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Trex Co. Inc. (TREX - Snapshot Report) reported record first-quarter 2013 earnings of $1.25 per share, increasing 69% from the year-ago adjusted earnings of 74 cents, surpassing the Zacks Consensus Estimate of $1.09. The outstanding results reflect Trex’s expansion of its high-performance product platform, ongoing manufacturing and supply chain initiatives, growing distribution network and innovative marketing strategies.
 
Total revenue improved 12% year over year to $108 million, ahead of the Zacks Consensus Estimate of $107 million, driven by higher sales volume. Trex launched 3 new products during the quarter, expanding its product line to include "good, better and best", high-performance decking and railing platforms.
 
Cost and Margins
 
Cost of sales increased 9% to $66 million. Gross profit increased 18% to $41.9 million. Gross margin improved 190 basis points (bps) to 38.8% in the quarter, helped by increased capacity utilization and reduced sales related costs. Excluding a 90 bps non-recurring LIFO inventory benefit realized in the prior-year quarter, gross margin improved by 280 basis points. 
 
Selling, general and administrative expenses increased 7% to $19.8 million in the quarter. The increase was due to higher payroll taxes and healthcare expenses and higher branding expenses, reflecting the launch of new Engineered Artistry campaign. Operating profit increased 31% to $22 million. Operating margin expanded 290 bps to 20.4%.
 
Financial Updates
 
As of Mar 31, 2013, cash and cash equivalents were $1.9 million versus $2.1 million as of Dec 31, 2012. Cash from operating activities was an outflow of $66 million in the quarter compared with $45 million in the prior-year quarter. As of March 31, the company had $70 million of net debt. 
 
Outlook 
 
Trex Co expects net sales of approximately $103 million, reflecting an annual growth of 10%. Trex began the final redeployment of production equipment from its Olive Branch facility to remaining operations in the first quarter of 2013, which is expected to be completed by the end of the second quarter. Trex is also modifying the configuration of certain production lines within its remaining manufacturing facilities. This redeployment and reconfiguration process is expected to affect earnings by approximately $1 million in the second quarter.
 
However, by the end of 2013, the transformation of all production lines will be completed and lead to further cost reduction and enhanced flexibility in future quarters. SG&A spending is projected to be about $1 million higher than last year's underlying second quarter, mainly due to the timing of the branding campaign.
 
Our Take
 
Trex used its Trex Transcend technology to expand its high-performance decking platform. In railing, the company has started offering products that compete in the PVC and aluminum railing markets, Trex Select and Trex Reveal. These new railing products open up $325 million of market opportunity, previously not served by Trex. Including these new decking and railing additions, with around 1,200 different decking and railing combinations, Trex now offers an unmatched portfolio that allows homeowners endless choices for creating their ideal outdoor living space.
 
Trex has also been chosen for several boardwalk rebuilding projects, including the 1.3-mile boardwalk in Belmar, New Jersey that resulted from the destruction caused by Hurricane Sandy. Given the positive response to Trex’s 2013 product platform along with its high-profile Engineered Artistry branding campaign and the strengthening home remodeling market, the outlook for 2013 looks promising.
 
Winchester, Va. Based Trex Company, Inc. manufactures and distributes wood/plastic composite products, and related accessories, primarily for the residential and commercial decking and railing applications in the United States. The stock retains a short-term Zacks Rank #3 (Hold).
 
Other stocks to consider in the same industry with a favorable Zacks Rank are CaesarStone Sdot-Yam Ltd. , James Hardie Industries plc (JHX - Snapshot Report) and PGT, Inc. (PGTI - Snapshot Report) which retain a Zacks Rank #2 (Buy).

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