Executives
Richard Burger- CFO
Gary Yetman –President, CEO
Analysts
Matt McCall - BB&T Capital Markets
Brett Levy - Jefferies
Tyson Bauer - Wealth Monitors
Alex Rygiel - Friedman, Billings,Ramsey
Coleman Cable (CCIX) Q3 2007 Earnings Call November 14, 1969 11:00 AM ET
Operator
Good morning, ladies and gentlemen, and welcome to theColeman Cable third quarter financial results conference call. Today's call isbeing recorded. At this time for opening remarks and introductions, I'd like toturn things over to the Chief Financial Officer, Mr. Richard Burger. Please goahead, sir.
Richard Burger
Thank you for joining Coleman Cable's third quarter 2007conference call. Joining me today in the conference room is Gary Yetman,Coleman Cable's President and Chief Executive Officer; and Shari Campbell,Coleman's Vice President of Finance.
As we have detailed on slide 3, our comments today mayinclude forward-looking statements that make assumptions about our operations,business and economic and political environment. These forward-lookingstatements are subject to risks and uncertainties that are detailed in the riskfactors section of our annual report Form 10-K for the fiscal year ended December 31st, 2006.
We will begin our formal remarks with a review of businesshighlights. Then I will review the third quarter financials and we will takeyour questions.
I will now turn the call over to Gary.
Gary Yetman
Thanks, Rich. If you will turn to slide 4, I'm pleased toannounce once again a very solid quarter for Coleman Cable. Our strategy tobroaden our product offerings, strengthen relationships with distributors andincrease end market diversity has produced a second consecutive quarter ofrecord revenue.
Third quarter revenue of $253.5 million was up over 120%from last year's third quarter and up sequentially over the second quarter of2007. We again came in at the top end of our guidance with adjusted EBITDA of $22.4million, up nearly 37% over last year and produced adjusted EPS of $0.41, upnearly 14% over last year.
We also continue to make progress integrating Copperfieldinto legacy Coleman. We have recognized planned material cost savings andvertical integration initiatives during the third quarter, but a portion ofthese savings were negated by higher material costs, particularly the continuedincrease of PVC compound.
On November 8, 2007our board approved the planned Copperfield integration strategy of streamlinedmanufacturing operations and cost reductions that were considered in ourCopperfield acquisition. The plan involves the consolidation and closure ofCopperfield manufacturing and distribution facilities located in Avilla, Indiana, Nogales, Arizona and El Paso, Texas into operations at a larger state of theart facility in El Paso, along withrealignments of existing Copperfield facilities.
We expect that these measures will result in a combinationof restructuring charges and purchase accounting adjustments of approximately $300,000to $600,000 in the fourth quarter of 2007 for severance costs and approximately$3.5 million to $4.5 million in 2008 for other restructuring costs. We estimatethat these measures will result in net cash expenditures of approximately $2 millionto $3 million depending on various factors, including the timing of the sale oftwo of our own facilities and the amount of proceeds received. We expect thatthese measures will result in cash savings of approximately $3.5 million in2009 and in subsequent years.
If you will turn to slide 5. Revenue for our consumer outletsegment for the three months ended September 30th increased by 9.3%. Revenuesfor our distribution segment, which includes our electrical wire and cable distributorsas well as specialty distributors and OEMs, saw sales decline just over 4%during the quarter. Finally, Copperfield has performed to our expectations asit has contributed 123% to our revenue growth during the third period.
Slide 6. We are experiencing fluctuating market demandsacross a number of our channels particularly due to copper volatility andgeneral market uncertainty. We continue to see weakness in our residentialconstruction markets, somewhat offset by stability in our industrial OEM andcommercial markets. We also continue to see inflationary cost pressures due tohigher PVC costs and fuel surcharges. Labor efficiencies continue to affect anumber of our facilities due to higher than normal employee turnover and tightlabor markets. We have initiated expanded recruiting and retention efforts andexpect to see productivity improvements in these facilities by the firstquarter of 2008.
With the announced acquisition of Woods Canada, weaccomplished the major objective of expanding our North American footprint. Welook for the addition to significantly enhance our Canadian distributionplatform. One of our initiatives with the Copperfield integration was theexpansion of our industrial product offering. We are pleased with our progressand expect a number of new product introductions in the first half of 2008.
These initiatives will further expand our reach into theindustrial and OEM markets and further diversify our product offering andcustomer base. We believe the planned integration of Coleman, Copperfield andWoods into one company provides significant opportunities to leverage ourbusiness platform and significantly enhance our value propositions to both ourcustomers and our shareholders.
Slide 8. We previously announced last week the signing of adefinitive agreement to acquire the electrical products business of KatyIndustries, which operates in the United Statesas Woods Industries and in Canadaas Woods Industries Canada.
The principal business of Woods U.S. and Woods Canada is thedesign and distribution of consumer electrical corded products, which are soldprincipally to national home improvement, mass merchant, hardware and otherretailers. Through the Copperfield and Woods acquisitions, we believe we cangrow our North American footprint while creating real economies of scale thatwill translate to true improvement in the bottom line.
Without rehashing too much from the Woods conference call,upon making the acquisition we plan an immediate, permanent reduction of workingcapital of $12 million to $15 million within three months of closing, whicheffectively lowers Coleman's investment in the Woods acquisition to $30 millionto $33 million rather quickly. This will also allow us to reduce our debt byapproximately $12 million to $15 million.
Coleman will utilize its current revolving credit facilityto fund the purchase price. The Woods acquisition is subject to customaryclosing conditions and is expected to close effective November 30. Mostnotably, we expect this transaction to be accretive in 2008, contributingapproximately $125 million in additional revenue, approximately $10 million inadditional operating income and approximately $0.20 a share in additionalearnings for the full year of 2008.
We believe this acquisition significantly enhances ourmarket position in the Canadian consumer channel and also establishes a broaderplatform for penetrating other distribution channels and OEMs in Canada.We also solidify our position as the leading supplier of electrical wire andcable products for the U.S.consumer and industrial distribution channels, by significantly expanding ourengineering and sourcing platform in Asia.
Assuming stable market conditions, we remain very optimisticabout our business and the acquisition of Copperfield and the pendingacquisition of Woods. We have significantly diversified our product andcustomer base, have a number of projects and initiatives in place and believethat we are well positioned to deliver strong operating results in 2008.
With that, I would like to turn the call over to Rich, whowill provide an overview on our third quarter 2007 results.
Richard Burger
Thank you, Gary.If you'd please turn to slide 9, I will do a brief review of our GAAP financialresults for the third quarter of 2007. As you can see from the slide, with theacquisition of Copperfield our new platform has produced consistent results forthe past two quarters, specifically producing third quarter 2007 revenues of$254 million; EBITDA of $21.3 million; and earnings per share of $0.24.
As we noted in our second quarter conference call, severalitems continue to affect current period EPS versus last year, including thestock-based compensation of $1.1 million; intangible asset amortization of $2.5million; incremental depreciation of $900,000; increased income tax expense ofapproximately $5.8 million since Coleman converted to a C corporation from an Scorporation. As mentioned previously by Garyin talking about our planned consolidation and closure of Copperfieldmanufacturing and distribution facilities, we continue to drive the integrationthroughout the organization.
Please turn to slide 10, where I will give you an overviewof a few key liquidity metrics. As evidenced by these three charts, Coleman continuesto strengthen its balance sheet. We are very proud to have improved our workingcapital, DSOs and inventory turns. These improvements, while somewhat due tothe Copperfield acquisition, have been driven by our continued focus oninventory and working capital initiatives.
Please turn to slide 11 for a discussion on various leveragemetrics. The company's total debt to adjusted EBITDA remained unchanged fromthe second quarter at 3.9 times while our total debt to capitalizationdecreased 1.3 percentage points from the second quarter. As we stated in thepast, Coleman has a strong history of debt reduction and while we intend towork to reduce our leverage to approximately 2 to 2.5 times, we are notuncomfortable in operating at a leverage rate at the current leverage ratio, aswe have a history of successfully delivering the company from leverage ratiosof greater than 6 times.
We have included our fixed charge coverage ratio as it isdefined in our revolving credit facility and signifies our strength in meetingour interest and funded indebtedness. Under the revolving credit facility, the companyis required to maintain a fixed charge covenant ratio of not less than 1.1:1for any month during which the excess availability falls below $30 million. Asof September 30th, 2007 ourexcess availability was $84.3 million.
Additionally, several investors have requested informationregarding the pounds of products and copper sold as compared to other periods.Although management does not use this information as a leading metric inassessing our business, we are providing this information to investors. Thisinformation will be posted on our website and available later this morning.
Please turn to slide 12 where I will review our fourth quarterguidance. We typically experience softness in the fourth quarter as many of ourend markets reduce their inventory stocking levels in conjunction with year-endholidays. Notwithstanding, we started the fourth quarter with strong operatingresults in October. While we continue to experience inflationary pressures fromhigher material and fuel costs, we have been successful in offsetting some ofthese pressures by implementing our cost reduction initiatives.
Finally, as stated in our press release last night, weexpect our fourth quarter revenues to be between $220 million and $240 million,while we expect our adjusted EBITDA to be in the range of $17 million to $21million.
Operator, would you please open up the line for calls?
Question-and-AnswerSession
Operator
(Operator Instructions) Your first question comes from MattMcCall - BB&T Markets.
Matt McCall - BB&T Capital Markets
Starting with the guidance, just so I understand what our costsare, do you have handy the pro forma numbers that we're up against in Q4 of '06for both your revenue and your EBITDA guidance?
Richard Burger
Matt, we didn't acquire Copperfield until actually the beginningof the second quarter and I don't have that information here and I don'tbelieve we have published it anywhere. I do believe in the conference call thatwe made on the Copperfield acquisition, I gave you the trailing four quarters Ibelieve of both sales or -- at least, EBITDA.
Matt McCall - BB&T Capital Markets
I'll look back in my notes. I'm sure I have it.
Richard Burger
I just don't have itin front of me right now. I apologize.
Matt McCall - BB&T Capital Markets
That's fine. In theguidance, I know you talked about potentially closing the Woods acquisition inNovember. Does either your top line or EBITDA guidance include the benefit oneither line from the addition of Woods in November? I guess you would get one month of benefit?
Gary Yetman
We haven't includedany of the Woods numbers in our guidance.
Matt McCall - BB&T Capital Markets
Is there any seasonality in that business we should look ator is that top line number that you gave a pretty consistent pattern throughoutthe year for Woods?
Gary Yetman
Woods is going to have seasonality weighted towards thesecond half of the year.
Matt McCall - BB&T Capital Markets
From an EBITDA perspective, I know you quantified the EBITbenefit. I think I asked a similar question on the Woods call, I didn't thinkof it in terms of the Q4 benefit for looking at what the benefit couldpotentially be. I'm assuming that EBITDA could be a little bit higher than theEBIT that you forecast. I believe therewas some cost savings assumed in that EBIT number. How should we look at the potential EBITDAbenefit from that December period?
Richard Burger
Matt, we have not completed the fair valuation of assets,which would revolve around the allocation of purchase price. So with that said,we left it out of our guidance. As you would recognize, the requirements wouldbe that we would step up the inventory at fair value; at the end of thetransaction I would be pushing around a lot of numbers so that's why we went tothe market in a conference call with we had paid $45 million for about $41million of net working capital. I would not expect any normal EBITDA pickup inQ4 from a one-month ownership of Woods.
Matt McCall - BB&T Capital Markets
Gary, youmentioned that you are seeing some benefit from some of the efforts to improvepurchasing at Copperfield. Can you give us an idea, I think you had quantifiedthe potential for $10 million of savings. What have you recognized so far andare you expecting to see the balance of that $10 million in '08?
Gary Yetman
We are very, very pleased with the integration of the costsavings that we have been seeing out of Copperfield and are on track certainlyon an annualized basis to get at least $10 million in '08. I think the offsetto that, that candidly we hadn't planned on is the run-up of PVC since thefirst quarter of this year that has had a significant impact on that and if it continuesat the current pace, will erode most of those savings.
Richard Burger
We experienced about $750,000 worth of PVC resin costincrease just in Q3.
Gary Yetman
Over Q2.
Richard Burger
Over Q2.
Gary Yetman
So it is significant.
Matt McCall - BB&T Capital Markets
Gary, you'resaying that if we get the annualized benefit next year from these purchasinginitiatives that carrying the current PVC costs forward would offset themajority of that?
Gary Yetman
Right now, the increase from the first quarter of this yearon an annualized basis would be between $9 million and $10 million a year. Nowwe would hope to be able to pass some of that along, Matt, in the marketplacebut right now I don't think we can quantify how much of that we will be able topass through to the customer base. So the way we sit right now, if PVC resinsremain at their same costs or continue to escalate, then I would assume that alot of those cost savings that we are getting will be mitigated.
Matt McCall - BB&T Capital Markets
And that's despite the high levels in Q2 and Q3? You willstart to annualize some easier numbers next year, so do you have to assume thatthe price continues to rise to see continued hit? Because again, if we justcarry this number through you're going to at least in Q3 and Q4 next year, seesome easier comps, if you will.
Gary Yetman
Yes, that would be true.
Matt McCall - BB&T Capital Markets
So the impact was $750,000. I think there was a similarimpact in Q2. Is that correct?
Gary Yetman
Correct. In Q4, wewould expect if resins stay where they are today, probably $450,000 to $500,000increase on a quarter-over-quarter basis.
Matt McCall - BB&T Capital Markets
Sequential, so quarter to quarter from Q3?
Gary Yetman
Q3 to Q4.
Matt McCall - BB&T Capital Markets
I know copper has actually fallen. Can you quantify what thecopper impact was in your guidance for Q4? I know you cited that as a source ofpressure. What was the impact if copper would have held and was basically flatfrom last quarter, what was the impact in your EBITDA guidance?
Gary Yetman
We would expect ifcopper, if we look back historically, if copper stays in the $3.10 range froman average in the third quarter of about $3.47, we would expect margin compressionon the legacy Coleman side again depending on our ability to lag our pricedecreases, someplace in the $2 million range.
Matt McCall - BB&T Capital Markets
That's the assumption that's in the guidance right now?
Gary Yetman
Yes, sir, and thatwould be again a one quarter impact as we work through the inventory. The otherside of that, Matt, again, if you look back to last year as copper retreats, wehave significant positive cash flow which we would expect if copper does staydown in the $3.10 to $3.15 range, we would expect to generate significant cashover the next three to four months.
Matt McCall - BB&T Capital Markets
The final question I had, you mentioned inefficiencies inyour facilities caused by higher than expected turnover. Is something new goingon there? Is it at the legacy Coleman facility? Is that legacy Coleman? Hasanything changed or is that just a problem that you consistently face?
Gary Yetman
No, actually a coupleof facilities, one in particular that we've always had a very strong labor poolto draw from has shifted in the last year and we've been experiencing theselabor problems most of 2007. Part of it is it's just a tight labor market andwe probably have in one facility 40% of our employees have less than six monthsexperience. So getting them up and trained and efficient at running theequipment has been causing us some cost efficiency, both from a laborstandpoint as well as a material standpoint. We hope and we believe that we canhave most of that mitigated by the first quarter of 2008.
Operator
Your next question comes from Brett Levy - Jefferies.
Brett Levy - Jefferies
Can you talk about what the acquisition plans are from thispoint forward, or are you going to take a little bit of a breather here?
Gary Yetman
Our plan right now isto really focus on the operation side of our business in 2008. We think thatthere are some significant opportunities still to be gained from theCopperfield acquisition. As we announced with the consolidation of a number oftheir facilities, we see a lot of work ahead of us there this year. Certainlythe Woods acquisition will not be as complicated from an integrationstandpoint, but our focus will be on improving the operations of thosebusinesses and getting them integrated into Coleman Cable.
Brett Levy - Jefferies
So is it fairly safeto say that 2008 is unlikely to be the year of either acquisitions ordivestitures?
Gary Yetman
I think that wouldprobably be a good assumption. I never want to say never but it would have tobe something that was very, very compelling and we would have to feel verycomfortable with where we are with the two current integrations.
Brett Levy - Jefferies
The last question is with respect to the whole PVC and thattype of pricing, are you guys looking to go to something that's a little bitmore rapidly adjusting with your customers in terms of that or is that anonstarter?
Gary Yetman
I'm sorry, can youask that again?
Brett Levy - Jefferies
With respect to passing PVC prices on quickly, are youlooking to change the nature of your relationship with your customers or isthat a nonstarter?
Gary Yetman
I think part of theproblem that we are seeing today versus a year ago is that with the marketcontraction that we've seen in some of our areas it is more difficult to passalong price increases. So while I think over time those prices will be able tobe passed along into the marketplace, I just don't see it happening as quicklyas it has happened in the past.
I would look for the first half of the next year as really ameasure of how quickly they can be moved into the marketplace. Again, if thoseincreased resin prices and plastic prices hold in the marketplace.
Operator
Your next question comes from Tyson Bauer - Wealth Monitors.
Tyson Bauer - Wealth Monitors
The distribution channel that you operate through, can youcharacterize the inventory levels that are being held at those locations? Alsohow that affects the pricing environment now that copper has shown some weaknessin the last few weeks, are they more hesitant to take shipments and to holdinventory if there is a belief that copper is going to continue to be weaker?
Gary Yetman
With the volatilityof copper in the last couple years, we've seen buying patterns from ourcustomers change. And we see pushback in a lot of areas and as far as actuallyloading up with inventory. They will have a tendency to order more frequentlyon smaller orders.
The demand, which has a tendency to throw us from aforecasting standpoint, can be very, very strong one month as it was inOctober, and then seems to drop off. The only thing we can attribute part ofthat to is they are trying to play the copper market. When copper retreatsand/or goes up, we see those buying patterns change even more dramatically.
Tyson Bauer - Wealth Monitors
Are you telling usthat's what you've seen thus far in November?
Gary Yetman
We've seen fluctuating demands in early November, yes.
Tyson Bauer - Wealth Monitors
What would be the situation that you would like to seetranspire that would certainly help you? Is that just a function of getting atighter range on copper prices to get a more level ordering pattern?
Gary Yetman
Yes, I think if wewould get stability in copper at any given level, then over time the historicalorder patterns would return to more normalcy.
Operator
Your next question comes from Alex Rygiel – Friedman, Billings,Ramsey.
Alex Rygiel - Friedman, Billings, Ramsey
Great press release. I love the detail you provided in it,so thank you. A couple questions here. First on a pro forma basis, if you ownedCopperfield a year ago in the fourth quarter of last year, and you compare thatto the fourth quarter guidance, it would appear that your sales guidance isassuming flat to up 10% year over year. Generally, does that math sound aboutright?
Richard Burger
Yes.
Alex Rygiel - Friedman, Billings, Ramsey
Again, I haven'tfound the fourth quarter '06 Copperfield EBITDA, but backing into it and doingsome math, it would also appear that your EBITDA guidance year over year issort of flat to up, despite all of these headwinds that you continue tohighlight. Does that seem accurate as well?
Richard Burger
Yes, that information actually I don't have it in front ofme, Alex but you could grab the pressrelease on Woods, if you looked at EBITDA. Now, with that, I have to say, justso everybody is on the same page and it's footnoted there as well, because wenever provided detailed information from Copperfield '06 because they wereprivate and only did a review once, they were audited by PWC once a year, Wejust took 2006, their $35 million of EBITDA and divided it by 4.
Alex Rygiel - Friedman, Billings, Ramsey
Fair enough. That'sall in the math that I did.
Richard Burger
That's what everybodyelse is doing, so I just did it as well.
Alex Rygiel - Friedman, Billings, Ramsey
Great. So despite theheadwinds you're feeling, it would appear as if you are even more aggressive incutting out costs despite the fact that internally you're identifyingchallenges. It would appear that your plan for 2008 is very similar withregards to the manufacturing consolidation and so on. Correct?
Gary Yetman
Alex as I said earlier, I think that the integration with Copperfieldis going very well. We feel very good about the initiatives that are in placethat we've outlined for next year. With a stable economy, we feel very positiveabout moving into 2008, especially with the Woods transaction at the end ofthis month.
Alex Rygiel - Friedman, Billings, Ramsey
Could you expand a little bit upon the Woods transaction,particularly as it relates to expanded manufacturing and sourcing in Asia?
Gary Yetman
We believe that there's some opportunities on two fronts.One, to pick up a good bit of manufacturing of what Woods was sourcing from theoutside; we think we can bring that production into our facilities right away,which we believe will have a positive impact. When you combine their Asianpresence with ours and their buy combined with ours, we think we will gainsignificant leverage in the marketplace from a purchasing standpoint throughoutAsia.
Richard Burger
Just one other appendage I would put there is the WoodsCanada acquisition actually creates a great distribution platform for our otherchannels. I know that Gary hadmentioned it in our call here, but it would also give us the distribution andCanadian presence to go to other distribution channels, just not those thatWoods historically participated in.
Alex Rygiel - Friedman, Billings, Ramsey
That's excellent. Sothat's revenue synergies driving the top line, correct?
Richard Burger
That's correct.
Alex Rygiel - Friedman, Billings, Ramsey
One last question as it relates to the seasonality of yourbusiness. Would you characterize the fourth quarter in a normal period wherecopper doesn't change too much throughout the year, as the fourth quarter ofbeing the lowest or least profitable quarter? Or is it the first quarter?
Gary Yetman
Legacy Coleman, the fourth quarter would be more comparableto the third quarter but normally down. We would expect now with Copperfield,the fourth quarter to be probably the weaker quarter, especially withCopperfield because of the plant shutdowns over the holidays.
Alex Rygiel - Friedman, Billings, Ramsey
How does that fourth quarter compare to a normalized firstquarter and second quarter?
Richard Burger
Alex, usually if I were going to characterize the second andthird quarters are usually the strongest. First quarter depends on a lot ofdistribution channels. Over simplify, if you look at your irrigation channelsand those things that have some climate-related activity, if you get an earlyspring and thawing you'll get increased expansion earlier in Q1 in some ofthose markets. So if you were characterizing the four quarters, Q2 and Q3 arestrongest. Q4 I would still probably characterize as maybe weaker than Q1.
Operator
At this time we have no further questions. I would like toturn the program back to our speakers for any additional or closing comments.
Gary Yetman
Once again, we'd like to thank everybody for joining thecall. Thank you very much and that would conclude the call.
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