GARBAGE INTO GOLD

Trex had the benefts of a monopoly—along with the arrogance that almost killed it. Ron Kaplan saved the synthetic-decking pioneer by treating it like a startup.

Trex had the benefits of a monopoly—along with the arrogance that almost killed it. Ron Kaplan saved the synthetic- decking pioneer by

treating it like a startup.

When Ron Kaplan took over as CEO of Trex in January 2008, he knew the composite wood decking company was in a death spiral of quality problems, falling sales and widening losses. The previous year Trex had lost $76 million on $329 million in sales and its debt had ballooned to $134 million.

What Kaplan didn’t know until a board meeting on his second day as CEO was that Trex’s abysmal debt-to-earnings ratio violated its bank covenants—putting it on the precipice of bankruptcy. He hustled to meet face-to-face with the president of one bank and issued a challenge: “I said, ‘Do you want to run the place, or do you want me to run it?’ ”

Trex’s creditors deferred to Kaplan’s 30 years of manufacturing experience, a decision that likely saved the company. Sales aren’t that much higher than when Kaplan took over— $381 million over the past four quarters—but it now shows a profit of $51 million. Its debt load? Zero. And Wall Street has taken notice: Though Trex stock plummeted 83% between 2005 and 2007, it’s up more than 900% since Kaplan came aboard. “It’s the most successful, extensive turnaround of a company that I’ve seen in the building materials space,” says Trey Grooms, managing director of equity research at Stephens.

So what happened? It’s a classic case of focus. Trex lost it, foolishly thinking that a virtual monopoly meant it had no pressure to maintain quality. Kaplan has used culture and the product itself to get it back.

Trex, after all, basically invented synthetic decking. In the ’90s a bunch of Mobil Oil engineers figured out how to make decking out of plastic waste and wood scraps, creating a composite that wouldn’t rot or splinter. Today Trex claims its decking will last 25 years without staining or fading, versus pressure-treated lumber, which requires yearly maintenance and lasts 7 years on average.

Sizing up the outdoor decking industry— then a $2 billion market, now $7 billion—four Mobil executives saw the larger opportunity, buying the unit from the parent company in 1996 and then rapidly expanding. Between 1998 and 2004 sales surged from $47 million to $254 million— and after the company went public in 1999 the stock raced up in lockstep.

Controlling 90% of their market, they attempted to goose margins further. Big mistake. If you visit Trex’s headquarters in Winchester, Va., in the foothills of the Shenandoah Mountains, it’s immediately obvious what its key component is: trash. Giant bales of plastic bags arrive by the truckload every day, complete with food detritus and supermarket logos. That garbage is spun into gold: The bales of plastic are heated and combined with industrial wood shavings to make the com-

posite deck boards. But in 2003 management tried to lower costs by buying lower grades of plastic—yes, there’s a quality hierarchy in retail bags—and the results were dismal.

Customers saw their new deck surfaces deteriorate, and they started filing lawsuits (Trex settled in 2010 and still pays to replace defective decks). New competitors like Fiberon and AZEK stepped in, introducing more durable products. Even after two members of Trex’s original management team came out of retirement to try to fix operations, the damage was done. Trex’s market share had fallen to 30%, and the cure proved as bad as the disease, as a decision to swell the labor force to monitor quality by hand also swelled costs, throwing the company into a loss.

Enter Kaplan. “We knew almost immediately Ron was the guy,” says Frank Merlotti Jr., Trex board member since 2006. “He had a certain confidence and calmness—a guy who knows what he wants and can get everyone marching in the same direction.”

Raised in a family of military veterans and armed with a Wharton M.B.A., Kaplan had spent 26 years at Harsco, where he managed factories for propane tanks and high-pressure cylinders and demonstrated a certain coldheartedness, culling employees as needed.

His take-no-prisoners approach proved shock therapy for Trex’s collegial culture. On a Friday early in his tenure he pledged not to alter the lax dress code—before noting he would be making final decisions the following Monday about which executives deserved to stay. “Neiman Marcus had its best weekend ever,” he jokes.

The executives should’ve saved their money. He axed 10 of his 11 vice presidents, along with around 30 managers, including one whose entire job was overseeing charitable donations. “I didn’t think a company in a death spiral needed a senior executive in charge of giving away money,” shrugs Kaplan, a gruf 63-year-old with a deliberate, almost robotic gait. Those executive ofces have been sublet to an X-ray imaging center and a physical therapy clinic. And it wasn’t just managers. Automation improvements at the factories eliminated another 30% of full-time manufacturing workers in 2008. The survivors were incentivized: Managers earn bonuses based on the company’s financial performance, while factory workers can boost their income by up to 15% by hitting targets for production costs and returns.

The culture now reset, Kaplan went to the core of his problem: the product. To regain market share, he introduced a new line with the kind of innovation that people had originally associated with Trex. The Transcend line was the first major composite board encased in a hard shell. As a result the product was both more resilient and more woodlike in appearance.

The tougher exterior enabled the company to ofer a 25-year warranty, which has allowed it to charge more. Where Trex boards previously sold for $2 to $3 per foot, prices now reach $3.75. “Millennials aren’t like the Baby Boomer generation,” says Adam Zambanini, vice president of marketing. “They don’t want the maintenance.”

Even with higher-price products, Trex is back to owning 40% of the composite market. And Kaplan intends to expand beyond catering to the beer-and-grill crowd. “One way to look at Trex is as a decking and railing company,” says Kaplan. “Another way to look at it is as a recycling and extrusion company.”

In order to get the plastic it needs, Trex has to accept all of the polyethylene that retailers like Wal-mart send. That means it has a lot of surplus. Rather than resell it at cost, Kaplan is developing other products, starting with tiny polyethylene pellets that can replace virgin resin for plastic producers.

Why get into plastic commodities? Kaplan thinks his formula can work in any number of areas. This seems to risk a distraction similar to the one that prompted Trex’s collapse in the first place. But such are the perks of being the company savior: When you’re playing with house money—and the balance sheet remains debt-free—investors are willing to let you roll the dice.

FINAL THOUGHT

“It is not a daily increase, but a daily decrease. Hack away at the inessentials.”

— BRUCE LEE