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Encore Wire Corp. (NASDAQ:WIRE)

Q4 2009 Earnings Call

February 11, 2010 10:00 am ET

Executives

Daniel Jones - President and CEO

Frank Bilban - CFO

Analysts

Liam Burke - Janney

Keith Johnson

Gill Nathan - Restoration Capital

Robert Kelly – Sidoti

Kerry Rigdon – Mayberry Partners

Operator

Hello and welcome to the Encore Wire Fourth Quarter Conference 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 welcome and turn the call over to Mr. Daniel Jones, President of Encore Wire. Go ahead please.

Daniel Jones

Thank you, Amanda. Good morning, ladies and gentlemen. Welcome to the Encore Wire Corporation quarterly conference call. I'm Daniel Jones, the President and Chief Executive Office of Encore Wire. With me this morning is Frank Bilban, our Chief Financial Officer and we have several others in the room as well.

Our unit volume decrease is caused by a slowdown and construction and has created a volatile, crossing environment in our industry that compressed 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 fourth quarter of 2009 the spread fell by 48.2% versus the fourth quarter of 2008 it fell by 27.1% for the full year of 2009 versus 2008.

We attempted to lead the industry with several price increases during the quarter but met strong competitive cost cutting as the average spread fell 8.8% on a sequential quarter basis. We managed to earn $3.6 million this past year in the difficult environment 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 that the volatility of copper over the last year coupled with declining industry volumes has caused many of our distributor customers to maintain very lean inventory levels. Low inventory levels in the distribution chain like Encore's excellent order fill rates are valuable to customers who are relying on a just-in-time inventory.

We believe our volume decreases are less than the total industry and we believe that we're able to get a slight premium for our excellent service level from customers who realize value. We thank our employees and associates for the tremendous efforts. We'd also like to thank our shareholders for their continued support. Now I'll turn it over to Frank to go over the financials.

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 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 the financials. Net sales for the fourth quarter ended December 31st, 2009 were $177.1 million, compared to $180.2 million during the fourth quarter of 2008. Unit sales in the fourth quarter ended December 31, 2009 decreased 13.1% versus the fourth quarter of '08 offset by higher prices for building wire sold the quarter. The average price of building wire sold increased 13.2% per copper pound sold in the fourth quarter of 2009 versus the fourth quarter of 2008.

Sales prices rose primarily due to higher copper prices. However, the intense building wire industry competition did not allow wire prices to rise as much as copper prices. Copper prices rose 57.1% in the same period comparison. Net income for the fourth quarter of 2009 was a loss of $1.9 million versus positive income of $16.7 million in the fourth quarter of 2008. Fully diluted net earnings per common share were a loss $0.08 in the fourth quarter of 2009 versus earnings of $0.72 per share in the fourth quarter of 2008.

Net sales for the year ended December 31, 2009 was $649.6 million, compared to $1 billion 81 thousand during the year ended December 31, 2008. Lower prices for building wire sold in the year ended December 31, 2009 accounted for the bulk of the decrease in net sales dollars declining 28.8% versus 2008. Unit volume in the year ended December 31, 2009 decreased 15.6% versus 2008. Net income for the year ended December 31 2009 was $3.6 million, versus $39.8 million in 2008.

Fully diluted net earnings per common share were $0.16 for the year ended December 31, 2009, versus $1.70 in 2008. On a sequential quarter comparison, net sales for the fourth quarter of 2009 were $177.1 million, versus $168.7 million during the third quarter of 2009. Unit volume decreased 3.1% on a sequential quarter comparison while the average selling price of wire increased 8.5%.

Net income for the fourth quarter of 2009 was a loss of $1.9 million versus a positive $300,000 in the third quarter of 2009. Fully diluted net income per common share was a loss of $0.08 in the fourth quarter of ’09 versus positive earnings of $0.01 in the third 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 a wire that contained a pound of copper.

As Daniel highlighted earlier, our spreads were down dramatically year-over-year and also slid on a sequential quarterly comparison. Informed investors who had followed our stocks for some time and understand the dynamics of this business have always focused on the spread, 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 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.

Our balance sheet remains strong. We ended 2009 with $226.8 million in cash on December 31st and $100 million of debt on our senior notes. As we announced previously on our press release, on January 15th 2010, we paid off the entire balance of the senior notes and are now debt free, leaving us with over $100 million in cash and a $150 million revolving line of credit untapped. We also declared our 13th consecutive quarterly cash dividend during the quarter.

We'd like everyone to note that this conference call will be available for replay after the conclusion of the session. If you wish to hear the replay, please call 866-206-0173 and enter the conference reference 251159*. I'll now turn the floor back over to Daniel Jones, our President and Chief Executive Officer. Daniel.

Daniel Jones

Thank you. As Frank highlighted all things considered, Encore performed very well in the past. We're never happy about a loss but we believe we're well positioned for the future. We'll now take questions from our listeners Amanda.

Question-and-Answer Session

Operator

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

Liam Burke - Janney

Daniel, could you give us some of the thought process as you went through the quarter. Obviously you weren’t getting the minimum margin you needed to make money on the wire from the distributors. How do you decide whether or not take the price that’s out there versus turning down the deal and saying sorry, there is not enough profit in it for us?

Frank Bilban

Most of the damage Liam occurred in October. We had running copper about, I think it ran somewhere around $0.20 a pound from beginning to end and we had some competition that felt that copper should be a $1.50 or $1.75, somewhere in that range and they were out explaining why copper was going to go down. So in that timeframe, we lost a significant of sell price in October with copper going the other direction.

So it somewhat cleaned up in November and December but when that happens, you fight for each order that you can breakeven on or make any money on the order whatsoever. It was very few and far between in that month but the decision that you look at is, we could set out completely sit out completely or step in and support some of the customers that are with us until things return. And as I mentioned November and December we're a little bit better than October but you can't just completely shut those customers out.

Liam Burke - Janney

Great, and there was an announcement that AIW is going to be acquired by Southwire a few weeks ago. It looks like we've got the first step in consolidation of the market. How does that affect your outlook for 2010?

Daniel Jones

Well in the past its immediate effect is it's a good thing. Long term effect we'll have to wait and see. We view it overall though as a positive for the market itself and again we have a few competitors that operate differently when you have one or two competitors that’s saying to try to maintain and establish some discipline in the market. I think that the fact that South is taking over the AIW plants will be a good thing long term in the market for us.

Operator

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

Keith Johnson

Just a couple of quick questions. Maybe just kind of from a housekeeping standpoint, what should we think about the 2010 capital or CapEx spending?

Frank Bilban

Right now what we have on the bracket Keith is running in the $16 million to $20 million range and as Daniel and the staff come up with additional projects, that could up a little.

Keith Johnson

Okay. Could I get the breakdown on volume changes in the residential market and the commercial market for 2009 versus 2008?

Frank Bilban

Are you looking at the quarter-to-quarter or the year-over-year?

Keith Johnson

Year-over-year, I'm sorry.

Frank Bilban

Year-over-year residential was down 36% and commercial was down almost 9%. As we indicated in the last quarter call and we're seeing it a little more going forward again the comps on residential are getting a little better. As you can see third quarter to fourth quarter residential was down on a consecutive basis only 5.5%. It appears that for the last five quarters starting in Q4 of '08 that residential is forming a bottom.

Keith Johnson

Okay, when I look at the down 9% in volumes on commercials and then read about more significant declines in non res spending or starts, how should I think about commercials volumes do we look in the first half of 2010. Are you guys thinking that there is a significant drop kind of coming because building wires is sort of a latter stage construction process or is there market share being gained in the commercial channel or how should we kind of think about that?

Frank Bilban

Those are great questions. I didn’t really know we were going to discuss 2010 and our report was on 2009 quarter but I more than happy to answer that question. What we're seeing today is January and February are okay. They're not great. They're okay. Things are going on fine. Again October was the key to the fourth quarter. There was really very little business to be had. Copper prices were going up, sell price was going down and that pretty much summed up the month of October. If we compared volumes going forward to October, I'll tell you I think all the numbers are going to be positive. If you look at going forward versus 2004, I don't think we we'll get back to that volume yet.

Operator

Okay. Our next question comes from Gill Nathan with Restoration Capital. Go ahead please.

Gill Nathan - Restoration Capital

My question about your competitor being taken over by Southwire was obviously answered. My question now is copper prices have been down for the last couple of weeks. Are you seeing pricing pressure again? I know you've tried to implement the price increases and that's been kind of tough but how has it been. And you said that one competitor was pricing at about 50 copper or back in October. Is that happening at all anymore or where do you think that's kind of headed as copper is stable?

Daniel Jones

Well Will, the last couple of days copper has actually been up but overall just for your question, I guess we could move it based on whatever time we're on but in general the price cutting that we saw in October started to dry up in November and was not there as much in December. And as we continue to go forward, rather than seeing the price cutting that we were seeing in Q4, it's kind of when copper is down, $0.03 or $0.04 or $0.06 today and back up $0.03 or $0.04 or $0.06 tomorrow, there is more sitting on the sidelines, so to speak rather than quick to jump to a lower price and evidence of that is a price increase that was announced yesterday by one of our competitors. We were able to pick up in the market place. So there is more discipline today then there was in October. But again November and December there was more discipline than October. So I’m trying to stay on track and discuss the fourth quarter in ’09 is the reason from my answer.

Gill Nathan - Restoration Capital

Okay, and looking back, Frank mentioned a bottom in housing that you think is starting to happen. I’m just wondering did you see an abnormal amount of residential construction based on the first time home buyer tax credit like we saw some of the builders increase inventory a little bit seasonally. It's not very normal. So I’m just wondering if you guys saw that too.

Frank Bilban

It's possible that that contributed to some of it. I don’t think it's all of it but in the residential construction side in the field what we're seeing is when we travel around, there seems to be a pick up in knocking down houses and building a new one on existing lots. How that’s reported and to what credit you would give that type of construction I really am not sure but we're actually seeing that in some of the major cities around the country, not on the volume level again that we were at in 2006 or 2007 when it peeked but there is pockets of activity. Some of the projects have changed hands. Maybe there are two or three investment generations removed but we are seeing some activity. It's not huge. Its not large numbers in volume but there is activity out there.

Gill Nathan - Restoration Capital

Just the last question. For 2009 what do you think your average capacity factor was?

Frank Bilban

I don’t think its any secret. We were running basically four days a week in most departments. We'd like to run six or seven, but I'm not going to force inventory or copper pounds through for the sake of covenant price to move the volume in the marketplace. So we were running at about four days for 2009.

Operator

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

Unidentified Analyst

Frank I think that when you answered the questions regarding the unit volumes on a year-over-year basis, was that for the full year of 2009?

Frank Bilban

That’s correct.

Unidentified Analyst

Could you perhaps provide that detail for the fourth quarter on both a sequential quarter and year-on-year basis please?

Frank Bilban

Sure. Q4 sequentially to Q3 of '09, residential was down as I indicated, 5.5% and commercial was down about 1.1%. On a fourth quarter of '09 versus fourth quarter of '08 comparison residential was down 9% and commercial was down 15%.

Unidentified Analyst

Okay. That’s helpful. Could you tell me what the impact, if there was of any LIFO adjustment within the quarter?

Frank Bilban

For the quarter we took a charge to earnings of $5.2 million for LIFO.

Unidentified Analyst

And was there any LIFO liquidation benefit or detriment?

Frank Bilban

Actually, we did have some benefit of growing back in old layers, kind of inadvertent. We really are trying to hold inventories pretty constant but as you know and we've indicated there is a little bit at the tail end with an up surge in orders in late December when we will shut down.

Unidentified Analyst

So there was a LIFO liquidation benefit in the quarter?

Frank Bilban

Yes, a little bit.

Unidentified Analyst

Get that out of the (inaudible).

Frank Bilban

Yeah, we're putting that all together.

Unidentified Analyst

That's helpful. And just overall can you give us a sense as to your thoughts on the overall health of the other remaining competitors out there in this environment?

Frank Bilban

The list continues to shrink. This is my 21st year here at Encore and I can think of six or seven, most of them larger than us at the time that are not around anymore in this market but the guys that are still out there, its Southwire is a well known company, well funded I'm sure, very active in the market place. Siro is owned, parent company is Berkshire Hathaway. I don't think they're going anywhere. And then there is a handful of other competitors that maybe short lined or parent companies in Mexico what have you but the field is narrowed and, Brian it would be great if we had a public competitor. It would be great and I would welcome them all to go public. That'd be wonderful. But it would be supposition on our part but what we're hearing in the market place is and knowing what we know about cost structure and the plants that we compete with, I would guess that their structure with lend itself to, guess on our part would be they are now again so high.

Unidentified Analyst

Sure, understood. It's kind of what we were thinking here as well. And maybe one last one for Frank is, could you provide a little bit more color on the breakout of your SG&A in terms of the component parts?

Frank Bilban

In which period Brian?

Unidentified Analyst

I’m sorry, Q4.

Frank Bilban

Q4 freight again and you’ll see this in the (inaudible) was 2% of sales or $3.5 million. Commissions were 2.6%, right inline about $4.6 million and the remaining G&A was about $3.3 million and then we had a $75,000 accrual for bad debts.

Unidentified Analyst

And that run rate on G&A seems to have ticked up a little bit. Is that due to the audit preparation in end of year sort of bank stuff?

Frank Bilban

Yeah, that and some legal.

Unidentified Analyst

Legal? Okay, that’s right. I forgot about that.

Operator

Okay, our next question comes from Robert Kelly from Sidoti. Go ahead please.

Robert Kelly – Sidoti

Do you know off hand what AIW's market share was prior to their acquisition?

Daniel Jones

I don’t have a good handle on that. We competed with those guys on the commercial side. They did not manufacture it full on residential product. So I had been through each of their production facilities except for one and I really don’t know. I think I have an idea of what their capacity would have been and we could probably back into in overall number but I just don’t have an idea of what their market share was.

Robert Kelly – Sidoti

And then just as far as January, February; you called that being okay. Are you seeing a little bit of uptick in volume along with the restored price discipline or you still seeing a kind of flattish trend from what you saw in 4Q?

Daniel Jones

There has been improvement in the discipline. As far as volume goes, it's very volatile. We'll have a day that’s phenomenal and unexpected and we'll a day that it's super quite. So overall it’s a little early to say what’s going to happen but what we’ve seen so far has been moderate volume and better price discipline in the market. It's not a secret, I don’t believe. When I'm telling you that October was not good and it's presumptuous but I'm going to tell you, if it wasn’t good for us it wasn’t good for anybody. So there has to be some discipline and typically in this industry there is an outside force that moves us to discipline, whether it would copper or 0:29:49.2 type or freight goes crazy or have you but we rarely put through a price increase and it holds unless there is some type of outside influence. So discipline is better today than it was in October.

Operator

Okay. Our next question is from Kerry Rigdon with Mayberry Partners. Go ahead please.

Kerry Rigdon – Mayberry Partners

How would you describe from a distributor standpoint inventory levels now as compared to the end of the year, end of '09?

Daniel Jones

Based on the size of the orders that were coming in, in the fourth quarter versus the average size of an order today, I would tell you that there is exceptions but for the most part, our distributor customers are not carrying a whole lot of inventory. And also a relative comment but traveling around, I was out last week making calls and what have you with customers, and there is just no inventory in the field to speak of it at all.

The electrical contractors, they don't carry any inventory. Distributors are super lean. And I think the only reason for some of that is the value of the pound of copper and leaving it sitting on the job side, doesn’t make a lot of sense. So in the chain from the manufacturer to installer, I'll tell you I think inventories are super lean. I don’t think that's going to be a brilliant statement. I think it's more of self defense than anything.

Kerry Rigdon – Mayberry Partners

And concerning you residential side, I know Frank you were talking about, as we go back a number of quarters it looked there is a flattening of that line at least a basing. Are there any areas of the country that you're starting to see some improvement or is it pretty constant it across from coast to coast?

Frank Bilban

Well again, there is pockets where it's okay but if I had to be pinned down to the one area that seemed to be talking more positively than the others, it would be in the North East. But again, they were the first to go and the farthest to go. So maybe who knows? I'm not good at predicting what's going to happen but there is more positive conversation in that area. But they've been beat up for close to three years now so maybe its time for them to change or whatever.

Operator

And that was our last question.

Daniel Jones

Super. Amanda, thank you. We appreciate all the calls and all the questions and look forward to speaking to you guys on the next call. Thanks a lot.

Operator

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

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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.

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