Encore Wire Q2 2009 Earnings Transcript

Jul.23.09 | About: Encore Wire (WIRE)

Encore Wire Corporation (NASDAQ:WIRE)

Q2 2009 Earnings Call

July 23, 2009 11:00 AM

Executives

Daniel L. Jones - President and Chief Executive Officer

Frank J. Bilban - Vice President and Chief Financial Officer

Analysts

Liam Burke – Ferris, Baker Watts

Robert Kelly - Sidoti & Co.

J. Keith Johnson - Morgan Keegan

Michael Coleman - Sterne, Agee & Leach

Operator

Good morning and welcome to the Encore Wire Second Quarter Earnings Call. As a reminder, all lines will be on listen-only mode, and there will be a Q&A session at the end of the call. (Operator Instructions).

At this time, I would like to turn the call over to Mr. Daniel Jones, President, so that we begin our call. Go ahead please, Mr. Jones.

Daniel L. Jones

Hey thank you, Reyna. Good morning, ladies and gentlemen and welcome to the Encore Wire Corporation quarterly earnings conference call. I'm Daniel Jones, the President and Chief Executive Officer of Encore Wire. With me this morning is Frank Bilban, our Chief Financial Officer.

We continue to announce earnings in the midst of the tough, competitive environment, and our industry in the slump in the overall U.S. economy. And we certainly want to produce more profit than we currently are.

Our results must be reviewed in the context of the current economic and industry conditions. The slowdown of construction activity in the United States continues to impact our industry adversely, as it has over the last three years.

Our unit volumes shipped in the second quarter of 2009 decreased 9% versus the first quarter of 2009. It should be noted that this 9% sequential unit decline compares to the first quarter of 2009, during which we had a 9% sequential increase in units, versus the fourth quarter of 2008.

The current financial crisis has raised uncertainty amongst builders across America. Uncertainty has also affected our competitors, and created a volatile, crossing environment in our industry, that we compressed. That would actually compress the spread between what we paid for a pound of copper, versus what we're able to charge per wire that contained a pound of copper.

In the second quarter of 2009, the spread fell by 9.4%, versus the second quarter of 2008. And it fell by 5.1% versus the first quarter of 2009. We attempted to lead and support the industry with several price increases during the quarter, but with limited success as the average cost of the wire sold increased only 21%, while the copper cost increased 34% on a sequential quarter basis.

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. The low inventory levels in the distribution chain makes Encore's excellent order build rates valuable to customers for gravitating towards adjusted inventory.

Unit volume decreases are less in total of the industry. We believe that we're able to get a slight premium, where excellent service level from customers you realized are saving money by buying from us.

Making a profit in this economy is an impressive accomplishment and we thank our employees and associates for their tremendous efforts. We thank our shareholders for their continued support. Now Frank Bilban, our Chief Financial Officer, will now discuss our financial results. Frank?

Frank J. 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 question 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 these 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 advice 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 uncertainties. 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 investors, are posted on www.encorewire.com.

Now for the financial results. Net sales for the second quarter ended June 30, 2009, were $159.4 million, compared to $32.8 million during the second quarter of 2008.

Lower prices for building wires sold in the quarter ended June 30, 2009, accounted for most of the decrease in net sales dollars, declining 38.1% per copper pound sold, versus the same period in 2008.

Unit sales in the second quarter of 2009 decreased 20.2% versus the second quarter of 2008. Sales prices felt primarily due to lower comparable prices and building wire industry competition.

Net income for the second quarter of 2009 was $600,000, versus $1.3 million in the second quarter of 2008.

Fully diluted net earnings per common share was $0.03 in the second quarter of 2009, versus $0.06 in the second quarter of 2008. Net sales for the six months ended June 30, 2009, were $303.8 million, compared to $604.6 million during the same period in 2008.

Again, lower prices for building wires sold in the six month ended June 30, 2009, accounted for most of the decrease in net sales dollars, declining 42.6% versus the same period in 2008.

Unit volume in the six months ended June 30, 2009, decreased 12.4% versus the same period in 2008. Net income for the six months ended June 30, 2009, was $5.2 million versus $15 million in the same period in 2008.

Fully diluted net earnings per common share were $0.22 for the six months ended June 30, 2009, versus $0.64 in the same period in 2008.

On a sequential quarter comparison, net sales for the second quarter of 2009 were a $159.4 million, versus a $144.5 million during the first quarter of 2009.

Unit volume decreased 9% on a sequential quarter comparison. Net income for the second quarter of 2009 was $600,000 versus $4.6 million in the first quarter of 2009.

Fully diluted income from common share was $0.03 in the second quarter of '09 versus $0.20 in the first quarter of '09.

As usual, the real story behind our earnings fluctuation is in the spread between what we paid for a pound of copper versus what we were able to charge for wire that contained a pound of copper. As Daniel highlighted earlier, our spreads were down year-over-year and also on a sequential quarterly comparison.

Informed investors who have followed us for some time and understand the dynamics of our business, have focused on the spread as the key driver of our earnings, and also understand that LIFO adjustments are consistently applied under GAAP.

LIFO accounting nearly serves to bring the latest cost of materials into the statements and allows these spreads to be accurately included in our results. It is our low cost structure that continues to enable us to produce earnings in these turbulent times.

We continue to maintain our strong balance sheet. The only long-term debt we have as of June 30, 2009, is $100 million in long-term notes due in 2011, with our $150 million revolving line of credit at a zero balance.

In addition, we had $232.3 million in cash as of June 30, 2009. We also declared our 11th consecutive quarterly cash dividend during the second quarter of 2009. 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 this taped replay, please call 866-551-4520 and enter the conference reference number 253193 and the pound sign.

I'll now turn the floor back over to Daniel Jones, our President and Chief Executive Officer. Daniel?

Daniel L. Jones

Thank you, Frank.

As Frank highlighted, Encore performed well in the past quarter. We believe we are well-positioned for the future and Reyna, we would now like to entertain the questions please.

Question-and-Answer Session

Operator

Thank you. At this time, I would like to open up the call for questions and answers. (Operator Instructions). Our first question is from Liam Burke. Go ahead, please.

Liam Burke – Ferris, Baker Watts

Good morning, Daniel. Good morning, Frank.

Daniel Jones

Hey Liam.

Liam Burke – Ferris, Baker Watts

I know this tough in terms of end markets. I mean, it's no secret that the both the residential and commercial are beginning to surpass, and are creating other issues as such in the spread.

But if I segmented commercial, are there any pockets doing any better or any worse, vis-à-vis last year?

Daniel Jones

There are few a pockets Liam where we're seeing some positive numbers. They are more of the specialty cables that we manufacture, rather than just a broad sense of the term building wire.

We've been able to maneuver through and use our flexibility to our strength to write those orders and it's more specifically driven on the commercial side by hospitals and schools and government buildings, and schools would cover everything from elementary preschool type campus all the way up to major colleges that seem to be expanding pretty much nationwide.

Liam Burke – Ferris, Baker Watts

If you looked at the commercial unit volumes, they were down. They weren't down certainly with the amount of residential was. But usually, the wire goes into the tail-end of the building project. So the business would've held up as the commercial business was softening. Are we seeing any of that here or has that run its course?

Daniel Jones

Well, it's hard to predict. I think you can do enough research to support either conclusion. But one of that we're seeing in the field and having been on the road as late as yesterday with customers, there is some cautious optimism there.

But again, there is jobs that are going on. We saw the real cut back in inventory at the distributive level to maybe unprecedented top levels for us. And then as that started to turn a little bit to the positive side. They started to bring wire and similar products back in.

So, it's tough to say exactly where it's headed. But there are some positive signs out there. Most of the larger distributors that held on to some inventory have seen some gains. The guys that ran themselves completely out of inventory for fear of the volatility of across of building wire going forward, and they are unable to try to predict crossing patterns going forward. Those guys are trying to play a little bit of a catch up game, I believe, at this point.

Liam Burke – Ferris, Baker Watts

Great, thank you.

Operator

Our next question is from Robert Kelly. Go ahead, please.

Robert Kelly - Sidoti & Co.

Good morning, Daniel, and good morning, Frank. Just a question on the mix now between residential and commercial, what was that in Q2?

Frank Bilban

In second quarter, the commercial was just over 80%.

Robert Kelly - Sidoti & Co.

Okay. And then for 2Q as well, your cash flow from operations and CapEx if you would?

Frank Bilban

The cash flow from operations in the second quarter was $5.7 million and the CapEx was 3.8.

Robert Kelly - Sidoti & Co.

Okay. Are you still sticking with a budget of 18 million or so for '09?

Frank Bilban

We -- last quarter I believe, we said 18 to 21 was the range we were shooting at. I think with the couple things that have come up, today our best guess on CapEx for '09 is 23 to 25.

Robert Kelly - Sidoti & Co.

Okay, great. And then just on the pricing, selling price increases, you are able to raise prices to some degree, taking that higher prices in 2Q. Thus far in July have you gotten, your head above water? Or were you able to recover the last 13% that you hadn't covered in 2Q? How do we think about that?

Daniel Jones

Well, I would like to tell you a lot about that. Unfortunately, it's in fourth quarter. But answer it more directly Robert, we are in the midst of a couple of consecutive price increases right now, and I would say that the second one is too early to say yes or no.

But, we're still pushing the price increases through. And again, along those lines, it's tough to discuss just openly the pricing strategies and what have you. But it's not hard to run the numbers on the raw materials and find out where the sale process need to go.

Robert Kelly - Sidoti & Co.

Understood. It seems in the last two years or so, you have a difficulty when prices are rising. But you do a little bit better, should prices drift down or collapse like they did second half of '08.

Do you feel confident, if prices were to were to kind of see their seasonal drift back, you would be able to lower prices slower as we've seen in the last two years or so?

Daniel Jones

Yes and no. Historically, prior to the last two years, the market was much easier to increase prices, as your raw materials were increasing. And I'm going to have to answer this one carefully, but there was a, I guess, there is a change in the thought process, maybe, at one or two of the competitors that didn't make sense to them.

So last couple of years since they've been very active in the market, it's been much harder to increase prices in line with copper, maybe, they feel copper is too high or too low or they guess I'm not sure. I don't have the insight that I'd love to have there.

But to answer your question, the yes or no portion is, yes, it's much harder to get price increases through today. It's almost as if we're in a market where they are running the sales desk much like a trading desk, based on volume rather than profit.

So listen that's not a new situation. We've gone through this in the past. This one just seems to be lasting a little bit longer.

Robert Kelly - Sidoti & Co.

Okay, thanks guys.

Daniel Jones

Yes, sure.

Frank Bilban

You're welcome.

Operator

Our next question is from Keith Johnson. Go ahead please.

J. Keith Johnson - Morgan Keegan

Good morning.

Daniel Jones

Good morning, Keith. How are you?

J. Keith Johnson - Morgan Keegan

I'm doing okay. Just a couple of questions here. And first off, could you talk a little bit about the trends during the quarter, both from a maybe demand standpoint. In other words, was it stronger early in the quarter and then maybe from a bottom-line standpoint?

Frank Bilban

Yeah. Well, we can do that. April wasn't so bad, May was horrible and June was a little bit better. Each relative to each other within the quarter. The pricing environment in June from our perspective was more on the upside. The effort to get the prices up, because again May was nasty.

From a volume standpoint, it's almost too strong of the word to use today that you can save volume. There is just no volume to be had. But on the orders that are there, the day-to-day business that is there, all of those were being, from a pricing standpoint is being scrutinized to the point where folks are buying really, exactly what they need and some times they wait to buy, even though the product was needed because the volatility.

So the elasticity in pricing versus volume is kind of inverted today. And I hope that' not too confusing of an answer. But that's kind of where it ended up. June seems to be a little bit stronger in those two topics pricing and volume.

J. Keith Johnson - Morgan Keegan

Okay. I don't know if there is a way you can answer this. But if we look the kind of where you were in June, and you look to kind of what your pricing was relative to maybe where copper market was, on a monthly averages. Is there a way you could tell us maybe how far you are behind, or maybe had you called off. And its quite through there was a question early about have you done. The backlog of quarter maybe not looking in the fourth quarter, where we are today. But maybe if you just took choose June and just mention it?

Frank Bilban

Well, you saw the earnings that we put out of $0.03, June was around breakeven maybe a little bit better.

J. Keith Johnson - Morgan Keegan

Okay. And what about I think there was a question early about may be how the commercial markets are looking. If you look out in the 2010, maybe from the some of the markets where you're seeing commercial side some positive trends on special tables.

Is there any benefit that you guys would look for out of the stimulus money addicted into the system from government buildings, or institutional buildings qualifying for some of that money?

Frank Bilban

We talk about that around here a little bit, not a whole lot. But we are trying to get ahead of those projects as well. But as of this phone call, I just can't tell you that there's been any credit from our sales folks, given to the stimulus money, as far as projects or what have you. But going forward, there certainly seems to be at least that maybe a mid-level type atmosphere of projects going forward.

J. Keith Johnson - Morgan Keegan

Okay. And you made a comment I think on the inventories being very lean. How does the inventory in the channel look relative to 1Q, sequentially from the first quarter?

Frank Bilban

I think it's lower somewhat. Most of the distributors that are distributors that I met personally, it was in, when yesterday, in North East and they are just super lean.

And the fear is that they purchased the product one day and then two days later the price or the value of that has decreased significantly. And they just don't want to have it on the shelf. They want it to -- they would like to purchase it and have us deliver it and the invoice part get paid rather than the traditional cycle of going through distribution. They just don't want to hold it on the shelf.

J. Keith Johnson - Morgan Keegan

Okay, alright. Thanks a lot.

Daniel Jones

You are welcome.

Operator

Our next question is from Steve Bayer. Go ahead, please.

Unidentified Analyst

Hi Danny.

Daniel Jones

Hey Steve.

Unidentified Analyst

How are you, sir?

Daniel Jones

Good to hear from you.

Unidentified Analyst

Good. Is there anybody formally following you from a research standpoint? I mean, this finance is kind of vague. There is just one analyst follows you and may have a $0.25 estimate. I can't imagine they could be there far off.

But I just wondered, is there anyone following you?

Daniel Jones

Maybe not in the traditional sense. We've got some guys that do a fantastic job, and stay close to us and do the homework in the traditional sense, and we have one or two that right opinions that Frank and I are kind of confused as to where they got their information. So it's really -- but in fairness to those guys to Steve, we don't really give guidance. You've followed the story for quite a while now.

Unidentified Analyst

Long time, yeah.

Daniel Jones

And very familiar with how we go to market and stuff. But there is no one that really is -- there is one or two, like I said, that really stay in contact, and there is couple that right opinions that don't.

Unidentified Analyst

Yeah. Is the book value around 17 a true liquid book value, tangible book value.

Daniel Jones

Absolute sir.

Unidentified Analyst

Okay, okay. Keep your chin up, its tough time.

Daniel Jones

Hey thanks. Appreciate it.

Unidentified Analyst

Good talking to you.

Daniel Jones

You bet.

Unidentified Analyst

Bye-bye.

Operator

(Operator Instructions). We have no more questions. Actually, we have one more question from Michael Coleman. Go ahead, please.

Michael Coleman - Sterne, Agee & Leach

Hi good morning, how are you?

Daniel Jones

I can't believe you took so long. Where have you been?

Michael Coleman - Sterne, Agee & Leach

Last quarter we were talking a little bit about potential disruptions within your channel on smaller private distributors.

If you have any update there or whether you've seen any kind of mix shift within your channel to the distributors. Obviously, you're not going to name distributors, but have you started to see any mix shift within distributors from smaller to larger, or what have you?

Daniel Jones

That's a good question Michael. There's been -- there's actually been both.

The smaller independent guys that are strong in their market, continue to be so. The national chains that may have went on purchasing or expanding mission have cut back in some market areas, where maybe they had overlap between the original brand or location and a secondary location that may have been picked up in acquisition.

So we've actually seen both. There's really not a huge differentiation between the chain and the strong independents in the marketplace today. What you were seeing, or what we're seeing, the change in customer base is with the French guys who maybe didn't have a super strong identity. Or on the other hand maybe they were a very strong residential house and are going through certain transition toward the commercial and industrial side.

But overall, the A players are still the A players.

Michael Coleman - Sterne, Agee & Leach

Okay. Thanks and good luck.

Daniel Jones

You bet. Thanks Michael.

Operator

We have no more questions at this time.

Daniel Jones

Well. We certainly appreciate the call. And Reyna, you did a great job and we look forward to taking your questions on the next call. Thank you.

Frank Bilban

Thank you.

Operator

Thank you, ladies and gentlemen for attending. This call is concluded. Have a wonderful day.

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: transcripts@seekingalpha.com. Thank you!