Jim Cline never aspired to be a CEO. After serving as finance chief for more than seven years at Trex, a publicly held maker of wood-alternative outdoor decks and railings, he ascended to the top executive role in August of this year. But, at 64, it was Cline’s unbiased appraisal of the business’s needs, and not ambition, that drove him to take the job.
Cline had already served from 2005 to 2007 as president of a $350 million division of Harsco, a diversified industrial services company, so he understood what running a company was like. But instead of parlaying that role into a CEO slot, he chose, in early 2008, to take the CFO chair at Trex, working under a former boss, Ron Kaplan.
The Harsco division he ran was “far more expansive and complex” than Trex, he says, with 18 manufacturing sites across several countries. “If I had the emotional need to be a CEO, there’s no doubt in my mind that I could have leveraged that position to do it.”
The allure of Trex was the significant financial difficulties it was having. Although Cline was awarded stock appreciation rights when he joined, that was “icing on the cake,” he says. “I came on board for one reason: it was an exciting opportunity. Trex was in pretty dire straits — a lot of red ink, bloated inventories, and controls that were lacking from both financial and operational perspectives.”
Before he committed to joining, Kaplan, who had recently become its CEO, asked Cline to come to Trex headquarters in Winchester, Va., to meet with company managers. “It was an interesting visit, because after talking to these people it was clear that many of them knew what the problems were,” he says. “They either weren’t getting enough support or didn’t know how to approach solving the problems. But every time they brought up a problem, I saw dollar signs, because these were not difficult problems to overcome.”
Among many problems, two stood out. One was that management was too heavy. There were too many vice presidents and, in general, too many people trying to guide the ship. That led to micromanaging.
“There was an outstanding staff that needed running room,” Cline says. “And that’s what we gave them. We also gave them guidelines that they had to play within. But the running room [was a big reason] why the turnaround happened so quickly.”
The other big problem was product quality. Customers who bought wood-alternative decks did so because they didn’t want to work on them. Instead, they wanted decks that wouldn’t fade, wouldn’t stain, and were easy to clean. The first-generation wood-alternative decks offered by Trex and its competitors didn’t provide that. “We recognized that the company was losing market share and would continue to if we didn’t change what we made,” says Cline.
The executives worked with Trex’s marketing leaders to precisely identify what customers most wanted in wood-alternative deck boards. Then the R&D team was charged with creating a product with those attributes — and doing it fast. “They got it done in 18 months, which was Herculean,” Cline says. The company’s deck boards now have a 25-year warranty for fades and stains and are extremely scratch-resistant, he notes.
Since 2011, Trex’s average annual compound revenue growth has been about 12%, and that’s well outpaced by EBITDA, which has averaged 19% improvement over that time as a result of new efficiencies. For example, in 2014 revenue was up 14% from the prior year, to $392 million, but the company’s cost of revenue rose by just 3%.
Much of that happy trend is a result, Cline says, of improving the use of manufacturing equipment. “The company had assets that were not being utilized, so the management team identified uses for that equipment that were not originally planned in order to reduce manufacturing costs,” he says. “Prior management would have purchased new equipment and let the existing equipment sit idle. While we didn’t necessarily get all of the benefits that new equipment would have generated, we were able to get a substantial portion of those savings at a very low cost of capital.”
Now, every incremental dollar of sales drives 45% to the gross profit line and 40% to the operating profit line, according to Cline.
Trex announced last May that Kaplan would be retiring in August. The board conducted an exhaustive external search for a replacement and also asked a couple of people internally if they were interested. “I put up my hand,” Cline says. “I said that it was the least risk for the business.”
One principle that’s central to Cline’s management philosophy is that as a company grows, the size of the growth can be stymied if it’s unwilling to boost head count. To that end, he convinced Kaplan to increase the sales staff from 57 to 77 during the second quarter of this year. That’s helping to solve a lingering problem: Floor associates at Home Depot and Lowe’s, which together account for about 30% of Trex’s business, were not very knowledgeable about the selling points of the company’s products.
The beefed-up sales staff was able to provide more training to employees of the two home-improvement giants. Trex salespeople also ensured that stores were stocked properly with product in the proper location on racks, and provided samples and literature for customers.
“Now we’ve got data points, and at the stores where we sent sales employees in the second quarter, we could see a marked increase in sales compared to stores in the same regions that were not being serviced,” Cline says.
A notable aspect of Trex’s operations is the manufacturing process. Ninety-five percent of the materials in its deck boards are recycled. That includes plastic bags, stretch wrap, boat wrap, agriculture foam, and sawdust from cabinet and flooring manufacturers. “We blend all that in together, heat it up, add a few secret ingredients, and push it through a form,” says Cline. “It’s very much like a Play-Doh machine, where you pick a form, like a star, push the handle down, and it comes out like a long noodle. It’s the same concept, except when it cools this product becomes very strong.”
Trex gets the plastics largely from large retailers like WalMart and Kmart, as well as beer distributors. The catch is that deals with such companies stipulate that you have to take all of their plastic waste, not just what you need, and you take it every week of the year. Trex separates out what it needs and sells the rest.
Unfortunately, despite the public’s growing environmental sensibilities, the recycled nature of Trex’s products is not much of a sales tool. “Very few people will pay you one nickel more for a 95% recycled board as opposed to one that is 30% recycled,” Cline says.
Guidance for CEO Wannabes
What advice would Cline give to finance chiefs who move up to the CEO seat?
First, he says, never do anything that could damage your reputation. “I’ve seen it before, many times, that people stretch things, probably beyond what they thought was right, and bur[y] their careers. That can happen to both CFOs and CEOs. You can’t get your reputation back once you’ve lost it.”
Second, you need to listen to counsel from the people around you. “I didn’t go to the sales and marketing people and tell them to sell this or that, or that they ought to change the prices. But I did ask questions in such a way that they had to think about the value to the company of decisions they wanted to make. And it’s not just the vice president of sales — you need to get to the people at lower levels also. Spending time in the field is important. You get to know who you can rely on, and who’s just coasting.”
CFOs should be out visiting customers, too, regardless of any greater career ambitions, Cline adds. “Then you can pick up the phone and say, ‘I know your receivable isn’t due today but I wonder if you could do me a favor by paying me early, and here’s what I’ll do for you.’ ”
The reverse is also true: if it’s a good customer calling to say they’re working on new financing and want to push the due date back 30 days, you can do that.
If you’re not a CEO yet but want to be, don’t just focus on numbers. “If that’s all you do, you are not going to become a CEO,” Cline says. “Numbers are a small piece of the game. Just today someone said they wanted to go through all the details of our numbers with me, and I almost had a panic attack. I don’t memorize them. Focus on the operations, on the sales, on the marketing, how you’re branding the product. That’s going to drive the numbers.”