Trex Company Q1 2009 Call Transcript

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 |  About: Trex, Inc. (TREX)
by: SA Transcripts

Trex Company Inc. (TWP) Q1 2009 Earnings Call April 30, 2009 10:30 AM ET

Executives

Harriet Fried - Investor Relations, 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

Robert J. Kelly - Sidoti & Company

Steve Sharkey - Flat Creek Investors

Kenneth Smith - Lenox Equity Research

Eric Prouty - Canaccord Adams

Keith Johnson - Morgan Keegan

Stanley Elliott - Stifel, Nicolaus & Company

Operator

Welcome to the Trex Company First Quarter 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). As a reminder, this conference is being recorded, today April 30, 2009.

I would now like to turn the conference over to Harriet Fried of LHA. Please go ahead Ms. Fried.

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 McDonald, Controller; Brian Berteau, (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 first quarter of 2009. 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 would now like to turn the call over to Bill Gupp, Trex's General Counsel. Go ahead 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 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 related to product quality, and a highly competitive markets in which the company operates.

The company's report on Form 10-K filed with the SEC on March 12, 2009, 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.

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

Ronald W. Kaplan

Thanks, Bill and thanks everyone for joining us today. As we predicted in our fourth quarter release and conference call, sales for 2009 are following a different pattern than in past years. Because of a very tough economy, our customers are focused on holding inventories low and therefore do not take full advantage of the pre-spring purchase incentives. Instead, they've been ordering more based on pull-through demand from the consumer.

We said in February that we expect that these forces to shift sales activity from the first to the second and third quarters and we're definitely seeing that trend.

In the first quarter of 2009, net sales totaled $67.7 million and including the fairly substantial impact of the new accounting provision relating to embedded in interest on convertible debt, we reported a net loss of $3.1 million or $0.21 per diluted share. At the same time, we have been continuing to make substantial headway introducing new products, gaining new customers and expanding our distribution presence. All of these are very important for positioning Trex for the long-term and we continue to push forward with the operational improvements we started implementing when I joined the company last year.

So first, I would like to ask Jim Cline to provide a more in-depth look at our first quarter numbers, including the impact of FASB, staff position APB 14-1. After that, I'll comeback on to give you an overview of our product, distribution and operational initiatives, and why we are encouraged by the results today.

James E. Cline

Thank you, Ron. Good morning. As you know, the press release with Trex's first quarter financial results was issued this morning. The numbers I will reference are continued in the tables headed, Condensed, Consolidated Statements of Operations, Balance Sheet and Cash Flow.

The company recognized net sales of 67.7 million in the first quarter of 2009, a 43% decrease compared to 2008. The first quarter sales volume was approximately 50% less than 2008 which was partially offset by favorable sales mix and favorable pricing.

The overall economic conditions, coupled with our customers choosing to operator with leaner inventories compared to prior years were the primary drivers for the year-over-year decline in revenue. The company recorded a net loss of 3.1 million or $0.21 per share in the first quarter of 2009, compared to net income of $7.5 million or $0.50 per share in 2008.

The company's results for the first quarter of 2009 and 2008 included $1.6 million and $1.4 million respectively of non-cash interest expense due to the adoption FASB Staff Position APB 14-1 related to embedded interest on convertible debt. This reduced earnings per share by $0.11 and $0.10, respectively.

Gross margin was 24.8% for the first quarter of 2009, a 224 basis point decline from 2008. Our capacity utilization of 32% was down significantly from the prior year, approximately 27 points, and adversely impacted gross margin by approximately 900 basis points.

Our higher pricing and improved manufacturing productivity were more than offset by operating at reduced levels of capacity utilization and an increased level of excess poly sales at lower than normal pricing due to the weak demand in Asia and North America during the first quarter.

SG&A for the first quarter was 16.6 million, compared to 2008 20.3 million. The decrease in SG&A was primarily driven by lower personnel related cost and other general spend reductions which were partially offset by increased brand expense.

Net interest was $3.4 million in 2009, a $900,000 decrease from 2008.

As I noted earlier, the company's results for the first quarter of 2009 and 2008 included 1.6 million and 1.4 million of non-cash interest expense, respectively due to the adoption FASB Staff Position ABP 14-1. Net interest, excluding the non-cash recognition from the new accounting pronouncement, declined by $1.2 million.

The first quarter 2009 effective income tax rate remained low as a result of the valuation allowance against our deferred tax assets. The company had $19.5 million of cash on hand and no borrowings on our revolving line of credit at March 31, 2009.

As of March 31, 2009, total debt amounted to 85.2 million, which represents a $36.1 million reduction from March of 2008. Total net debt to total capitalization at March 31, 2009, was 38% compared to 47% at March 31, 2008.

Inventory was $61 million at March 31, 2009, a $5 million year-over-year reduction.

The company had free cash flow of negative $3 million in the first quarter of 2009, which represents an $18 million improvement over 2008. The improved free cash flow was primarily driven by a lower level of accounts receivable compared to last year. This was principally the result of lower revenue and a higher percentage of our customers choosing early payment discount options in lieu of extended payment terms for the pre-spring order season.

Capital expenditures for the first quarter of 2009 were $2 million, a $1.2 million reduction compared to 2008. Our 2009 investment strategy continues the path we established in 2008 with a focus on lower spend projects that support our productivity improvements, cost reduction initiatives and new product introductions. We're also in the process of completing an upgrade to our ERP system and investing in Business Intelligent Systems that will deliver a more efficient and robust reporting platform to enable more timely decision making.

In addition to recording the non-cash interest charges as a result of the new accounting treatment for convertible bonds, debt decreased 28.6 million and equity increased commensurately at March 31, 2009. The amount recognized as equity will be amortized through interest expense over the remaining term of the convertibles which will result in non-cash charges to earnings of approximately $1.7 million per quarter for 2009.

Finally, I'd like to summarize several significant achievements that we accomplished during the first three months of 2009.

As I mentioned before, we operated approximately 32% capacity utilization in the first quarter of 2009 versus 59% in 2008. This negatively impacted gross margin by approximately 900 basis points, masking the favorable impact of the 2009 price increase and continued operations improvements.

Both, our line rates and yields have continued to improve year-over-year as a result of ongoing and new process improvements. In addition, when excluding the effect of capacity utilization, our manufacturing cost per pound also improved year-over-year.

While SG&A expenses were lower in 2009 versus 2008, we did increase spending to support specific distribution, advertising and branding initiatives, that we believe, will help enhance our reach and exceptional brand recognition.

We continue to focus on free cash-flow. Our service levels during the first quarter exceeded our target 95%, as we intend to continue performing at these levels with even higher than expected levels of sales in the second and third quarter. We are committed to consistently meeting or even exceeding our service level goals, while at the same time, continuing our focus on free cash-flow by reducing inventory significantly.

Ron?

Ronald W. Kaplan

Trex continues to strengthen its market position and build an operating platform that should enable us to survive the recession and thrive during the recovery. Here are some specific actions that provide evidence. First, we continue to broaden our product offering in response to consumer demand for historically superior, eco-friendly, outdoor living products.

For example; in the past quarter we launched our expanded Trex Artisan Series Railing, whose modular construction provides flexibility for people to mix and match colors and styles to achieve their optimal design. We are rolling out decorative balusters, a charcoal black railing system and a graspable handrail system that meets the requirements of the Americans with Disabilities Act.

Second; we are taking market share because of our superior products, innovative marketing strategy and fiscal strength. For example, in just the last few months we've won contracts to give Trex exclusivity or preferred vendor status with the Nation's largest supplier of material for homebuilding, professional and contract builders, the second largest supplier of structural building products to new homebuilders, and a leading builder of luxury homes in the U.S.

All of these wins came directly at the expense of major competitors. And overtime, we expect them to produce significant sales increases.

Equally important, with continued consolidation expected in the pro-channel, we think strategic partnerships, such as these, strongly position Trex for long-term success and future market share gains. We're working aggressively to gain more market share.

Third; we're lowering our costs. In 2009 first quarter, we began to applying the Lean Six Sigma and other best-in-class manufacturing techniques at our Fernley plant and we're extremely pleased with our operating results.

As Jim noted, the recent reduction and capacity utilization has masked the significant progress we've made in productivity and cost reductions during the past quarter.

Fourth; our research and development efforts designed to further separate us from the competition are ongoing and productive. We have also eliminated costs that will improve operating margins by 2% to 3%. These cost savings were targeted throughout the organizations ... throughout the organization and include a recent step change in the production methods at the Winchester Plant, which has resulted further productivity gains and cost reductions.

Turning now to our guidance for the second quarter. The shift in purchasing patterns is now clearly evident. Based on the order flow we are seeing, we expect sales to approximate $85 million for the second quarter.

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

Question-and-Answer Session

Operator

(Operator Instructions) Our first question is from Keith Hughes with Suntrust.

Keith Hughes - Suntrust Robinson Humphrey

First reach into these accounting pronouncements. I don't really understand why are we lowering the amount of settlement and this seems to be shifting it to the equity count until you hit on the income statement. What is the purpose of that?

James Cline

Basically what's required is that we ... at the time debt was issued, the convertible bond was issued, we had to calculate what the embedded value related to the convertible feature was and then amortize that interest expense across a P&L from the date of election.

The reason is the debt is lowered is so that we can record that comparable interest over the term of the notes. In the case of the notes, the embedded interest rate that was used was roughly 18.4%.

Keith Hughes - Suntrust Robinson Humphrey

So this is a hypothetical calculation, the accounts are making you do around the value of redeeming these things in cash at some point. You broke up or is that part of the answer?

James Cline

That is part of the answer. And basically, you are correct. It's a requirement that we estimate with that number would have been as of June of 2007 had we offered a note without a convertible feature in it. It's all non-cash.

Keith Hughes - Suntrust Robinson Humphrey

Yeah. I understand that. Okay. So the account is made the financial statements and this order the rate (ph).

Next topic, as you look at the sales number you gave us for the second quarter, will production rates come up based on that sales guidance from this 32% you had in the first quarter?

James Cline

They will not.

Keith Hughes - Suntrust Robinson Humphrey

Okay. I'm keeping that right.

Ronald Kaplan

We are going to continue to draw down inventory.

Keith Hughes - Suntrust Robinson Humphrey

Let me see, you had mentioned I believe costs, poly costs that turned in your favor, is that correct in the first quarter?

James Cline

We didn't say poly cost that turned in our favor what I was referencing was that we sold off a large amount of poly at lower prices. The poly market basically, was fairly soft. We buy more poly than we utilize and when we sold it off, we took a loss on that sale.

Keith Hughes - Suntrust Robinson Humphrey

Okay. And finally on SG&A, it was down nicely in the year. Will that number do you think ... if sales stay at the kind of the rate we're seeing here will it continue to be down year-over-year?

James Cline

The total SG&A cost may be down slightly year-over-year. But I would not expect a dramatic reduction year-over-year.

Keith Hughes - Suntrust Robinson Humphrey

Alright, thank you.

Operator

Our next question comes from Jack Kasprzak with BB&T Capital Markets. Please go ahead.

John Kasprzak, Jr. - BB&T Capital Markets

Thanks. I wanted to ask about SG&A as well. When you say it's down slightly, I assume that's just from the reported amount of SG&A in '08, because there were some unusual items that hit SG&A particularly in the first half of '08. So is it just simply down slightly from what was reported, including unusual items?

James Cline

It will be down slightly from total reported SG&A for the year.

John Kasprzak, Jr. - BB&T Capital Markets

Okay. Thank you. And then Ron, you mentioned in your comments that cost savings should help operating margins by 2% to 3%. Is that over some period of time at higher utilization rates or is that something you expect to gain in '09 on a year-over-year basis, can you just help to frame out?

Ronald Kaplan

It's an annualized number, net of restructuring costs. And so, we should recognize it at the current rate of production. All things being equal, it's on an apples-to-apples basis you will see this through 2010 on an annualized basis.

John Kasprzak, Jr. - BB&T Capital Markets

Okay. Very good. Thanks a lot.

Ronald Kaplan

Thank you.

Operator

Your next question comes from Robert Kelly with Sidoti. Please go ahead.

Robert Kelly - Sidoti & Company

Good morning.

Ronald Kaplan

Good morning Robert.

James Cline

Good morning, Robert.

Robert Kelly - Sidoti & Company

A question on the reduction and cost per pound year-on-year. Is there anyway you can give us help on how much it was, some of the efficiency improvements you have all made compared to just a reduction in raw material cost?

Ronald Kaplan

The line rates, yields and overall cost per pound are all moving in the right direction. Net of or excluding the impact of lower capacity utilizations. So on a cash basis, they are all moving the right way. The cost of poly, of the acquisition cost of poly is down several percentage points from prior year. Does that answer your question?

Robert Kelly - Sidoti & Company

Yes. Do you think that poly trend to continue '09 and into 2010?

Ronald Kaplan

We certainly expect it to continue through the second and probably the third quarter. But depending on economic conditions, I don't think we can really go much further than that.

Robert Kelly - Sidoti & Company

Okay, great. The point on the excess poly sales, I guess, you took a little bit of loss there. Was that part of the 900 basis point drag from being underutilized or was that in addition to the 900 basis point drag?

James Cline

It's in addition to the 900 basis point drag.

Robert Kelly - Sidoti & Company

And then, finally on the convertible; last checked the public debt was rating at a pretty significant discount at par. Is there any chance to go back and buy, are you precluded from buying the debt back in the open market at a discount?

James Cline

We are not precluded from buying it back.

Robert Kelly - Sidoti & Company

That's something that you would... if you have enough excess cash, you would look into doing.

James Cline

I think its one of the many options we look at. We've looked that before and have elected to take a different course in the past. We've not made a decision going forward what we will do on that.

Robert Kelly - Sidoti & Company

Okay. Thanks.

Operator

Your next question comes from Alehandro (ph) with HIG Capital. Please go ahead.

Unidentified Analyst

Good morning. I wanted to ask first about the magnitude of the price increase and when that kicked in. And just in general, a little more color on that the acceptance by the market and whether competitors have followed suite?

Ronald Kaplan

The order of magnitude of the price increase was approximately 8% on a blended basis, it did stick. We haven't had any significant resistance to that. The distribution channel has taken it. By and large, there is some out-of-sync between us and some of our competitors, but buy and large, the positioning of Trex's price wise within the competitive landscape remains unchanged.

Everybody is either moved before us or after us and there has been no significant change in pricing positioning.

And further to that, just to be clear. In the first quarter the effective impact of that, we didn't realizes all 8%, it would have been closer to a 6% impact because of timing of the announcement and most people electing to take discount versus extended payment, but we did have some people take extended payment terms.

Unidentified Analyst

Okay. My next question is around your loss of one of your largest distributors last year around September. I just wanted to follow up on that and see what the impact of that loss has been and whether you have been able to pickup that business from other distributors that you had in same area.

Ronald Kaplan

Well actually we more then picked it up that actually is proven to be a net benefit to us what more we can tell. So, while it was exciting when it first happened and we had to move very quickly and decisively to establish the replacement, the people who replaced and they have been extremely enthusiastic and the overwhelming majority of the dealers are they actually switch distributors and quite other checks through the new distribution channel.

Unidentified Analyst

Thanks. Then moving on to CapEx, noticed current levels are fairly low relative to some of the historical levels around closer to annualized 25 to 30 million a year. Once the economy recovers, what are levels of CapEx that you envision that are more kind of like a growth/stable CapEx?

Ronald Kaplan

I expect that to be in the high single-digits, maybe up as high as $10 somewhere in that range.

Unidentified Analyst

Okay. And then my last question is about warranty claims. Have you seen any changes in the trends under warranty claims, anything similar to what you saw in 2007?

James Cline

Well, if we were to compare the first quarter of 2008 to the first quarter of 2009, first quarter 2008, the claims cost us about $7.6 million in cash. In the first quarter of '09 that same number was about 1.9. So we see the claims as payouts as declining

Unidentified Analyst

Thank you very much.

Ronald Kaplan

Thank you.

Operator

Your next question comes from Steve Sharkey with Flat Creek Investors. Please go ahead.

Steve Sharkey - Flat Creek Investors

Going back to the loss on the sale of the poly; why did you decide to sale it? Is it because you think you can buyback at a lower price in the future or you weren't happy with the quality? And just roughly what was the size of that loss in dollars?

Ronald Kaplan

Yeah, it's really a combination of two things. When we buy poly, we buy at including poly that we cannot use. Though part of that was poly that was not usable poly for our operations, we do that as a convenience to the people we buy the poly from.

In addition, we felt that the poly inventory we were carrying was higher than what we were comfortable carrying and made a decision to reduce the inventory.

Steve Sharkey - Flat Creek Investors

Okay. Jim is that sort of normal deal then I just never heard of that before maybe the amounts have always been de minimus?

James Cline

They have for example, if we looked at the same time period last year, we were basically able to sell poly at basically, what our cost was.

Steve Sharkey - Flat Creek Investors

I see.

James Cline

But what happened was the Chinese basically backed away from the market in the fall, late fall and did not re-enter the market as robustly as expected after the Chinese New Year. Plus with the U.S. market on being on a tier it just left us with more poly then we wanted. And the pricing to sell it off quiet frankly was considerably less then what we have brought it for.

Ronald Kaplan

When the Chinese leave the market or decrease their presence in the market, it's sort of a double edged sword. It lowers our cost of acquiring the new policy but it also lowers the cost of the poly that we want to sell. This time the spread between the two began to widen.

Steve Sharkey - Flat Creek Investors

And that dollar loss roughly was?

James Cline

Couple of million dollars.

Steve Sharkey - Flat Creek Investors

Okay. And then you mentioned, new product Trex profile with the deep green board with the structured profile. What does structured profile mean?

Ronald Kaplan

It means that it's got a wood green appearance to it and it is specifically for a particular customer. The structured profile can also be referred to it like a scalupt bottom.

Steve Sharkey - Flat Creek Investors

Oh, I see. Okay. Okay, thank you.

Operator

Your next question comes from Kenneth Smith with Lenox Equity Research. Please go ahead.

Kenneth Smith - Lenox Equity Research

Thanks. I was going to ask some more questions about the profiles product. You seem pretty exited about it. At the same time it sounds like some product you already have. So, can you just kind give ... what is it about it, I know what you said, but that makes some stand out as being particularly...

Ronald Kaplan

It is. All I can tell you is that, it's a unique appearance for a particular customer.

Kenneth Smith - Lenox Equity Research

Okay. Ron, those relationships you had established, you referred to earlier in the call, when would those start to benefit you on the sales line.

Ronald Kaplan

I would say, they begin to benefit us in the second and third quarters.

Kenneth Smith - Lenox Equity Research

Okay. And then in the past you talked about new product or products you have been developing and you would know how they are going to pan out until maybe sometime December or even fall, what is the status on that?

Ronald Kaplan

Well, what I said before remains true. I think, what I said earlier this morning was that our product development efforts remain ongoing and productive.

Kenneth Smith - Lenox Equity Research

Okay. Alright, thank you.

Ronald Kaplan

Thank you.

Operator

Your next question comes from Erik Prouty with Canaccord. Please go ahead.

Eric Prouty - Canaccord Adams

Great. Thanks guys. Just a couple of things. To previous questions, you approved warranty (ph) numbers in the balance sheet with down a bit, you assumed in reduced level of warranties your paying out that that number should continue to trend down for the remainder of the year?

James Cline

Yes, that's our expectation that all the claims related to that are being charged against the reserve and we do believe the reserve is adequate to our exposure at this point.

Eric Prouty - Canaccord Adams

Okay, great. And then you talked about an awful lot but just to be certain on the impact; you would expect then with this new charge related to the debt that the interest expense kind of going forward with beyond a similar run rate to what we saw in the March quarter, kind of that 3.4, 3.5 million per quarter on the interest expense line in total?

James Cline

The entire interest would be comparable, because there's no change in our plan to debt. So, the answer to your question, yes.

Eric Prouty - Canaccord Adams

Okay. Perfect. Just wanted to make sure that was totally clear. And then on the capacity, with the low capacity utilization, I mean is there any plans to permanently or semi-permanently take out additional capacity that you guys have? We already kind of comfortable that, sooner or later the demand will pick up to points where you will need most of that capacity?

Ronald Kaplan

Well, let me answer that, a couple of ways. The short answer is, no. We do not plan to permanently or semi-permanently reduce our capacity. Now let me give you a little more granularity on that. We can always reduce the lines that we have got in production. Without shutting down the factory, towards, let's us suppose we have got four lines operating in this plant, we can always cut it back to 3, 2 or 1, or even 0, if had to without shutting the factory per se.

We have no intention of shutting either one of our factories down. I've thought about it and decided against it because the cost of shipping the material back and forth across the country eats up any savings you get from shutting down one of the factories. So we are not going to go there.

We've got the one plant in Moth Falls (ph) it's going to stay in Moth Falls for the foreseeable future. And as I did say, we are working on important aspects of market share, between the potential for that and the potential for a recovery we're going to keep our manufacturing capacity intact.

Eric Prouty - Canaccord Adams

Perfect. And then finally, and again, you touched on this a bit. But on the raw material side, and obviously the market for raw materials at least in the plastic side, we've heard about collapsing markets quite a bit. Can you just give an update are you able to find enough material out there? Are you getting new channels of material or channels just occurring with even people now starting to landfill plastics and fibers given the low prices? And maybe a little commentary on that.

Ronald Kaplan

We haven't had any difficult finding raw material. I will tell you that while the price of acquiring poly is down on a gross basis, the cost of finding wood has gone up. Of course, we use much more poly then we do wood in terms of dollar value. We got to drive a little further to get the wood then we use to, but we haven't had any difficultly finding the poly that we need.

Eric Prouty - Canaccord Adams

All right. Is this something this as but, given the lower prices and the fact that you are keeping the price of your product intact and should we assume price coming down enough to help out the gross margin heading for this total working through higher cost raw material inventories so the impact will be much later on the year?

Ronald Kaplan

We are having a little trouble hearing you are breaking up, can I ask you to repeat that one again?

Eric Prouty - Canaccord Adams

Yeah, sure thanks sorry about that hopefully this is clear. Just again on the poly, can we assume that given your pricing your product is, end product is sticky or even being increased and we have heard a lot of the poly prices coming down; should that be an immediate impact your gross margin or you it's the working through higher costs raw material inventories?

James Cline

Well we certainly have poly on hand that we will work through. It takes a while for those price reductions to filter in. So you probably would see the effect of lower poly hitting in the second and then more heavily in the third.

Ronald Kaplan

But I would direct your attention to the comments that Jim has already made regarding the affect of lower capacity utilization. And if you add that back I mean you see sort of direction that our gross margin is headed.

Eric Prouty - Canaccord Adams

Okay, perfect. Thanks guys.

Ronald Kaplan

Thank you.

Operator

Your next question comes Keith Johnson with Morgan Keegan. Please go ahead.

Keith Johnson - Morgan Keegan

Good morning.

Ronald Kaplan

Good morning, Keith.

James Cline

Good morning Keith.

Keith Johnson - Morgan Keegan

Just a couple of questions, I think you have covered most of mine. Just a real quick, could you give us, I guess, any color on may be order trends you're seeing in the different channels and another channels the biggest piece and also may be the retail channel, maybe trends as you have come to April versus may be what you saw in March as we kind of move over last couple of months?

Ronald Kaplan

I would tell you that in last couple of weeks, April orders have exceeded the rate at which they were ... all few weeks before that. We did see an uptick. Earlier in the month, I sent a letter to the various CEO's of are distributors pointing out that our several economic indicators started to move favorable and make sure that they are indicating further to them that our orders have been on uptick and reminding them that we process orders on a first come first serve basis.

So, we have seen some uptick. I'm reluctant to advice on the difference in growth pattern between the channels. It's a fairly sensitive subject.

Keith Johnson - Morgan Keegan

Okay. I guess maybe a different subject. You have talked in the past economic conditions have been very challenging. You guys have done a great job managing all cash, but it looks like if you look at smaller competitors out there in the composite decking space, have you seen any more shake out or sounds of stress that may have been smaller that would have been off the radar screen that made sort a relief (ph).

Ronald Kaplan

We do see signs of stress and I believe the shake out continues. There have been a number of companies that have dropped out of the industry in last several months. And I can read the same publicly available financial information that you guys can read. So clearly there is stress out here.

There is nobody in the distribution channel that doesn't believe that Trex won't be a survivor and frankly one of our strengths within Trex is the strength of our balance sheet and it is becoming of increasing importance to the end-user and various parties within the distribution channel. Everybody wants to make sure they're hooked up with a survivor and everyone wants to get caught in a distribution chain, represent a company that might be here in two or three years. And that serves Trex well.

Keith Johnson - Morgan Keegan

Okay. All right. Thanks a lot.

Operator

Your next question comes from Stanley Elliott with Stifel Nicolaus. Please go ahead.

Stanley Elliott - Stifel, Nicolaus & Company

Good morning, sitting in for John today. Quick question about the guidance for 85 for 2Q, yes its run rate, it's down about 29. How much do you guess got pushed into the second quarter from the first quarter? And then also how should we look at that heading into the third quarter? Is that we're looking at run rate of down about 20% or is it just too hard to say?

Ronald Kaplan

It's a great question. It's just an imponderable. I don't want to give guesses. I don't have any evidence to back up my guess. I'm just going to not go there.

Stanley Elliott - Stifel, Nicolaus & Company

Okay. Fair enough. Could you also give a little more color on the major home improvement retailer on the West Coast?

Ronald Kaplan

We had their names in there and then last night we took their names out. This is such a sensitive marketplace that I just don't want to give anymore color. And other then to I tell you, they fit the description that I have used. You can draw your own conclusions.

Stanley Elliott - Stifel, Nicolaus & Company

All right and fair enough. And last just for clarification, I thought you guys said 39% utilization; did that include Olive Branch and if so, what would have been without that?

Ronald Kaplan

I don't thing we said 39, I think we said, well we are going to check here.

James Cline

32%.

Keith Johnson - Morgan Keegan

32, okay.

Ronald Kaplan

32 and yes it did include Olive Branch.

Stanley Elliott - Stifel, Nicolaus & Company

Great. And could you guys comment on what it would be without that?

James Cline

Well Olive Branch represents between 10 and 15% of our capacity.

Stanley Elliott - Stifel, Nicolaus & Company

Perfect. Great guys. Thank you very much.

Ronald Kaplan

Thank you.

Operator

(Operator Instructions).

Ronald Kaplan

Okay operator. Thanks everyone for your participation and questions today. I want to emphasize as we close that Trex is the number one brand in the category. We have the largest selection in decking and railing products. And we have great field sales and support team and we have a strong financial position. These are important advantages and we are using all of them aggressively to expand our presence throughout the U.S. and in Canada and position ourselves for long-term success.

We look forward to speaking with you again after the second quarter.

Thank you.

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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