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Coleman Cable (NASDAQ:CCIX)

Q4 2012 Earnings Call

March 08, 2013 11:00 am ET

Executives

Richard N. Burger - Chief Financial Officer, Principal Accounting Officer, Executive Vice President, Treasurer and Secretary

G. Gary Yetman - Chief Executive Officer, President and Director

Alan Bergschneider

Analysts

Min Cho - FBR Capital Markets & Co., Research Division

Brian Drab - William Blair & Company L.L.C., Research Division

Matthew Schon McCall - BB&T Capital Markets, Research Division

Operator

Good day, ladies and gentlemen, and welcome to the Coleman Cable Fourth Quarter 2012 Earnings Conference Call. [Operator Instructions] As a reminder, today's conference call is being recorded. I'd now like to turn the conference over to your host, Mr. Rich Burger, Executive Vice President and Chief Financial Officer of Coleman Cable. Please go ahead, sir.

Richard N. Burger

Thank you, Allie, and thank you for joining Coleman Cable's Fourth Quarter and Full Year 2012 Conference Call.

Joining me today is Gary Yetman, Coleman Cable's President and Chief Executive Officer; and Alan Bergschneider, our Vice President of Finance. Our comments today include forward-looking statements that make assumptions about our operations, business, economic and political environment, which are outlined on Slide 2 of the presentation we prepared on our website under the Investor Relations section. These forward-looking statements are subject to risks and uncertainties detailed in the Risk Factors section of our annual report, Form 10-K, for the fiscal year ended December 31, 2012.

I would like to note that during this morning's presentation, we will make reference to both adjusted EBITDA and adjusted EPS, each of which are non-GAAP measures. Our press release last night and our Form 10-K issued today provide cautionary statements and caveats with respect to relying solely on non-GAAP measures, as well as a reconciliation of our measures for our adjusted EBITDA to GAAP net income and measurements of adjusted EPS to diluted GAAP earnings per share for the fourth quarter of 2012 and comparable periods.

Gary will begin our formal remarks with a review of our business highlights beginning on Slide 4 of the presentation. Alan and I will then review the fourth quarter results, and we will take your questions. I would now like to turn the call over to Gary.

G. Gary Yetman

Thanks, Rich, and good morning. I'm pleased to report record fourth quarter results, which capped off a record year for Coleman in 2012. Our fourth quarter profitability was significantly higher on a year-over-year basis and was also higher on a sequential quarterly basis.

Several factors contributed to our strong fourth quarter results and reflect the strength and diversity of our overall platform. From a revenue standpoint we continued to show solid sales growth in our expanded industrial product offering, which helped offset a degree of softness within certain other legacy OEM product categories. Largely on the strength of sales of our new industrial products, increased transportation-related demand and the contribution from our Engineered Solutions segment, we came in somewhere above our revenue guidance for the quarter. We also experienced a fairly broad-based improvement in gross profit for the quarter with particular strength within our Distribution segment. In part, the year-over-year improvement in gross profit reflects an improved pricing environment as the fourth quarter of last year began with sharp decline in copper prices, which created a challenged pricing environment toward the end of 2011.

But you will note that our fourth quarter results actually improved versus the third quarter of 2012 in both sales and the EBITDA terms, which has not historically been the norm for our business the past few years. We believe this record fourth quarter performance in 2012 reflects a couple of main factors. First, the strength in our seasonal categories that I mentioned in our last call continued throughout the fourth quarter. And secondly, in certain areas where we generally see a fairly marked decline in demand from our third to fourth quarter, we experienced a good degree of stability in the fourth quarter of 2012. In short, we're very pleased with our fourth quarter and full year financial results.

Despite some fairly challenging economic conditions and general market uncertainty that existed throughout the year, we managed to achieve record earnings. Alan and Rich will provide additional greater detail on the financials in a bit.

With that, let's move to Page 5 where I will talk about our outlook. As we have noted in the past, our first quarter has historically been our lowest volume quarter as it doesn't benefit to the same degree as our other quarters do from seasonal business. Accordingly, we won't expect the results to match our record results for the most recent quarter. Keeping this in mind, for the first quarter of 2013, we're projecting sales between $215 million and $225 million, adjusted EPS between $0.24 and $0.37 a share and adjusted EBITDA between $19 million and $22 million.

As we look to the full year of 2013, we anticipate incremental growth throughout the year. We believe there will be added benefits coming in the back half of the year from our planned consolidation and expansion efforts, which have been the focus for us this past year and will continue to be a focus throughout 2013. In addition, as you know, Coleman started out largely as a manufacturer of wire and cable, serving construction end markets. In 2006, our overall platform was roughly 2/3 construction related. Clearly, we have made a much more diverse platform now as a result of our acquisitions and new product launches over the past few years.

We're not dependent on housing or construction at this point. But reports are starting to suggest signs of a housing recovery, and if the residential housing and commercial construction markets actually rebound in a meaningful and sustained way during 2013, it should provide significant additional upside for us. Our production capacity for our construction-related products is online and capable of delivering significant incremental revenue as the market improves. Between this opportunity and the positive impact we see coming from our recent capital expenditures, plant consolidations as well as the continued growth of our expanded product line, we remain confident the company is well positioned heading into 2013.

Now I'd like to ask Alan and Rich to provide additional details for the quarter. Alan?

Alan Bergschneider

Thank you, Gary, and good morning. If you'll please turn to Slide 6, I'll start with a brief overview of our results for the quarter.

For the fourth quarter of 2012, we generated sales of $233.6 million, a near 13% increase from the fourth quarter of 2011. Our sales volume, measured in total pounds shipped, grew 6%, which contributed approximately $11.6 million to the increased sales during the quarter. Meanwhile, average copper prices increased by 5.8% during the quarter, which favorably impacted sales by an additional $9.4 million. Also, the Engineered Solutions segment contributed $5.7 million of additional sales, which is primarily related to having 3 months of Watteredge results included in the current quarter. In total, the 6% increase in volume for the fourth quarter was driven by an 11% increase within our OEM segment and a 3.9% improvement in our Distribution segment. As a reminder, we do not track total pounds shipped within our Engineered Solutions segment.

And finally, as you can see on Slide 6, the fourth quarter was also our highest quarter for 2012 in terms of sales, and this was on the continued strength of our seasonal demand and stability in other markets, as Gary mentioned earlier.

From an earnings standpoint, fourth quarter 2012 adjusted EPS was $0.40 compared to $0.07 for the same period of 2011, and our adjusted EBITDA was $23.4 million for the fourth quarter of 2012 compared with $14.1 million last year. As Gary mentioned, these represent record fourth quarter results for the company.

The substantial improvement in profitability for the fourth quarter, which included a 66% year-over-year increase in adjusted EBITDA and a $0.33 improvement in adjusted EPS, largely reflects the favorable impact of higher sales, coupled with substantial growth in both gross profit dollars and margin across all of our segments.

If you turn to Slide 7, you'll see recent gross profit margin and SG&A trends for the business. For the fourth quarter of 2012, our overall gross margin as a percentage of net sales increased 3.6 percentage points compared to the same period of 2011. This increase reflects the inclusion of a greater proportion of sales in the Engineered Solutions segment, which generally carries higher margins. However, even if we exclude the impact of Engineered Solutions, we still experienced a sizable improvement in both our gross profit dollars and our margin rate compared to the same quarter last year. This was attributable in large measure to the higher volumes we spoke about earlier and generally more favorable pricing conditions within a number of end markets as compared to the prior year. On a sequential quarter basis, the improvement from the third quarter of 2012 was primarily a function of improved margin within our Distribution segment, notably within our seasonal business, and continued strength in certain OEM end markets.

Moving to SG&A, we reported $17.9 million in total SG&A expenses for the fourth quarter, which represented an increase of $3.2 million compared to the same quarter last year. It's important to note, however, that fourth quarter 2011 SG&A expenses included a benefit of $1.3 million related to the cash settlement we received on an insurance-related matter pertaining to an inventory theft from 2005. On Slide 7, we've adjusted our SG&A expenses to remove the impact of this benefit. Also, as we've done in the past, we adjust these figures for both noncash stock comp and acquisition-related costs, both of which were either nominal or not present in our fourth quarter results for 2012 or 2011. When excluding these items, our SG&A was $17.8 million compared to $15.9 million last year or an increase of $1.9 million. This dollar increase is partly the result of a $0.5 million increase in SG&A within Engineered Solutions primarily related to a full quarter's worth of expense at Watteredge, with the balance coming across a number of expense categories, primarily increased bonus given improved results and some degree of increase in health care costs.

On a percentage basis, our SG&A was 7.6% of sales for the fourth quarter of 2012, which was up nominally versus last year. For the full year of 2012, our SG&A expense as a percentage of net sales was 7.1%, which is in line with our long-term expectations of around 7%.

With that, on Slide 8, Rich which will provide a summary of our working capital metrics. Rich?

Richard N. Burger

Thanks, Alan. Focusing on our net working capital as a percentage of sales, we've shown some improvements. If you remember from our last couple of conference calls, net working capital as a percentage of sales increased slightly during the second quarter of 2012, which was primarily the function of the seasonality and partly due to the inclusion of Watteredge net working capital, for which only 4 months of sales had been included in the calculation at the end of the second quarter. Therefore, as expected, this metric shows further improvement in the fourth quarter to 21%, which is on the low end of our historical norm of between 21% and 22%. Meanwhile, you'll notice that our DSO and inventory turns have been fairly steady and have shown somewhat improvement metrics over the time.

Finally, I'd like to review Coleman's capital structure on Slide 9. On December 31, 2012, we had $50.4 million in outstanding borrowings on the company's credit facility with excess cash and availability of approximately $141.2 million. Total debt, net of cash, declined $28.1 million sequentially, which decreased our total debt-to-adjusted EBITDA to 3.5x at the end of December of 2012 from 4.3x at the end of September of 2012. This improvement came by way of a $24 million reduction in borrowings on our credit facility as we generated just over $33 million in operating cash flows during the quarter, which we used such cash flows to pay down debt as well as fund $3.8 million of capital expenditures in the quarter. I would like to point out that for the full year of 2012, we spent $32.5 million in capital expenditures, and we expect capital expenditures for 2013 to be between $14 million and $16 million.

Finally, as you recall in the third quarter, we announced my pending retirement at the end of this month, as well as Alan's promotion to Chief Financial Officer. Alan and I have worked closely together for more than 5 years, and I am confident in his success in this new role. That said, I want to express my sincere appreciation to our Board of Directors for their many years of continued support as we have together shared many exciting business opportunities, various capital market transactions and, most notably, the initial public offering of the public company. I am confident in the company's future and look forward to its continued success in the coming years.

I will be remiss if I do not take this opportunity to express my profound thanks to Gary in what has been nearly a 17-year partnership. His support and leadership has made this time pass quicker than either of us would like to admit.

Allie, I'd now like to turn the line over for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Min Cho, FBR Capital Markets.

Min Cho - FBR Capital Markets & Co., Research Division

A couple of questions. But I do have a question about your revenue guidance for the first quarter of 2013. At the midpoint, it suggests a flat year-over-year revenue. But then you still have the addition of Watteredge in 2013. So I was just wondering, is this a function of lower copper prices? I mean, your commentary suggests that volume should be improving through 2013 .

G. Gary Yetman

Min, I think -- it's Gary. I think it's a couple of areas really. We started out January very strong. February seemed to soften up a little bit. It's still pretty early in March to tell. The other factor really that we're seeing, our Engineered Solutions business, particularly the TRC business, has been hit somewhat by the sequestration. So we expect the lower volume as well as somewhat lower profitability out of that business in the first quarter. We do expect that to start to pick up in the second quarter and are projecting that business to start flowing back in the second half of the year.

Alan Bergschneider

And just to follow up, this is Alan, Min, relative to copper, you asked about copper and that is a component of it. Last year, first quarter, we were around $3.80 for average copper prices. And this year, we were at $3.67 through February. And in March, we've actually seen it come down. So that will play into it as well.

Min Cho - FBR Capital Markets & Co., Research Division

Okay. And then that goes to my second question, about the Engineered Solutions business. So obviously, the revenues were a little bit lighter versus the third quarter, and margins were substantially lighter. I just wanted to know, I know that there's some lumpiness in that business, but was the quarter impacted by TRC's exposure? And just the general outlook given -- I know that there is some backlog in that business for 2013.

Alan Bergschneider

Yes, I think that's fair to say. This is Alan again. I think that's fair to say that there is some impact from TRC. Gary mentioned, relative to sequestration, you're seeing some uncertainty in some of those markets. But keep in mind you're talking about going from $12.9 million in the third quarter to $12.2 million in the fourth quarter, so you're talking about a $700,000 difference on the top line. So it's not huge in dollar terms.

Min Cho - FBR Capital Markets & Co., Research Division

Right. I think I was concerned more about the margins, less the top line.

Alan Bergschneider

Now -- and again there, your point is well taken in terms of there was -- you went from about $1.9 million in operating profit down to $1.1 million. So again, it's a mixed issue on the TRC side.

Min Cho - FBR Capital Markets & Co., Research Division

Okay. And then just finally, regarding your business in Canada, it's been a steady 7% of sales for the last several years. Do you expect that to stay pretty steady? Or could you expect some -- to see an increase in that business? Just talk about maybe some of the different end markets or drivers in Canada versus domestically.

G. Gary Yetman

We expect that business to continue to grow, Min. When we had originally bought the -- or made the Woods acquisition, it was certainly more of a retail operation up there. Over the years, we have expanded that into the industrial and to our industrial products. And we've gained momentum each year with that. As some of the new industrial products have been introduced over the course of the last year and will continue to be introduced through this year, we see some real opportunity, both on the mining and the oil and gas side of the business in Canada over the next few years.

Min Cho - FBR Capital Markets & Co., Research Division

Okay, great. And Rich, I'm still almost crying from your little presentation there. But seriously, thanks for 7 fun years, and I wish you and Cindy the best of luck in your retirement.

Richard N. Burger

Thank you, Min. You'll probably hear from me again.

Min Cho - FBR Capital Markets & Co., Research Division

I look forward to it.

Operator

Our next question comes from Brian Drab of William Blair.

Brian Drab - William Blair & Company L.L.C., Research Division

Rich, best wishes. Alan, congratulations on the promotion.

Alan Bergschneider

Thank you.

Brian Drab - William Blair & Company L.L.C., Research Division

Just a few questions. So the beat in the quarter was primarily on margins. I mean, revenue was very solid. But could you talk a little bit about -- you talked a little bit about during your prepared remarks. Can you talk a little bit about more about what changed, what surprised you, if anything, since you gave the guidance? Was it more mix? Or was it timing of copper flow-through and changing copper prices or something else?

Alan Bergschneider

Well, I -- this is Alan. I think there were a couple of things that were notable. And to your point, we tried to address them in the prepared remarks, but I think that -- and we saw continued strength in the seasonal product category. So that was definitely a benefit for the quarter on a sequential quarter basis. And some of that is just -- and honestly, some of that is a function of those sales come in big buckets, and some of that was just a movement of -- from the third quarter to the fourth quarter. But you'll see -- in any given period, you may see sales of $2 million or $3 million shift from one quarter to another. So some of that was that benefit there. And then secondly, I would say, on the OEM side, we've historically seen volumes between third and fourth quarter fall off as you hit year end. This year, we didn't see that. We saw strength, continued strength in a lot of areas in our new industrial product categories. And then Gary mentioned in the prepared remarks strength in the automotive area as well.

Brian Drab - William Blair & Company L.L.C., Research Division

Okay. And so my next question was going to be about the strength in that seasonal business that carried into the fourth quarter. And you've talked about that -- you made it clear that, that happened, but do you have -- can you talk a little bit more about why that happened and what drove that demand from your customers?

Alan Bergschneider

It's really broad based. We did the Designers Edge acquisition in 2011 and added some product categories. So if you look at where the strength came from, it came from a number of product categories. So it wasn't really and one particular place that we saw strength. And again, also across multiple customers as well. It wasn't from one particular customer.

Brian Drab - William Blair & Company L.L.C., Research Division

Okay. And then can you just remind me? We're just a couple -- a few weeks away from the end of the quarter, and your guidance range is pretty wide here. What drives the wide guidance range for the first quarter? And what can put you at the low end versus the high end?

Alan Bergschneider

Well, to your point, we're sitting in March. It really is. Rich says March. It's really March.

Richard N. Burger

March.

Alan Bergschneider

We -- I think that the phrase Rich likes to use is we live out of the mailbox. And so we don't have, for the majority of our business, a lot of backlog to look at. So it really is truly March and how March finishes out. And Gary mentioned earlier, January came out of the gate very strong. February, we've seen some pullback. And so there's a degree of caution.

G. Gary Yetman

We also have some large projects that we've been working on that we're not sure that will get shipped this month they'll flow into the next quarter.

Brian Drab - William Blair & Company L.L.C., Research Division

Okay. And then could you -- I'm not sure that you said this in your prepared remarks. Give us what was the contribution was for -- in terms of revenue and EBITDA for Watteredge in the quarter.

Alan Bergschneider

We really don't break it out that way. We speak in terms in total Engineered Solutions, and I'm happy to give you those numbers. For the fourth quarter, sales in Engineered Solutions were $12.2 million and the OP was $1.1 million.

Operator

[Operator Instructions] Our next question comes from Matt McCall of BB&T Capital Markets.

Matthew Schon McCall - BB&T Capital Markets, Research Division

First, Rich, let me tell you that your optimistic view on life has always been so uplifting. I tell you, I'm going to miss working with you, but I really enjoyed it and good luck in everything that you do.

Richard N. Burger

Thank you, Matt.

Matthew Schon McCall - BB&T Capital Markets, Research Division

So the -- well, let me first hit -- you mentioned plant consolidations. You mentioned expansion. I think that's more from a product category perspective. But can you tell us maybe about the benefits that you expect from some of those moves that you've already made in 2013 when you compare it by 2012, kind of looking at the opportunity outside of the cycle, if you will?

G. Gary Yetman

Yes, Matt. We've had 2 major projects going on, both in Indiana. The 1 expansion at our 1 facility was completed last year, and the capital expenditures and as far as equipment that we've put into that facility has been completed in the fourth quarter of last year. Most of those products are the expansion of our industrial product line that we've talked about over last year, 1.5 years or so. We really -- we started to see the benefit of that in the second half of last year and certainly in the fourth quarter. We anticipate, as the year moves on, to continue to see incremental benefit out of that facility through 2013 and into certainly 2014. We still have a couple new product introductions to come out that are more focused in the oil and gas markets that will probably hit the second half of the year. So we're very encouraged we're getting everything out of that facility we felt we would and maybe even a little bit more. Our other -- the other project that we have is a very large one. We've put on a 200,000-square-foot addition on one of our other plants. There's a lot of equipment being moved around down there. That really won't be completed till the end of this year. It might spill over to a couple of months into the following year. We'll start you see some of the benefits there in the second half of the year really on production efficiency. We've been able to take, we think, some costs out of the product that, given market conditions, we hope will translate into increased gross margin dollars as the year moves on. And I think we see the real benefit of that plant, Matt, in 2014, but we feel we're extremely well positioned. As I mentioned earlier in the prepared remarks, the construction-related products that we were so successful with in 2004, '05, and '06, that capacity has been installed in this new facility. So we feel we're extremely well prepared as that market starts to return.

Matthew Schon McCall - BB&T Capital Markets, Research Division

So on the expansion side, have you quantified the -- I'm sorry if I missed it, but did you quantify the benefits in the second half and what could be incremental in the first half?

G. Gary Yetman

We really haven't, Matt. I think a lot of it will depend, quite candidly, how effectively we are or efficient we are in getting some of this equipment down and getting it up and running. It's kind of an ongoing process. I think you can imagine that if you have a 200,000-square-foot facility, you're putting down a lot of equipment, both new and relocating. So I think it'll just have to play out as the year goes on.

Matthew Schon McCall - BB&T Capital Markets, Research Division

Okay. And so the debt-to-EBITDA levels came down, and you talk about lower working -- I'm sorry, lower CapEx expectations for next year. Do you have plans to reduce that debt-to-EBITDA ratio further then [indiscernible] out of this EBITDA growth?

G. Gary Yetman

Yes, Matt, obviously, we have an awful lot going on. We're really focused this year on the consolidations with these plants and generating the cash flow. Our capital expenditures are down significantly this year over last year. We should be able to wrap up these consolidations. We would expect, without anything else in the marketplace happening, for our debt to come down under 3x by the end of the year. 3x.

Matthew Schon McCall - BB&T Capital Markets, Research Division

Okay. And Alan, on your piece that you gave the details about the impacts on SG&A, the items that took it up, what are the assumptions for -- that we should reflect in our model for SG&A for -- especially for Q1 and what's -- maybe what's reflected in the guidance? And then anything that we should keep in mind as we move through the rest of the year?

Alan Bergschneider

Well, Matt, I think you'd be safe to use for long term roughly 7% rate.

Matthew Schon McCall - BB&T Capital Markets, Research Division

Okay. And then finally, I might have missed it, but you referenced the strength of the Distribution segment gross profit margin. Was there something specific that you called out? Or was it some of the points that you made? And I just missed it, they were for Distribution?

Alan Bergschneider

I think it was, largely again, the strength of the seasonal business. But it was on the Distribution side really the driver.

Matthew Schon McCall - BB&T Capital Markets, Research Division

Okay. And the final one. You mentioned, Gary, a couple of times the pullback in February. Any specific areas that have softened? Or is it the seasonal product easing? Or what do you think is going on?

G. Gary Yetman

Yes, Matt, we saw a big surge in our OEM business, really orders late December shipping in January. And I -- from what we can tell, I think the OEM base in particular and the Distribution base is trying to see what kind of outflow they're getting on that inventory. So that's why it's kind of hard to tell for March right now. We could get hit really big as they replenish that inventory. Or if it's not moving off their shelves, we may not get the same impact that we had in January. So as we said earlier, we somewhat live out of the mailbox. We are seeing more projects. We're quoting a lot more jobs, bigger jobs on the industrial side of the business. So that's somewhat encouraging.

Operator

And I'm showing no further questions at this time. I would like to turn the conference back over to Mr. Rich Burger for any closing remarks.

Richard N. Burger

Once again, we'd like to thank you for your continued interest in Coleman, and have a great day.

Operator

Ladies and gentlemen, this does conclude today's conference. You may all disconnect and have a wonderful day.

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