Coleman Cable, Inc. Q3 2008 Earnings Call Transcript

Coleman Cable, Inc. (CCIX)

Q3 2008 Earnings Call Transcript

November 7, 2008, 11:00 am ET

Executives

Gary Yetman – President and CEO

Rich Burger – EVP, CFO, Secretary and Treasurer

Analysts

Matt McCall – BB&T Capital Markets

Ryan Merkel – William Blair

Presentation

Operator

Good day, everyone, and welcome to the Coleman Cable third quarter 2008 earnings conference call. This call is being recorded. At this time, for opening remarks and introductions, I’d like to turn the call over to Coleman Cable’s Chief Financial Officer, Mr. Rich Burger. Please go ahead, sir.

Rich Burger

Thank you. Thank you everyone for joining Coleman Cable’s third quarter 2008 conference call. Joining me today is Gary Yetman, Coleman Cable’s President and Chief Executive Officer.

Our comments today may include forward-looking statements that make assumptions about our operations, business, economic and political environment, which we have outlined on slide two. These forward-looking statements are subject to risks and uncertainties that are detailed in the Risk sections factor – Risk Factors section of our annual report Form 10-K for the fiscal year ended December 31st, 2007.

Gary will begin our formal remarks with a review of our business highlights, I will review the third quarter 2008 financials, and we will take your questions.

I will now turn the call over to Gary.

Gary Yetman

Thanks, Rich, and good morning. As it states in our press release yesterday, Coleman Cable was able to generate adjusted EPS and adjusted EBITDA at the upper end of our guidance given during the second quarter conference call. This is despite the continuation of very challenging market conditions.

As importantly, Coleman generated operating cash flow of just over $30 million in the third quarter, which allowed us to reduce total debt net of cash and cash equivalents by nearly $30 million, as compared to total debt levels at June 30th. The substantial generation of cash flow was aided by a decrease in inventory and the price of copper during the third quarter.

As we reported last quarter, we continue to face the combined pressures of contracting economic environments, slower demand, and increased competitive pricing levels. We continue to believe that these factors, which are indicators of recessionary conditions will be in existence and may accelerate for the remainder of 2008 and into 2009. In the midst of this environment, we are still able to deliver sales increases for the period.

But the quarter’s sales volumes increased 7% over the same quarter of 2007. Our overall volumes continue to be aided by our prior year acquisitions. Expansion of our product offering and customer base stemming from last year’s acquisitions is helping to mitigate a continuing broad-based slowing demand from many of our existing customers across numerous marketing channels.

We ended the quarter with adjusted EBITDA of $21.5 million, which was $0.2 million higher than last year, and $0.25 of adjusted earnings per share, which is $0.01 higher than last year. These results primarily reflect favorable performance in our distribution segment, offset by the continuation of the poor performance in our OEM segment and the efficiencies resulting from the realignment of multiple facilities. We are pleased with the overall performance of our distribution segment in the face of these challenging economic and competitive conditions.

As we have noted on slide four, this segment, which serves our customers and distribution businesses who are resellers of our products, delivered a 32% increase in sales volume. Again, with the help of prior year acquisitions, it was able to produce continued margin stability in spite of volatile market conditions. We attribute this performance in part to the breadth of our customers served by the segment and our diverse product offering.

In addition to recording over $188 million in distribution segment sales during the quarter, other factors contribute to our success in the segment, including the realizations, cost savings and synergies from our acquisitions, the successful integrations of Woods retail business, and the timely implementation of pricing adjustments put in place to help defray the impact of rising costs.

We have begun to see sales deterioration in a number of channels in this segment, especially late in the third quarter, as our customers manage their inventory levels in the face of current market conditions. Other selling channels are holding up reasonably well and are expected to mitigate some of the contraction.

In contrast, however, as we talked about during our second quarter conference call, the OEM segment continues to face challenges. As you can see on slide five, our operating profit within the OEM segment declined $3.8 million during the quarter, as compared to the same quarter last year. This decline was due mainly to an erosion of gross profit within the business and inefficiencies due to the consolidation of facilities.

In addition to softened demand, which resulted in an 18.1% decline in our OEM volume for the quarter, we believe the contracting market coupled with historical pricing practices for these products and customers have resulted in margin compression within the OEM segment. We expect demand to continue contracting through 2008 and into 2009.

Our third quarter results continue to reflect the profit impact of our inability to secure the appropriate non-copper related price increases during the quarter from a number of our customers. Our continued focus within this segment in the coming quarters is to work with our customers, particularly large automotive and appliance customers on securing acceptable price levels and arrangements that fairly reflect the cost inherent in producing our products.

This work is well under way, and we expect it to be completed by the end of the year. While we hope to limit the impact of such pricing changes on our overall revenues, we fully recognize that we will loose future OEM sales or customers as we adjust our pricing and rationalize our customer base. Additionally, as we talked about on our second quarter conference call, with the current realignment of our El Paso and Indiana facilities, we are currently positioning our production capabilities and support functions to support the projected 2009 sales demand within this segment.

In October, we took the difficult actions of announcing a series of planned workforce reductions affecting a number of our manufacturing facilities. This serves as an appropriate segueway into the topic of integration and restructuring.

As you know, we remained focused on the integrations of some pretty significant acquisitions made during 2007. The most recent activities and year-to-date accomplishments associated with these efforts are summarized on slide six. Although the slide can’t capture all the activities and people involved in making these integrations happen, it provides an overview on what has occurred to date.

We completed the integration of the Woods acquisition, incorporating this business into our core operations and eliminating separate corporate and distribution facilities.

In early November, we expect to complete our plan to consolidate three of our distribution facilities into a single distribution facility at the company’s new Midwest distribution center in Pleasant Prairie, Wisconsin. As you will recall, the Pleasant Prairie facility was opened in April. And starting this month, will handle all the distribution functions previously performed at the three centers.

We also continued the execution of our integration strategy for a number of manufacturing and distribution facilities, which were acquired as part of the Copperfield acquisition. As a reminder, this plan includes its consolidation and closure of Copperfield manufacturing and distribution facilities located in Avilla, Indiana; Nogales, Arizona; and, El Paso, Texas, into operations at one modern facility in El Paso, Texas.

During the first half of the year, we ceased operations at our facilities in Avilla and Nogales, with productions from these facilities moving to our facilities in Bremen, Indiana and El Paso, Texas. In September, we completed the transition of manufacturing operations in our Zaragosa road facility in El Paso into our new El Paso plant. Finally, the last plant scheduled to be transitioned to our new El Paso facility as part of our overall integration plan, our Englewood facility, will be transitioned during the fourth quarter.

Also, during the third quarter, we initiated a workforce reduction in our Oswego, New York manufacturing facility as a result of the decision to transition copper fabrication activities from our Oswego plant to our Bremen, Indiana facility. We believe the addition of these activities to our Bremen plant will further improve the productivity operation in Bremen and will lower the costs associated with our fabrication operations.

Finally, as I briefly mentioned during the discussion of our OEM segment, in October, Coleman announced a series of separate planned workforce reduction to align our production capabilities and capacity with market demand. These difficult actions will affect the number of our manufacturing facilities as well as our corporate office in Waukegan, Illinois, and includes the elimination of approximately 160 positions over the remainder of 2008.

While taking such steps is difficult, controlling our costs and in timely adjusting our capacity are keys to our ability to continue generating strong operating cash flows and effectively managing our balance sheet. The timing and extent of such actions are contingent upon the result of our customer rationalization program and our performance for the balance of 2008.

For the third quarter of 2008, we recorded restructuring charges of approximately $2.5 million, and reported $5.5 million through the first nine months of 2008, primarily in the form of equipment relocation cost. Including these charges, we expect to incur a total of $6 million to $7 million in restructuring costs for these integration activities in 2008. And we remain on target to realize approximately $3 million to $4 million in annual cost savings in 2009 and subsequent years.

As you may recall, we closed and consolidated two of our legacy manufacturing facilities in 2006. These actions, combined with the numerous consolidations this year, has put the company in a much better position to cost effectively operate in the difficult market conditions that we’re experiencing.

With all of these in mind, on slide seven, we provided our financial expectations for the coming quarter. We expect the distribution segment to experience historical trends in the fourth quarter. And believe that synergies derived from our acquisitions will continue to provide benefits.

Our OEM segment results are expected to remain strained as we complete the final projects related to the consolidation and transition out of relationships with a number of non-profitable customers. We fully expect that as we begin 2009, all actions will have been completed and the OEM segment will be poised for improved profitability in 2009.

Therefore, taking into consideration these facts, the recent dramatic decreases in copper prices and current market conditions, we expect fourth quarter sales to be between $190 million and $250 million, adjusted EBITDA to be in the range of $13 million to $18 million, and adjusted EPS to be in the range of $0.03 to $0.15 per share.

As copper remains in the $2 range, we would expect to generate another $40 million in cash and debt reduction in the fourth quarter, and another $15 million to $20 million in the first quarter as soon as we receive the working capital used for the customers that were rationalized out.

With that, I’d like to turn the call over to Rich, who will provide additional information on our second quarter and first half results. Rich?

Rich Burger

Thank you, Gary. Please turn to slide eight, where I’ll review our financial results for the third quarter.

As Gary mentioned, our sales grew 7% during the third quarter versus the same period last year. Our adjusted EBITDA increased $200,000. And our adjusted EPS increased $0.01. These increases were realized despite the difficult economic environment that we experienced.

As you can see on slide nine, we have listed both gross profit margin in relationship to COMAX as well as our selling, engineering, and general administrative expenses as a percentage of sales. For the third quarter, our gross profit and margin percentage increased sequentially as gross profit within the distribution segment increased, partially offset by the lower gross profit margin within our OEM segment. The decline in the OEM segment gross profit reflects the impact of lower sales demand and our inability to pass along inflationary cost increases to certain of our customers within this segment. As Gary mentioned earlier, we may loose OEM sales in the future – in future periods as we work to improve the gross profit by adjusting our product pricing.

Prior to going into my discussion on our selling, engineering, and general administrative expenses, I would like to point out that such SEG&A expenses for the third quarter included a non-cash charge of $1.6 million for an allowance we established during the quarter relative to an insurance claim filed for a theft, which occurred in 2005.

During the third quarter, as a result of failing to secure settlement of the matter with our insurers, we commenced legal action, and recorded an allowance for the related insurance receivable. Excluding this $1.6 million non-cash charge SEG&A expenses declined by nearly $900,000 from the previous quarter; however, increased approximately $800,000 in the current quarter versus the same period last year. The increase was primarily comprised of higher expenses across a number of non-payroll selling and marketing expense categories.

On slide 10, you can see an overview of a few of our liquidity metrics. As evidenced by these three charts, we continue to manage our balance sheet, and these metrics continue to show improvement in the current quarter versus the previous two quarters. We did, however, recognized a slight increase in our DSOs in the third quarter, primarily due to increased sales in our distribution segment, specifically, retail distribution. As we have mentioned in the previous calls, we continue to focus on our inventory and working capital initiatives, and are pleased with the improvement in these metrics.

As you can see on slide 11, as of September 30th, 2008, we had $93.2 million in excess availability on our credit facility. From a capital structure perspective, approximately three-fourths of our indebtedness is fixed at 9.78%, with the remaining one quarter floating at LIBOR plus 125 basis points. Both the senior notes and the revolving credit facilities mature in 2012.

Please turn to slide 12. During the third quarter, we managed to decrease our total debt by nearly $30 million as a result of positive operating cash flow. Our debt to adjusted EBITDA reduced by 40 basis points versus the second quarter, and improved substantially from the third quarter of 2007 as well. Additionally, as you can see from our total debt to capitalization continued to decline and stood at 76% at the end of the third quarter.

As Gary stated earlier and in conjunction with our guidance, if copper stays below $2 and assuming our expected seasonal sell through, we would expect to reduce our indebtedness another $40 million in the fourth quarter of 2008. Additionally, as we continue our customer rationalization efforts, we would also expect an incremental $15 to $20 million of debt reduction during the first quarter of 2009.

Finally, as we’ve done in the last quarter, on our Web site, we have provided information regarding the pounds of our products and – pounds of our products and copper sold during the third quarter as compared to other periods. Although management does not use this information as a leading metric in assessing our business, we are providing this information to investors based upon requests we received in the past.

With that, I would like to open up the line for questions. Connie?

Question-and-Answer Session

Operator

Thank you. The question-and-answer session will be conducted electronically today. (Operator instructions) And we’ll pause for just a moment to assemble the roster. And we’ll take our first question from Matt McCall from BB&T Capital Markets.

Matt McCall – BB&T Capital Markets

Hi, Rich. Good morning, everybody.

Gary Yetman

Hi, Matt.

Rich Burger

Good morning, Matt.

Matt McCall – BB&T Capital Markets

First, Gary, on the expectations of the lost sales and the OEM business, can you tell us a little bit about what that’s going to mean for – it sounds like you’ve made – you’ve taken some steps on the volume or the manufacturing front already. First, I guess was that profit or is any of that profitable business that’s going away? Is it just, I guess, less than optimal or is it unprofitable? And then, what will that mean for your margins as we look into ’09?

Gary Yetman

About, Matt, half the business was very marginally profitable. And the other half of the business was actually non-profitable. So as we consolidate into the loans facility and take out associated overhead with it, we would expect our profitability in that business to significantly improve in the first quarter of next year.

Matt McCall – BB&T Capital Markets

I’m sorry, you said 50%. What’s that 50% a total of? Did you give the total number of expected pressure?

Gary Yetman

Yes. The total volume will be some place between $75 million and $100 million.

Matt McCall – BB&T Capital Markets

Right. Okay. And then, is there any assumption in the Q4 guidance that any of that goes away? Is this more of an ’09 occurrence?

Gary Yetman

It’s an ’09. It will take all of the fourth quarter before we in lined a couple of the customers.

Matt McCall – BB&T Capital Markets

Okay. And then, Rich, a question on inventory, I think part of the comment on inventory was the price of copper. And part of it sounded like it was just bringing down your inventory levels. Can you break out the two? How much was – how much of the inventory reduction was because copper is moving lower? And how much of it is because you guys are trying to work through some inventory? And what are your expectations as far as – outside the copper, what inventory you can recall just from controlling it better as we move through a tough time?

Rich Burger

Matt, actually, if you can see from some of those that – inventory turns. Your answer is I can’t divide the two. We have continually worked on reducing the number of units in inventory. So that has actually been a constant process. And as we have gained capacity, whereas demand has softened, we have been able to take our inventory models down because we have the capability to produce in a shorter period of time. And then, it was very much, to some degree, aided in Q3 relative to the reduction of copper. I would see a lot of that benefit coming more in Q4 because you actually had a much more significant decline in copper end of September and October timeframe.

Matt McCall – BB&T Capital Markets

Right. Okay, okay. And then finally, as we look out into ’09, I know we’re going to have to make our own assumptions about the top line. But if I were to tell you that copper will remain flat at $2 – in the $2 range and then we continue this Q4 volume, Gary, given all those initiatives that you talked about and the cost savings expectations, where could you see your margins for the business, as a whole, next year? Again, assuming the flat copper or assuming Q4 – expected Q4 volume trends continue into next year? I know we’re assuming a lot there, but I’m just trying to get an idea what the benefit’s going to be from all these steps you’ve taken.

Gary Yetman

Well again, Matt, I think it depends where copper settles out because we will get enough tick just with the lower copper as a percentage. And then, I would expect to see an incremental 100 basis points to 200 basis points increase just as we rationalize that from these customers knowing what we know today.

Matt McCall – BB&T Capital Markets

Okay.

Gary Yetman

And then, and Matt – that’s also, I think, with stable copper – I mean, realize that – especially in the fourth quarter where you have such a dramatic decline in copper over a short period of time, parts of our business will see some margin compressions. We will work through those by layers.

Matt McCall – BB&T Capital Markets

And just to be clear, how much – how much of that pressure is assumed in the Q4 guidance?

Gary Yetman

Well it’s assumed in the Q4 guidance. Yes.

Matt McCall – BB&T Capital Markets

I mean, how long – how long will – we got to make this assumption about copper, but you made the assumption that copper was at $2, earning you $40 million in cash. If copper was at $2, at the current volume level, how long will we then see that adjustment period on the margin front?

Gary Yetman

I think it would take us the balance of the fourth quarter to work through the layers of inventory.

Matt McCall – BB&T Capital Markets

Perfect. Okay. Thank you, guys.

Operator

(Operator instructions) And we’ll go next to Ryan Merkel from William Blair.

Ryan Merkel – William Blair

Thank you. Good morning, guys.

Rich Burger

Hey. Good morning, Ryan.

Ryan Merkel – William Blair

Hey Gary, can you just talk about sales by the month during the quarter? And then also, how October looked?

Gary Yetman

Sales, actually, were relatively stable the first two months of the quarter. And then as we stepped into September, we really saw significant drop the second half of the month.

Ryan Merkel – William Blair

Okay.

Gary Yetman

I think what we’re struggling with a little bit is the drop in copper or the volatility in copper has a lot of distributors just kind of sitting back and possibly not loading up with inventory like they normally would. And then, as we move into the fourth quarter, we saw that decline continue in October thus far. And again, distributors are really hesitant to put anything on their shelf.

Ryan Merkel – William Blair

Okay. Thanks. And then, secondly, in the gross margin, it was actually a little better than we had thought. Can you talk – give a little bit more color on the puts and takes during the quarter? And then also, what’s kind of implied in your guidance for the fourth quarter?

Gary Yetman

Again, part of it will have to do with mix. Our retail business kicks in, obviously, in the third quarter. And some of our lower margin business in the OEM business, I think we were down about 18%. So overall, you’re going to see a little bit of up tick just on the overall mix. And we would expect that to continue in the fourth quarter as well as we wean out some of the lower margin business that we have.

Ryan Merkel – William Blair

Okay. Great. Thanks.

Operator

(Operator instructions) And at this time, we have no further questions in the queue.

Rich Burger

Well, we’d like to thank everybody for participating on the call. And have a good day. Thank you, Connie.

Operator

This concludes today’s conference. We thank you for your participation. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: [e-mail]. Thank you!