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Encore Wire Corporation (NASDAQ:WIRE)

Q4 2008 Earnings Call Transcript

February 10, 2009 11:00 am ET

Executives

Daniel Jones – President and CEO

Frank Bilban – VP and CFO

Analysts

Liam Burke – Janney Montgomery Scott

Keith Johnson – Morgan, Keegan & Company

Operator

Hello, and welcome to the Encore Wire fourth quarter earnings conference call. As a reminder, all lines will be on listen-only mode and we will conduct a Q&A session at the end of the call. (Operator instructions) At this time, I'd like to turn the call over to Mr. Daniel Jones, President of Encore Wire to begin. Please go ahead.

Daniel Jones

Thanks, Eric. Good morning, ladies and gentlemen, and welcome to the Encore Wire Corporation quarterly earnings conference call. I am Daniel Jones, the President and CEO of Encore Wire. With me this morning is Frank Bilban, our CFO.

We are pleased to announce significantly increased earnings in the midst of the tough competitive environment we are experiencing in our industry and the slump in the overall U.S. economy. The slowdown in construction activity in the United States continues to adversely impact unit volume in our industry as it has over the last two plus years. However, we were able to increase our margins significantly despite declining unit volumes and copper prices. We are pleased that our industry has exhibited some measure of pricing discipline in response to these two trends.

Copper prices were volatile during the second half of 2008, starting at a COMEX close price of $3.92 per pound on July 1st and closing at $1.39 per pound on December 31st. Volatility of that magnitude and the uncertainty it generates tends to disrupt our customers' normal buying patterns and has historically contributed to competitive pricing pressure. We believe we sacrificed unit volume in 2008, acting as an industry leader by exerting pricing discipline, enabling us to grow profits in a down market.

Our reps in the field also tell us that the volatility of copper over the last year coupled with declining industry volumes has caused many of our distributor customers to lean down their inventory levels. Low inventory levels in the distribution center or in the distribution chain makes Encore’s excellent order fill rates more valuable to customers. We believe our volume decreases are less than the total industry and we believe that we are able to get a slight premium for our excellent service level from customers who realize the value of our approach. Making $1.70 per share in this economy is an impressive accomplishment and we thank our employees and associates for their tremendous efforts.

Encore Wire is ranked as the Number Five Best Performing Stock for 2008 in the DFW area by the Dallas Morning News with a 19.1% gain for the year. We thank our shareholder for their continued support.

Now, Frank will cover the numbers. 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 at 800-962-9473 and we will get you a copy.

Before we review the financials, let me 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 statement involves 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 those risks and uncertainties.

Also, reconciliation 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 investors, are posted on www.encorewire.com under Latest Press Releases.

Now, for the financial results. Net sales for the first quarter of the year ended December 31st, 2008, were $180.2 million compared to $281.9 million during the fourth quarter of 2007. Net income for the fourth quarter of 2008 was $16.7 million versus a loss of $1.1 million in 2007.

Fully diluted net earnings per common share were $0.72 in the fourth quarter of 2008 versus a loss of $0.05 in the fourth quarter of 2007.

Gross margins increased 363% to 22.2% versus 4.8% in 2007. The 63.9% decline in dollar sales from the fourth quarter of 2007 to the fourth quarter of 2008 was due to the average selling price declining 21% coupled with a 19% decline in unit sales.

It should be noted for comparison purposed that the fourth quarter of 2007 was a strong quarter in terms of unit sales. Average selling prices fell due to declining copper prices. The average cost of copper purchased fell 43% in the fourth quarter of 2008 versus the fourth quarter of 2007.

On a sequential quarter comparison, net sales for the fourth quarter of 2008 were $180.2 million versus $296.3 million during the third quarter of 2007. Net income for the fourth quarter of 2008 increased 106% to $16.7 million versus $8.1 million in the third quarter of 2008. Fully diluted net income per common share was $0.72 in the fourth quarter of 2008 versus $0.34 in the third quarter of 2008.

Net sales for the year ending December 31st, 2008, were $1.081 billion compared to $1.185 billion during 2007. Net income for the year ended December 31st, 2008, was $39.8 million versus $30.8 million in 2007. Fully diluted net earnings per common share increased 31% to $1.70 for the year ended December 31st, 2008, versus $1.30 in 2007.

Our unit volume shipped in the fourth quarter of 2008 decreased 19% versus the fourth quarter of ‘07. Our year-to-date unit volume was down 12%. The average selling price of wire containing a pound of copper decreased by 20.9% while the average cost of a pound of copper purchased decreased 42.9% in the fourth quarter of 2008 versus the fourth quarter of 2007. This spread increased by 72.7% in the fourth quarter of 2008 compared to the fourth quarter of 2007 and increased by 33.3% on a sequential quarter comparison and 19.3% on a total year-over-year basis. These increased spreads drove our gross margin increase.

Informed investors who have followed us for some time and understand the dynamics of our business have always focused on the spread as the key driver of our earnings, and also understand that LIFO adjustments are consistently applied under GAAP. LIFO accounting merely serves to bring the latest cost of materials into the statements and allow for spreads we just discussed to be accurately included in our results.

Our balance sheet remains strong. The only long-term debt we have as of December 31st, 2008, is $100 million in long-term notes due in 2011, with our $150 million revolving line of credit paid down to zero. In addition, our $217.7 million cash balance as of December 31st, 2008, exceeds our long-term debt by over two times. We also declared our ninth consecutive quarterly cash dividend during the fourth quarter of 2008.

We want everyone to know that this conference call will be available for replay after the conclusion of this session. If you wish to hear the taped replay, call 866-439-4729 and enter the conference reference 374387#.

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

Daniel Jones

Thank you, Frank. We’ll now take questions from our listeners, Eric.

Question-and-Answer Session

Operator

(Operator instructions) First up is Liam Burke with Janney Montgomery. Go ahead please.

Liam Burke – Janney Montgomery Scott

Daniel, Frank, how are you this morning?

Daniel Jones

Good, Liam.

Liam Burke – Janney Montgomery Scott

Commercial construction held up through the end of the year. Next year the prospects don’t seem to as good. It looks like you’ve gotten some good pricing in a weakening market. Is this sustainable as the market begins to roll over the commercial construction side?

Daniel Jones

Well, we think so, Liam. It remains to be seen. We actually recently have instituted and we’ll continue to institute some pricing discipline and then going forward we actually have a price increase slated for tomorrow that was announced at the end of last week. So – who knows? The way it looks today things are going on pretty well.

Liam Burke – Janney Montgomery Scott

Okay. And you have over $100 million in net cash on the balance sheet now. Are there any priorities for it?

Daniel Jones

Well, answer to that question is yes, obviously, but we are not willing to discuss that publicly yet. As soon as we have some news on that, then we’ll go forward with it.

Liam Burke – Janney Montgomery Scott

Great, thank you.

Operator

(Operator instructions) Next is Keith Johnson. Please state your company.

Keith Johnson – Morgan, Keegan & Company

This is Keith from Morgan, Keegan.

Daniel Jones

Hi Keith.

Keith Johnson – Morgan, Keegan & Company

How are you guys doing this morning?

Daniel Jones

Good

Keith Johnson – Morgan, Keegan & Company

Just – and I guess a couple of questions. First off, looks like you did a little bit of share repurchase in the quarter.

Daniel Jones

Yes we did, Keith. We bought 132,700 shares in the quarter.

Keith Johnson – Morgan, Keegan & Company

Okay. And (inaudible) average price on that is –?

Daniel Jones

$14.25.

Keith Johnson – Morgan, Keegan & Company

Okay. And what about – as you kind of look forward into 2009, could you give I guess any color around maybe CapEx spending and budgets there kind of how you guys are looking at that right now?

Frank Bilban

Well, we have the maintenance CapEx that will be ongoing. We have a few projects that we are working on –

Keith Johnson – Morgan, Keegan & Company

Okay.

Frank Bilban

Nothing is significantly large relative to other projects we’ve had in the past, but a few de-bottleneck projects. There is a few that are related to product categories that we are expanding a little bit, but again nothing out of the ordinary.

Keith Johnson – Morgan, Keegan & Company

Okay. Is – could you talk a little bit about how I guess trends kind of moved through the quarter and then maybe what you think thus far into the first quarter of ’09 as far as demand trends and pricing trends I guess trying to get an idea – or is the market still lagging over selling price, still lagging significantly with copper or did you start seeing (inaudible) started catching up as you came through the quarter?

Daniel Jones

Well, there is three or four questions there. It’s – in the fourth quarter copper came down sharply as everyone can see and the selling price did not exceed that COMEX level in rate. In the past, in my experience, we have seen – or I have seen – the selling price typically will drop faster than the COMEX drop for whatever reason. In the fourth quarter this time we didn’t have that. As far as where we are at today, there is still pockets of pricing discipline, there’s pockets where it’s not so great, but overall in general things are going along pretty well. We have had strength in copper recently. I believe it’s up to about $1.60 today.

Keith Johnson – Morgan, Keegan & Company

Right.

Daniel Jones

Therefore we are trying to stay ahead of that with price increases that we talked about with Liam’s question.

Keith Johnson – Morgan, Keegan & Company

Okay. And I guess – if I guess understand correctly any LIFO definitely comes in and out as you look over your performance for the last three years. Did anything change, in other words, did the process [ph] of the change in volume and the change – continued challenging markets did you trigger any lower price layers in that LIFO as copper inventories came down through the quarter?

Frank Bilban

During the quarter the answer is no. We actually replenished prior year layers by about 1.5 million pounds, which was insignificant in the grand scheme of things.

Keith Johnson – Morgan, Keegan & Company

Okay.

Frank Bilban

For the year, as we indicated in our 10-Q fully disclosed in the Q3 10-Q, we decremented some prior year layers –

Keith Johnson – Morgan, Keegan & Company

Right

Frank Bilban

And that impact on the income statement through the first three quarters was favorable by $900,000. And for the year we’ve recalculated that and it’s right about the same, it’s that about $1 million.

Keith Johnson – Morgan, Keegan & Company

Okay.

Frank Bilban

So, it’s a very minor amount.

Keith Johnson – Morgan, Keegan & Company

Okay. And I guess, just I guess last question. Could you give us an idea of how volumes were down I guess in the non-res or commercial versus the residential markets in the fourth quarter?

Frank Bilban

Versus what comp –?

Keith Johnson – Morgan, Keegan & Company

Sorry, year-over-year.

Frank Bilban

Year-over-year, residential continues – no surprise – to be very slow. Year-over-year – and again the quarterly results sometimes bounce around.

Keith Johnson – Morgan, Keegan & Company

That’s right.

Frank Bilban

But year-over-year residential was down almost 40%, but commercial was almost flat. It was down about 3%.

Keith Johnson – Morgan, Keegan & Company

Okay. And that’s for – that number you called out that was for the year 2008?

Frank Bilban

That was Q4 –

Keith Johnson – Morgan, Keegan & Company

Q4, okay. And –

Frank Bilban

I’m sorry. Q4 to Q4 of ’07 is what you asked for, yes that’s the question.

Keith Johnson – Morgan, Keegan & Company

Yes, okay. And it looked like SG&A as a percentage of sales bounced up a little bit in the fourth quarter. I guess part of that’s because revenue is down. We – did you have (inaudible) of bad debt expenses or anything or the credit situation is getting worse at the customer level?

Daniel Jones

That’s a very astute question, actually we did. G&A is going to bounce up a little, as you indicated, as a percentage because it’s relatively fixed and to the extent that the sales dollars come down, your G&A as a percentage is going to climb dollars all being equal. However, in the quarter – and you will see this in the Q or the K, rather, we did write-off almost $2.2 million to expense for bad debt.

Keith Johnson – Morgan, Keegan & Company

Okay.

Frank Bilban

We did have some bad experience in Q4 where we had to write off one particular account over $1 million and to be prudent management and the Board elected to replenish the reserve to the $2 million level in light of the current economy.

Keith Johnson – Morgan, Keegan & Company

Okay.

Frank Bilban

We – you know, hope we don’t have to use it, but we’ll see how it goes.

Keith Johnson – Morgan, Keegan & Company

Okay. So, the combination of all that resulted in $2 million of expense in the income statement?

Frank Bilban

That’s correct.

Keith Johnson – Morgan, Keegan & Company

Okay. Okay, thank you.

Frank Bilban

Thank you. Welcome.

Operator

And gentlemen, it appears to be all the questions today.

Daniel Jones

Well, Eric, and folks we thank you so much for participating and calling in and look forward to the next call. Thank you.

Operator

Thank you, ladies and gentlemen. This call is concluded.

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