore our banking relationship with the core objective of eliminating surprises would previously had lead to numerous amendments of the credit agreements. There were no such surprises in 2008 and we don't intend to have any moving forward. We overhaul the organization, with reduced cost, established clear lines of authority and made the organization more nimble. This led to more timely and effective decision making throughout the organization.

As you know, we implemented a series of productivity and process improvement focused on manufacturing a higher quality product at lower cost. Plant productivity increased and cost decreased, as we utilized the principles of Lean Six Sigma and other best in class manufacturing techniques including procedures focused on safety. In fact, we had a 65% improvement in safety over prior year based on recordable incidents.

Our cost reduction and process improvement initiatives were broad-based and expanded beyond the manufacturing operations. We reduced the use of consultants and implemented internal controls (Technical Difficulty) driving a level of discipline throughout the organization that supported our goal of execution in then restoring confidence with our key constituencies.

Activities taking place on a day-to-day basis, that don't receive much attention externally, include increasing our Information Technology effectiveness by upgrading our systems and delivering more timely and effective information and reporting the support decision making.

We expanded our product platform rolling our Trex Escapes ultra-low maintenance decking and grooved Brasilia with the Trex Hideaway fastening system. Our goal has been to provide our customers more choices in building products that alone to build the deck, railing offenses that is distinctive, but requires less maintenance than would. I am here happy to report, that our new products have been well received by the market.

We strengthen our distribution networks with a number of steps including stronger partners in the West. And we took steps to enable us to expand our supply of Escapes essentially doubling the supply, so that we can reliably meet market demand. These stories I have highlighted as well as many more company successes that I haven't mentioned help return Trex to profitability and our shareholders were rewarded with a solid performance in our stock price of 2008.

In addition, employee morale has increased significantly. This organization has a high sense of record (ph) and unique cohesion. Moving forward, we will complete the business turnaround that we'd be ending year ago, and continue to concentrate on long-term shareholder value by responding to consumers' desire for attractive high quality outdoor living products.

For competitive reasons, I can't share with you yet all of the things we have untapped for 2009. But I would like to call out a number of important initiatives. First, product innovation has always been an opportunity and strength for Trex and we're continuing to expand our product line in 2009. We want to make it easy for homeowners as they seek to maximize our outdoor living experience and turn their backyard into a next great room.

We think our significantly expanded orders in line of railing offers and specially promising growth opportunity for us, and are focused on considerably expanding Trex's market share in this category.

Privacy fencing is another great growth opportunity for our company; we've been expanding our distribution footprint and recently introduced an exciting new product that's targeted to the DIY segment of the market. In addition, our R&D engineers are developing some new opportunities that we think have lot of promise and we'll report back to you as these projects are near completion.

On the marketing side, I mentioned in our last call that we've retained a new advertising agency the Neiman Group, we've implemented a two pond campaign, one for the consumer and one for the trade that drive awareness and preference for the Trex brand. We're carrying out an aggressive innovative marketing campaign for 2009, including a so called walk-to-walk tour with a movable onside display of Trex decking and railing starting Monday. This display over a 10 different cities to spread the word on Trex, the contractors and consumers and I will personally lead the way.

We've also expanded our website to include features that allow consumers to find out more about the advantages Trex offers, designer deck and test out new looks. And we started new website, trexpartners.com to provide the trade with information on Trex and its capabilities and offer tip for helping contractors build their business.

We are proud to offer an eco friendly product to consumers who are increasingly concerned about sustainability and their impact on the environment. We utilize waste plastics and waste wood mould chip which is now used by Trex, with end up in landfills across the country. We'll continue to foster and deliver green products that satisfy consumer demand for outdoor living.

Finally, although I can't share you details really at this point, I would like to say that we're assessing strategies that will enable Trex to take advantage of today's tough market conditions and gain additional market share.

Turning now to our guidance for 2009, as everyone knows this is an extremely challenging environment for every business and the economic turmoil makes it difficult for us to predict our top line with confidence. That said; we've established a target of $60 million for net sales for the first quarter.

It's important to emphasize that these numbers are not directly comparable to our sales in the first quarter of 2008. As we noted in this morning's release, we expect to shift in purchasing patterns as our customers order more based on pull through demand than at past years due to the current economic condition and the redesign of our early by sales program.

As a result, we expect our sales activity to be considerably more weighted to the second and third quarters as been in previous years. As we get further into the year we have better visibility of sales, which we expect during the second quarter if necessary, we will adjust our operations and cost structure. This management team is committed to maximizing shareholder value and maintaining liquidity. Throughout 2009, we'll maintain a strong focus on free cash flow. This has been a very successful strategy for us in 2008 and we're going to stick to it.

Operator, we are now ready to open the call to questions.

Question-and-Answer Session

Operator

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

Keith Hughes - SunTrust Robinson Humphrey

Thank you. I guess first question is on cost savings for '09. You've done a great job in '08, how much left is there to do in sort of metric number you can put around that?

Ronald Kaplan

We could but that's our policy, not to put a metric around that. I guess I would ask people to pass the behavior probably an indication of future behavior, this management team hasn't shown itself to be bashful.

Keith Hughes - SunTrust Robinson Humphrey

Okay. A second question on the first quarter, given the sales view, is that is going to be profitable quarter for the company?

Ronald Kaplan

We don't give guidance on profits going forward.

Keith Hughes - SunTrust Robinson Humphrey

Okay. And third question regarding the balance sheet, just yes or no is this fourth quarter we're heading into the cash poor period of the year, is that correct? And that will improve with the third quarter being the cash rich period.

James Cline

That's correct. The first quarter... going into the second quarter, typically the low end of our cash availability.

Keith Hughes - SunTrust Robinson Humphrey

Okay. And as you look at inventory as you stand today, given what's going to be a slow start of season due to reasons that you mentioned earlier. Is inventory... in a tough environment what it going to be in 2009, is it going to be another source of cash in 2009?

James Cline

It is going to be another source of cash in 2009.

Keith Hughes - SunTrust Robinson Humphrey

Okay. And is there a minimum level of inventory that you just can't go below it to keep... basically got to keep products in the warehouse keep running...

Ronald Kaplan

We'll...

Keith Hughes - SunTrust Robinson Humphrey

Can you what level that is?

Ronald Kaplan

There is something that we watch very carefully but I'm not going to indicate what that level is.

Keith Hughes - SunTrust Robinson Humphrey

Okay. And final question, you talked about some new product initiatives not asking what they are, but when would we see those in the market easily?

Ronald Kaplan

If we're going to unveil them, we would unveil them most likely our next distributor meeting which is held in late September or early October.

Keith Hughes - SunTrust Robinson Humphrey

All right, thank you.

Operator

Your next question comes from the line of John Kasprzak of BB&T Capital Markets.

John Kasprzak, Jr. - BB&T Capital Markets

Thanks. Good morning everyone. Congratulations on a good year. And first question is the fourth quarter gross margin looked to be about 23.4% which was a little lower than what we've through first three quarters of '08. Is that just the reflection of seasonally slower period and lower utilization rates or is there something else going on?

James Cline

That's primarily what it is. Reduced capacity utilization as well as you have the holidays in there, two large holidays, lot of vacation.

John Kasprzak, Jr. - BB&T Capital Markets

Yes. Okay. And CapEx in 2009, I mean can we still expect... what would we expect to similar level to what we saw on '08 fairly de-minimize level?

Ronald Kaplan

We wouldn't call it de-minimize, but I'd say it to be fairly similar.

John Kasprzak, Jr. - BB&T Capital Markets

Fairly similar, okay. And with regard to the first quarter sales guidance and the comment about changing in costumer buy patterns, obviously we know the economy is weak, but you mentioned that you've redesigned your early buy sales program, I mean can you... how much of it is just the uncertainty and people only making in a purchase with an order in hand and how much of what's going on with the shifting in sales, is this redesign of your early buy program?

Ronald Kaplan

Yeah, that's an excellent question what I anticipated it's extremely difficult if not impossible for us to conjecture as to how much is attributable to which explanation. What we see out there is the same thing that I'm sure you see, which is... we have a distribution chain which appears to be very, very thin, this channel is not jammed at all, we think that there is going to be a very quick response period between when the end consumer buys something and it filters all the way back to the factory.

Having said that, distributors just aren't going to buy anything to put under shelf, when they need it to replace something it comes off their shelf though place the order. Now on the other hand, we did change the early buy program and we removed the requirement that we.... that the distributor buy a certain minimum level to achieve the discount. The discount now is base of the function of how early they buy it.

But this was not the right year to be jamming the channel and an early buy program. It could have had I think non-intended consequence, I'll put it that way. So there is going to be some shift through the second quarter based on the redesign of program and some shift based on distributors just not wanting to buy moment before, they need to replace something that's left the shelf.

John Kasprzak, Jr. - BB&T Capital Markets

All right, that's helpful. Thank you. And lastly, just starting the quarter any change in the competitive landscape I know you've seen some competitors come out of the industry. Anything notable with regard to the competitive landscape in the fourth quarter?

Ronald Kaplan

Yeah, we've got competitors listening to me right now. We do have what I'll refer to is well some finite and some anecdotal information that we continue to go northward on market share. And this is a marketplace where.... I'll say it's marketplace clearly in transition. There is a lot going on out there. Meantime, we're sitting on a treasury and we're going to protect it very carefully.

John Kasprzak, Jr. - BB&T Capital Markets

Right, thanks a lot Ron.

Operator

Your next question comes from the line John Baugh of Stifel, Nicolaus.

John Baugh, Jr. - Stifel, Nicolaus & Company

Good morning.

Ronald Kaplan

Hi John.

James Cline

Hey John.

John Baugh, Jr. - Stifel, Nicolaus & Company

You, I believe if you look at '08 you achieved this significance swinging out there, you said four.... I can't remember your number for the year its 480 basis points for the fourth quarter of gross profit margin. But it sounded like it was close to 500, I can't remember positive swing and yet a negative impact from underutilization of 560 basis points. So first as to make sure I heard that right, I mean you basically had a 10 point improvement on a 1000 basis points excluding the impact of negative utilization, is that correct?

James Cline

John, you're exactly right. The impact was the total, little bit more than 10% year-over-year on a pro forma basis.

John Baugh, Jr. - Stifel, Nicolaus & Company

Okay. And then leading to my question which is how do we think about '09. I think you ran 47% of utilization '08 and we have to take a step and an estimate in '09 and presumably revenues will be down. If you got to lower inventory further, production therefore will be down. But you mentioned you have a lower polyethylene going into the fourth quarter in terms of purchases.

I am just kind of wondering should we be relative to the pro forma with 29% gross margin for '08, thinking that gross margins can still go up because we've got lower cost and productivity initiatives or volumes are going to be down so much, the productivity is going to be down, utilization I should say will be down so much, did is going to offset, how do we think about that?

James Cline

John, you're heading on the issues that certainly, you ought to be and as you know we don't give guidance going forward. I think you clearly understand that we are going to be reducing inventory that is going to cause us to reduce our capacity utilization. We still have a number of initiatives that we believe we can generate positive results on the gross profit line and the balance is how much of that reduced capacity can we overcome with the cost savings.

And I'd say that we can do a fair amount to overcome that; we've had extreme success over the last year. We've got a number of initiatives. But as far as giving the exact numbers in where we're headed we just aren't prepared to share gross profit guidance at this point.

John Baugh, Jr. - Stifel, Nicolaus & Company

So, it wouldn't be a forecast on your business, I told your revenues are going to be down 20% I gave you that number; is there a way to and may be offline get at... okay if that happened we think gross margins would be roughly X or some kind of variable fixed help. And I know you don't want to give out numbers but that's not making an estimate as much as it is saying.

Ronald Kaplan

I think you got to be over the... this management team is committed to can allow an inventory to grow; continuing to effect operational improvements to keep our cost line in structure with our demand. And I think the 64000 and a question for you guys to come up with this, what is going to happen with macro demand. And so, I am trying to give you the formula, I can't really go any further than that.

John Baugh, Jr. - Stifel, Nicolaus & Company

All right. What was... are you really going to laymen and say fairly confident, you'd be profitable in '09 based on guesses internally of where revenues will be or...

Ronald Kaplan

I would love to answer that question, but I'm absolutely committed to sticking to the basic principle that I obviously I took this job which is I don't give guidance.

John Baugh, Jr. - Stifel, Nicolaus & Company

Okay. What was brand spending as a percentage of revenues in '08 versus '07 and then slowing the plan for '09?

Ronald Kaplan

Hang out a second. Branding went down substantially in '08 versus '07 but we do expect it to rise some what over '08 levels. It will be higher than '08 less than '07.

John Baugh, Jr. - Stifel, Nicolaus & Company

Okay. And Jim let's say I was I wanted to... you mentioned the early buy programs changing the only change again with a similar discount for buying early but no required minimum volume?

Ronald Kaplan

Essentially that's correct.

John Baugh, Jr. - Stifel, Nicolaus & Company

Okay. And you seem to be in the comment about market share hinting that there is an opportunity to consolidate somebody out, but without giving away what's going on, would there be a scenario where you'd be committing material amount of capital to a situation?

Ronald Kaplan

I don't envision a scenario where we go and buy another company and they give us the keys of the front door and we write them to the cheque. I don't see that classical type of consolidation occurring, I mean if you look at Trex, we still got more than enough factories. We got the technology; we got property plan equipment.

So, I am not sure that would be in our interest, in fact I am quite confident that it's not in our interest to go on and start buying competitors and paying for the privilege of putting amount of business. I don't think that's a wise strategy, I think what we're going to do is stick to what we do best, we should run our own little business. But, having said that there maybe some creative ways of continuing to increase our market share.

John Baugh, Jr. - Stifel, Nicolaus & Company

Okay. Yeah, I wouldn't think you need capacity or inventory at this point. And last question is maybe for Jim. Could you walk us through that liquidity covenants. You mentioned, we know almost seasonally when you'd be kind of... where are the issues there are kind of how they plays out on that front?

James Cline

John, as you're aware, company such as Trex models on a number of different scenarios, what the impact would be on covenants. And we looked at it throughout the year and the only quarter that we believe conceivably could be an issue and that would be a remote situation would be fourth quarter.

And I think the other thing to remember is if you aren't borrowing money, it really doesn't make a lot of difference. And aren't borrowing money outside with our revolver right now, and we still have the covenant requirements, but we don't really see a scenario where we are going to be bumping up against spending at this point.

John Baugh, Jr. - Stifel, Nicolaus & Company

And are you saying you saying, you mentioned in revolver last spring, do you envision not have to go into the revolver this spring?

James Cline

We don't believe we're going into the revolver John.

John Baugh, Jr. - Stifel, Nicolaus & Company

Right. Thank you very much. I appreciate it.

James Cline

Okay.

Operator

Your next question comes from the line of Eric Glover of Canaccord.

Eric Glover - Canaccord Adams

Hi, good morning, I was just wondering if you could talk generally about pricing trends in the business, whether you're able to actually hold the line on some product pricing or whether you're getting some pushback from distributors strictly given lower input costs?

Ronald Kaplan

Actually it's been quite the opposite, we've put on 8% price increase in effect January 1st and it stuck.

Eric Glover - Canaccord Adams

Is that across all product lines?

Ronald Kaplan

No, it's not across all product line, that's a weighted average.

Eric Glover - Canaccord Adams

Okay. All right, thank you very much.

Operator

Your next question comes from the line of Keith Johnson of Morgan Keegan.

J. Keith Johnson - Morgan Keegan & Company

Hi, good morning.

Ronald Kaplan

Good morning.

James Cline

Good morning.

J. Keith Johnson - Morgan Keegan & Company

Just a couple of quick questions. I guess first of all given the major in demand, its, we may see in 2009 and as people have very lower visibility in to those spring demand right now. Will that require, I know you guys talked about inventory focusing on pulling working capital out of that, through 09, but you have to bill inventory as you kind of come through the first quarter or just to be.... and having in place to satisfy demand if it's a quick response?

James Cline

John, we're going to have more inventory on hand then what we would have planned or had we had a normal quarter. Well we anticipate they will be lower than last year.

J. Keith Johnson - Morgan Keegan & Company

Okay. About the end of March.

James Cline

By the end of March.

J. Keith Johnson - Morgan Keegan & Company

Okay. I was wondering just to make sure that I understand the changes in the early buy program, no minimum order point, the discount also for the weighted average 8% price increase. Your customers can still come to you all the way to the end of April this year and still buy the volume and get the price increase or price of the discount of the price increase?

James Cline

Basically what happens on this Keith is as the months take off, the discount goes down.

J. Keith Johnson - Morgan Keegan & Company

Okay.

James Cline

So if you buy in January you get the best discount if you buy in April you get the lowest discount.

Ronald Kaplan

And so by the distributors waiting to not place your orders until, they actually need the stuff, could actually accrued to our benefit because we're going to pay a higher price. We have actually discusses that with distributors and as the cash is king, we know that, we would rather pay the higher price than probably with our cash a day early.

J. Keith Johnson - Morgan Keegan & Company

Okay. It's to make sure I heard you correctly on utilization in the fourth quarter. Did you say that you ran utilization in the fourth quarter was around 40% or 40% of which you ran in the fourth quarter of '07?

Ronald Kaplan

It's 40% lower than the fourth quarter of '07.

J. Keith Johnson - Morgan Keegan & Company

Okay. Just to something on that. So I guess that'll put down somewhere below 35% of utilization?

Ronald Kaplan

We will calculate it.

J. Keith Johnson - Morgan Keegan & Company

As you kind of... I mean does that pop up a little bit as you kind of work your way in the first quarter of '09. Just trying to adjust for this potential demand shift or can you... do you think you can continue to satisfy demand and hold the utilization rate kind of where you are?

James Cline

It will come up slightly.

J. Keith Johnson - Morgan Keegan & Company

Okay.

James Cline

But not dramatically.

J. Keith Johnson - Morgan Keegan & Company

Okay. I was just trying out an amount to make sure I am thinking about seasonality, potential seasonality shift this year versus the way the business operate in the past. And I guess last question, could you... is your dollar amount that you could give us in relation to cost save in 2008 from your initiatives just... some color around that on the SG&A line or in total or...?

Ronald Kaplan

Well, I think the best way to look at it is percentage wise on a pro forma basis. Jim gave... I think I heard the number of 1000 basis points, kind of $330 million in sales, I think you can do the math.

J. Keith Johnson - Morgan Keegan & Company

And part of that that was all cost savings, or was that a combination of all your initiatives?

Ronald Kaplan

Combination of all of our initiatives.

J. Keith Johnson - Morgan Keegan & Company

So part of that slower fee in polyethylene pricing as well?

James Cline

That's right.

J. Keith Johnson - Morgan Keegan & Company

I'll ask one thing, could you give us kind of an update on trends maybe on polyethylene market as you kind of enter 2009 from a pricing standpoint?

Ronald Kaplan

Polyethylene prices have continued to decline and they're very soft, we do see some anecdotal information that some of the wood and poly prices are trying to be pushed northward. We don't know the net result of that yet, but there is some upward pressure on wood and poly prices.

J. Keith Johnson - Morgan Keegan & Company

But the recycle is still soft?

Ronald Kaplan

Yes.

J. Keith Johnson - Morgan Keegan & Company

Okay, okay. Thank you very much.

Ronald Kaplan

Thank you.

Operator

Your next question comes from the line of Dave Corgi (ph) of Flat Creek Investors.

Unidentified Analyst

Great job in an unbelievably tough macro environment. And thank you for the color on the redesigned early buy program. And just one another question related to that. Do you still also... does the distributor have an option of getting the extended payment terms or discount or is just the price discount now?

Ronald Kaplan

It's the extended payment terms or discount.

Unidentified Analyst

Okay. So you still give that option. And I know that the accounts receivable rough a little bit do you have any concerns about any of your distributors and their financial conditions?

Ronald Kaplan

We do not. As most companies we stay very close to our receivables and basically as we started to the early buy; virtually all of our distributors are taking the discount as opposed to extended terms.

Unidentified Analyst

Okay. Okay, good. And then on the capacity utilization numbers, do those include all Olive Branch?

Ronald Kaplan

They do.

Unidentified Analyst

And what would they have been roughly for the year, without Olive Branch? If you can give that from top of your head.

Ronald Kaplan

Oh, gosh.

Unidentified Analyst

Too hard, okay.

James Cline

One second. It's about 50, 50%, little bit more than 50%.

Unidentified Analyst

For 2008, excluding all of that. Okay. And then in the pro forma adjustments, you exclude about 7.2 million related to incremental incentive comps for the full year. Why is that appropriate for us to think of that as an extraordinary non-recurring expense?

James Cline

Well, I think the reason that we excluded is because it's not normal for a management team to exceed their objectives by the degree that this group exceeded it. It made it comparable to the prior year to exclude it both years.

Unidentified Analyst

Obviously I think Ron may be you explain one time some easy targets have been set and so that might not be the case going forward, and that's?

Ronald Kaplan

Well back and prior to my comment on Board, management had what I call personal goals, we don't have any personal goals anymore, they're just all based on EPS and cash flow.

Unidentified Analyst

Okay. So this is an incentive that you generally wouldn't hit under normal program. Okay, I think I understand. And last comment is that I really appreciate you not wasting your time or our time providing guidance. No one knows how bad this downturn is going to get the keys to manage the businesses as best as generated much cash flow you can survive the depression. And come out bigger on the other side, thank you for that.

Ronald Kaplan

I appreciate your remark, you've hit on our nerve or sympathetic cord with me because one of the challenges I've got as CEO is to keep everybody focused and there are so many ways in which we can get distracted from the mission. I think one of the very first week I was on board, somebody asked, how do we intend communicate with Street if we don't give out all those information, I said, well, how about with numbers.

And we are just going to keep doing our best to fight, the fight that's out there, this dragging of an economy and we're going to focus on our sales, we're going to focus on our costs, we're going to make stuff, we're going to sell stuff, we're going to collect the money, put the money in the bank, start over again. That's where we're going to focus on and we'll.... we can control, we can trim the sales, I can't control the winds, so I am not going to worry about it.

Unidentified Analyst

Terrific. I feel like I am not an analyst that I have try to forecast quarterly numbers in a depression. Thank you.

Ronald Kaplan

All right take care.

Operator

Your next question comes from the line of R.A Rosenberg of Loews (ph).

Unidentified Analyst

Hi guys.

Ronald Kaplan

Good morning.

Unidentified Analyst

I was wondering, if you could give us an idea, how much your polyethylene cost was down percentage wise, year-over-year in the fourth quarter. And if prevailing polyethylene prices for you guys were to continue for the rest of this year, what do you think your polyethylene cost would be?

Ronald Kaplan

Hang around. I am going to put you on mute for a second, I am not sure I want to answer this question. Go ahead.

James Cline

With regard to the spot price on polyethylene, you can clearly the spot price on polyethylene that everyone else is buying is down year-over-year by about between 35 and 40%. We don't buy polyethylene in that manner, we buy stream of products that is really outside of that and while the market went up considerably for the polyethylene as everybody else is buying ours do not increases as much. We aren't going to give out what our polyethylene cost is. But we can tell you that our polyethylene cost is down year-over-year but not down to the magnitude that the other people saw in their decline.

Unidentified Analyst

Can you give us an idea though whether if the current price that you're paying were to prevail for the rest of the year, whether your polyethylene costs would be down on a meaningful amount versus '08?

Ronald Kaplan

We believe we'll still hold the competitive advantage I think just as far will take that. Trex is a 500 pound grow up in this recycled poly market and we still have a competitive advantage. Jim talked to you about the relativity between the two streams of raw material. And for us to give talk any more about it, I think we give competitive information to our competitors.

Unidentified Analyst

One other question with respect to receivables. I was wondering if you could clarify again why they were up year-over-year?

James Cline

Sales were up late in the quarter and that's primarily why the receivables were up and no other reason than that.

Unidentified Analyst

Okay. Thanks.

James Cline

Certainly.

Operator

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

Kenneth Smith - Lennox Equity Research

Thanks. Ron you alluded to new products and question was just about when you might announce them. I think you said in the fall at your distributor meeting. Would that be.... are you saying that that would be the first time we would hear anything about them or might you be talking about that sooner?

Ronald Kaplan

I don't envision talking about any sooner if in fact it's going to happen. I'm not yet committed to the fact that it will happen. We continue to work cautiously optimistic about it, but I don't make any predictions at this point. We'll have to make a go, no go decision internally in the early summer, but I think our distributors have the... we have an obligation to make sure our distributors are the first ones to hear about this.

And we would launch it for the 2010 early buy. And so, we wouldn't want to give our competitors any advance knowledge of it, and so I think that's where the time will play out. So, the distributors will be the first people to hear about it.

Kenneth Smith - Lennox Equity Research

Okay. And then the cost initiatives that you seemed confident about for '09, are there any initiatives that you've already identified and it's a matter of implementing them or is it more a matter of... we've been good at this in the past, and we're confident, we're good at it in the future we just need to keep plugging a way at?

Ronald Kaplan

I think, it's more the former.

Kenneth Smith - Lennox Equity Research

Okay.

Ronald Kaplan

There're things where we're going to capital budget put together that speaks to that issue. And what we're doing is, most of our Lean and Six Sigma initiatives are really been focused on the, Winchester plan, now they are going to start migrating to the friendly plan.

Kenneth Smith - Lennox Equity Research

Okay. Thanks very much and good job.

Ronald Kaplan

Thank you.

James Cline

Thank you.

Operator

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

Ronald Kaplan

Thank you, operator and thanks to everybody who's been on the phone. I see that we had employees, directors, analysts, owners, have all been on the telephone I appreciate everybody's attendance. I am glad we've had a chance to talk about the significant progress made in 2008. Many plans we have to make 2009 another successful year, despite the extremely challenging economy. And we look forward to speaking you again next quarter. That's it, good bye and good luck.

Operator

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

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