Coleman Cable Inc. Q1 2008 Earnings Call Transcript

Coleman Cable Inc. (CCIX)

Q1 2008 Earnings Call

May 9, 2008 11:00 am ET

Executives

Gary Yetman - President and Chief Executive Officer.

Richard Burger – Chief Financial Officer and Executive Vice President

Analysts

Arun Jayaram - Credit Suisse

Min Cho - FBR Capital Markets

Brett Levy - Jefferies

Presentation

Operator

Good day, everyone and welcome to the Coleman Cable first quarter 2008 earnings conference call. Today’s call is being recorded. At this time for opening remarks and introduction, I would like to turn the call over Coleman Cable’s Chief Financial Officer, Richard Burger.

Richard Burger

Thank you, Amy, and thank you for joining Coleman Cable’s first quarter 2008 conference call. Joining me today is Gary Yetman, Coleman Cable’s President and Chief Executive Officer.

As we’ve detailed on slide 2, our comments today may include forward-looking statements that make assumptions about our operations, business, economic, and political environment.

These forward-looking statements are subject to risks and uncertainties that are detailed in the Risk Factors section of our Annual Report, Form 10-K for the fiscal year ended December 31, 2007.

Gary will begin our formal remarks with a review of our business highlights. I will then review the first quarter financials and then we will take your questions.

I’ll now turn the call over to Gary.

Gary Yetman

Thanks, Rich. If you’ll turn to slide 3, we’re pleased with our first quarter 2008 results, which included revenues of $252 million, up 131% versus last year; EBITDA of $20 million, up 128% from last year; and EPS of $0.19, which is up 12% versus last year.

Adjusting for the duplicate facility cost, which we highlight in yesterday’s press release, our EBITDA would have been $21.2 million and our earnings per share would have been $0.24.

If you’ll turn to slide 4, if you had a chance to look at our Q this morning, you may have noticed that we changed our segment reporting structure to better reflect how management views the business. Also the new structure reflects how we have aligned our organization, given the acquisitions we made in 2007.

We will now report in two segments, which include distribution and OEM. The distribution segment serves our customers in distribution businesses who are resellers of our products.

Within this segment, we sell to similar end user customers, including construction, industrial, MRO, and consumers. Our OEM segment serves those direct user customers who generally purchase tailored products from us, which are used as inputs into their products.

If you’ll turn to slide 5, in our distribution segment revenues increased 61% to $164.6 million, while segment operating income increased 86% to $16.4 million. Segment operating margin improved to 9.9% in the first quarter of 2008 from 8.6% in last year’s first quarter.

The improvement in segment operating income margin is a result of the increased sales due to the 2007 acquisitions and to greater expense leverage relative to SG&A expenses.

Within this segment, we are experiencing stable market conditions. Volatile copper pricing coupled with inflationary prices due primarily to higher PVC costs and fuel surcharges are being offset by the synergies we gained from the 2007 acquisitions.

The duplicate expenses I alluded to earlier are beginning to be eliminated in April, which we expect will benefit the company in subsequent quarters.

If you’ll turn to slide 6, in our OEM segment you’ll notice large increases in both revenues and operating income, which improved to $87.9 million and $2.7 million respectively, which are due to the 2007 acquisitions.

Segment operating income declined to 3.1% in the first quarter from 3.8% in the same period last year. This decrease reflects the shift in sales mix due to the 2007 acquisitions, as we now have a significant portion of our business where our products are priced to earn a $6 margin, which causes margin to compress in higher copper price environments.

Within the OEM segment, we continue to experience contraction from our automotive and appliance customer bases. These customers continue to face difficult market conditions.

Inflationary pressures, primarily due to higher PVC costs and fuel charges, continue to be a challenge. However, these are expected to be somewhat offset as duplicate costs related to warehouse and manufacturing facilities are eliminated.

In addition, we believe we will obtain further benefits in the back half of the year from improved productivity and further rationalization of our customer base.

If you’ll turn to slide 7 where I’ll review our second quarter 2008 guidance. Taking into consideration the current market conditions, we expect our second quarter revenues to be between $245 million and $255 million; our EBITDA to be in a range of $18 to $21 million, and our EPS to be in a range of $0.15 to $0.24 a share.

Based on stable market conditions and the benefit from the synergies of our acquisitions and cost-saving initiatives, we continue to expect an uptick in earnings in the second half of the year.

With that, I’d like to turn the call over to Rich, who will provide additional information on our fourth quarter and full-year results.

Richard Burger

Thank you, Gary. If you’ll please turn to slide 8, where I’ll review the financial results for the first quarter. As you can see from this slide, with the acquisition of Copperfield and more recently Woods, our new platform has produced consistent results for the past four quarters, specifically producing first quarter 2008 revenues of $ 252.5 million; adjusted EBITDA of $21.2 million, and adjusted earnings per share of $0.24. These adjustments are related to the duplicate costs that Gary mentioned earlier.

If you’ll please turn to slide 9, where I will review the gross margin vis-à-vis COMEX and our selling, engineering, general and administrative expenses as a percentage of sales.

As you can see from our acquisitions, we’ve been able to expand our product offering in end markets, which have contributed to our ability to deliver consistent gross margins despite a volatile copper market.

Selling, engineering, general and administrative expenses as a percentage of sales remained unchanged from the previous quarter and were down significantly from the same quarter last year.

These decreases reflect the impact of increased expense leverage in the company’s fixed costs were spread over higher net sales base due to the 2007 acquisitions and increased copper prices.

Please turn to slide 10, where I give you an overview of a few key liquidity metrics. As evidenced by these three charts, Coleman continues to manage its balance sheet. With the Woods acquisition on November 30, we experienced an increase in our net working capital.

This increase is primarily driven by increased inventories due to heightened raw material cost, primarily copper. As we’ve mentioned in previous calls, we continue to focus on inventory and working capital initiatives.

Please turn to slide 11 for a discussion of Coleman’s 2008 capital expenditures and our current capital structure. As you can see, for the first quarter 2008, capital expenditures increased to $4.3 million from $400,000 a year ago, primarily as a result of the manufacturing and warehouse consolidation. In total, we expect to incur approximately $8 to $12 million in capital expenditures in 2008.

From a capital structure perspective, approximately two-thirds of Coleman’s indebtedness is fixed at nine and seven-eights with the remaining one-third floating at LIBOR and 1.25. Both the senior notes and the revolving credit facility mature in 2012. As of March 31, 2008, we had $59.2 million in excess availability on our revolving credit facility.

Please turn to slide 11 for a discussion of Coleman’s various leverage metrics. The company’s total debt to EBITDA improved in the fourth quarter to 4.4 times, while our total debt to capitalization decreased to 78.6.

What’s most significant about the first quarter metric is that we de-leveraged the balance sheet from the fourth quarter, which included an incremental indebtedness from the Woods acquisition as of November 30.

As we have stated in the past, while we are not uncomfortable operating at the current leverage ratio, notwithstanding, we are focused and expect to continue to reduce leverage throughout 2008.

Finally, as we did in last quarter, on our website we have posted information regarding the pounds of our products and copper sold as compared to other periods. Although management does not use this information as a leading metric in assessing its business, we are providing this information to investors.

With that, Gary and I would like to open up the line for questions.

Question-and-Answer Session

Operator

We’ll go first to Brett Levy - Jefferies.

Brett Levy - Jefferies

Relating to some of the one-time stuff that’s related to cost pass-throughs or the delay in them. As you are looking currently, does it look as if third quarter could be better than second quarter? And talk about synergies as well?

Richard Burger

We expect a lot of the duplicate costs that began rolling off in the second quarter and then continue to roll off in the third and the fourth. In addition to that, our retail business really is the second half of the year, so that will really begin to kick in in the third and fourth quarter.

Brett Levy - Jefferies

And can you quantify the duplicate cost; can you give me a rough timeline? I am not asking you to build the model, but just for this particular metric on a duplicate cost. Can you say how big they are now and give a rough timeline as to when they roll off?

Richard Burger

Yes, Brett. If you look at the press release, we gave some non-GAAP information and so in the first quarter the duplicate cost we estimate to be about $1.2 million.

Brett Levy - Jefferies

And then the timetable?

Richard Burger

I would plan to see a reasonably significant reduction in Q2, and then roll off in Q3, and probably towards the end of the year I would expect it to be virtually gone. Some small going into Q1 of 2009, but at this current period of time we’re not expecting that.

Brett Levy - Jefferies

Got it. And then you previously talked about wanting to take your bank debt level down by $100 million. Is that still a priority and what was the starting point on that timetable? Just reiterate what the goals are with respect to bank debt.

Richard Burger

From a bank debt respective, Brett, I’m not sure where the $100 million came from. We currently have about $130 million on our bank debt, which is the revolving line of credit. When we did the Copperfield acquisition, which was in April 1 of 2007, we used $100 million of that $130 that I’m borrowing right now to secure the acquisition of Copperfield.

So, we went out to the marketplace, increased our senior notes by $120 million, we borrowed roughly $100 million on the revolver and so in that context my revolver was a big contributor in the acquisition financing.

We used 100% of our free cash flow, actually daily, to reduce our revolver and so we’re very focused on that. As you can see from the financials, working capital is very tied primarily to the underlying copper. PVC and resins as well, but certainly copper.

Brett Levy - Jefferies

The $100 million was actually a direct quote from you from last quarter’s conference call. But I’ll go check the transcript on that. My thought is, the idea that you will stay out of the M&A markets for a little while, focus on bank debt reduction for a couple of years. Is that still conceptually the theme we should be looking at here?

Richard Burger

Yes. We would use our free cash flow to reduce our indebtedness to position us to go do something else, whether that would be to do multiple things, an additional equity raise, whatever it would take to, if you will, position us to do acquisition.

Brett Levy - Jefferies

But you’re going to stay out of the M&A market for a little while?

Gary Yetman

Yes. We still have a lot of work to do with the integration of these businesses. Right now, we don’t see anything on the horizon that would involve an acquisition issue.

Brett Levy - Jefferies

Okay. Thanks very much. I’ll get back in queue.

Operator

We’ll go next to Min Cho - FBR Capital Markets.

Min Cho - FBR Capital Markets

Just a couple of quick questions for you. Can you tell me how much of the gross margin did increase on a year-over-year basis? What’s from the Copperfield pass-through versus pricing pressure? It looks like the duplicative costs are maybe 50 basis points of the decline?

Richard Burger

Min, a large portion of the OEM, which would have been from the Copperfield acquisition; margin erosion is highly correlated to the copper getting to $4 a pound, and copper in most of that market is an absolute pass-through. What has probably played another significant role certainly last year and this year as well in terms of margin is PVC and resins, which are not pass-through.

Min Cho - FBR Capital Markets

Okay.

Richard Burger

And so unless we get greater efficiencies, if you will, or better yields, that pressure is put on us to try to get other costs out.

Min Cho - FBR Capital Markets

Okay. On the copper side, though, in your distribution segment, where it’s less of a pass-through when you are trying to raise your prices to get the copper cost back. Are you at parity there right now? Or are you a little behind, given how quickly the copper prices have gone up?

Gary Yetman

I think where we have the ability to pass the prices on in the marketplace, I think we’re pretty much at the current level. In the recent week or so we’ve just seen significant volatility up to $4 and back to $3.75. So, we feel that with most of our businesses at the current market level.

Min Cho - FBR Capital Markets

Okay. Within any of your segments and mostly on your distribution side, did you see any organic volume growth?

Gary Yetman

No.

Min Cho - FBR Capital Markets

And then one final question regarding your expansion opportunities in Canada with your Woods acquisition. Can you talk about what are you doing there; if you are doing anything or what the timing of that type of expansion would be?

Gary Yetman

Right now we’re really very focused on integrating our systems in Canada, which will take place over the next couple of months. After that we will begin to look to expand into some of the other markets, but I would really look for that to be a fourth quarter/first quarter of 2009.

Min Cho - FBR Capital Markets

Okay. And then you mentioned on the OEM side that you expect the second half of 2008 to be a little better given further rationalization of the customer base. Can you provide some details on that?

Gary Yetman

With a number of those customers we don’t have the ability to pass on some of the compound increases. And we are evaluating a number of those customers, if we can’t get price increases there to make them more profitable, then we will probably begin to cull some of that business out.

Min Cho - FBR Capital Markets

Okay. And then one clarification, so the guidance that you’re providing for EPS and EBITDA for the second quarter, those are not adjusted numbers for duplicative costs, right?

Gary Yetman

Good catch, Min, yes.

Min Cho - FBR Capital Markets

Okay.

Gary Yetman

That does not. They are straight up what we would historically call straight EBITDA and GAAP EPS.

Min Cho - FBR Capital Markets

All right, great. Thank you.

Operator

We’ll go next to Arun Jayaram - Credit Suisse.

Arun Jayaram - Credit Suisse

Just to start off on the revenue side. I don’t know if you’ve disclosed this in the past, but just on a pro forma basis, roughly how much of your sales growth this quarter are acquisitions and how much was the impact of higher copper prices?

Richard Burger

From a sales perspective, in the Q you’ll find from a sales perspective we do provide you with some pro forma information. Regarding sales, but relative to copper, no, we don’t provide that, but you can go look on the website on the supplemental slide and certainly get pounds, if you would like. So, you have copper pounds and totals pounds of product shift over respective quarters.

Arun Jayaram - Credit Suisse

Okay, understood. And just a follow-up on a previous question, considering that copper prices have moved up so sharply, are you anticipating any increase in pricing on your legacy Coleman products at all, any time over the coming 3 months or so?

Gary Yetman

The legacy Coleman business pricing will move with copper. As copper goes up, we will increase our prices accordingly. As copper continues to contract, then eventually we’ll have to lower our prices to those market levels.

Arun Jayaram - Credit Suisse

Just to clarify, for the second quarter, your price levels you see are sufficient at current copper prices?

Gary Yetman

Yes.

Arun Jayaram - Credit Suisse

Okay, perfect. And the last question, just a clarification also on, I think it was Brett’s previous question. As far as using free cash flow to pay down debt, do you really want to reduce debt at least over the next year or so just because of the cycle or are you more comfortable operating in that 2 to 2.5 times range?

And so the question is, are you comfortable taking leverage back up to the 4s or 5 times if you want make an acquisition, say, in the early part of 2009?

Richard Burger

I’ll give you some historical context. It is only post the equity offering that we have operated in a leverage environment that was at the 2, 1.8 to 2. So, we have said that the public equity market relative to comparables are putting pressure on us to reduce our leverage, but historically we have operated in the 4 and 5.

It’s back in 2000, 2001, we were at 6. So, from an historical perspective at 4, we’re not uncomfortable. I think our reaction to reducing leverage is driven by equity markets. The other half of that is, and to give us the flexibility if at some time in the future, we wanted to do an acquisition.

Arun Jayaram - Credit Suisse

Also, you implied from your answer to the previous question that if you wanted do an acquisition that you would look at least equally at equity markets for financing as opposed to debt markets. Is that accurate?

Richard Burger

I think that’s fair, yes.

Operator

It appears we have no further no questions in the queue. At this time, I’d like to turn it back over to the presenters for any additional or closing remarks.

Richard Burger

Once again we’d like to thank every one for joining Coleman Cable first quarter conference call, and have a good day. Thank you very much, Amy.

Operator

That does conclude today’s conference. We thank you for your participation and you may disconnect at this time.

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