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Encore Wire Corporation (NASDAQ:WIRE)

Q3 2008 Earnings Call Transcript

October 23, 2008, 11:00 am ET

Executives

Daniel Jones – President & CEO

Frank Bilban – VP and CFO

Analysts

Liam Burke – Janney Montgomery Scott

Curtis Jensen – Third Avenue

Robert Kelly – Sidoti and Co.

Michael Coleman – Sterne Agee

Louis Corrigan – Kingsford Capital

Forrest Tempel – FlyLine Partners

Gil Nathan – Restoration Capital

Paul Connelly – Southwell Partner

Operator

Hello, and thank you for joining the Encore Wire third quarter earnings call. (Operator instructions). At this time, I'd like to turn the call over to Mr. Daniel Jones, the President of Encore Wire. Sir, you may begin.

Daniel Jones

Thank you, Julia. Good morning, ladies and gentlemen, and welcome to the Encore Wire Corporation quarterly earnings conference call. I Daniel Jones, the President and CEO of Encore Wire. With me this morning is Frank Bilban, our Chief Financial Officer. We are pleased to announce increased earnings in the midst of the tough competitive environment we are experiencing in our industry. The slowdown in construction activity in the United States continues to impact our industry adversely as it has over the last two years. However, we were able to increase our margins despite declining unit volumes and copper prices. We are pleased that our industry exhibited some measure of pricing discipline in response to those two trends.

Copper prices were volatile during the third quarter '08 starting at a COMEX close price of $3.92 per pound on July 01, and finishing at $2.89 per pound on September 30. Volatility of that magnitude and the uncertainty it generates tends to disrupt our customer's normal buying patterns and has historically contributed to competitive pricing pressure. Our unit volume shipped in the third quarter of ’08 decreased over 9% versus third quarter of '07. Our year to date unit volume is also down over 9%. However, the average selling price of wire containing a pound of copper increased by 5.8% while the average cost of a pound of copper purchased increased only 1.3% in the third quarter of '08 versus third quarter of '07. This spread increased by 25.2% in the third quarter of 2008 compared to third quarter of 2007 and increase by 20.8% on a sequential quarter comparison. The increased spread drove our gross margin increase. Our low cost structure and strong balance sheet have enabled us to withstand difficult periods in the past. We believe we will emerge stronger when market conditions improve.

We would like to thank our employees and associates and our Board members for their tremendous efforts and our shareholders for their continued support during these challenging times.

Frank Bilban, our Chief Financial Officer, will now discuss the financial results. Frank?

Frank Bilban

Thank you, Daniel. In a minute we will review Encore’s financial results for the quarter. After the financial review we will take any questions you may have.

Each of you should have received a copy of Encore's press release covering Encore's financial results. This release is available on the Internet or you can call Denise List or me at 800-962-9473 and we will provide you with a copy.

Before we review the financials, let me also indicate that in our initial comments and in the question and answer period that follows, we may make certain statements that might be considered to be forward looking. In order to comply with certain securities legislation and instead of attempting to identify each particular statement as forward looking, we advise you that all such statements involve certain risks and uncertainties that could cause actual results to differ materially from those discussed today. I refer each of you to the company's SEC reports and news releases for a more detailed discussion of these risks and uncertainty. Also, reconciliations of non-GAAP financial measures discussed during this conference call to the most directly comparable financial measures presented in accordance with GAAP, including EBITDA, which we believe to be useful supplemental information for investor are posted on www.encorewire.com under "Latest Press Releases."

Now, the financial results. Net sales for the quarter ended September 30, 2008 were $296.3 million compared to $308.5 million during the third quarter of 2007. Net income for the third quarter of 2008 increased 40% to $8.1 million versus $5.8 million in the third quarter of 2007.

Fully diluted net earnings per common share were $0.34 in the third quarter of 2008 versus $0.24 in the third quarter of 2007. Net sales for the first nine months of 2008 were $900.9 million compared to $902.8 million during the first nine months of 2007. Net income for the first nine months of 2008 was $23 million versus $31.9 million in the first nine months of 2007. Fully diluted net income per common share was $0.98 in the first nine months of 2008 versus $1.35 in the first nine months of 2007.

On a sequential quarter comparison, net sales for the third quarter of 2008 were $296.3 million versus $322.8 million during the second quarter of 2008. Net income for the third quarter of 2008 increased 507% to $8.1 million versus $1.3 million in the second quarter of 2008. Fully diluted net income per common share was $0.34 in the third quarter of 2008 versus $0.06 in the second quarter of 2008.

Our balance sheet remains strong. The only long term debt we have as of September 30, 2008 is $100 million in long term notes due in 2011 with our revolving line of credit paid down to zero balance. In addition, our $108.5 million cash balance as of September 30, 2008 exceeds our long term debt resulting in zero net debt. We also declared our eighth consecutive quarterly cash dividend during the third quarter of 2008.

We also want everyone to know that this conference call will be available for replay after the conclusion of this session. If you wish to hear this taped replay, please call 866-551-4520 and enter the conference reference number 235401 and the pound sign.

I will now turn the floor back over to Daniel Jones, our President and CEO. Daniel?

Daniel Jones

Thank you. As Frank highlighted, Encore performed well in the past quarter. We believe we are well positioned for future growth.

Julia, we will now take questions from our listeners.

Question-and-Answer Session

Operator

(Operator instructions) Our first question is from Liam Burke with Janney Montgomery Scott. Go ahead.

Liam Burke – Janney Montgomery Scott

Thank you. Daniel, Frank, how are you this morning?

Daniel Jones

Great Liam.

Liam Burke – Janney Montgomery Scott

Daniel, the residential construction market speaks for itself. It’s been three years of contraction and nobody is expecting anything for 2009. Commercial construction for the first half of the year has been holding its own and even in July it looked like it was okay. Are you seeing a dramatic shift in the commercial construction market at this point or did you see it in September? And how does it look for the rest of the year?

Daniel Jones

I'm not seeing a dramatic shift, Liam, but certainly there is some apprehension out there. You know the larger jobs continue. Some of the medium size jobs may push out into the future a little bit as much as they can stand. But for the most part, they are moving along. The institutional type construction – colleges, universities, hospitals, local schools seem to be going along pretty well. The retail obviously has been down a little while. But it seems to be kind of hold about flat where it is.

Liam Burke – Janney Montgomery Scott

Thank you.

Daniel Jones

You are welcome.

Operator

Our next question is from Curtis Jensen, Third Avenue. Go ahead.

Curtis Jensen – Third Avenue

Good morning, fellows. Just a quick question. Cash from operations versus CapEx – it looks like your working capital is up a little in the quarter.

Frank Bilban

Cash from operations – would you like it for nine months or the third quarter?

Curtis Jensen – Third Avenue

Well, nine months is fine.

Frank Bilban

For the nine months, our cash provided by operating activities is $45.5 million and our capital expenditures for the nine months also are $12.6 million.

Curtis Jensen – Third Avenue

Okay. So what – how do you see CapEx going out through the balance of ’08, and if you thought about kind of your ’09 planning?

Frank Bilban

I was just going to say that through ’08 we are targeting around $16 million to $17 million as a final number.

Curtis Jensen – Third Avenue

Okay.

Daniel Jones

And in ’09, we have some projects that we are buttoning up. And I don't see today sitting here anything that's large to report.

Curtis Jensen – Third Avenue

Okay. Thanks.

Daniel Jones

You are welcome.

Operator

(Operation instructions) Our next question is from Robert Kelly with Sidoti and Company. Go ahead.

Robert Kelly – Sidoti and Co.

Gentlemen, good morning. Thanks for taking my question.

Daniel Jones

You are welcome.

Robert Kelly – Sidoti and Co.

If you could, could you just comment on spreads throughout the third quarter – how July compared to August, and how August compared to September?

Frank Bilban

They were fairly consistent. We did trend up a little bit toward the end of the quarter.

Robert Kelly – Sidoti and Co.

The trend up towards the end of the, was that due to holding out or raw materials weakening?

Daniel Jones

It’s a combination of both. We had some price discipline toward the end and obviously we received some relief on copper.

Robert Kelly – Sidoti and Co.

Great. And then, as far as October has fared and copper's been pretty weak here, are you seeing the continuation of the discipline? I mean, it seems like lower prices really won't stimulate demand in this environment.

Daniel Jones

Well we are certainly not one to think lower prices ever stimulate demand. But your original comment is correct, yes.

Robert Kelly – Sidoti and Co.

And then, all things equal with copper weakening shouldn't this be a net major positive for Encore Wire?

Daniel Jones

You know historically we do better as an industry in an upward trending copper market, but we are in for – times today are a little bit different that what I’ve seen in the past. We have – the election is right on top of us. You’ve got the overall economic issues to consider. So, it’s hard to give any kind of guidance beyond the short term right now. It’s hard to say.

Robert Kelly – Sidoti and Co.

Understood. And then, just one final one. With the free cash flow generated, have you stepped in and repurchased shares or is that the plan for the next – the near term here?

Frank Bilban

We do have a 10b-5 plan in place with a 1 million share buyback, through the first reported period of that we bought 270,000 shares. We did not buy any shares in Q3, but pursuant to that plan when things got soft here in October we did buy some stock back at a favorable price.

Robert Kelly – Sidoti and Co.

Okay. Thanks guys.

Frank Bilban

You are welcome.

Daniel Jones

Thank you.

Operator

(Operator instructions) Our next question is from Michael Coleman with Sterne Agee. Go ahead.

Michael Coleman – Sterne Agee

Hi, good morning guys.

Daniel Jones

Hey, Michael.

Michael Coleman – Sterne Agee

You mentioned in your press release that you would sacrifice some volume. Is it – can I read that to mean that you think the market was maybe down a little bit more than what your volumes showed on a year over year basis?

Frank Bilban

Well, it seems like it, Michael. But there was a few several – there was a few times and several opportunities that came by where the order was just – or the potential order –the quote was significantly lower than breakeven. So, we walked. We let it go to someone else. That percentage of volume that was there that we passed on would best describe or explain the wording in the press release. There were some orders that we walked away from, yes.

Michael Coleman – Sterne Agee

Okay. So that would describe your discipline in the marketplace but not necessarily your competitor’s discipline. So, as you’ve seen the prices that you’ve held up in a quarter or maybe hold up now, is it really a function of just the timing of how fast those prices adjust or is it do you think actual discipline in the marketplace?

Daniel Jones

That’s a great question. I think there's a little bit of both. There are a couple of categories of competitors out there. And one category I believe is being disciplined and following the good business practice, based on our opinion. And then, there are others out there that seem to maybe drift off a little bit and try to buy an order here or there. But overall, as an industry, I believe that the pricing discipline that we are giving credit to I think it is a mixture. Again, copper went down at one rate and building wire prices came down a little bit slower. So, I think it’s probably a combination of both, Mike.

Michael Coleman – Sterne Agee

That's historically – or that's opposite what historically has been the pattern?

Daniel Jones

Yes. We've had pockets where it's been positive like this. But in the past when we had more competitors that are not around anymore, but they seem to accelerate the price decrease versus the decrease in COMEX, yes.

Michael Coleman – Sterne Agee

Okay. In the inventory of $65 million at the end of the quarter, approximately how many pounds, how many millions of pounds of copper does that represent?

Frank Bilban

Roughly 40.

Michael Coleman – Sterne Agee

Okay. Thank you.

Daniel Jones

You are welcome.

Operator

Our next question comes from Louis Corrigan with Kingsford Capital. Go ahead.

Louis Corrigan – Kingsford Capital

Hi. Could tell me what’s the LIFO credit was in the quarter?

Frank Bilban

LIFO credit for the quarter was $14.6 million.

Louis Corrigan – Kingsford Capital

Okay. And so, the way this will work is if copper remains low through the fourth quarter, essentially do you think that at the current level of your price discipline that you can operate profitably in the fourth quarter?

Frank Bilban

Well, we demonstrated our ability to do that in the third quarter. As we indicated in the press release if you look at what copper did in the third quarter it came down nearly $1 and what we’ve done as a management team, I think over the last couple of years is demonstrate our ability to make money in rising copper prices and declining copper prices. Again, LIFO is just a GAAP measure of making sure that you are matching current prices of wire to current costs of copper. And so the real story here again is the spread increase which Daniel was just talking about with Michael Coleman. To the extent that, as we indicated in the press release, copper prices fell and wire prices fell a little slower, that increased our GAAP or spread as we tend to call it here, and our margins went up. And that’s good news. If that continues in the fourth quarter whether copper goes up, down or sideways the whole story here is all about the spread.

Louis Corrigan – Kingsford Capital

Let me follow up again on the question of competitors’ pricing discipline. It seems like that this year it's kind of gone back and forth. There have been periods where competitors have been more aggressive. I understand that part of the argument is that there are fewer competitors out there. I guess what – how can we gauge that sort of activity? What do you look for on sort of a daily basis to gauge that? Obviously the past couple of quarter, you passed up some business that wasn’t at the rate that you wanted. Is there simply always going to be enough business out there that you can pick and choose and let your competitors accept a lower price, if they are willing to, and essentially not impact you as much?

Daniel Jones

There are about four questions in there. And I will try to hit them all. There seems to me today to be more discipline than there has been in the prior two quarters. Speaking of the third quarter. Why it's there today – the industry itself has not been on an upswing or an uptick since about May or April of ’06. When volume or the overall market gets squeezed a little bit from a volume standpoint, I believe – and this again is my opinion, I believe that there is competitors who would like to run their plants to a pre-determined copper pound number. It’s not always going to work in that manner if you get the volatility that we’ve had and it is not always going to work to cut prices to write an order. Other things involved, and there is some value to be sold to customers other than just a low price. So I hope that answers all four of them.

Louis Corrigan – Kingsford Capital

It does. Thank you.

Daniel Jones

You are welcome.

Operator

Our next question is from Forrest Tempel with FlyLine Partners. Go ahead.

Forrest Tempel – FlyLine Partners

Hi guys. Frank, I think I'm going to call you, because this LIFO stuff always throws me off. Can you tell me where we were poundage of copper last quarter to this quarter inventory wise?

Frank Bilban

We were actually pretty flat. I mean we don’t publish the exact numbers, but it was about the same. Daniel has done a good job working with our team and pretty much matching what we ship with what we purchase.

Forrest Tempel – FlyLine Partners

Is it down about what we are seeing volumes down year over year then? Is it down about 9% or 10% from what you used to carry, 44 million, 45 million pounds and now you carry 40 million.

Frank Bilban

We might be down 5% to 10%, yes. But we are actually adding SKUs. There are some new SKUs that are being introduced by our sales team. We are kind of broadening our product line wherever we can. And I think we are just doing a good job with the inventory management.

Forrest Tempel – FlyLine Partners

When a LIFO gain comes in, is it taxable?

Frank Bilban

Sure, all earnings are taxable.

Forrest Tempel – FlyLine Partners

So, the $14.6 million is – where do I find that?

Frank Bilban

It’s really just the cost of material.

Forrest Tempel – FlyLine Partners

No, I mean, where – so it comes in cost of goods sold.

Frank Bilban

Yes.

Forrest Tempel – FlyLine Partners

Okay. And then if I – so we have a LIFO pool sitting out there and this is a gain to that, right?

Frank Bilban

It’s a detriment to it.

Forrest Tempel – FlyLine Partners

It takes it down?

Frank Bilban

Yes, sir.

Forrest Tempel – FlyLine Partners

So where is that account number? What is it now?

Frank Bilban

It’s $82 million.

Forrest Tempel – FlyLine Partners

Okay. And what happens if we run through that?

Frank Bilban

Well, it will either go to zero and you can actually go the other way.

Forrest Tempel – FlyLine Partners

You can go negative?

Frank Bilban

Yes, sir.

Forrest Tempel – FlyLine Partners

Okay, I'm going to call you afterwards, Frank, because I just need you to walk me through it. But I got it. Thanks very much.

Frank Bilban

You are welcome.

Operator

(Operator instructions) Our next question comes from Michael Coleman with Sterne Agee. Go ahead.

Michael Coleman – Sterne Agee

Maybe I missed this. But, Frank, what is that LIFO pool?

Frank Bilban

$82 million at the end of Q3.

Michael Coleman – Sterne Agee

Okay. And the LIFO credit was $14.5 million and your operating income was $12.5 million. Is that correct?

Frank Bilban

That’s correct.

Michael Coleman – Sterne Agee

Okay. Thank you.

Operator

Our next question is from Gil Nathan with Restoration Capital. Go ahead.

Gil Nathan – Restoration Capital

Hey guys. A quick question for you, Frank, and maybe I'm not understanding it correctly. You guys said you have about 40 million pounds copper which is flat quarter over quarter?

Frank Bilban

Yes, sir.

Gil Nathan – Restoration Capital

And how is that – how is inventory checked on the price of copper? If your poundage is flat and inventory is flat, wouldn't that imply prices are flat? I am just confused right now.

Frank Bilban

I am confused by your confusion. Price of copper as we indicated in the press release was down nearly $1 in the quarter. So, prices are not flat.

Gil Nathan – Restoration Capital

No, no, no. That's what I am trying to get at. If prices are down 25% and poundage is flat and inventory amount – dollar amounts on the balance sheet are flat. What’s the missing part of the equation here? (inaudible) dollar amounts are not flat?

Frank Bilban

Dollar amounts are not flat. The LIFO reserve has been detrimented and basically when you have inventory – what we have on the books is $147 million of inventory at FIFO reduced by an $82 million reserve, which gives you the net of $65 million.

Gil Nathan – Restoration Capital

Okay. All right. Thank you very much.

Frank Bilban

You are welcome.

Operator

Our next question is from Paul Connelly with Southwell Partner. Go ahead.

Paul Connelly – Southwell Partner

Good morning. Just to follow up on inventory. I hate to beat this horse here. But if $65 million of inventory representing 40 million pounds of copper – that would be an average price of roughly $1.60. Can you just explain to me how your inventory cost can be at that level when copper hasn't traded at that price since 2005?

Frank Bilban

Once again, the inventory at FIFO, as I just indicated to the last caller is at $147 million. That indicates first in, first out. Your LIFO pool brings it back to in effect pushing your latest cost of copper, your highest cost of copper, back through the income statement when prices were rising, and your latest costs are lower cost of copper when you are going through. What LIFO is really doing and this is true in all companies, it’s a GAAP measure. It’s just making sure that your income statement is not ballooning or detrimenting your earnings unreasonably versus your current costs. It's marrying current cost of copper and other materials, I might add, to your current prices that you are getting for wire.

Paul Connelly – Southwell Partner

Great. Thank you very much.

Frank Bilban

You are welcome.

Operator

(Operator instructions) We appear to have no more questions.

Daniel Jones

Well, Julia and group, thank you very for the participation. We enjoyed the inventory discussion. If you guys would like to go into that deeper, call us offline here at the office, and we will be glad to discuss it. But again, thank you very much for your participation.

Operator

Thank you. This call has been concluded.

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