Good afternoon, and welcome to the Trex Company Second Quarter 2018 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Viktoriia Nakhla. Please go ahead.

Thank you all for joining us today. With us on the call are Jim Cline, President and Chief Executive Officer; and Bryan Fairbanks, Executive Vice President and Chief Financial Officer. Joining Jim and Bryan is Bill Gupp, Senior Vice President, General Counsel and Secretary, as well as other members of Trex management. The company issued a press release today after market closed containing financial results for the second quarter of 2018. This release is available on the company's website. And this conference call is also being webcast and will be available on the Investor Relations page of the company's website for 30 days. Now, I would like to turn the call over to Bill Gupp. Bill?

Thank you, Viktoriia. Before we begin, let me remind everyone that statements on this call regarding the company's expected future performance and conditions 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 1933 and other 1934 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 will turn the call over to Jim Cline.

Thank you, Bill and thank you all for joining us to review our second quarter operating and financial highlights and to discuss our business outlook heading into the second half of this year. This was another very strong quarter for Trex, representing our 11th straight quarter of record revenue and our sixth consecutive quarter of record revenues and earnings. We think the trends are clear. Our residential business continues to benefit from high consumer confidence levels and increasing repair and remodeling spend. Within this environment, outdoor living remains an important growth category that aligns with lifestyle trends and adds value to the home. The Trex brand continues to resonate with residential customers who increasingly recognize the competitive nature and advantage of our decking and railing products, both compared to other composites and with the growing importance compared to the large wood market, which we began aggressively targeting three years ago. Taken together, the positive macro environment and our brand leadership resulted in a 20% increase in the Trex residential sales in the second quarter. The commercial segment provided $17 million of sales and a solid margin expansion, consistent with our plan. Related to Trex residential products, our data analytics continue to point to an engaged consumer. We have experienced record activity on our website, where the consumer can browse our products, order samples, estimate the cost of a deck and even find step by step checklists for building a deck. Additionally, our channel partners are reporting positive point of sales data along with higher lumber prices, specifically for cedar and redwood, which have further enhanced Trex value proposition. Given the strong demand that we're seeing, we expect the 2018 data will show conversion from wood, increasing by 1 percentage point in a single year, a milestone that took 2 years…

Thank you, Jim. Good afternoon, everyone. We are pleased to report on an exceptional quarter, reflecting favorable market conditions and strong consumer demand for Trex residential products and notable progress of Trex commercial products. Before we begin, I want to remind you that we distributed a stock dividend in the form of a two for one stock split on June 18. Consequently, all per share data for 2017 and the first six months of 2018 in our earnings release and prepared remarks have been adjusted accordingly. Second quarter 2018 consolidated net sales amounted to $207 million, an increase of 31% year-over-year, mainly driven by higher volumes in Trex residential products, where revenue grew 20% to $189 million. Trex commercial products contributed $17 million this quarter, in line with our expectations. Consolidated gross margin in the second quarter was 44.1% compared to 45.6% reported in the second quarter of 2017, reflecting the impact of lower gross margin profile of Trex commercial products. Trex residential products gross margin expanded by 30 basis points to 45.9% due to the sustained benefits of lower polyethylene material costs due in large part to product substitutions along with manufacturing efficiencies and higher capacity utilization. The benefits were partially offset with additional expenses related to the improvements to our production lines that are underway to significantly increase throughput, increased product innovation costs and higher freight costs. As we've mentioned in the past, Trex has undertaken to our decking lines that will provide a step change in the manufacturing process for our deck boards. In the first quarter of 2018, we began to implement production line enhancements and we will complete this phase by the end of this year. This retrofit not only provides an expansion of our decking capacity, but will drive further utilization cost savings in…

Thank you, Bryan. 2018 is developing into another year of strong growth for Trex. Our second quarter performance brought the first half total sales growth to 25%. Residential products year-to-date revenue growth was 14%. The latest data we have seen indicates projections for the growth that the repair and remodeling market remain the same at high single digit rate for 2018. This provides an excellent backdrop for Trex as the brand leader in composite decking and railing, a growing category within outdoor living and one that is gaining more attention from traditional rail buyers. Additionally, our product appeal to the increasing number of consumers seeking eco-friendly products who are attracted by our high recycled content for decking and the environmental processes we use in our manufacturing operations. At the same time, our commercial business continues to move forward, in line with our expectations. We continue to see collaboration on a number of projects between residential and commercial products that will drive further revenue synergies and profit improvements. I would like to emphasize to new investors that Trex is primarily a repair and remodeling play. Significant swings related to new housing builds have little effect on our core business. Residential repair and remodeling tracks better with consumer confidence and the sale of existing dwellings. Trex’s consolidated profile today is approximately 83% residential repair and remodeling, 12% commercial and only 5% residential new construction. We do expect that the growth in residential new construction in which Trex participates in both multifamily and single family, will expand over the next several years as we approach the next peak in new housing starts. However, we do not expect residential new construction will exceed 10% of our sales during this cycle. In the third quarter, we expect to report consolidated sales of $173 million, up 23% compared to 2017. We anticipate that Trex residential sales will account for $154 million, representing an 18% growth and that Trex commercial products will contribute approximately $19 million. As you can see, we expect our positive momentum to continue. This reflects the commitment and the drive for excellence by the entire management team. You may have noticed we have introduced announcement of three executive promotions in a release issued last week. These expanded leadership roles are part of an executive structure that Trex committed to as our continued growth in the residential and commercial products and to maximize economic value for our shareholders. Operated, I’d now like to open the call up for questions.

[Operator Instructions] And our first question will come from Frank Camma with Sidoti & Company.

Hey, Jim, you mentioned that it sounds like the conversion from wood to composite is accelerating. Can you give us a sense of how much of that could be caused by either rising wood costs or lack of certain types of wood in your estimate?

It's pretty difficult to bifurcate between people becoming more knowledgeable and appreciative of the second generation composites. I can tell you on the West Coast, the prices of cedar as well as redwood caused many times the pricing of our product to be extremely competitive and therefore it is driving market share on the West Coast. But the wood market is pretty volatile, you've seen increases lately, you’ve seen reductions in the price. So overall, we believe it's a bit of a tailwind, but I think the appreciation of the performance characteristics of the composites in the second generation products is what's carrying it for the most part.

Okay. Obviously compared to my model, your residential numbers were much better. I guess the only thing I would pick apart and maybe it's just the way I modeled it was, so that the expansion that I had modeled in the gross profit and I'm wondering is that because the freight cost, you mentioned freight for a couple times Bryan and did the freight costs sequentially become more challenging or is that untrue? I'm just trying to figure that out like if in Q2, it was more challenging for freight?

Yeah. It’s fair to say that was more challenging on a sequential basis. Over the quarter, we continue to show improvements related to lower cost recycled materials, our cost initiatives and capacity utilization, but some of that was offset with increased freight, higher raw material cost as well as Jim mentioned increased development costs as it relates to the higher throughput projects we're working on as well as certain product development trials that were occurring at our plants.

Okay. And then we'll see those improvements later in the year or does that take -- how long do you continue to invest in those improvements where you might not see the gross profit margin compared to the sales increase?

Yeah. Our incremental margin guidance is unchanged between 45% and 50% for the year. We will continue to have investments in the throughput trials as we go through the rest of the year and then product development will continue as well and that's inclusive in the guidance that we've provided.

And our next question comes from Matt McCall with Seaport Global Securities.

So the high return capital investments we talked about, I mean I go back to my notes and I remember talking more about capacity, opening up, unlocking or debottlenecking some capacity. I feel like there was more of a conversation around the margins. I understand the incremental throughput, but can you give us an idea of the margin opportunity that you’re referencing there and how much maybe we're going to see beyond the second half of this year?

We haven’t provided guidance for next year, but with the additional capacity, additional capacity, you'll see the utilization improvements continue into the future. You also see us doing a better job, leveraging the labor that's already in the system at this point. So again, for this year, it's inclusive within the guidance we've provided, but the real benefits, we’ll start to see as we move into 2019.

And Bryan, maybe you hit on the input cost a little bit. In the past, we’ve talked about the potential for some new material streams, any updates that you can provide and either for what can, including in the back half if any or opportunities beyond the back half, not necessarily guidance, but just potential for some incremental savings?

Sure. We do continue to see improved pricing with polyethylene. As we mentioned in our comments, it's not as much pricing related to the same material streams, but our sourcing team and our R&D teams working to use alternative streams, which we can then use at a lower price through our production. So we did continue to see improvement in that, even net of the higher freight cost, inbound freight costs that we saw during the quarter. As we move through the back half of the year, we expect to see continued opportunities. But as we said before, that will decline as the year goes on, as the benefit that we’ll have for reduced poly pricing won't be to the same degree that we saw over the past two years.

And the last one for me, any competitive pricing moves that you've noticed year to date, and can you just give me an idea on what your thoughts are on price relative to some of this -- taking price relative to some of this inflation that you're facing?

For the most part, the competition has been relatively rational, although we do see a bit of average behavior from one of our competitors from time to time. Pricing has not been a button that most have tried to push. I think in part that's due to the fact that because of our low cost position, starting a price for is not something that's in anybody's interest and certainly they probably don't want to be going down that path and kicking the dog. With regard to future price increases, we’ll evaluate as we get later in the year whether or not the cost increases we see necessitate a price increase. Thus far, we've been able to continue to make expansions in our margins through other ways and not adversely impact our customers. We would try and do that going forward, but at some point, if the costs accelerate, we may have to increase prices.

And our next question comes from Keith Hughes with SunTrust. Hello, Mr. Hughes. Your line is live. You may proceed with your question. All right. And we will move on to our next question, which is from Alex Rygiel with B. Riley FBR.

Jim, I think, in your prepared remarks, you've made a statement that said something along the lines of second quarter, you invested in certain assets that will improve the appeal to deck buyers. What did you mean by that?

There are certain assets that we purchased that we believe will help generate a greater level of interest in the Trex products in the future.

Okay. And then can you comment on, within the commercial business, maybe the level of backlog in the bidding environment, higher, lower? Feel free to be general and not exact.

Yeah. What we found is that it is a competitive industry. We knew that when we got into it. Our view, as we got into it is if we could improve execution, introduces some opportunities for high return investments with related cost savings. That's where our margin expansion would come from and that's basically what we've seen. It has not been on the backs of our customers by increasing prices, but rather better execution and cost reduction initiatives.

[Operator Instructions] And at this time, I am showing no further questions, so I would like to turn the floor back to Jim Cline for any closing remarks.

Well, thank you for your interest and support of the Trex Company I'd like to thank all the members of the Trex team, including our distribution partners, Trex pros and our retailers. This is a challenging time of the year for them and they are performing magnificently. We look forward to meeting with you in person at one of our upcoming conferences. Thank you for attending the call today. Good bye.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.