Here's the article from the Washington Post on Trex:
On Deck: Trex, With Big Plans for a Recycled Product
By Jerry Knight
Washington Post Staff Writer
Monday, May 10, 1999; Page F07
The ingredients for an initial public offering usually include microchips, exotic technology or a new product that everybody has to have.
Yet Trex Co. has come up with an entirely different formula: shredded wood chips, common kitchen technology and old stuff that nobody wants.
Winchester-based Trex takes recycled plastic bags from supermarkets and mixes them with sawdust and scraps from furniture factories to make waterproof, weather-resistant boards for building decks.
The process involves a fair amount of secret know-how, but it comes down to this: They grind up the wood and plastic in giant Cuisinart-like processors, combine the materials in industrial-strength KitchenAid-style mixers, heat it, and then squeeze the "dough" through mammoth nozzles that extrude two-by-six boards 24 hours a day.
Even running around the clock, the company can't keep up with demand for Trex decking. Sales rose 40 percent last year to $46.8 million -- and could have grown even more if the plant had the capacity to spit out more product.
"We've been sold out for two years," said Trex President Robert Matheny, one of four former Mobil Corp. executives who bought the plastic decking business after Mobil spun it off three years ago.
Demand also is outrunning the supply of Trex stock, pushing it up 76 percent in the 4 1/2 weeks since the company's IPO on April 8. Climbing from $10 a share to $17.62 1/2 at the close of Friday's trading on the Nasdaq Stock Market, Trex stock has outperformed the three Internet IPOs in the mid-Atlantic region this year.
Closest behind is USinternetworking Inc. of Annapolis Junction, which provides time-sharing of software over the Net. The company's stock is up 73 percent, to $36.37 1/2, since it went public at $21 a share April 8, the same day as Trex. Shares of vaunted Value America Inc., the Charlottesville-based Internet department store that also went public that day, are up 43 percent, from $23 to $32.87 1/2. The stock of Proxicom Inc., a Reston-based builder of Internet sites, is up 44 percent to $18.75 since its $13 IPO on April 19.
Like the Internet IPOs, which are legendary for turning entrepreneurs into instant millionaires, Trex has proven highly profitable for its four founders. In addition to Matheny, 53, they are Anthony J. Cavanna, 59, executive vice president and chief financial officer; Andrew U. Ferrari, 52, executive VP of sales and marketing; and Roger A. Wittenberg, 50, executive VP of technical operations.
Each of the founders put up $500,000 to buy Trex from Mobil in 1992. Each of them took out more than $2 million in cash before the IPO. And each owns Trex stock worth about $39 million at current prices.
"It's beyond our wildest dreams," said Matheny, 53, who was general manager of the chemical specialties group of Mobil Chemical Co., a division of the Fairfax-based oil company, before he joined a team of company executives working on a new composite decking product.
Hoping to polish its environmental image, Mobil in the early 1990s decided to seek a recycling business that would mesh with its existing operations. The assignment went to Ferrari, then the new business manager of Mobil Chemical.
Ferrari found a small company owned by Wittenberg that had developed a process for making lumber out of plastic and ground-up shipping pallets. Mobil acquired the business and hired Wittenberg to be technical manager in charge of developing the process.
To handle the financial aspects of the project, Mobil brought in Cavanna, who had been vice president for planning and finance of Mobil Chemical.
Working as entrepreneurs within the company, the four men set up shop in a vacant warehouse in Winchester. They spent four years refining the process and bringing the product to market.
Depending on recycled raw materials, they made deals with cabinetmakers, such as American Woodmark Corp. in Winchester, to buy the sawdust that often was discarded. They contracted with supermarket chains, including Giant Food Inc. of Landover, to buy returned bags as well as plastic packing material that otherwise might end up in a landfill.
Unlike recycling processes that return plastic to a near-virgin state, Trex can tolerate some impurities and different kinds of scrap plastic.
The company ran into problems with the blue plastic bags used by Wal-Mart Stores, Matheny said. They produce aquamarine decking, which doesn't sell -- even in Miami. Blue bags now are separated, mixed with a little powdered carbon and turned into dark-colored decking sold as Winchester Gray.
Not strong enough for structural use, Trex is used only for decking. At about $1.50 a lineal foot for six-inch boards, it is priced between treated lumber at less than $1 a foot and cedar and redwood at $2 and more. A Trex deck costs about 20 percent more than one covered in treated lumber, but it doesn't require sealing or staining, the company said.
Trex was turning a profit by 1996, but with sales of about $25 million a year it was not big enough to warrant even a footnote in Mobil's financial statements.
At a recent lunch with reporters and editors of The Washington Post, Mobil Chairman Lou Notto said Trex had proven to be a success, but didn't fit into the company's long-term strategy. Mobil decided to sell several of its non-core businesses and gave the four managers a chance to buy Trex.
After discussions with dozens of potential investors, the Trex team received $29 million in financing from Cigna Corp. Mobil took a $3 million stake in the spinoff and the founders came up with $2 million of their own money.
The four Trex founders set the stage for their success when they financed the original buyout.
Often in spinoffs, a buyout firm handles financing, routinely getting one-third of the company for its services. But the Trex partners kept 90 percent of the equity for themselves. Cigna got 10 percent of the stock in what's known as "an equity kicker" on top of interest it earned on its investment.
Cigna sold about $10 million of its stock in the IPO and remains the largest outside shareholder with 847,000 Trex shares worth more than $15 million.
Matheny said Trex had not planned to go public so soon after the management buyout, but needed more capital to maintain its growth. The IPO was scheduled for last fall, but had to be delayed because the IPO market had dried up.
Completing the offering still was a struggle, Matheny said. Institutional investors are enamored with the Internet and other technology stocks, but only a handful of manufacturing companies have been able to go public in the past few months.
The company had hoped to sell its stock for $13 to $15 a share, but it scaled back the asking price to $11 or $12 after a lukewarm reception from investors. It settled for $10 a share.
Still, the offering raised enough money for Trex to refinance its original debt and pay for a second plant in Nevada that will allow the company to produce $100 million worth of products a year.
Supply will catch up with demand when that plant opens; it is set to begin production later this year. Even though it has no boards to sell, Trex is continuing to increase its spending on advertising. From $10 million over the last three years, the ad budget will grow to $25 million for 1999 through 2001.
Besides building a backlog of demand, that strategy is intended to make Trex a synonym for non-wood decking, just as Corian is for solid surface kitchen counters.
"It's building brand leadership," Matheny said. Competitors are getting into the business now, he said, but Trex is the only product most people have heard of. "The second guy in and the third guy in are going to have to spend 10 times to catch up with us."
© Copyright 1999 The Washington Post Company |
