Encore Wire Corporation Q3 2009 Earnings Conference Call

Oct.22.09 | About: Encore Wire (WIRE)

Encore Wire Corporation. (NASDAQ:WIRE)

Q3 2009 Earnings Call

October 22, 2009 11:00 a.m. ET

Executives

Daniel Jones - President and CEO

Frank Bilban - VP and CFO

Analysts

Liam Burke

Keith Johnson

Robert Kelly

Presentation

Operator

Hello and welcome to today's Encore Wire Third Quarter Conference Call. As a reminder all lines will be on listen-only mode and there will be time for Q&A at the end of the call. (Operator Instructions).

I will now turn the call over to Mr. Daniel Jones, President. Go ahead please.

Daniel Jones

Thank you, Lisa. 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.

Slow down in construction activity in United States continues to impact our industry adversely as it has over the last three years, and commercial construction has been slowing since beginning of 2008. Unit volume decreases have effected our industry and created a volatile pricing environment that compressed the spread between what we paid for a pound of copper versus what we were able to charge per wire that contained a pound of copper.

In the third quarter of 2009, the spread fell about 24.3% versus the third quarter of 2008 and it fell about 19.6% for the first nine months of 2009 versus the first nine months of 2008. We’re tempted to lead the industry with several price increases during the quarter but met limited success as the average spread remained almost unchanged on a sequential quarter basis. The fact that we have managed to post breakeven results in this difficult environment is due to our low cost business model and aggressive cost cutting in all facets of our operation.

Our staff has worked diligently to control cost effectively while maintaining the service level to our customers Encore is known for. Our reps in the field tell us the volatility of copper over the last year coupled with declining industry volumes as cause many of our distributor customers to lean down their inventory levels.

The low inventory levels in the distribution chain make Encore’s excellent order fill rates valuable to customers who are gravitating towards the Just-in-time inventory. 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 they are saving money by buying from us. Despite our desire and efforts to do better, our performance is impressive in this economy and we thank our employees and associates for the tremendous efforts. We also thank our shareholders for their continued support. Frank?

Frank Bilban

Thank you, Daniel. In a minute we will review our 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 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, reconciliation of non-GAAP financial measures discussed during this conference call to the most directly comparable financial measures presented in accordance with the GAAP including EBITDA which we believe to be useful supplemental information for investors are posted on www.encorewire.com.

Now the financial results; Net sales for the third quarter ended September 30, 2009 were $168.7 million compared to $296.3 million during the third quarter of 2008. Lower prices for building wire sold in the quarter ended September 30, 2009 accounted for much of the decrease in net sales dollars declining 25.1% per copper pound sold versus the same period in 2008.

Unit sales in the third quarter of 2009 decreased 24% versus the third quarter of 2008. Sales prices fell primarily due to lower copper prices and building wire industry competition. Net income for the third quarter of 2009 was $300,000 versus $8.1 million in the third quarter of 2008. Fully diluted net earnings per common share were $0.01 in the third quarter of 2009 versus $0.34 in the third quarter of 2008.

Net sales for the nine months ended September 30, 2009 were $472.5 million compared to $900.9 million during the same period in '08. Lower prices for building wires sold again in the nine months ended September 30, 2009 accounted for most of the decrease in net sales dollars declining 37.4% versus the same period in 2008.

Unit volume in the nine months ended September 30, 2009 decreased 16.3% versus the same period in 2008. Net income for the nine months ended September 30, 2009 was $5.5 million versus $23 million in the same period of 2008. Fully diluted net earnings per common share were $0.24 from the nine months ended September 30, 2009 versus $0.98 in the same period in 2008.

On a sequential quarter comparison, net sales for the third quarter of 2009 were $168.7 million versus $159.4 million during the second quarter of 2009. Unit volume decreased 9.2% on a sequential quarter comparison. Net income for the third quarter of 2009 was $300,000 versus $600,000 in the second quarter of 2009. Fully diluted net income per common share was $0.01 in the third quarter of 2009 versus $0.03 in the second quarter of 2009.

As usual, the real story behind our earnings fluctuation is the spread between what we paid for a pound of copper versus what we were able to charge for wire the contained a pound of copper. As Daniel highlighted earlier, our spreads were down year-over-year and virtually flat on the sequential quarterly comparison. Informed investors who have followed us for sometime and understand the dynamics of this business have always focused on the spread as the key driver of earnings and understand that LIFO adjustments are consistently applied under GAAP. LIFO merely serves to bring the latest cost of materials into the statements and allows these spreads to be accurately included in our results. Our low cost structure 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 September 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 $213.6 million in cash as of September 30, 2009. We also declared our 12th consecutive quarterly cash dividend during the third 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 the tape for replay, please call 866-206-0173 and enter the conference reference 248150 and the pound sign. I'll now turn the floor back over top Daniel Jones, our President and CEO. Daniel?

Daniel Jones

Thank you, Frank. Lisa, we'll now take questions from our listeners.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from (inaudible). Go ahead please.

Unidentified Analyst

How does the competitive environment look with the economy the way it is? Is it profitable that the balance sheets of some of the other members in the industry might be challenged and in the process, Encore may pickup additional market share?

Daniel Jones

The first part of the question is hard to gauge what the other guys balance sheets look like only because they are private. But I would guess they are in similar shape or something in the range of what we've done in the past quarter, but also the second part would be the market share. We feel like we’re doing the right things in sticking to our disciplines in the market that when it turns and we’ve seen a few signs here and there from month-to-month type numbers, but we think we are ready to go whenever it comes back. The challenge that we have and what we continue to push any operations to side is to keep our cost as low as possible so that we can weather the storm.

Operator

(Operator Instructions). Our next question comes from Liam Burke. Go ahead please.

Liam Burke

Daniel, could you give us a sense either volume declines or capacity utilization of how each of the general business split between residence and commercial construction stand?

Daniel Jones

Internally or as an industry?

Liam Burke

No, internally.

Daniel Jones

We’re running about 70% commercial and about 30% residential.

Liam Burke

Okay. And in terms of volumes, how are they doing by commercial and residential?

Frank Bilban

Yeah. Well, would you like nine months to nine months? I can give you that. Its right here. The volumes for residential are still going down a lot more than the commercial. Year-over-year, the residential is down almost 42%. The commercial volumes are down 7%, nine months to nine months, and what we saw on the residential side was in the fourth quarter of last year, it kind of hit a plateau and we’ve been at that plateau now for four straight quarters and whether that holds there, starts to climb back up remains to be seen.

Liam Burke

And Daniel, you mentioned seeing pockets of stability. Could you give us a sense whether it’s a geography or line of business that’s showing some, lack of better of word, stability?

Daniel Jones

Geographically there are some spots, Liam, that seem to or hit harder earlier, that seem to be the businesses come back somewhat, not like it was obviously, but the orders are more regular. They seem to be a little more consistent in size even though they’re significantly smaller than they were in the past. There are some geographical spots. And as far as actual markets themselves, in the residential product in the areas geographically, the stability seems to be a little more frequent. At a full year, you’ll go for a month and think, man, its going along pretty well in an area and then the next week its like someone flip the switch off. But overall, it’s more geared in the residential side and it’s pretty sporadic but there are some geographic spots that seem to be headed in the right direction.

Operator

Keith Johnson has the next question. Keith your line is open.

Keith Johnson

Hey, just a couple of quick questions. I believe you made a comment earlier that sequentially volumes or total volumes declined about 9.2% from Q2 to Q3 this year.

Unidentified Company Representative

That’s right.

Keith Johnson

Can I get that or could you break that on a residential and commercial basis?

Unidentified Company Representative

And again, these are small increments in terms of total units, but on a sequential basis actually residential units were up 8%, and commercial units were down 13%.

Keith Johnson

Okay

Unidentified Company Representative

And whether that’s the beginning of a trend or not again as I indicated, remains to be seen.

Unidentified Company Representative

And that’s Keith that fits in line with Liam’s question and our answer. There’s pockets out there that we’ve been able to identify and the residential seems to be, headed in the right direction.

Keith Johnson

And just, kind of as a refresher, the wire product of course comes into line, mid stage of the construction cycle of the house. So, we look at the starts out there, stabilizing coming through the summer actually may be sequentially, showing improvement, but a little bit of lag there to how it should start affecting the demand for wire and cable.

Frank Bilban

Well you would think so, I mean that would be an intuitive obviously but it's not only the single family housing starts. The product that we consider be residential would actual go into four, maybe five different residential products, single family, multi family and they continue. So it’s not only the single family start number that you see in the paper.

Keith Johnson

Any of those showing more strength than those groups showing more strength than another one?

Frank Bilban

Not really, from one week to the next, and from one day to the next you might see some strength but overtime, it kind of evens out and again, the up to 8% number, 8% of the total is still not a big number, but it is a positive sign.

Keith Johnson

How should, as I look into 2010 I think from a stimulus spending stand point as more of that money enters into the construction markets, how are you guys looking at that as a potential benefit kind of help offset some of the headwinds on the commercial side.

Frank Bilban

We try to not get too excited or to down either way on the promises that we hear, but specifically it would be for us tied to the banks loaning out money, as the money starts to flow a little bit more freely or starts to flow it all, on new construction projects. That’s when we’ll get a little more excited but, I just don’t have the data to suggest that the stimulus money is tied specifically to any positive or negative numbers at this point.

Keith Johnson

Your manufacturer reps out there [cut] on the ground so to speak, are they still kind of waiting to see or more excited or less excited maybe as they look ahead, related to (inaudible)?

Frank Bilban

They are still some categories that Keith has never really died, in the hospitals and schools and some government structures and so forth steel, is the leader and on the commercial side, and I think probably all three categories would benefit from stimulus money, but specifically, to tie that to a timing or a point in time or a stake in the ground or however you describe it, that’s the part where we’re set and ready to go with.

When it happens, we’re ready to go, and the feedback from the sales reps that are on the street. Everyone seems to be ready to go, the distributors are ready to go, the customer distributors, the sales reps are working as harder, harder than they ever have, our demands on them are a little bit stronger now. But again, as far as exactly the perfect timing we don’t have a real specific date to go to.

Operator

Our next question comes from Robert Kelly. Go ahead please.

Robert Kelly

Question I had with copper rising to the level where it is. Is the response from your competitors to kind of cut back service levels or do they in fact get more desperate with their pricing? How that’s kind of flow to the summer?

Frank Bilban

Well, copper’s doubled since late last year and historically that’s been a fantastic situation for our industry. The change this time around on the copper climb has been there is a competitor that’s been very public with, they don’t agree with the passing on those cost, because they feel like the won’t allow it.

Our approach to that is you pass it on and it is what it is regardless of the demand. Its very transparent for contractors and distributors alike to see that copper is up $0.10 or down $0.05 or whatever the volatility would lead to and from my 20 years that’s copper is the deciding factor on a price increase or actually price decreases as well. You can have PVC, you can freight, you can nylon, you can have other cost influences but until copper trends one way or the other, the price increases typically fail.

This situation is different because again, we have a competitor that’s been very public with, they don’t believe in that only because demand is down. So when you have copper trending as we have, to pass it on has historically been a real simple equation and as you can see going back in time, when demand is strong and copper is going in the right direction, it’s a great thing. When we have demand a little soft and copper going up, again, we have folks that depend on volume and believe that they should shove so many pounds into the market place or what have you, it’s a little harder to get those price increase through to stay ahead of the copper increase.

Operator

Our next question comes from Brian (inaudible). Go ahead please.

Unidentified Analyst

Thank you for taking my questions. Congratulations on maintaining profitability in the tough environment. Three cheers to your (inaudible) and your skilled operators. Just a couple of (inaudible) model. You talked about volumes on a year-to-date basis. I’m wondering if you can help me with year-over-year comparisons on volumes for the Q3 period on both residential and commercial.

Frank Bilban

If you want to know the percentage change Q3 to Q3?

Unidentified Analyst

Yes, please

Frank Bilban

Q3 to Q3 residential is down 42% and commercial is down 17%.

Unidentified Analyst

And I think you mention in the press release I heard Daniel say and (inaudible) that, the spreads were relatively flat quarter-over-quarter. How about pricing quarter-over-quarter?

Frank Bilban

The spread was flat, so we maintain ourselves on the same page, was flat on sequential quarters, and so if that’s what you’re asking, the pricing, the average price that we shipped from Q2 over ‘09 to Q3 over ‘09 was up 16%.

Unidentified Analyst

Exactly, that’s the exactly the period that I’m looking for. And just a housekeeping item. Cash flow from ops and CapEx during the quarter?

Frank Bilban

During Q3 the cash flow from operations was a negative $18.7 million primarily due to rises in a receivables of almost $12 million and inventory specifically in prepaid copper of $17 million. Everything else was positive and then CapEx was a quarter was $3.7 million.

Unidentified Analyst

What did the budget for ‘09 look like for CapEx? I think you had given some guidance as to that before and may can you give us a look at what ‘10 look like on the CapEx line?

Frank Bilban

Well CapEx for ‘09, year-to-date is at $19.7 million and we are projecting at the moment that will come in at around $22 for ’09. Now as far as '10 goes, we've got a couple of projects that we're working on right now Brian and depending on where those come in timing wise, we're looking about the same in '10 as it was in '09.

Operator

(Operator Instructions). We have no more questions at this time.

Daniel Jones

Lisa and Ladies and gentlemen and Jimmy (inaudible), thank you guys very much for calling in and we look forward to speaking to you again and thank you for your support.

Operator

Thank you very much ladies and gentlemen. This conference has concluded.

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