Encore Wire Corp (WIRE) 2007 Q4 法說會逐字稿

Welcome to the Encore Wire Fourth Quarter Earnings Conference Call. (Operator Instructions) At this time I would like to turn the call over to Daniel Jones, President of Encore Wire, so that we may begin the call. Go ahead, Daniel.

Thank you folks for joining us this morning and I am Daniel Jones, the President and CEO of Encore Wire. With me this morning is Frank Bilban, our CFO.

The past five quarters have proved to be very challenging for the building wire industry. In the fourth quarter of 2007 these conditions adversely impacted Encore resulting in only the second quarterly loss this Company has reported since 1995. Certain competitors continue to respond to the slowdown in residential construction by cutting wire prices in an attempt to maintain budgeted production schedules compressing margins below our expectations at this level of COMEX prices.

Our unit volume shipped in the full year 2007 held up fairly well despite the slowdown in residential construction. However, we sacrificed unit volume repeatedly in 2007 as we attempted to avoid low prices to obtain volume. This was particularly true in October of 2007, which began with strong COMEX copper prices of $3.75 per pound, below unit sales volume in October, which is historically one of the stronger months of the year due to our efforts to introduce and support price increases. We purchased quantities of copper in October that exceeded our sales volume at the October average COMEX price of $3.59 a pound. This turned out to be problematic as the industry chose not to match our attempted price increases and copper prices fell precipitously in November and December with COMEX average prices of $3.13 and $3.02 respectively. With this volatility in copper we were forced to reluctantly match our competitor's pricing in November and December selling the remaining high priced October copper in the next months.

While we're disappointed with our fourth quarter loss, it must be viewed in the context of the current industry environment. Our staff has done a remarkable job to enable us to perform as well as we have exemplified by our higher order fill rates, innovative products, and low cost structure. We have an excellent group of independent representatives selling our products through which we have developed lasting customer relationships. All of these attributes contributed to the many positive achievements we had in 2007. With our exceptionally strong balance sheet we had the capability to approach the future confidently, while our short-term focus is one of riding out the storm. Our low cost structure and strong balance sheet have enabled us to withstand tough periods in the past. We believe we will emerge stronger when market conditions improve. We'd like to thank our employees and associates for their tremendous efforts and our shareholders for their continued support in the challenging times.

Frank Bilban, our CFO, will now discuss our financial results. Frank?

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 Liss or me at 800 962-9473 and we will get you a copy.

Before we review the financials let me indicate that in our initial comments and in the Q and A 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 advise you that all such statement 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.

Now for the financial results. Net sales for the year ended December 31, 2007 were $1.185 billion compared to $1.249 billion during 2006. Lower prices for building wire sold in 2007 accounted for the decrease in net sales dollars versus 2006. Unit volume in 2007 increased 1% over 2006. Net income for the year ended December 31, 2007 was $30.8 million versus $115.1 million in 2006. Fully diluted net earnings per common share were $1.30 for the year ended December, 2007 versus $4.86 in 2006.

Net sales for the fourth quarter of the year ended December 31, 2007 were $281.9 million compared to $262.3 million during the fourth quarter of 2006. Unit sales in the fourth quarter of 2007 increased 10% versus the fourth quarter of 2006. However, intense competitive pricing pressure compressed gross margins to the lowest levels in the history of the Company. Net income for the fourth quarter of 2007 was a loss of $1.1 million versus a $6.2 million profit in the fourth quarter of 2006. Fully diluted net earnings per common share were a loss of $0.05 in the fourth quarter of 2007 versus a profit of $0.26 in the fourth quarter of 2006.

On a sequential quarter comparison net sales for the fourth quarter of 2007 were $281.9 million versus $308.5 million during the third quarter of 2007. Net income for the fourth quarter of 2007 was a loss of $1.1 million versus the profit of $5.8 million we enjoyed in the third quarter of 2007. Fully diluted net income per common share was a loss of $0.05 in the fourth quarter of '07 versus a profit of $0.24 in the third quarter of '07.

The only long-term debt we have as of December 31st, 2007 is $100 million in long-term notes due in 2011 with our $200 million revolving line of credit paid down to zero. In addition, we have $78.9 million in cash as of December 31st, 2007. Our balance sheet has a conservative 28.2% debt to equity ratio. If you deduct cash balance from our debt resulting in a net debt of $21.1 million our net debt to equity ratio is 5.9%. Due to the lower debt levels in 2007 we were able to cut our net interest cost by over $3.6 million versus 2006, a decrease of 47%. Our capital expenditures for 2007 totaled $28.5 million.

Pursuant to the stock repurchase plan we announced in November of '07, we repurchased 177,300 shares of our stock through January. 124,400 of these shares were repurchased in the fourth quarter of 2007. We also declared our fifth consecutive quarterly cash dividend during the fourth quarter of 2007. We would like everyone to know that this conference call will be available for replay after the conclusion of this session. If you wish to hear the taped replay dial 866 439-4729 and enter the conference reference number 351380 and the # sign.

I will now turn the floor back over to Daniel Jones, our President and Chief Executive Officer. Daniel?

Thank you. As Frank highlighted, Encore performed about as well as could be expected in the past quarter and we believe we are well positioned going forward. Miko, we would like to start the question and answer portion of the call.

(Operator Instructions) Our first question comes from [Steven Nissen] from Mind.

Dan, obviously it's been a challenging quarter, not necessarily your guy's fault. No one could have predicted what's going to go on in the construction industry but definitely keep up the good work you guys have done.

Thank you very much, appreciate it.

A couple of things, can you talk about the operational and proven initiatives? Obviously with the challenging economy we're facing what are going to be the operational improvement initiatives you will want to implement in 2008 or you have going on currently revolved around LEAN, TPN, Six Sigma to overall improve throughput throughout your plants and what benefits would you like to see them impact the business?

Well, we certainly on a daily basis discuss and look into and probe the cost cutting measures in the plant. We have one that's somewhat significant and several others that we don't necessarily discuss publicly and openly. We don't want to expose all of our secrets but we have those in place but again, I do want to stress, Steve, this is not a function of a cost issue as much as it is a function of the price for the product in the marketplace and I do want to stress that. The cost here if you look at the margins that were there and if you took our SG&A, any of the structure that you want to look at on the balance sheet or the income statement, it's about as clean as you can get it. The real issue is, is if we were to come up with a quarter of a point or an eighth of a point savings on the production floor, it's priced in the way we price our product in the market can be given away very quickly at a multiple. But having said that, again, we do certainly have some things in front of us that we're looking at and going forward with but it's a pricing issue. It's not a cost issue.

Okay so at some of your plants are you concerned with the amount of throughput you're producing in terms of your capacity utilization or your labor output? Are those concerns right now to you?

Not concerns from the standpoint that we're bumping it, we have to constantly manage and keep an eye on obviously daily throughputs and weekly throughputs based on what we're selling but it's one plant. It's one location. It's right here in McKinney, Texas and we think we have a-- and I walk through it, and we think we have a good handle on that and I do appreciate the questions.

What metrics are you guys using though to measure your success? Obviously you guys have done very well for the last 10, 12 years. This is only the second quarterly loss. What metrics are you using to measure success? Are you looking at RONA, OEE? How are you measuring how you're competing up against other companies out there?

We don't have any public competitors currently in the specific space that we sell into, so it's tough to get a gage but in house we have our own formula that's not something that we publish and it's not public but it's not RONA. It's not Six Sigma. It's more of a combination and plagiarism of all the above, but it is our in house system and it-- you know, again though if you look at any of the balance sheet items you can see that it's not a cost situation. It's more of a sell price.

More of a sell price?

Yes, sir.

But when do you see that correcting itself? Are you thinking it's sometime in '08?

It's hard to say. We've gone through these cycles in the past. Having done this for the last 18 years or so, we've seen it come up in the past but as far as when it corrects itself we'll have some more structural change going forward most likely in some fashion. There's typically an outside influence that corrects these types of things and turns the table for us, so the prediction part of it I am not that great at but I would think that sooner than later.

Okay and regarding continuous improvement initiatives, what solutions would you like to put in place? If you could look the next couple of years out where would you like to be maybe two years out in terms of continuous improvement initiatives to make sure the Company is running as a whole most efficiently that it can?

I don't have a specific answer for that one, Steven. You know, again, we think we are controlling the controllables here very well. We're at the mercy of the market currently and when that starts to turn and we have a clearer picture on that situation maybe we'll have an idea.

And final question, what do you want to accomplish in '08? What's your number one goal?

To make as much money--

Other than to see the Dallas Cowboys win the Super Bowl.

To make as much money as we can. It's not a volume story. We're after profit.

Thank you for your time and good luck this year.

Liam Burke from Ferris, Baker, Watts, Inc.

Daniel, armored cable was something you talked a lot about in the first three quarters of the year. How did it finish the year and does it look like it has momentum going into 2008?

It does. That's a great question. In fact, that was one of the bright spots in the fourth quarter. Our sales volume was up about 85%. That product was a year old at the tail end of the third quarter of '07, so it is going actually a little bit better than what we had expected. We've got some things going on in the plant right now that we're looking at to enhance that product offering, so it certainly is one of the bright spots, Liam.

Do you get any benefit on the pricing side, Daniel? I mean I know copper is driving-- it drives a lot of things and I know competitive pricing with the other five, with your five other compo-- your privately held competitors is another, but is there any pricing benefit on the armored cable side versus the rest of the product line?

I think so. We're able to keep a pretty good eye on that through our sales reps because we don't necessarily try to force it as a separate product offering. We try to tie it into the package. There's a very distinct strategy that we use to move that product and it's certainly not sales price driven and it's not volume driven, so the profit on that one particular item does look pretty good.

[Adam Poland] from Keller Equity Investments. Michael Coleman from Stern, Agee & Leach.

We talked briefly about the armored cable. Where are you at-- or I forget whether you share capacity utilization but where do you see yourself in terms of your armored cable in the fourth quarter with respect to capacity utilization?

There's not a concern there yet. I'd love to get to that at some point but currently there's no issues with capacity, Mike.

Okay so how many quarters of this heady armored cable growth up, volume up 85% in the fourth quarter, how many more quarters of that do you think we could see before your armored cable at least it resembles or it looks more like end market growth plus maybe a couple of points?

Well, it's hard to say. I am not sure exactly who is sacrificing the market share and allowing us to squeeze in. I am just not sure who that is and without public competitors it's tough to see what their sales volume is but I would tell you more directly, Michael, that as long as we can continue to grow that product line profitably that's the goal, not necessarily a market share target so to speak. And, as you know and as folks know that follow the story, the residential commercial relationship or blend in the market changes from year to year, so it's kind of tough to predict that or forecast that.

Okay and in terms of the number of reps that you have carrying the armored cable, is it the same line up as the residential and the commercial or at least the commercial?

Yes that's correct.

And I appreciate-- is what is that 23 or 22?

32.

32. Do you have any-- have you had any changeover in reps in the last year, added reps, change, drops out and so forth?

Not in '07 but in early '08 we're looking at making a change in one territory in the southeast.

Okay. Is that a territory you're under penetrated in?

Not necessarily. There was a structural change within the agency or the rep agency that represented us, which has led us to look and see what's available.

Okay. On the commercial side in terms of the quote activity in terms of the size of jobs that you're quoting have you see either the quote activity level off, decline or have you seen the actual size of the quotes decline or have you seen any variability in the size of the jobs being quoted?

The residential jobs that are being quoted are relatively large. They're just fewer and further between. The commercial jobs appear to be about average with what we've seen the last couple of years but their frequency has picked up a little bit and the lead times themselves for request of delivery has shortened somewhat, if that answers your question.

Okay so commercial's average size frequency is up and the lead times are down. Putting that together what does that kind of in your expectation for commercial over the coming year, you know you were still-- you saw growth in it this year. Do you expect to see growth in commercial in the coming year as well?

I think so. With the travels that we do there's still quite a few cranes in the air in most of the major cities and some of the outlying cities. The answer would be directly yes. How much it's hard to predict but I think it also lends itself to maybe the customer or distributor pipeline is somewhat empty because again, the lead times have been shortened somewhat.

Okay putting February and March aside and just kind of looking at January relative to the December quarter maybe average, you know on a margin basis would you put January's running on average how many points ahead of that 4.8% gross margin that you reported in the fourth quarter?

It's probably a little bit too specific for me to answer right away but there's some improvement. It's not huge but there's some improvement.

The last question I have is that in terms of the ownership of the private companies in the industry there has been some change recently with respect to Cerro Wire and last Fall there was at AIW there was an ownership that changed hands or may change hands. Do you-- have you seen anything as a result of these in terms of a change in the actions of your competitors that would-- that has resulted or that you think might improve it?

Yes. I don't want to go into a whole lot of detail because it's really not something that's a positive comment but yes I would think that there would be some change going forward and I would guess that it would have to be positive for the market. Coming from where we were in the fourth quarter I don't think anyone buys a company with the intent of messing it up so to speak but I would think there would definitely have to be at some point going forward some business acumen applied and some discipline.

Right and previous when you've gotten into extended period of times where the lack of pricing discipline in the marketplace it's lasted for one quarter, two quarter, three quarters. How long has this lasted in the past before something is changed that-- for the better?

There's not a real standard answer for that, Michael, other than to tell you it's typically an outside influence that corrects it. We're not smart enough as an industry to do it ourselves. What's happened in the past there's most recently you've seen hurricanes corrected. You've seen product raw materials corrections. You've seen trucking industry have an effect. Structural change in the industry, those types of things that typically are seen as an outside influence or something outside the Company tend to correct it, so it's hard to predict. There has been times when it's one or two quarters. There has been times when it's been three or four quarters. It's just hard to predict.

Okay and lastly, in terms of your overall market share in building wire, would you care to provide an estimate or what you think your market share is in the six interval category?

Somewhere between 20 and 40%.

20 and 40.

[Michael Shinick] from First Source.

First off, from the buy side I'd like to thank you for your business acumen, your stewardship of shareholder equity and focus on profitable growth, which really then segues to my two questions. The first would be in terms of the buyback. I know when we spoke back in '06 though you had initiated a buyback you weren't actually starting on that and it's clear you started in a meaningful way to actually repurchase shares in November, December and into January. Would we read into that that there's a certain price at which it makes sense and a certain price at which it doesn't make sense, i.e. are you going to be buyers up to 20 and perhaps stop at that level? Can you give any color on that?

You know maybe a little bit, Mike. We don't necessarily have a hard number. When the Company is trading around book value and the cash is what it is and we've kicked the tires around in looking for what to do or what not to do we certainly have addressed in house bottlenecks that we've taken care of. It's the moon and stars line up appropriately. It's the right thing to do type thing and right now we're sitting in that position.

But no in a sense kind of comment as to when you would kind of back out of the market?

No, sir.

The second question relates to the copper purchasing. You explained in the Release and in your comments about some of the pricing changes there with October having more inventory, if you will, than you expected and having to move that at pricing that you didn't necessarily like in November/December. Could you refresh me on how that purchasing happens? My understanding of your business model is that you weren't in a sense trying to over buy in any point in time. You were rather taking a daily average on pricing from your primary supplier there from Freeport?

That's correct basically in general. Again though, I wouldn't want you to get too hung up on the copper or trying to figure out FIFO or LIFO effect but we felt the need to throw that out there because it did have a negative impact. We could not have predicted the lack of sales or lack of sales revenue in time to make a business decision but having said that with that volatility in COMEX happening up and down, the fall of or the predatory pricing that we ran into in the marketplace should not certainly have happened. If COMEX closes one day down or two days in a row down competitively you see pricing drop quicker in the marketplace. That's not-- I don't want to go in too deep here and I am trying to tiptoe around this but right when you cut your prices to gain one or two orders in the market first thing you see tomorrow when you wake up is copper or COMEX is up $0.17.

Sure, sure, sure.

I don't know if it's a learning curve. I don't know if it's production volume scheduling, budgets that they're after. I really don't have an answer for you other than to tell you it certainly is something we've seen in the past. We just tried in October to hold the line as long as we could and we forfeited quite a bit of volume in October at higher prices, so I'll take full responsibility for that. It was my call to hold those prices. You set there for three or four weeks scratching your head. We decided to take the gloves off in November and December and here we are.

So again just confirming it, from a business model perspective you're not in a sense over buying periods when you see it as lower priced? You're just-- you're buying based on your average expected needs--

That is correct. We did not--

--taking the daily average.

We didn't change our approach. We just simply tried to hang on to some price increases that we initiated and--

Sure. That makes good sense. Thank you.

Gill Nathan from Restoration Capital.

I was wondering, it looks like the fourth quarter you said November/December you took the gloves off. It seems that the market got a little bit weaker or your margins I might say got a little bit weaker each of those months and you said January is a little bit better. Can you give us any indication of how January/February are shaping up? I mean last year you did about $0.27 in the first quarter, so I am just trying to get a feel for what this year is shaping up as.

We really don't give guidance or do any forecasting, Gill, for obviously reasons but the-- my opinion is things are a little bit better today. How much better is really hard for me to put a number on.

Okay and you were asked about stock buybacks just before. I mean do you think it's a time that's kind of imperative maybe for somewhat of capital preservation? It looks like you did that by paying down the revolver but with your cash base it looks like you lost money for the first time in ten years. It looks like that first quarter that could maybe happen again. Are you a little concerned that maybe buying back shares here could be a little aggressive?

No I am not concerned about that.

Okay and obviously you talked a lot about copper prices have been all over the place recently. On a pricing wise for your products are you seeing-- I know you said when copper goes down slightly people are lowering prices the next day but have you seen any stabilization there?

If I said the next day I apologize. When the price of copper goes down they lower the price immediately.

Oh okay and I guess our-- do you have any indication that some of your competitors maybe have hedged their copper, so they're able to-- or have a long-term supply contract that they're able to sell wire at the end of the day at lower prices and still be profitable.

Gill, we have supposed everything you could possibly imagine if that answers your question.

Yes it does.

I don't know that they could do that. We think we're familiar with all of the options that are out there. We feel like we have a strong balance sheet, as strong or stronger than anyone we compete with. Having said that, the way that our product is marketed and sold lends itself to purchasing the way that we purchase and vice versa, so to deviate from that one month might look great. The next month you'd be in the soup, so I don't know that there would be some other way to do it that would work.

Is there any concern-- you know, the commercial side has been relatively strong. Is there any concern that if there's some weakness on the commercial side people go to cut prices further to increase share again like you saw with the residential?

We have concern for that each and every day and most of the time it's not related to market conditions. We're not certain as to why that happens. We try to and suppose different things here but it's not necessarily just a volume situation. I mean at some point and I am trying to answer this appropriately but at some point this will correct itself. It's not a situation that is easily addressed. I don't know and don't participate in management strategies of the competition, so it's just hard to tell you what they're going to do and why they do it honestly.

Well, I guess that is that I am just a little concerned that maybe with the residential buildup we've seen over the last let's call it ten years, you know residential construction was booming and now it's falling off a cliff. Is there any chance here that there's too much supply, not necessarily you guys but other smaller people who need to sell at whatever cost just to recoup operating?

I don't know of any one specific instance but my answer to your question in general would be yes.

Okay and lastly, I was looking at your balance sheet. It looks like AR continues to rise. Is that a function of all your high priced inventory recently with copper accelerating and the cost of the product maybe going up a little bit?

Accounts receivable is going to bounce around a little bit quarter to quarter. The incremental changes are usually not that big. What you will see, and this was a prime example because we've told you what happened during the quarter, we sell as an industry on average on 60 plus day terms. To the extent that in this quarter, which is a classic example, October was a low month in sales, which generally if you had October sales you would collect them before the end of the quarter because it was the first month of the quarter but we had stronger sales in the second and third months of the quarter. Those are still on the books. I would relate that just to the motion of the ocean and there's really not big story there. It's strictly timing.

Okay well, thanks a lot, guys. Good luck.

Brad Langston from [Sandorn Capital].

I know it's been a tough quarter. I just have two quick questions for you guys. In the prior releases you guys gave unit volume percentage change year-over-year as well as sequentially quarter-over-quarter. Could we get the quarter-over-quarter unit sales change numbers?

Quarter-over-quarter sales change numbers, let me dig that out for you.

Just in the unit volume and maybe while we're digging that up, adding to Mike's earlier question it seems like the environment and I guess the gross margin worsened in December. When you guys look back at January you mention slight improvement. Can you point us to where you're seeing this improvement and what's driving it? And also in addition to that, is January seasonally strong or should we-- and should we expect similar gross margins to the fourth quarter as we go through this little trough difficult time in the environment?

Well, that's short-term. I don't know that there's an answer to your short-term question about the margins but I do know that the situation as it is today is a little bit better and when you ask me what is driving it I couldn't tell you what drove it the other way other than sell price. We have had a little bit of an improvement in sell price and we've had a little bit of relief on average in COMEX. I don't want to reveal too much to maybe tell a competitor, "Hey this is happening or that's happening," but it has been a little bit better pricing environment in January versus the last three months. Now that doesn't mean it's phenomenal or whatever but I am certainly not going to give you some forecast for the first quarter yet. We just don't do that.

Understood, understood. And then on the quarter-over-quarter change?

Copper pounds shipped in Q4 versus Q3 were down 4.7%, which generally is not unusual. As a matter of fact, it's usually more pronounced Q4 historically, not every year. We'll have some strong Q4s but Q4 is generally a softer quarter than Q3.

And if we see margins continuing in this sort of band or maybe a little bit higher if we're getting better pricing and improvement in COMEX, would you guys look to further rationalize some volumes to-- if that margin is at a point where it's not necessarily as profitable?

Yes we consistently try to rationalize those volumes on a daily basis. We watch what's coming in. We watch what's going out. We look at our monthly but we're looking at it each day. But again, if the market is a particular size we're not going to try to shove a predetermined volume into that market based on cutting prices. That just doesn't make any sense to me and that's what we see on a consistent basis. And historically we've seen it from folks, and I could name six or seven of them for you, that have that common thread and that common thread is they're not here anymore. We don't compete with them any longer.

John Jay from TIG Capital.

You guys, I've got to commend you on your balance sheet. It's fantastic and also your patience and ability to weather the storms. As you said, I find a lot of those firms over the last 15 years have flooded the market with inventory and they're not here anymore. I also wanted to thank you guys with the really refreshing to see the shareholder friendly environment that you folks have over there, as I've been following you for a long time.

I just have a couple quick questions.

We have all day, John. You can keep talking.

Let me stroke you a little more. Can you expand a little bit more on some of your capital allocation decisions? I-- you know, I know there are some shakeups over at Cerro. I've been following a little bit myself and I like the stock buybacks. Any acquisitions, maybe partnerships, anything of that sort maybe you can highlight at all? That's question one. And my second question is just differentiation on your product. I know your fill rate is probably one of your key selling points, your high fill rate. Is there anything else on your armor product or any other products that really separate you from some of the competition that you can highlight without giving out any trade secrets? That's it.

Yes the idea of partnering or buying, we certainly have. We have an eye on the market. There are some product categories that we're looking at. We haven't announced anything yet obviously. The CapEx, we've been again, de-bottlenecking some areas, cleaning up some areas, upgrading some areas. If there was something there, John, that fit on an acquisitions approach, if there was something that fit our Company and contributed to the Company rather than took away from it-- and I know that sounds very simple but that's really what we have been looking at. We just haven't been able to find or locate any one thing specifically that really adds to the Company. There are some things that would-- or there are some companies there that appear on the surface that would be an addition. We just haven't located one at this time.

As far as partnerships, we've looked at that. We've talked back and forth, just general discussions but nothing on paper, nothing of any seriousness there. As far as differentiation with our product, we try to promote the value in general, so that we don't necessarily just draw a roadmap to what we're doing but w do continue to push the relationship in being as close to those customers as we can and provide answers or solutions to the questions or problems that they come up with.

And without being too specific if you'll allow me to just speak in general, one of the things that you see in the market obviously is the effect on the building wire companies with this volatility. Something that we try to help and manage with our distributor partners is that same volatility and when you manage those types of things and build an increase and strengthen your relationship, obviously when you come out of these types of times or troughs, it's beneficial going forward. That's been our approach in the past and that's something that we've worked very hard on the last 18 months or so is to strengthen our relationships in the market because again, it really boils down to again the price of the product going in the market. When you look at the cost structures that are out there across the board, there's just not a lot of low hanging fruit left out there, so it's more of a culture or an approach than it is any one specific differential as far as the product offering itself goes.

Anything else, John?

Our next question comes from [Robert Mackintosh] from [Keller Refers Capital]

So certainly what we've learned today is there's a lot of issues affect Encore that are just out of your control, supply side issues, demand side issues. Some of the issues that, at least from experience, are under your control, operational efficiencies, conversion costs. Are there anything, specific initiatives you're doing that while these other issues are not under your control? Can you take more things under your control?

Not more on a percentage basis. When the revenue become compressed and your copper base is going up obviously copper becomes a bigger percentage of your cost of goods sold but the more direct answer to your question is a yes. We don't publicize those initiatives to try to get a pat on the back or anything because we don't want to draw any type of attention to or roadmap to our competition. We think we have-- we know we have a low cost structure. We have a culture here that is continually pushed for keeping the edge. I don't know how better to tell you that without going into the specifics, which I am just not willing to do but the answer is yes. We-- it's a-- you know, we're surviving in a suicidal industry. You can go back in our short 20-year history and name 10 to 12 companies that were larger than us that are not here today. We're aware of that. We've gone through those ups and downs. We've had public companies that we compete with that were five and ten times larger than us in revenues and so on and so forth, but we are survivors. We know what we're doing. We maintain the culture that we try to continue to cut cost every opportunity but again, the answer to this situation is not necessarily some rabbit that's in the hat from the cost side because when copper is running 80% of your cost of goods sold you hit it on the head. What's left to control is a very small portion of it but we think we're the best at controlling the controllables.

Our last question comes from Michael Coleman.

Not to dwell on this but you used the phrase, "You took the gloves off." Not referring to any specific time period but when you do that how much do you give up? How many points do you give up in terms of margin?

That's a guess, Mike, but it's hard to say. It's a guess. We've had competitors in the past that I don't think there's a price that's too low for them to beat, so we try to be the first one up and the last one down. We don't think it's right or good business to sell someone a list of material that they commit to for inventory and then two days later you're out there offering lower prices to the same type of customer, so it's a moving target.

Would you characterize it as giving up your service premium?

Not necessarily. I mean we still don't have to go as low as someone else. I do believe all things being equal we're still going to get the order and there's some value there but everything seeks the lowest denominator in this industry and at some point you can't just sit on the sideline and watch. You've got to get in there and hang in there with some of the customers that you've developed 15-year relationships with and if it's at a certain price level everyone loves us. At-- when you start creeping that price up you start eliminating some folks until you get down to family and then at some point you're going to have to ship something, so is it at the same level? Who knows? Is it at the bottom? We sure try for it not to be.

But when it gets to that point where you decide to do that, do you risk? You did it in the fourth quarter but do you risk more of less teaching your customers that you're willing to go down to where some of the irrational competitors are where they then become, have an expectation that you'll go there?

The answer to that I guess is yes from a general standpoint but more specifically if all of the competition is there, it's no longer an irrational competitor. It's the industry and that's kind of where it ends up. It depends on who leads it and who follows and those kind of things but again, if there's four or five producers and there's four or five prices out there at this certain level, it becomes the market. It's not necessarily just one irrational predatory price. It becomes the industry.

So in a near commodity product I mean wouldn't the expectation be that this may be the normal state of things over the long run?

I think the competitors and the customers are very accustomed to volatility, Michael, and this last year has proven that that volatility is extremely high and, as Daniel had indicated, it's a moving target and it moves day to day. I think the customers know that it comes and it goes and I don't think you're training them in the long run.

Okay we actually do have one more question. It comes from [Wayne Atwell] from [Pontis Capital].

I have a couple quick questions. What's your capital of budget for CapEx for '08?

15 maybe 18 million.

Okay do you have any products you're real excited about that are on the drawing board?

None that we've announced publicly.

Is there a copper environment that would be really favorable for your business if-- obviously copper prices came down and that was a problem. If copper prices are rising you would have lower cost inventories. What kind of copper environment would you like, flat pricing? What would be best for your business model?

Wayne, what we prefer and what we have proven and the industry has seen in the past as being successful is a slowly upward trend in COMEX prices, not the volatility that we have today. The ups and the down lead to exactly what I had mentioned earlier. When the industry has a price increase we print a whole new price sheet and start over. On the decrease we discount deeper on the price that we're owned, which you eat into the higher copper content items faster. That's something that we fight every price increase. We have competitors that don't-- maybe don't get that, don't see that, don't want to see that, but it's a reality, so the industry prints a new sheet when there is an increase. Unfortunately, on the way down if you get copper on a daily basis COMEX that closes down one or two days, it may equal 5 or 6%. It might be less than 1% on the month average, yet we see pricing going 2.5 and 5% downward spiral, so an upward trend is the best thing for this industry and that's our story.

Right and probably the most unattractive period for you would be if you get a sharp drop. That would tend to put pressure on your competition and that would be the most likely period when you'd be accident prone I would guess.

That is correct. We believe that we live in the society where in our industry that we are certain of one thing about copper. It's going to go up and it's going to go down. We don't give forecasts or projections because we don't have an idea of exactly when and where that's going to be. We do though compete with folks that try to budget or model or whatever you-- whatever it is to a certain copper number in pounds out the door. If the market doesn't take it they run it like a trading desk and they start to cut prices to move that volume. You see it at the end of every month. What I am saying is that's nothing that's new. We've seen it in the past from other competitors. The common thread is they're not here anymore.

Right and you don't publish backlog number I guess.

That's correct. We do not.

Do you give us any adjectives?

Not really. Again, we try to take an order in and ship it out immediately. We don't take orders ahead of time and build it, so to speak, and that's probably the best answer for me.

Okay and then just lastly and thanks for your patience, what's your buyback authorization that you haven't completed yet?

A million shares I think?

Well, the total was 1 million and we've purchased about 180,000, so we still have 820,000 roughly in ammunition dry powder left and again, even that is subject to potential increase by the Board.

Is this going to be an aggressive program on your part because you obviously have quite a lot of dry powder?

We really don't want to get into the specifics of our program.

We actually did have one more question. It comes from [Matthew Sherwood] from [Ziosk Fund].

I just had one last question. I'm just trying to understand for a business that has the working capital intensity that your business does and when copper prices are high, so working capital levels are high, you would think that spreads would need to be higher in this down cycle than they were in the last down cycle just cause your capital needs are higher to earn an acceptable return. It doesn't look like that's happening, so can you just walk through what's going on?

Yes the prices are too low for the finished goods in the marketplace. I mean everything you've said is relatively intuitive. There's times when in this industry things happen that are counter intuitive. For example, you wouldn't think that we would like an upward trend in cost of a product that's about 80% of our cost of goods sold. What's happened in the past though has or historically going further back, as copper trends upward and we're able to stabilize the margins in a certain range, obviously the fixed costs go down as a percent of revenues but your revenues continue to go up. As you can fight that battle in the market and it's a-- the best way to describe it really, Matthew, is, is customers or end users are more accepting of a higher price if they can see or feel something about copper on an upward trend. It's acceptable to them. On the downward side or a dip, we still have people out there that think copper is going to $1.50. They'll say so publicly. When that happens and here we go type thing, the prices get slashed and everything feeds on itself. When copper comes down revenues come down also. It cuts both ways, hence the strength of our balance sheet. You just don't know which way or when it's going to go.

Now a competitor that's debt financing though a build in working capital would probably really need to earn a return in an up copper market, no?

Well, you would think so. That would make sense. You could make an argument for it certainly.

But that doesn't seem to happen.

Right.

This doesn't seem to happen and again, we're down to basically 5 or 6 competitors and in the industry that 20 years ago had 15 or 20.

On another gear is there any risk to switching to aluminum in a high priced environment?

Shame on you. We sell copper.

I know. Yes.

Okay, gentlemen, there are no more questions at this time.

Well, we appreciate the participation and all the questions and, Miko, you did a fine job and we'll look forward to the next call.

Thank you. This call has been concluded.