Why Buy Now, Pay Later Regulations Aren't Scary

In the podcast, Motley Fool Senior Analyst Bill Mann discusses:

• The Consumer Financial Protection Bureau announcing plans to oversee buy now, pay later businesses and why this is not an example of government overreach.
• His recent trip to Eastern Europe and the current state of energy access in the region.

Motley Fool Analyst Deidre Woollard interviews Trex CEO Bryan Fairbanks and discusses the products for public spaces part of Trex's business and what gets Fairbanks excited to go to work every day.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

This video was recorded on Sept. 15, 2022.

Chris Hill: We've got some boots on the ground research from Eastern Europe and we've got a conversation with Trex CEO Bryan Fairbanks. Motley Fool Money starts now. I'm Chris Hill and I am joined by Motley Fool Senior Analyst Bill Mann. Thanks for being here.

Bill Mann: Hey Chris, how are you?

Chris Hill: I'm doing all right. I want to talk about energy in Europe in a minute, which is something we talked about the last time you were on the show, but let's start with the buy now, pay later businesses. As a refresher late last year, the Consumer Financial Protection Bureau opened an inquiry into buy-now-pay-later businesses. The inquiry appears to be over because today the PRO said it plans to subject now pay-later companies to the same oversight as credit card companies. You tell me what all this means because, from a stock perspective, it's not like these businesses that I'm looking specifically at, Affirm Holdings, PayPal, which has some exposure to buy-now, pay-later, and Block the company formerly known as Square. It's not like these stocks are getting hit today.

Bill Mann: No, I think this is probably pretty much expected. The Consumer Financial Protection Bureau basically said that there are various areas of potential consumer harm, including things like loan stacking, which is debtors laying various debts on top of each other and juggling payments. We know from several surveys that a lot of buy-now, pay-later is being done by people who are financially vulnerable. This is an area where I think just not even as stock analysts, but as people who live in this country, we need to be wary of forms of debt that impact the people who are most vulnerable most greatly, and so I don't know that this was a big surprise, but it is going to change some of the areas of obvious potential abuse that the segment could see.

Chris Hill: Is this a business that holds great potential for shareholders? One of the thoughts I had, when you were talking there, was, and I think you and I have talked about this in the past, that this is something that is far more prevalent in an age of ubiquitous e-commerce. I have gone onto websites in the past 12 months and bought a single item for less than $50 and have immediately been offered the chance to pay in installments, which I appreciate, I've not availed myself for that, I'm able to buy a single T-shirt all in one fell swoop. But when I see that Bill, I just think like, OK, how great are the margins on this business that this is being shoved in front of everybody everywhere?

Bill Mann: Yeah, the margins are pretty good. The question that I have always had is the backend, and I'm always nervous, Chris, whenever I see someone offer a financial innovation. Financial innovations to me, particularly ones that involve consumers, a lot of times my hackles immediately go up thinking that there is something within this that is going to impact people negatively. In the case of buy-now-pay-later, basically what it is is that it's a way of people to use interest-free or interest-light loans to buy things that they would buy anyway. But the problem is that none of these loans have gone into the clearing houses let people know exactly what the total level of debt these people have.

It primarily has gone as I mentioned before, to people who are financially vulnerable. You can measure that a number of different ways. You can measure it by credit scores, you can measure it by incomes, you can measure by some form of income to debt ratio. But the fact is that these services are being used by people to stretch their budgets. When you stretch your budget, there is a payment that has to be made eventually, and if you do nothing but keep stretching, obviously at some point this is going to impact people negatively. I'm happy to see that buy-now pay-later is probably going to be put onto the same standards as credit card loans because though it is a different mechanism, it is still the same money for the borrowers.

Chris Hill: Just to be clear, there's nothing about this story that makes me think like, oh, this is regulators run amok. This is overreach. It's like no, as you said, it's the same standards that credit card company

Bill Mann: That is what regulators do, Chris. You don't want regulators to go out idled. Maybe some people do, but I don't want regulators to go out and try and regulate things that don't exist yet. The fact is in this country, take almost any area of exploration. We have allowed entrepreneurs to go out and look for new models. This is in fact a new model. To me as the investor because it's a new model, it's one that I inherently don't trust. I would like to see a full credit cycle, for example. But that doesn't mean that the regulators have run amok. What has happened, and this started, as you said, late last year, they've seen enough to make some decisions, and so I certainly don't think this is the end of the road for buy-now pay-later. Probably, this will limit some of the excesses, and hopefully, this will limit some of the potential damage that may be done to some of our most vulnerable borrowers out there.

Chris Hill: Let's move on to Europe because you just got back. I know this was a personal trip. This was not a business trip. But as I mentioned the last time you were on the show, we talked about energy in Europe. I'm wondering if you had any boots on the ground observations while you were there.

Bill Mann: Well, I was in Prague in the Czech Republic, and it was interesting consuming local media while I was there, and I spent a lot of time really paying attention to this. That sounds fancy. What I really like to do when I travel is get a local paper and read it and see what's going on.

Bill Mann: See what they have to say, what their view of the world is, and the checks by and large what I'm getting from them is obviously they are incredibly nervous and they're coming to the realization that the decisions that have been made and let's put it in context. The Czech Republic is a delightful place, but it is not one of the largest economies in Europe. It is a middling former Eastern European economy that's growing but they very much have to follow along countries like Germany. I'm going to keep saying companies. Countries like Germany, countries like France, the Czech Republic very much has to follow along. So what we are seeing is a recognition that the decisions that they've been made over the years is leaving the Eastern Europe at grave risk this winter of not having enough molecules to run factories, to run businesses. People's power bills have gone up by 14 times. The easiest solution for governments is to come in and offer some relief in terms of the cost.

But that doesn't create any more energy. It does in fact, it may actually exacerbate the basic problem. And again, as in the last time we were on, it's not The Motley Fool's position to be political at all. But what is happening in Europe is a sign of people who are in charge who don't really know how the world works, particularly in commodities. The pricing of the commodities, particularly natural gas and oil, that have gone up so much, is at least partially because Europe has said we're not going to use Russian oil and gas. Russia still gets to sell to somebody else that oil and gas at a much higher price. What would have been much better from a pricing standpoint, would be for Europe and the US, and everyone else who is absolutely opposed to Russia's actions in Ukraine to say, "We're going to produce as much as possible. We're going to produce as much as it takes." But instead, you have a situation where we have done the thing that feels good, but it is ultimately only harming one party. I'm terrified for the Europeans, for what's going to happen this winter. We had better hope that it is an unseasonably warm winter.

Chris Hill: One of the stories and we don't really focus on commodities all that closely at The Motley Fool but, a lot of the businesses that we do pay attention to they are dealing with commodities and that is part of their input costs. The story broadly of commodities and commodity prices over the last six months has been one of declining prices.

Bill Mann: Yeah.

Chris Hill: In your crystal ball, do you see companies over the next six months starting to talk more about this? Do you see this affecting US businesses with an international footprint?

Bill Mann: To me, it doesn't really matter whether the companies do or not. It matters whether the governments figure out whether or not they have an understanding of how the world works in this regard. You have the US government that's limiting every way it can new production in the US. You can say from a green energy standpoint or from an environmental standpoint, that is a valorous thing to do, but it doesn't answer the question of what good does it do in the meantime to limit production when you do have marginal production out there in a country that we are trying to force to behave differently. If you give them a platform where they can sell to other markets for a much higher price it doesn't, hurt them. It hurts Europe as much as anything else. I don't like saying it this way. It's not it's pleasant but at some point, the way the world works, the way we have harmed Russia and Saudi Arabia and any other country that you want to put on the list in the past, Iran is by producing as much as possible and causing prices to go way down. That's the end result of a policy that is meant to cause geopolitical change.

Chris Hill: We'll keep watching it, Bill Mann. Thanks for being here.

Bill Mann: Thanks. Chris. 

Chris Hill: Bryan Fairbanks is the CEO of Trex, a leading manufacturer of decking and railing products. Deidre Woollard interviewed him in front of a live audience at our recent investing conference. We wanted to bring you part of that conversation. Trex is probably best known for the products they make for residential housing but Deidre asked Fairbanks about the products they make for public spaces, including boardwalk's. How much of that is a part of Trex's business? 

Bryan Fairbanks: Yeah, it's actually a sizable part of our business. We have dealers throughout the country, about 6,000 locations that sell Trex products. In each one of those locations when there's a local bid for a commercial product, they're involved with those bid. Unfortunately, from a corporate perspective, it's really tough for us to be able to track where all of those projects are because they're coming through our channel. When it's a really big project, we tend to get some information about it. I was just on the phone with sales and 18 truckloads going into Dallas, Texas for a commercial project there. We get more as the big projects, we see where they are. But Trex is well-recognized by the architectural community. They understand what they're getting for products that will have a long life. We go back to the earliest days of Trex 30 years ago, one of our first projects is the Everglades down in Florida. While that product is quite dirty and looks like a first-generation product, Ii's doing just fine in that environment today.

Deidre Woollard: Talk a little bit about the marketing then, because you're marketing to consumers, you're also marketing to, it sounds like to architects to developers. How do you figure out what types of messages to market these days? Is it evolving as more people care about environmental concerns? Are you talking more about the way that the product is made?

Bryan Fairbanks: Yeah, we absolutely are. Another thing it's very unique about Trex is we're a branded building products company. There are very few building products where you could say, I know the brand. Probably another one would be Andersen Windows, you see that regularly. That was something that our founders did very early on, which would set us apart from the rest of the marketplace. Today we do a lot of outreach directly to people who are looking to install a deck, we're able to target them online from a digital perspective, but also be able to go where that consumer is shopping. From a retail perspective, from how we manage to market on TV. I like to say if we've done our job right, we've locked that consumer in before they've ever talked to a contractor, or they've ever gone to a dealer location to talk about the products. We know that's not always going to happen, people trust their contractors, they trust their pro channel, they trust what Home Depot and Lowe's carry.

We also have relationships with all of those locations where they can go in and ask what products do you recommend? More often than not they come away with the Trex product. You also mentioned from an environmental perspective. If I go back to my early days at Trex, environmental, while we were always at 95 percent plus recycled content. It wasn't nearly as important to the consumer back in 2005 through 2015 timeframe as times are changing. Now what you're seeing on a top 10 perspective, it's probably moving up into the top five. We're still seeing price aesthetics and durability being the top three, those haven't changed over the past 20 years. But environmental concerns about the product have moved from number 7 or eight 15 years ago to number 4 today. It is something that we do focus on from a marketing perspective, and especially with the next generation of consumers coming in. Younger consumers are much more focused on the environment, and they look to understand the companies that they're buying from, are they walking the walk, and are they doing what they say they're doing?

Deidre Woollard: Well, let's talk about the plastics in general. You're right, there's more awareness, there was the whole plastic straw thing. As a business, how are you thinking about the ways that plastic is being used? Is that going to change your sourcing in any way over time? Places banning plastic bags is something like that a concern?

Bryan Fairbanks: Yeah, from a plastic bag perspective, we've always understood that there is a threat to plastic bags and we've seen some plastic bags laws passed here in DC notably, and out in California. It's a small piece of what we buy. I mentioned that we focus on that because people quickly understand the bag, and how it works and of course, it gets an awful lot of publicity as well. There's still a lot of plastic out there in the economy. Plastic is not going away anytime soon. But what's important is figuring out how can we truly put plastic into a circular economy? We're doing that with over 400 million pounds of plastic last year alone. We're the largest buyer of this type of polyethylene film in the country, and we continue to have outreach and find new organizations where we can take that plastic that was otherwise going into a landfill, creating environmental issues but also creating a cost for those that are disposing it. Instead of creating that cost will pay you for it, we'll pick it up, we'll bring it to our location, and make it into a great product.

Deidre Woollard: How about the energy side of things and what it takes to manufacturer, and turn these plastics into Trex products? Are you evolving and how you think about energy? Is that part of this as well?

Bryan Fairbanks: Absolutely. I think there's a lot of controversy these days over ESG and what's the benefit to organizations and shareholders. Without getting into the larger piece of it, our own journey we started about four years ago. And we had a lot of the pieces available for ESG. We just didn't do a very good job telling our investor base order all the things that we're doing. We went ahead and we put it all together in one document. We also did our first greenhouse gas assessment as well as resource usage assessment. One of the things that we quickly found out was the amount of local water that we were using. When I say found out, we always knew that but didn't necessarily put it together.

This is an area we should be going to from a cost savings perspective. Once we got worked in the head with this is the amount of water we're using, we quickly invested in recycling systems. Now today 99 percent of the water we're using across all of our facilities is on a closed loop system, and we've taken that completely out of the equation at this point. The other thing we've been able to do from an energy perspective, is understand how can we run our lines more efficiently anywhere from the simplest part of using LED lights to the type of equipment that type of transformers were using? Just in the last year alone, our greenhouse gas intensity dropped by about 30 percent.

Deidre Woollard: Wow, that's fantastic about the water because I think that's really important. Let's talk a little bit about climate change and heat because I know with the heat of your products is something that you're thinking about as well. How are you thinking about formulations and the problem of decks being hot summer?

Bryan Fairbanks: Sure. That is something that it's interesting with the composite industry, that my deck gets hot. Your deck gets high if it's a gray wood deck, it gets hot, if it's a gray composite deck, it gets hot. The composite industry in Trex specifically is in a unique position where we can do something about that heat by adding UV reflect ends, and other changes to the makeup of the shell that we put on our product. We just launched in June of this year, our Transcend Lineage product, so it's a line extension to transcend, which we launched back in 2010. Has new lighter, more on-trend colors as well as a very clean streaking aesthetic, but also provides heat mitigation. Now on a hot day, your deck will be warm, but it's not going to be so hot that you can't walk on it with a barefoot. I think that will start moving its way through the composite industry, pretty heavily over the next five years. We would have liked to have come out with a product earlier, but I told the marketplace until we had our channels fully stocked with material of our existing products that we wouldn't be launching any new products. As soon as we got there, we went ahead, and we launched that product and there'll be more innovation coming as we move forward.

Deidre Woollard: How are those conversations when you really want to move somewhere forward with something, but you also have to be cautious? Is that a little bit of a leadership at moment for you?

Bryan Fairbanks: Absolutely. We got to, was late part of last year, and I was pretty set that we have not launched a product in quite some time and that we really needed to get to the marketplace. One of the things I'm well known for in the company is I do listen a lot, and just because I want something to happen, talk to me, and we'll come up with the right decision. The team really pushed back me and say look, I know you want this to go to the market, I know the investors would like to see something new coming into the market, and our customers would. But our channel was not ready to accept that product as of yet. Showed me that, explain to me what the channel was saying about that, and we absolutely made the right decision to hold off on that. But part of it also is just pushing the team as well, making sure that that product is ready to go so that when we hit June of this year, we were able to flip the switch and be able to get the product into the marketplace.

Deidre Woollard: Interesting. You said you've been with Trex 18 years, you've seen market cycles, you've seen stocks go up, stocks go down. What gets you excited to get up and do this work every day?

Bryan Fairbanks: I think what really drove me to Trex, was I came from Ford Motor Company, I was there for 10 years, great experience with a much larger organization. I was able to bring that experience from Ford to Trex and bring the better parts of the process and leave some of the politics and larger bureaucracy behind on that, and that's served me well over the years. I started in finance, moved into supply chain marketing and sales, and then CFO of the organization and finally CEO in beginning of 2020. Seen a lot of different parts of it. The organization went through a large turnaround back in 2008 through 2010 timeframe. Gained a lot of experience in many of the leaders in the organization today are people that were there during that turnaround, they remember what things were like when the marketplace pulled back. There's no I guess I shouldn't say shyness about adjusting the cost basis to what the new market reality is.

For those of you that follow the stock we announced in the second half of this year, we took down our revenue guidance by about $300 million. A major shock to the system compared to where we had been for the past 2.5 years, where we've been completely sold out. Two hundred million of that is related to channel destocking because the channel is concerned with where that consumer is going to be, and 100 million of it is what we think is a consumer weakness. Now what we're really seeing in the channel right now, is that we're seeing it's about flat from a volume perspective with the prior year. In the whole scheme of things after the growth that we've seen, that's pretty good, but we do have to get inventories right-sized in the channel and, we've been able to quickly reduce the cost in the organization. We've said that's something we'll continue to work on through the back of this year, and we'll see what next year brings for us. 

Chris Hill: If you're a member of any Motley Fool service and want to access the entire conversation with Bryan Fairbanks, just click the link in the show notes. As always, people on the program may have interest in the stocks they talk about, and the Motley Fool may have formal recommendations for or against, so don't buy yourselves stocks based solely on what you hear. I'm Chris Hill. Thanks for listening. We'll see you tomorrow.