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Motley Fool Exclusive: David Gardner Interviews Trex CEO

By Jason Hall - Feb 18, 2021 at 6:01AM

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David Gardner's recommendation of this green decking manufacturer has delivered massive gains for investors. Learn why -- and what's in store going forward -- in this exclusive interview.

Since it was first recommended to Rule Breakers members in July 2012, shares of Trex Company (TREX -2.02%) have gained an incredible 2,980%. To put it another way, a $10,000 investment in Trex when Motley Fool co-founder David Gardner first recommended it would be worth almost $300,000 today. 

Yet even with these wonderful gains, Trex is still growing at a rapid rate, and its chops as an ESG investment -- Trex decking is made from 95% recycled plastic and wood waste -- mean it's still a compelling company to own. 

In the video below, from "The Wrap" on Motley Fool Live recorded on Jan. 21, host Jason Hall and Motley Fool co-founder David Gardner interview Trex Company President and CEO Bryan Fairbanks. 

Transcript: 

Jason Hall: All right, everybody. Welcome to The Wrap. We are closing down, the markets are closing down, and we're going to open up for a fun hour of foolish education, knowledge, and hopefully, a few things to help you be a little happier and richer too. I'm really excited that David Gardner is going to be joining us along with Bryan Fairbanks, the CEO of Trex. Bryan, I see that you're already on. Welcome.

Bryan Fairbanks: Good afternoon. Yes. Glad to be here.

Jason Hall: David.

David Gardner: Delight to have you. Hey Jason, how are you? Good to see you.

Jason Hall: Absolutely.

David Gardner: Well, we're really excited about this hour. Bryan, I know you ascended to CEO of the company after, I think, 17 good years now?

Bryan Fairbanks: Yeah, it's been about 17 years. A lot of excitement over those years, without a doubt.

Jason Hall: While you've been CEO for I think about a year, you've been a long term guy. You started as Director of Financial Analysis back in the day, a finance guy?

Bryan Fairbanks: Yeah, back in 2004, I came from Ford Motor Company where I held a number of different financial positions, and joined the finance team here as Director of FP&A. I managed that for a couple of years and saw there were some issues on our operation side and moved into develop a supply chain function within the organization in 2006. Then spent, I guess, from 2006 really right up through 2015, managing the supply chain as well as a period of time managing international marketing and sales. Then in 2015, became the CFO, and then finally, CEO in April of this year.

David Gardner: Wonderful. Jason, I'm going to kick it to you to really start our questions. But before we do, I just want to mention that somewhere in those years, well, in fact, it was July 25th of 2012, my colleague, Rick Munarriz, at Motley Fool Rule Breakers said, "Hey, let's take a look at Trex here." I thought, I like what I see, so we made it a recommendation. The cost base is $3.38. So with the stock [laughs] just over 95 today, we're looking and feeling pretty good nine years later. Bryan, I don't know how much you know about The Motley Fool, but that's how we invest. We don't really sell, we find good things and we stick with them. It's been a 28-bagger for our members. That's, in part, why I'm excited to meet you today and why we're looking forward to showing up the company and getting a lot more people aware of the wonderful 1996 start-up, I see. The Motley Fool is two years older. We're a little bit smaller, though. [laughs] You guys have grown up. [laughs]

Bryan Fairbanks: Yeah, I'm very familiar with the investing philosophy and we've been very happy to try to provide information to your team along the way. I had a great meeting probably about a year ago with John Rotonti, I gave him a lot of details and even mentioned to the team. I think you're based in, is it Alexandria?

David Gardner: That's right. You're based in Winchester.

Jason Hall: Yeah.

Bryan Fairbanks: Right. Once we get through this whole pandemic craziness, I'll bring a team out to Winchester and we can show you our manufacturing operations. That really helps the investing team, especially the analysis side, really understand what makes this company tip. It's what brought me in the door. When I came out to interview in the finance area, I asked the then CFO, "Hey, let's go take a walk through the plant." I walked through and said, "All right, I get it. I see the opportunity here." It's been a great 17 years since.

Jason Hall: Bryan, the thing I think is really interesting and compelling to me is that that side of your business has only continued to grow stronger. Your tenure is interesting because you actually predated Ron Kaplan who in some ways came in to turn the company around. A number of years after you came on board, Trex had some struggles. There were some product issues, you have the global financial crisis. Then Ron Kaplan came in and brought in some other outsiders, but you were an insider with the company that immediately became a big part of how the company moved forward. What I'd like to hear from you a little bit about is thinking about the performance of Trex's business across multiple CEOs, Ron Kaplan, Jim Cline who you've succeeded, and talk about the board's role here, and talk about corporate culture because I think it's clear that there is some really strong fingerprints there.

Bryan Fairbanks: Let me start with the succession piece of it first. I think there's really two key characteristics that you'll find not just in the CEO position here at Trex, but within the leadership team. The first thing, the keyword I just said there is the team. It's not about one person sitting in an office directing everybody what to go do, it's having a strong team all the way throughout the organization. We spend a lot of time on employee development, making sure that we have the right people in the right places, and we're developing those people so that they can move on to future positions with more responsibility if it's something that they want to do. The second thing would be financial discipline. This is an organization that has really been rooted throughout the organization that we will operate in a disciplined financial matter with all of the decisions that we make. We use the data to understand, what are the potential outcomes and how can we make the decisions that have the greatest probability for success for the company? We've been able to continue growing, both the top line as well as outside this performance on the bottom line by really following that data and ensuring we're making those decisions with the right financial outcomes.

Jason Hall: Go ahead, David.

David Gardner: I was just going to say, I realize we might be slightly guilty of taking for granted that everybody, roughly a thousand people logged in as right now knows what Trex is. Now, I think a lot of us probably do. But one of my favorite lines about the company, the numbers could probably be a little outdated. This is just straight from Wikipedia about halfway down the Trex Company entry. But here's a beautiful thing to be able to say, Trex diverts more than 400 million pounds of plastic film, bags, and wraps each year from landfills and uses it to make eco-friendly outdoor living products that endure for 25 plus years. One of the things we often look for at Rule Breakers, we like to make our portfolio reflect our best vision for our future. We love to find companies that are doing well by doing good. Fundamentally, this business, Bryan, that started in 1996 with, I think a patent that was issued right around that time has turned into a leader and one that we can all feel really good about because of the operations of what you do every day with your composite outdoor decking. Want to make sure I just laid some scalping in place for anybody who didn't already know Trex, I think many of us do.

Bryan Fairbanks: We were green before we were sexy to be green. [laughs] This company was developed on the bedrock principles that we could use waste material to make high-value-added product for the end consumer along the way. We have been doing that since the first day that we started manufacturing as an organization, and we continue to abide by that today. We continue with 95%-plus recycled content in all of our deck boards and we're very proud of that.

Jason Hall: It's interesting because I think there's misconceptions about your supply chain and where you get your raw materials from. Over the past few years, I'm based in Southern California, things like banning of plastic bags and that sort of thing, every once a while, I'll see somebody pop up and say, "Well, that's not good for somebody like Trex." Can you maybe clear up some of those misconceptions about where your supply chain comes from and the materials you use?

Bryan Fairbanks: You'll hear us talk a lot about plastic bags. You will see pictures of them in our investor presentations. We talk about it because people understand a bag, and that is polyethylene, so we use it as an example. About 5% of what we source are those plastic bags today. So if they go away completely because of those bags, that really doesn't impact us all that much. The majority of what we're using is coming out of distribution centers. It's going to be protective overwraps or product that's in shipment. Post-industrial polyethylene along the way, which is in much higher quantity than grocery bags are, at the end of the day. Even if we see more environmental rules, the good news is with a lot of those materials that we are using, there are ways for them to get into the recycling stream. From a bags perspective, maybe 15% at the high-end get back into the recycling stream. We would be much happier if it were up in the 80%, 90%, but most of the materials that we are recycling have that recycling capability. They see that is going into other products and we're able to pick up 40,000 pounds over time while doing it.

Jason Hall: One follow-up question, David, I know there's a couple of things you want to ask. But one of the things one of our members asked earlier this morning when we were spreading the word we were going to be interviewing with you, Douglas McNamara, one of our members said, "Does being American-made give Trex an advantage in the recycled material industry?" I wanted you to address this because I know a couple of years ago, there were some major changes from China in terms of materials that they would accept into the country for recycling waste materials.

Bryan Fairbanks: Yeah, there were significant changes back in 2016, 2017 when China banned the majority of materials, cardboards, plastics, and a number of other commodities that we're shipping out of the US into overseas markets, banned those from coming in. All of a sudden, all of these people, especially in the West Coast that were shipping overseas didn't have an outlet for that material. It allowed us to get into those accounts that did drive the market value down, so did definitely help from a financial perspective.

Jason Hall: It's a feedstock for you, so it lowers your costs.

Bryan Fairbanks: It did, absolutely. Since that time, the market has remained relatively flat. But with the new focus on ESG from the industry side of things, we've continued to see more materials coming available. Most organizations are now focused on how can they do more with the materials they have. If we can give them away instead of putting these materials into a landfill, let's say spending five or six cents to truck it there and then paying the tipping fees. Instead, Trex on the other side, we'll pay you, we'll send a truck to pick it up, that's a win-win for everybody.

David Gardner: I'm wondering if we were having this conversation a year ago and I told you, by the way, within a few weeks, a global pandemic will start and within a year or so, your stock will have doubled. Would you have believed either of those? How do you reconcile those two things?

Bryan Fairbanks: Yeah, probably not. The interesting thing, my first day as CEO, I walked into the office and I think there were five people in the office that day. At the end of April, of course, we were in the full swing into the pandemic. I'm sure as many of other people have said on this channel, there's no rule back in working through a pandemic. That's where we really relied on the team to make the best decisions for the safety of our employees. Now, as we got about two months into the pandemic, we really started to see, let's call it the animal instincts of the consumers who were staying at home, who had money in their pocket because of the checks that were sent out and ready to do work at home. We saw a lot of decking moving through the DIY Centers, as well as our pro channel. We continue to see that today and we do get a question, a lot of saying, "Bryan, are you concerned that there was a big pull ahead during that time frame?" The way I respond to that is, this company had been growing 13-15% for the five years prior to the pandemic along the way. As we look forward, we still have a huge wood market that we're looking to convert. So it did a little bit pull ahead, probably so, but 80% of the market is wood today and we see a huge opportunity to go after that. So I don't really worry about that short-term blip.

David Gardner: Let me ask just about the classic question for so many investors, especially of our ilk, is the total addressable market question. In general, when we ask this, whether it's a CEO or somebody who's an industry fan, they think about the biggest imaginable number and it's usually this amazingly size total addressable market. Realistically, can you help us understand roughly where you are and what you think the size of this market is. I know the company has around a billion sales as we speak. How big is this market?

Bryan Fairbanks: The market size for decking and railing is going to be about $4 billion. Now, it's a little bit misleading on its own because 80% of that market is wood. Every time we convert a wood buyer into a Trex buyer, that TAM goes up by two times. So let's say hardboard is selling for $2 a foot, wood is selling for $1 a foot. So there is a multiplier to the total market size as we convert along the way. That's the exciting part to us if there's such a large piece of it that still needs converting. I mentioned about 20% today is composites and we see a great opportunity with continuing to provide more information to the consumers, providing deck boards that are more affordable than what composites have been historically to be able to really ramp that conversion up. Historically, we've been about 100 basis points in 2016, '17-'18 time frame of conversion and that was just through focusing on the market and advertising to wood buyers. As we launched our enhanced Basics and Naturals products in the beginning of 2019, we started to see that conversion increase. It's tough to tell exactly, was it 150, was it 200 basis point a year, but that's exactly what we expected to happen and it did start to happen at that time frame, and has continued since then.

Jason Hall: As a follow-up to that, so I know one of the things a couple of years ago, Trex's marketing pivoted a little bit from focusing on how it was better than the competition to just really focusing almost exclusively on wood. I know the competitive landscape is changing. The bottom line is that, this is a profitable industry, it's a lot of growth. One of your competitors, AZEK (AZEK 1.26%), it owns the TimberTech brand, recently went public. I'm not going to ask you to speak about your competition directly, but I'm just curious to how you think about the broader competitive landscape and more specifically, what do you think are Trex's competitive advantages?

Bryan Fairbanks: Sure. One of the other things I think that makes this industry unique is overall, it's a pretty disciplined industry along the way. The industry recognizes that if one were to take a price cut, obviously we see what Trex's balance sheet has been for the long term, we can do that as well. Our number 3 competitor can do that as well if necessary. So you haven't gained any market share by doing that, all you've done is take value out of the entire industry along the way. We've not seen that price be used as a lever in the entire time that I've been here because everybody recognizes there is a certain value with a composite board that the consumer is willing to pay along the way. So the discipline in the industry is key. When we look at the Trex Company of what makes us stand out. Why are we 50%-plus share of the overall marketplace? First is going to be the brand. There are very few national brands for a company with less than a billion dollars of revenue that have the name recognition that Trex has. When you say the name Trex, people say, "I know the name." That's their composite decking manufacturer along the way. If you're looking for composites, they think of Trex immediately. So that has been a huge benefit for the company. Going back to the original founders, that was one of the key decisions they made at that point of we want to be a brand in building product, not just another commodity that we can't distinguish from anybody else that's out on the marketplace.

Second, I include this. Brand doesn't matter if you don't have the market-leading products. Once you bring people in on the brand, you have to have the products that they say, "Yes, this is what I want to put on my deck." We make sure that we're always staying in a leadership position from the design, the aesthetics, and the performance of our products. Then the last thing, I think is key for the overall industry, is on distribution. We have some of the strongest specialty materials distributors in the country and increasingly throughout the world. It's very difficult to have these distributors move off to another product. Other distributors that are out there are carrying competitive product, so there's not a lot of room for new entrants to come into the marketplace because the best distributors have already been taken by those in the industry today. Then lastly, from a dealer perspective, those selling the material, if you're a new entrant, what's in it for me to bring on brand number 5 along the way? I'm already selling with brands 1 and 2, let's call it 80% of the marketplace. So I bring in brands 3 and 4, what does that do for me along the way? It is consolidated, but a very disciplined consolidated industry.

Jason Hall: You mentioned distributors and I think an important thing to talk about that I think Trex has done well. I followed the company for almost the entire time since David first made the recommendation, is working with decking pros. It feels like that, that might be a bit of a competitive advantage too because of your scale and one of the things that helps you leverage those regional distributors. I'd like to hear you talk about how you work to leverage the industry professionals versus just being for DIY-ers in your big box retailers.

Bryan Fairbanks: Having those relationships with the contractors is extremely important for our Trex Company. We have programs, one we call the TrexPro program, where we work directly with the contractors to show them the benefit of working with Trex, how to sell Trex, making sure that they have samples in hand. So when they're meeting with the homeowner, they have that material, provide them marketing, provide them website capabilities, being able to help them build their business along the way, provide any business counseling they need. That has grown manifold over the years and we continue to expand our group that manages the contractor relationships. Of course, our group of contractors that we work with continues to expand. All of our contractors are available out on our website. So if you put in your zip code where you're looking for a contractor, you can find our platinum levels. These tend to be individuals that are exclusive with Trex. Our TrexPro Gold, where they do a certain dollar value with Trex on an annual basis. Then our regular TrexPros, which have been certified by Trex to install the material. Our sales team has gone out, they've looked at the quality of the craftsmanship on the deck to make sure that when a customer clicks on their name, they're going to get a good result from them. There is no shortages of names for most geographies to pick from.

David Gardner: Well, behind the scenes, Bryan, we're getting questions asked by our viewership, our members. I'm just go straight sorting these in here, there where they're seated adjacent. This one's a technical one, probably Randy from whom this question comes from, might work within the industry or is just maybe an engineer and likes to see here how things get broken down. Here we go. "Your product is called a composite," he says, "Many questions when I see that word. What are the components?" Fiberglass? What are the resin materials, are they fire-rated, structural comparison to other composite materials available on the market like fiberglass. Let's really get into the product for a second, the chemistry of it.

Bryan Fairbanks: Sure. It's a great question. It's a simple but complex formula. For the most part, it is reclaimed wood and recycled polyethylene. As simple that. Roughly 50-50 between those two ingredients. The remaining ingredients are other proprietary part of the deck board. We've got various additives, colorants, UV inhibitors, things like that that give the board the properties that we're looking to have in the marketplace. What's key in this industry, it's fairly easy to manufacturer a rectangle board, wooden plastic together and some additives. It's very difficult to manufacturer board that has the aesthetics and will surpass the 25-year warranty that we have on the product. That's we're making sure you've got a process of well under control, you understand how those additives are being used, what the appropriate amount of those additives are, and over 25 years of experience has really taught us how to go about that part of the business.

David Gardner: Bryan, can you paint a picture for us real quick of just what it looks like in Winchester, Virginia. I'm imagining some massive plant manufacturing facility. I'm seeing big hoses and plastic bags that's shooting into it and it's all getting mixed up and there's fire. Can you just tell us what it looks like, the making of it?

Bryan Fairbanks: The new building opening up, our 200,000 square foot manufacturing facility. It is much larger than it was six months ago at this point. But I think the right way to look at it is we will have trailers [inaudible] that are at the dock door. You will see them coming off and trailers going on to a belt which will then feed our manufacturing. It will go through a shredder, feed the manufacturing lines. The other side of the wall, there are wood trucks that will feed the wood into our grinders, which then send it to another side of the wall, and that's where it goes into the extrusion environment. You've got many extruders laid out and we just run the material down to the end of the building. We cut it of course, to length, we do quality checks at the end of the line. At that point, it gets moved off the line, bundled up, and final quality checks into our finished goods yard.

David Gardner: Thank you.

Jason Hall: Congratulations on completing a pretty significant expansion. It's not that long ago. We can go back and look at the headlines and see where you guys were dealing with a real high-class problem where you had made some improvements in your extrusion technology and then you just got to keep up with demand. Can you talk a little bit about your R&D process, because it seems to me it's a continual process. It's not just the step-change things that you go through so I'd be interested to hear how you guys approach that.

Bryan Fairbanks: It really is. That's the overall culture of the organization, is continuous improvement. You can't every year, you're not going to have that big bang that's going to give you a 10%-plus type output increase. But over the years, there was continued increases of 2% or 3% or 4%. They begin to add up and reduces that future investment you'd need because of that efficiency. We did get to the point where we saw that the market was growing faster. A big part of that was the launch of our enhanced product line. We knew that it would take off, at least on the DIY side of the marketplace. We weren't sure on the pro side that it would be adopted as quickly as it would. We knew that over a course of a number of years, that it would be a home run in that channel as well.

What we found was that channel listened to our message that this is an incremental business opportunity for them. The people who are going to be buying that enhanced product would have likely bought wood on the other side. Many of them weren't selling wood and didn't have nearly the same profit margin in the wood that they were selling so it was an opportunity in a number of ways. You can improve your margin and you gain yourself that you weren't having before. With that launch, we recognized we needed to be able to get more capacity on. I guess if I think back, it was June or July of 2020 when we announced that. Here we are about a year-and-a-half later with that building up and running at this point. It was really an amazing feed by your organization to be able to get that done while having a pandemic as well too.

Jason Hall: You might not have it right in front of you. But if I recall correctly, there was a third manufacturing facility that you folks on, maybe in Mississippi, Louisiana, or somewhere like that, a number of years ago that the company made the decision to shutter it, and now you just had these two facilities. I'm curious, even though you've reduced the number of facilities you've had, how much is your output capacity grown since the decision was made to go to just two facilities?

Bryan Fairbanks: Oh, boy. Since we have got two facilities? That's a good question. It is significant growth out of both our Virginia facility as well as our Nevada facility. At that time when we were running those two facilities, we were 250, $300 million organization. Last year, we were able to generate $745 million of revenue with just the two facilities that we have. Yeah, it has been a significant improvement in output over the years and we continue to focus on that.

Jason Hall: How much of that is adding lines versus just improving the process and the speed and the throughput on your lines?

Bryan Fairbanks: Virtually no lines have been added since the 2007 time frame. It was capacity. We did have a period of time where we were not running at full utilization along the way so we were able to build back into that with the existing lines we had in those two buildings.

David Gardner: I've got a two-part question here, this just comes from me. The rubric for these two questions is life as a public company. My first question, Bryan, you weren't around back that not many people were when the company started. It was 1996, I believe. What surprised me as I look back at the company's history, and I just love looking at corporate history so this just makes me happy when I learn these things. The company came public in 1999 so I'm trying to picture a more industrial company with a three-year ramp from founding to going public. You weren't back there then so presumably, you could be as objective as you want. Was that the right move? Why would accompany that started so soon be held at the public markets that early?

Bryan Fairbanks: Trex was definitely the innovator in the marketplace, was first-to-market with a composite deck board, was sold out back in those days, a lot of allocation. People couldn't get as much product as they wanted. There was quite a bit of pricing power at that time in the marketplace if they were willing to use, and generate a very attractive financials early on in the business. I think they look and said, here's an opportunity where the market will receive this company very well and decide to move it into the market at that point. But you're right, I wasn't around in those time frames, but I expect that was the thinking.

David Gardner: Well, a follow-up to that one. This is not my second question yet, but just a follow-up to that one is, you mentioned earlier founders, and we're talking a little bit about founders, are any founders still active? Who is the oldest person that's still around who still offers advice, whether it's a board member or a founder?

Bryan Fairbanks: I speak with one of the founders regularly. Usually, at the end of every quarter, he'll call and he's still a significant shareholder with the company, very interested in the success. He loves to see that a lot of the people that he brought in over the years have advanced in their positions and in many cases are part of the executive team today.

David Gardner: Wonderful. Now, my second question, life as a public company. We're a private company, so we always imagine that there's a lot of additional pressure if you were to go public. There's the old saw about Wall Street expecting quarterly results. I know I'm talking about finance guy who probably cares more about the numbers or as much about the numbers as any other CEO out there regardless of your industry. But Trex also strikes me as the company that is just a quiet, steady grower. I'm wondering, how much pressure do you feel to deliver to Wall Street expectations for a given quarter? I know all CEOs love to say if they can, "No, we're playing this one for the long term. We're not trying to manage one quarter to the next. That wouldn't be our culture." How true is that of you? What are your thoughts about being a public company's CEO?

Bryan Fairbanks: We will always do what's right for the long-term interest of the Trex shareholder along the way. I think one of the things that you will see fairly consistently with Trex and I tell this to investors all the time, if you're looking for a company that's going to give you quarter-over-quarter consistently over the course of the year, two years, 10%, 15%, every single quarter, go look somewhere else. But if you're looking for a company that's going to give you that 10, 15, 18, 20% consistently over the course of the full-year, then Trex is going to be your company. A great example this year where the first quarter we grew by 8% and I forget what second quarter was. We've guided to the midrange of our guidance in the fourth quarter of this year, a 30% growth along the way. It's not always even the way that growth comes.

Of course, the market really likes that even growth quarter-after-quarter, but we're happy to explain it along the way and we've built a track record as well too. That does give us the ability to look back and say, this is what we've told you in the past. This is what we've done, no reason to doubt that's going to be the case in the future. We did provide some level of guidance out for next year where we did call for expected to have strong double-digit growth in the company for 2021.

David Gardner: Do you feel a need to give guidance? Not all public companies do, some CEOs don't like to do that. Is that your own internal motivation or do you feel like you should be delivering to Wall Street and/or the world at large?

Bryan Fairbanks: We provide enough guidance that we can help our investors understand where the organization is going to be. On the flip side, it is a consolidated industry. We recognize that our competitors are going to be on all of our calls. I probably have competitors sitting, listening in on this today. There is a balance to what we're going to provide.

Jason Hall: I'm going to crow a little bit on your behalf here, Bryan. I'm just going to do a screen share of the metrics that we as investors really love and we like, and that have just been so impressive for a company that makes decking. For a company that manufactures construction material, your gross margins have steadily grown over the years as your scale has increased and your operating margins are wonderful, your return on invested capital also has consistently been quite good. One of the things to me that's interesting about that is that margin profile has been so incredible even when you folks made the decision to acquire SC Company, which is a lower-margin business -- even though the cash margins are incredible. You still managed to generate these tremendous margins. With all of that said, those are the things we look at that we like to see on top of the revenue growth.

What are the most important metrics as the CEO that you focus on?

Bryan Fairbanks: Sure. It's going to be a lot of those same things that you look at. The work that we do results in those financial numbers at the end of the day. I spend a lot of my time as I talked earlier about the personnel development side of things, making sure that we have the right team in place that can drive the strategy that we've developed as a team together, which has been reviewed and plenty of input from our Board of Directors as well. That's a key part of what I'm doing as well as making sure that we're keeping on track with the commitments that we've made, both to our board as well as to our shareholders in the market.

Jason Hall: One follow-up on that, I mentioned SC Company and that's essentially the only substantial acquisition that Trex has made in a number of years. You've had some deals that have expanded your business with distributors. When it comes to capital allocation, whether it's an acquisition, the recent manufacturing expansion, share buybacks, dividends, any of those things, what informs your decisions?

Bryan Fairbanks: We'll go back to the company being conservative financially. We recognize the majority of acquisitions don't provide the returns that are expected. So we go into it with a very conservative mindset. We also recognize that our investor base expects to have high returns from the company. If we were a 15% EBITDA company, we could go out and we could do acquisitions all day, we could generate the revenue, continue generating 15% EBITDA. As long as we're returning more than our cost of capital, that's good for the shareholders. With the type of returns that we've been putting forward, we really have to be careful that we don't dilute that down to a market average. So we have to be very selective. Every now and then, there will be opportunities that we think are great strategic advancements for the company and we will go after them. That's what we saw in the commercial railing business. There has been some hiccups along the way and some things we needed to fix as we got in there, but I feel good with where that business is moving.

David Gardner: If you just tuned in, we're talking about Bryan Fairbanks, the CEO at Trex, Winchester, Virginia's own. As the Motley Fool is also a Virginia domiciled company, we are brother and sister, so go Virginia. Bryan, let me ask you a cultural question. Culture matters so much to us at our company and not just for our own culture, but we always love learning about the cultures of the companies we're investing in. We're cultural anthropologists with a desire to buy stock. I'm curious about your reflection on Trex's culture now since you've been part of it for 17 years. Would you say either A, it's more of the same every year? It looks a lot like the company culturally did in 2007, '12, '17. Or have you watched the culture continually evolve or somewhere in between? Tell us about the Trex culture that you've seen.

Bryan Fairbanks: We've grown so rapidly over the past 10 years, the culture has definitely changed along the way. But there are some of those invaluables that we still have. That's going to good discipline and development, making sure that we have the right people on the team along the way. Overall, we are an aggressive organization. To grow the way we're growing, we need people to be constantly thinking of ways of how are we going to continue? How can we get more of that share away from wood in the marketplace and making sure that we keep a leadership position with the products that we sell as well. It really does take an aggressive group of individuals to be able to pull that off consistently, as well as recognizing that you do need to have fresh thinking coming in from time-to-time. We balance the internal promotions with bringing in external talent as well. A great example is our Vice President of Manufacturing. He comes to us with over 25 years of experience with Kohler Corporation. So great plumbing fixture organization, I think had 15 plants around the world that reported to him. So did brought a little bit different of a mindset of the way the rest of us thought and has been able to continue the success that we've seen within operations.

David Gardner: Bryan, when you started as CEO, it's been roughly a year. Did you consciously want to evolve any aspect of the culture? Would you say that the culture has changed in your first year or not? Pandemic this time.

Bryan Fairbanks: From a pandemic perspective, the work-from-home has absolutely changed. But the underlying culture of the company I wouldn't have wouldn't say has shifted all that much. That was really a testament to both the board and Jim Cline, our prior CEO. Making sure that as we move into a transition timeframe, that people were comfortable who is moving into that position. They've known me for a long time. They know pretty well how I'm going to manage along the way and I wasn't in a position where I had to say, "Boy, we need to really break this down and start over." Have there been some adjustments under the way, I see things? Absolutely. But I think that's something you'll continue to see from the Trex Company along the way on that succession thinking and making sure that we are adjusting the culture as we go.

Jason Hall: In a similar vein here at the Motley Fool where we're big proponents of conscious capitalism. We love companies that think about all of their various stakeholders, not just their customers, not just their suppliers, not just their shareholders, not just management and other employees. How do you think about serving all of Trex's various stakeholders?

Bryan Fairbanks: Sure. When we think about that, I guess if I go back about four years ago now, we rested on our environmental theme where we use 95% recycled material. Hey, our investors ought to know that, that's just part of who we are, and miss the fact that our investors were looking for more than just, hey, here's your green tag line. This is what you do. They want full ESG reporting and understanding what our strategy is long-term. We did our first report a little over, I guess, two-and-a-half years ago now, followed the FASB standards. I pick up a lot of items based on our industry that we needed to do. We're very clear with our investing base that we would improve as we move forward. We wanted feedback from the investors of what are you looking for us to have added in here?

We issued our second report last year, which definitely included more data, it included our performance over at least two or three years on many things. This year you'll continue to see an advancement based on what's being asked for, as well as just continuing changes in the industry and wanting to see more ESG-type data from their investments. I would come from a position of we should be seen as a sustainable organization because we use this material to now accompany that. We should be seen as a sustainable company because we use the material, and we're telling you about how we do it, and all of the other pieces that go into our ESG story.

David Gardner: A couple of more member viewer questions here. I'm going to fuse these together. I don't know if that's fair to these questions, but maybe you'll be able to speak to them at once. The first ones from Doug Miller talking about soft pine two-by-four is a key component of residential construction for over 100 years. Doug goes on. "They have lots of good qualities. But on the downside, they are irregular in shape and susceptible to termites, fire and rot." Question A, "Do you see any innovation in this area on the horizon?" He says for framing homes. Question B is, "Bryan, are you able to share with the group any new technology that Trex's coming out with to continue your differentiation in the market?" These questions are about innovation.

Bryan Fairbanks: Sure, as we look at the framing marketplace today, our composites are not structural in nature. So to get the structural capability, a lot of cost would have to be added to that composite. If it's 2x or 3x the price of Lumber today, maybe it goes to 5x, and I think we all know that are homebuilders. Not many people are interested in building something that is, it will always be standing along the way. They are OK using woods are OK using metal studs. Metal studs are great substitute for wood. Used heavily in commercial, not as much in residential along the way. I'd be surprised if composite makes a big inroad from that perspective. As it relates to new technology. Absolutely. We've got a big group of people over in our R&D center. They spend a lot of time looking at new product ideas. How can we be working with the formulation that we have, using different types of plastics within our materials with the existing product line. But also what are the products that we need to have to serve our customers in the future?

Jason Hall: So a follow-up question on that in terms of materials, one concern that consumers have, and environmental advocates have is what happens in 25 years? What happens at the end of that deck's life? There are questions about reusability, recyclability. I just like to hear you address what your thinking is with that and what Trex is doing to work on that?

Bryan Fairbanks: Yeah. I see there being an industry solution for this a number of years out. Today, very little material is going into landfills. While it's not something we can ignore. There just isn't much going into landfills. In the future once people decide they want to replace their Trex and other composite decks, we need to be able to have a solution where that material can come back and can be recycled back into our operations. Virtually all of the scrap that comes out of our operation today. We're able to turn right back around and put back in, again. We can do that with a lot of competitor materials as well. I would expect eventually there'll be an industry solution where we can collect this material, bring it back to whoever has the most local plants, and run it back through the system again.

David Gardner: I'm thinking some about AZEK. We talked about it earlier. Certainly, not nearly as well known of brand, but now a public company as Jason mentioned earlier. I think for a lot of us, and I'll include myself here, when we hear Trex and AZEK, if you're not that knowledgeable about the industry, you're not in the industry, you might be like "Okay, so Pepsi and Coke." For a lot of us, we don't draw a huge distinction between Pepsi and Coke, I think some people do. Some consumers really do feel that. Probably at the companies themselves, the Pepsi people feel very different from the Coke people and their culture. I'm wondering if you can help us see some contrast and some comparisons, how would you characterize AZEK and Trex if you're trying to explain to a general audience how each is different?

Bryan Fairbanks: Sure. The products that the largest players all have are good products in the marketplace. We think that's good for the composite industry. The last thing we want to have happen is somebody put out a product that isn't good for the consumer because that hurts the overall industry. A key thing that really is going to set Trex's side with two things I mentioned earlier, our first is going to be the brand. The number of people who go directly to trex.com to start their search about decking has just been growing leaps and bounds over the past year, so the name is resonating with people. Second would be distribution. Having the best distributors in our marketplaces allows us to get into more retailers both at DIY as well as within the pro channel.

Jason Hall: Angelo has a good question. I cover the housing industry pretty closely and homebuilders have dealt with skyrocketing lumber prices. There are some interesting things there, the tension how it affects Trex. How has Trex reacted to that? Has it been an opportunity for margin expansion or simply helped Trex being more competitive?

Bryan Fairbanks: Generally, what we've seen with lumber is it will spike up for a period of time and come back down again. When we look at lumber work competing against generally, $0.80-0.90 a linear foot for Southern pressure-treated pine. It may spike up to $1.50, $1.10 as it was probably in June of this year, but since that time has come back down again, that pressure- treated lumber doesn't necessarily correlate with builder lumber along the way. You can see much larger spikes in Builder lumber than you see with pressure-treated. Our strategy has been we're not going to react to what short-term moves out there. We've always said that we felt that having a product line at roughly two times the price of wood, would be that sweet spot to be able to convert more of the wood market to composites along the way. That's what we've seen happened. We have not adjusted the pricing at that entry level. I think it's likely we'll probably see wood continue to be in that $0.80-0.90. That strategy may change if we see it spike up and stay at a higher level for a longer period of time.

Jason Hall: One follow-up on that. One of the things that I find myself doing in these situations, just trying to forget what I know. I know so much about Trex. That I assume everybody else does, and that's not fair. I think a question, maybe some people don't understand your company. Why would they pay twice as much? What are they getting?

Bryan Fairbanks: It's a great question for those that aren't as close. Clearly, I'm guilty of that, assuming everybody understands the benefits of a Trex deck. What Trex delivers to the consumer is a product that will give you 25 plus years of life on your deck, will give you a color fast deck, stain and scratch resistance. We have a 25-year color, 25-year both durability as well as stain warranty on the deck. So if you're having your normal get-togethers on the weekend, it's just easier to go out and and hose it off. We have a selection of about 18 different colors of patterns on the deck board. Depending upon the price level you are looking with, there's different levels of performance that deck board will have.

When we talk to those would say, "Why would I buy given it's more expensive?" If you're just looking at it from a financial return perspective, putting on tracks will pay for itself over a number of years. Our board that costs $1.75, I believe it's in our investor presentation about 2-3 years out. I think it was actually five years out. As we look to the higher-end deck boards, you could be out in the 7, 10-12 year time rate.

Why does it pay for itself? Anywhere between 10 and 15 years, if you've installed a wood deck, chances are it's going to need to be replaced. Unless, you take really good care of that wood. I don't know how many people you know that take really good care of their wood deck. I know almost nobody. They tend the need to be replaced in that time frame. With that replacement costs, it really does add a lot of costing. You're better off building it once with composite from Trex.

Jason Hall: You're telling me, I don't have to spend the first nice day every spring, power washing my deck. The second nice day every spring, staining my deck. The third nice day every spring, water treating my deck. Or just not doing any of those things and then having to rebuild at every seven or eight years?

Bryan Fairbanks: Right. We give you the ability to go out and enjoy your deck rather than work on your deck for days on end.

Jason Hall: I'm sold.

David Gardner: Course of a different color question here. By the way, we have about less than 10 minutes now with Bryan Fairbanks here at the end of the day for Motley Fool Live. Hope you're having as good time as I am. This has been wonderful, Bryan. Annie has a question about volatile organic compounds. The quality of the air that we breathe of concerning, increasing concern to lots of people that now that we can measure it better, can you speak at all to what the VOC levels of your products are, which can be a concern especially for indoors, but could also well be for outdoors?

Bryan Fairbanks: I'm not sure. I guess if that's from a manufacturing perspective, really any manufacturing environment, will have some VOCs. We're in full compliance with the state requirements and any air emissions. There are very, very low emissions from wood in plastic and extrusion along the way. From a homeowner perspective, once the deck is purchased, there's really no off-gassing from the product itself along the way. It's a very environmentally stable product.

David Gardner: She has a second question. I'll just start in for the fun of it. This is looking at adjacencies in your business. As you think about 5, 10, 15 years from now, might there be some half steps you take out of what you're doing, and she says, "What about windows?" [laughs]

Bryan Fairbanks: The Trex name is a powerful asset for the company. We do look at opportunities where Trex could expand our capabilities in the marketplace beyond what we do from just decking and railing. But we also want to make sure that if we're going to do something in that industry, there needs to be a reason why we're doing it. Why should people be buying that Trex products if we enter into it?

Jason Hall: I had a question in here that I seem to have completely lost. I hate it when that happens too. One thing that's been interesting is a couple of years ago, there was talk about Trex's international results, some pictures that were featured of some very large decks in the Middle East and other places, and it seems like there hasn't been a lot of talk about that more recently. Can you talk about Trex's future outside of North America?

Bryan Fairbanks: Sure, we're really excited about the opportunity outside of North America. We had a pretty big push on a number of years back, when I was running that area of the company. As we started to run into more of a capacity situation, we probably got a little bit more material here in North America, and those markets, while they still grown, they've not grown to the extent that they potentially could have grown. As these new capacity comes on, we see great opportunities in these international markets. Markets that have generally high GDP, relatively high family incomes, as well as an interest in outdoor living. We built distributor relationships, we started branding in some of the markets along the way, and we see them ready to take off as our new lines come on and we can get more product shipped overseas.

Jason Hall: I found the question, so I want to be sure to get it in, it's really, really important. To talk about the difference between existing homes and new construction in terms of where Trex's business comes from.

Bryan Fairbanks: The vast majority is going to be from existing homes along the way. We see generally, about 90%, 95%. But we do see more of an opportunity on the new home side of things with our enhanced product line of working directly with those homebuilders. For a long time, what we've seen with the homebuilders is by time the consumer is looking outside the house, they've already spent their money on upgrading their countertops, the floor, the fixtures. I'll move into the house with all of those great things, and then I'll put the deck on a year or two later. More of that spending flows into the remodeling side. But we think that there is an opportunity to both show the homeowners when they're ready to move in, this is a product they should have, as well as for the homebuilders, that there's profit margins to be made by turning more of their selling focus on that as well.

David Gardner: You are of course surrounded by investors and certainly not all of us, but some investors really like their dividends. Now, Bryan, you guys have been a public company for more than 20 years, pretty stable, spectacular performer. I mentioned earlier, our own recommendations since 2012 was up 28 times in value. Just remarkable, especially considering your company doesn't even have a billion dollars in sales yet. Wow. Do you think you're going to pay a dividend at some point in the next five years?

Bryan Fairbanks: We consistently look at our capital structure and understand what is going to be the best mix of things that we can do to return capital to our shareholders. When we look at those strategies, first is going to be internal growth. Clearly, we've had a lot of spending over the past two years, and even into this year as we finish out the capacity from a capital spending perspective. Second would be share buybacks. We've been very successful over the years, purchasing our shares at opportunistic times, and have provided great returns for our shareholders. We generally haven't taken a stance of, let's just always be in the market. Hindsight were worked out pretty well along the way but generally, we've done it on an opportunistic basis. Then the third area would be acquisitions. I mentioned earlier that we are conservative from that perspective. I think things will come up from time-to-time, but it won't be an annual event.

Jason Hall: Important question I want to be sure we asked before before we close, you have a few more minutes here. We talked a lot about your successes, we mentioned the pandemic and we didn't really get to something I think is important. What are the kind of things that keep you up at night? What are the things that are constantly going through your mind that need to be worked through somehow?

Bryan Fairbanks: I think the overall economy is important to us. How's the middle-class doing with their home values along the way? Do they feel good? Is their consumer confidence continuing to stay at relatively high levels? We see that as an important success determinant for Trex. Even as we saw some of the consumer confidence numbers come down through the pandemic, consumers came in and continued to buy. But if we look at a long term change in that confidence along the way, it's something that would concern me.

David Gardner: Got to ask you, Bryan, right near the end here, what do you do outside of work for fun?

Bryan Fairbanks: [laughs] I have a great family, I've got two kids that are in college. They're only about an hour south of where we are, so we get to spend a lot of good family time and enjoy being out on a lake whenever we can be.

Jason Hall: Love it. Absolutely love it. Anything outdoors is a win in my book, whether it's on our Trex deck or stand right in the middle of the woods.

Bryan Fairbanks: Absolutely.

Jason Hall: Let's think about the future. Let's look out three years, five years, even 10 years out. Where do you see Trex?

Bryan Fairbanks: I see us being able to take significant market share away from Wood over that time frame. We've got the right products in the market, we'll continue to develop new products that keep us in a lead position. If parts of the market that maybe don't have the right products there to be able to expand our revenue based, all while doing it and making sure that we can increase the profitability of the organization as well.

Jason Hall: David, I'll leave the last word for you.

David Gardner: Well, I just want to say thank you. Thank you very much, Bryan. We're just delighted. I'm glad to know that our team had met with you before. Just our analysts learning from you. This is my first chance to get to meet you and to show you off to our membership, and for them to hear your good answers and learn about the present day Trex and the future, and especially the world that we all want to live in. For me, it's a world that involves a lot more recycling. I like higher-margin things and higher-margin businesses. One of my reflections is that this is a part of the power for Trex investors is that it is a cut above product. I'm not going to draw and do comparison with someone like Starbucks whereas you could've just had coffee. [laughs] But that's a little bit tawdry [laughs] but still, at the same time, it's often true of some of our best companies that you have to pay up a little bit for quality.

Bryan Fairbanks: I appreciate being able to give me an hour to speak with your team there. It's rare that we can get almost 1,000 people online to be able to hear these type of interviews along the way. I'm glad we can help your team out. We appreciate the long-term support from Motley Fool. As we move forward, feel free to pick up the phone and you may call us if you've got questions. We're always happy to talk. We do a lot of shareholder outreach at Trex. Our CFO, Dennis Schemm, is always happy to talk and I'm available as well.

David Gardner: Wonderful. Bryan Fairbanks, thank you very much for joining us at Motley Fool Live. I, of course, want to say thank you to my friend, Jason Hall, it's such a wonderful -- The Wrap, so many days, Jason, I love watching you at the end of the market, and it's fun to have a CEO join us from time-to-time too. Just a delight to do this with you and Fool on to you, sir.

Jason Hall: I can't figure out why these guys pay me, Bryan. It's incredible. [laughs] It really is. Thanks, Bryan. Also, just a quick thanks and a tip of the hat to Tim Sparks, our producer, he does such a great job handling the Sli.do, making sure that our job is easy and fun while he does all the hard work. So thank you, Tim. All of our members who support this and allow us to do exactly what we're doing, thank you to all of our members. This is it for Fool Live today. Just a reminder, we're going to kick-off again tomorrow morning at 9:00 Eastern, The Morning Show, and I will be back on tomorrow afternoon and 4:00 for The Wrap. We got two great guests lined up, so looking forward to it. Thanks again, Bryan, David. Thank you.

David Gardner: Thank you. Bye.

Bryan Fairbanks: [inaudible] Great evening. Bye.

Jason Hall: Fool on, everybody. Take care.

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Stocks Mentioned

Trex Company, Inc. Stock Quote
Trex Company, Inc.
TREX
$60.71 (-2.02%) $-1.25
The AZEK Company Inc. Stock Quote
The AZEK Company Inc.
AZEK
$19.32 (1.26%) $0.24

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