Coleman Cable, Inc. Q2 2008 Earnings Call Transcript

Executives

Richard N. Burger – Chief Financial Officer

Gary G. Yetman - President and Chief Executive Officer.

Analysts

Brett Levy – Jeffries & Co.

Alex Rygiel – Friedman, Billings, Ramsey & Co.

Matthew McCall - BB&T Capital Markets

Keith Johnson – Morgan Keegan

Coleman Cable, Inc. (CCIX) Q2 2008 Earnings Call August 8, 2008 11:00 AM ET

Operator

Welcome to the Coleman Cable second quarter 2008 earnings conference call. (Operator Instructions) At this time for opening remarks and introductions, I would like to turn the call over Coleman Cable’s Chief Financial Officer, Richard Burger.

Richard N. Burger

Joining me today is Gary Yetman, Coleman Cable’s President and Chief Executive Officer.

Our comments today may include forward-looking statements that make assumptions about our operations, business, economic, and political environment, which are outlined on Slide 2. 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. Then I will review the second quarter financials and we will take your questions.

I’ll now turn the call over to Gary.

Gary G. Yetman

As discussed in our press release yesterday, and as you can see from Slide 3 of this morning’s presentation, our second quarter was a challenging one. We continue to face the combined pressures of an uncertain economic environment, slower demand, and inflationary cost pressures, factors we believe will be in existence for the foreseeable future.

In the midst of this environment we continue to deliver strong sales increases. For the quarter higher copper prices and to a lesser degree, increased sales volumes combined to drive our sales up 8% over the same quarter of 2007. Our overall volumes continue to be aided by our prior year acquisitions with the expansion of our product and customer base helping us to mitigate a swelling demand across most of our channels.

However, despite the increase in sales, we ended the quarter with adjusted EBITDA of $18.8 million and $0.16 of adjusted earnings per share, both of which compare unfavorably with our results for the same quarter last year and with our performance for the first quarter of 2008.

EC clients primarily reflect favorable performance in our distribution segment, offset by poor performance in our OEM segment, as well as increases in our general and administrative expenses. We were pleased with the overall performance of our distribution segment in the face of the turned economic and competitive environment.

As we have noted on Slide 4, this segment, which serves our customers in the distribution businesses, who are resellers of our product, delivered a nearly 8% increase in sales volume, again, with the help of prior year acquisitions, was able to produce continued margin stability in spite of inflationary cost pressures. We attribute this performance in part to the breadth of our customers served by this segment.

In addition to recording nearly $176.0 million in segment sales during the quarter, we have had a number of other wins in this segment, including the realization of cost savings and synergies from our acquisitions, the successful integration of the recently acquired woods resale business, and the timely implementation of pricing adjustments for our products, helped to defray the impact of rising costs.

We remain cautiously optimistic about the future prospects for this segment of our business and we believe that the business is well positioned to benefit from any turn around in market conditions.

In contrast, however, our OEM segment performed below our internal expectations for the quarter. As set forth on Slide 5, our operating profit within the OEM segment declined $2.0 million during the quarter as compared to the same quarter last year. This decline was mainly due to an erosion of gross profit within the business. In addition to softened demand, which brunt resulted in a 4.8% decline in our OEM volume for the quarter, we believe the overall general market uncertainty, coupled with historical pricing practices for these products and customers, have resulted in margin compression within the OEM segment.

We believe these external factors are likely to continue during the second half of 2008 and our second quarter results reflect the profit impact of our inability to secure non-copper-related price increases. Our challenge within this segment in the coming quarters is to work with our customers, particularly our larger automotive and appliance accounts, on securing acceptable price levels and arrangements that fairly reflect the cost inherent in producing our products.

This work is well under way. While we hope to limit the impact of such pricing changes on our overall revenues, we recognize that we may loose future OEM sales or customers as we adjust our pricing and rationalize our customer base. With the current realignment of our El Paso and Indiana facilities, we are also well positioned to right size our production capabilities and support functions that need it, in response to any significant changes in sales demand within this segment.

This serves as an appropriate segue into the topic of integration of restructuring. As you know, we remain focused on the integration of some pretty significant acquisitions. The most recent activities and accomplishments associated with these efforts are summarized on Slide 6. This slide in no way captures all the activities and people involved in making these integrations happen. But it gives one a sense of what has been achieved to date.

We have significant progress on our previously announced plan to consolidate three of our distribution facilities into a single facility in our new Midwest distribution center in Pleasant Prairie, Wisconsin. We opened that facility in April and closed both the Gurney, Illinois, and Indianapolis, Indiana, facilities during the most recent quarter. Furthermore, we expect to complete the consolidation of our Waukegan, Illinois, distribution activity into Pleasant Prairie by the end of 2008.

We continue the execution of our integration strategy for a number of manufacturing and distribution facilities, which were required as a part of the Copperfield acquisition. As a reminder, this plan included the consolidation and closure of Copperfield manufacturing and distribution facilities located in Avilla, Indiana, Nogales, Arizona, and El Paso, Texas, into operations at one modern facility in El Paso.

During the second quarter we ceased operations at our facility in Avilla, Nogales, and at our Esther Lama warehouse in El Paso with the operations of these facilities moving to our Breman and El Paso locations.

Additionally, we anticipate ceasing production activity at our Zaragosa facility, also in El Paso, by the end of the third quarter and expect closing this facility altogether by the end of the year.

In connection with these activities, we recorded restructuring charges of approximately $3.0 million in the first half of 2008, primarily in the form of equipment relocation costs. Including these charges we expect to incur total $4.0 million-$6.0 million in restructuring costs for these integration activities in 2008 and we remain on target to realize approximately $3.0 million in annual cost savings in 2009 and subsequent years.

With all this in mind, on Slide 7 we provided our financial expectations for the upcoming quarter and we have noted we expect the distribution segment to continue performing well and believe our acquisitions will continue to provide benefits in the coming quarter. Our OEM segment depends on the outcome of our pricing and customer rationalization efforts.

Therefore, taking into consideration these facts and the current market conditions, we expect third quarter sales to be between $265.0 million-$275.0 million, adjusted EBITDA to be in a range of $18.0 million-$22.0 million, and adjusted EPS to be in a range of $0.12-$0.26 per share.

Looking at the second half of 2008, we continue to believe that the projected cost savings from the integration of our 2007 acquisitions may help somewhat mitigate the negative impact of the current economic conditions and inflationary pressures.

With that I would like to turn the call over to Rich who will provide additional information on our second quarter and first half results.

Richard N. Burger

Please turn to Slide 8, where I will review the financial results for the second quarter. As Gary mentioned, while Coleman sales grew 8% during the second quarter of 2008 versus the same period last year, adjusted EBITDA and adjusted EPS experienced declines as we faced not only a difficult economic environment but also rising material and transportation costs, especially within our OEM segment.

As you can see from Slide 9, we have listed both gross margin in relationship to COMAX and our selling, engineering, and general administrative expenses as a percentage of sales. As Gary spoke earlier, the decline in the OEM gross profit rate negatively impacted our gross profit rate, which resulted in a decline in the 2008 second quarter versus the same period last year.

Selling, engineering, general and administrative expenses as a percentage of sales declined slightly from the previous quarter, however increased by $2.5 million in the current quarter versus the same period last year. The increase was primarily comprised of approximately $1.0 million in increased total payroll-related expenses and approximately $1.5 million increase in non-payroll selling and general administrative expenses, largely as a function of the increased head counts stemming from the 2007 acquisition.

On Slide 10 you can see an overview of a few key liquidity metrics. As evidenced by these three charts, we continue to manage our balance sheet as all of these metrics show improvement in the current quarter versus the first quarter of 2008. As we mentioned in previous calls, we continue to focus on inventory and working capital initiatives and are pleased with the current quarter’s improvement in these metrics.

Our 2008 capital expenditures and our quarter-end capital structure are outlined on Slide 11. As you can see from the second quarter of 2008, capital expenditures increased to $9.0 million from $3.0 million last year, primarily as a result of our manufacturing consolidations in El Paso, Texas, and our warehouse consolidation in Pleasant Prairie, Wisconsin. In total, we expect to incur between approximately $8.0 million-$12.0 million in capital expenditures for 2008.

As of June 30, 2008, we had $62.8 million in excess availability on our credit facility. And by the end of July our availability under the same credit facility had expanded to approximately $75.0 million. From a capital structure perspective, approximately 2/3 of our indebtedness is fixed at 9.875% with the remaining 1/3 floating at LIBOR plus 125 basis points. Both the senior notes and the revolving credit facility mature in 2012.

Please turn to Slide 12. During the second quarter we managed to decrease our total debt by nearly $11.0 million as a result of positive operating cash flow. The total debt to adjusted EBITDA remained unchanged at 4.4x versus the first quarter, while this metric improved from the second quarter of 2007. Additionally, as you can see, our total debt to capitalization continued to decline and stands at 77.8% at the end of the second quarter.

What is most significant about the second quarter metrics is that we de-leveraged the balance sheet from the 2007 fourth quarter, which included the incremental indebtedness from the Woods acquisition on November 30.

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

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

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Brett Levy with Jeffries & Co.

Brett Levy – Jeffries & Co.

Can you quantify the benefit of all the plant closings you discussed and talk about when those benefits will start to roll in.

Richard N. Burger

As Gary mentioned, and we’ve mentioned previously, we expect the annualized cost savings from these consolidations to be about $3.0 million a year starting in 2009 and forward. A large portion of those cost reductions were the consolidation of a number of plants into one specific plant, so transportation costs between plants, particularly Avila, Indiana, to El Paso, Texas, was a large portion of the rationalization, if you will. But fundamentally it was to house everything in one plant.

Gary G. Yetman

Until we get the El Paso facility fully integrated, which we would expect to have done by the fourth quarter, we really won’t begin to see the real benefits, especially on the freight side of the business. In fact, we may actually incur additional freight in the third and fourth quarter as we close down the facilities in El Paso.

Brett Levy – Jeffries & Co.

Based on the current economic environment, does it seem like you’re done with the cost-cutting measures or is this sort of normal blocking and tackling from this point, but no major plant closures?

Gary G. Yetman

Right now we don’t see any major plant closures on the horizon. We do see some opportunities over the course of the next 12 months that takes additional cost out of the business at certain locations.

Brett Levy – Jeffries & Co.

In terms of what you are thinking about on the M&A front, at this point are you actively out there looking for additional targets? What is your comfort zone in terms of leverage pro forma for a prospective acquisition?

Gary G. Yetman

That’s a multiple-part question. I guess from an acquisition front, we are certainly well aware, and I’ll put a historical perspective on it. We have been higher levered than 4.4x but when we were a private company and with debt only. But since the public equity we have been very conscious of where we are in relationship to leverage as it affects the equity side of our business. So I think in that regard we would be cautious about incurring additional indebtedness or in leveraging the business up, unless, and I can’t see it now, in this market place, and the credit markets, us being able to do that.

Brett Levy – Jeffries & Co.

And I wanted to get a sense as to what types of companies you are looking at, would it be upstream, downstream, a competitor, etc. in terms of what types of acquisitions you are looking at.

Gary G. Yetman

When we’ve looked at opportunities they’ve really been opportunities that either will expand our product offering and/or expand our customer base. Those are the two key areas that we look at that we can take through our existing manufacturing and distribution platform. And they can be in the form of a very small bolt-on product line that could be a few million dollars. Obviously Copperfield was much larger. And I wouldn’t anticipate doing anything of that size in the near future.

I would say that we did the Woods acquisition, to put it in perspective where we did it with debt. We looked at that, in that particular case, we paid about 3x earnings and from our perspective were able to close what would have been the back offices of Woods US.

Brett Levy – Jeffries & Co.

Is the strategy to de-lever at this point?

Gary G. Yetman

I think the strategy right now is for us to be very focused on the balance sheet, to continue to de-lever, complete the integration, in terms of the warehouse here in Waukegan, which we will close, integrate that third warehouse into Pleasant Prairie between now and the end of the year, and complete the vast majority of the El Paso integrations by the end of the year and to work on de-levering, yes. Those will be the primary objectives for the balance of 2008.

Operator

Your next question comes from Alex Rygiel with FBR.

Alex Rygiel – Friedman, Billings, Ramsey & Co.

As it relates to the pricing environment out there right now, have you recently implemented any price increases and if so, what is your comfort level of those price increases sticking?

Gary G. Yetman

We’ve had fairly good success pushing through price increases on the distribution segment of our business. Obviously right now copper has been in a free-fall over the last week or so, so we will have to wait and see what type of downward pressure we get over the course of the next couple of weeks there. But overall I feel pretty good about our ability to move pricing within that segment.

The OEM segment we’ve success with a large number of the OEMs in moving price. We have not had a lot of success with some of the appliance and automotive customers thus far but we are in the process of initiating price increases across that customer base as we speak.

Alex Rygiel – Friedman, Billings, Ramsey & Co.

Are you seeing any difference in your ability to push price through either the core Coleman business or through the Copperfield acquisition or the Woods acquisition? Is one more successful than the other?

Gary G. Yetman

Through the distribution channel I would say it is about the same. I think the difference is, it just takes a little bit more time to get prices implemented because in some cases competition will drag their feet a little bit longer trying to pick up some additional volume. But overall I think we’ve been very successful in being able to get the price increases through in that distribution segment.

Alex Rygiel – Friedman, Billings, Ramsey & Co.

As it relates to the acquisitions, can you update us on whether or not they are mildly successful, wildly successful?

Gary G. Yetman

Certainly we are very, very pleased with the Woods acquisition. That has been fully integrated. The warehouse and their corporate office has been closed and moved into our facilities up here in Waukegan and Pleasant Prairie area.

From a customer standpoint that is going very well. We have been able to accomplish the majority of the goals that we set out and as far as establishing new pricing parameters with a number of those customers. So we feel very, very good where we are right now with that business. I think the question there will be the consumer demand in the third and fourth quarter. We expect to have a strong showing there. I think the question will be just how strong it will be if the consumer continues to reduce spending, or discretionary spending. But overall we feel very good about that.

The synergies that we had planned to get out of Copperfield we have certainly gotten and then some. We feel very good about that. That market has certainly contracted. A lot of the OEM appliance, automotive customer base, demand has obviously weakened so we’re seeing less volume on that side of the business. But overall we still feel very good about where we are with the acquisition.

Once we get El Paso taken care of and fully integrated, I really think we will start to see the full results of the Copperfield.

Alex Rygiel – Friedman, Billings, Ramsey & Co.

And Rich, on the SG&A side, it seemed to step up quite a bit on a sequential basis, so if you could address that. And then maybe give us some directional guidance over the next couple of quarters as to where that line item should fall out.

Richard N. Burger

As a relative percent of sales it’s really been in about that 5% range. I would say in Q1 we did about $12.8 million in SEGA and then it jumped to about 13.5%. So in terms of absolute dollars it’s in that $13.0 million range. The vast majority of that, we have had increased in that regard in terms of the head counts, primarily from the Woods acquisition, although we acquired a company that about 43 employees, we actually geared up about 11 here. I think we transferred that. We took about 20 some employees out of the equation.

So I think that, if you will, we’re kind of stable in that area. I think we will continue to look for selling and administrative expense reductions, but I think we’re flat with where we’re going to be. Now the expenses are generally in the people-related areas and then the professional-related areas. And some of the professional-related is a function of being a public company.

Operator

Your next question comes from Matt McCall with BB&T Capital Markets.