Encore Wire Corp (WIRE) 2008 Q2 法說會逐字稿

Hello, and welcome to the Encore Wire second quarter earnings conference call. As a reminder, all lines will be on listen-only mode and we will conduct a Q&A session at the end of the call. (OPERATOR INSTRUCTIONS).

At this time, I'd like to turn the call over to Mr. Daniel Jones, the President and CEO of Encore Wire, so that we may begin.

Thank you, Julia. Good morning, ladies and gentlemen, and welcome to the Encore Wire Corporation quarterly earnings conference call. I'm Daniel Jones, the President and Chief Executive Officer of Encore Wire. With me this morning is Frank Bilban, our Chief Financial Officer.

Despite strong copper prices, building wire industry margins decreased in the second quarter after having shown positive momentum in the first quarter. Our unit volumes shipped in the second quarter of 2008 increased over 9% versus the first quarter of 2008. However, the spread between the average price of wire we sold in the second quarter, that contained a pound of copper, minus the total cost of all materials decreased $0.269 per pound versus the first quarter of 2008.

Copper prices were somewhat volatile on a day-to-day basis during the second quarter, and the uncertainty this generates tends to disrupt our customer's normal buying patterns, which contributed to the competitive pricing pressure. Our margins were low during the first half of the second quarter, and improved somewhat in the second half the quarter. We understand this is a cyclical industry and therefore, we design and manage our cost structure and balance sheet accordingly. Our low cost structure and strong balance sheet have enabled us to withstand difficult periods in the past. We believe we will emerge stronger than most when market conditions improve.

We thank our employees and associates for their tremendous efforts and our shareholders for their continued support during these 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 List 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 here, and in the question-and-answer period that follows, we may make certain statements that might be considered to be forward-looking. In order to comply with certain securities legislation and instead of attempting to identify each particular statement as forward-looking, we 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 discussions of these risks and uncertainties.

Now the financial results. Net sales for the six months ended June 30, 2008 were $604.6 million compared to $594.4 million during the first six months of 2007. Higher prices for building wire sold in the six months ended June 30 accounted for the increase in sales dollars versus the same period in 2007. Net income for the six months ended June 30, 2008 was $15 million versus $26.1 million in the same period of 2007.

Fully diluted net earnings per common share were $0.64 for the six months ended June 30, 2008 versus $1.10 in the same period in 2007. Net sales for the second quarter ended June 30, 2008 were $322.8 million compared to $333.6 million during the second quarter of 2007. Net income for the second quarter of 2008 was $1.3 million versus $19.7 million in the second quarter of 2007. Fully diluted net earnings per common share were $0.06 in the second quarter of 2008 versus $0.83 in the second quarter of 2007.

On a sequential quarter comparison, net sales for the second quarter of 2008 were $322.8 million versus $281.8 million during the first quarter of 2008. As Daniel indicated, unit volume increased 9.4% on a sequential quarter comparison.

Net income for the second quarter of 2008 was $1.3 million versus $13.6 million in the first quarter of 2008. Fully diluted net income per common share was $0.06 in the second quarter of 2008 versus $0.58 in the first quarter of 2008.

The only long-term debt we have as of June 30 is $100 million in long-term notes due in the third quarter of 2011, with our revolving line of credit paid down to $0. In addition, we have $104.6 million in cash as of June 30, 2008. Our debt-to-equity ratio is a conservative $27.2 million. Our cash balance exceeds our long-term debt, actually resulting in $0 net debt.

We also want everyone to know that this conference call will be available for replay after the conclusion of this session. If you wish to hear this tape replay, please call 866-551-4520 and enter the conference reference number 231022 and the pound sign.

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

Thank you. As Frank highlighted, Encore performed about as well as could be expected in the past quarter.

Julia, that would conclude our prepared portion of the statement. We'd now like to take questions from our listeners.

Absolutely. (OPERATOR INSTRUCTIONS). Michael Coleman, Sterne, Agee.

I know that copper volatility has played havoc with the normal seasonal patterns of your business for the last couple of years, but you did see a sequential improvement in volume from the first to the second quarter. Is this something that from the second to third quarter, you would expect to see flattish volume? Or do you think you could see up volume? Or what has that been on a historical basis and do you think that historical pattern plays out?

We've had both historically. Typically, July and August are vacation-type months; July, domestically and August, abroad. And that does typically lead to volatility in copper, historically.

It's hard to say right now. As we indicated in the prepared portion of the statement, the first couple of months of the second quarter were not that great. June picked up somewhat, so I guess based on factually as what we know today, it looks like it's a little bit better.

Okay. And your balance sheet is in great shape. You bought back stock in the first quarter. What do you envision on your buyback?

Well, we have authorization to continue. And as we deem necessary and appropriate, we'll step in and pick the stock up. Again, there's factors that lead into that, obviously. And right now, with the cash situation as it is, we'll certainly take a strong look at it.

Tom Brashear, Mayberry Partners.

What is your current staffing level versus the first quarter of '08?

It's about the same. If I understand the question, do you mean as far as personnel at the office?

Correct. Yes, sir.

It's about the same. It hadn't changed a whole lot.

Are you talking total company, Tom, in the plants as well?

Yes, in the plant as well -- with the economy showing some sluggishness in all, have you changed your headcount?

No, not really. There's not much of a change at all, actually.

Very good. So you remain the largest employer in McKinney?

We're in the top five or six, I believe. There's a few guys that have more than we do. We're still floating right around the 800 number.

Very good. Keep up the good work. We appreciate you.

Liam Burke, Janney Montgomery Scott.

It's -- there's no secret the residential construction market is still having problems. Has it gotten any worse? Or have you seen any sort of stabilization in that space?

There's pocket that are still -- to both extremes. But for the most part, it seems to have calmed a little bit on the downside. It's not fantastic, as anyone could read, but there's still pockets and there's still certain categories that seem to be doing okay. But as far as the drastic downside, it seems to have calmed a little bit.

Okay. In the release, you mentioned competitive pricing and a weakening construction market. Is that a function more residential than non-res? Or is it just general -- is that just a general overall view of the construction market?

Well, the thought there was overall, in the construction market when you have the volatility in COMEX and you have the volatility in building wire prices, our traditional customers tend to sit on the sidelines and hopefully, buy at the low point. Obviously, when you have intraday COMEX fluctuations of $0.10, $0.15, it leads to a real lack of -- or a real slowdown in immediate demand. So, there needs to be some type of perceived bottom during that volatility before the traditional customers step in and buy.

When that perceived slowdown happens, during the day, during the week, what have you, we have competitors that, in some fashion or another, feel like they have to broadcast out faxes and get on the phone and try to stir up demand by cutting the prices even lower. And typically, that even leads to more volatility and slowdown.

So the attempt there is, I guess, to gain volume or -- I really don't know; that's speculation -- but it really leads to people to just sitting on the sidelines. And so, over all, the folks that are buying the wire kind of sit back and wait till there's a perceived bottom.

Great. Thank you.

(OPERATOR INSTRUCTIONS). Kerry Rigdon, Mayberry Partners.

Could you comment briefly on how you see your market share right now, in terms of just the wire market, how that has changed maybe over the last couple of quarters?

It's hard to say, Kerry. There's just not a real good set of numbers to get your hand on. The reporting agencies that we take a look at, typically, the information, if it's coming from a government agency, would be old; old data. But the best we can tell and to stick to as close to the facts as we can, we think we've positioned ourself in the industry as number two, from a volume standpoint.

Would you say, if you can, that you feel like you've picked up market share during this slow period that, because of your low cost structure, that you guys have actually picked up the market share in the space?

I don't know that there's been a significant pickup, but I don't feel at all like there's been a decline. Based on the numbers that we see, we still think we're holding on pretty tightly to that number two spot.

Okay. And I know this is one of those questions that has some comments usually associated with it, but could you comment on whether or not there was any LIFO adjustment for the quarter?

Yes, there was. We took a LIFO expense of $8.9 million, which is included in the cost of sales.

Okay. I'm sorry, did you say $8.9 million?

That's correct.

Okay, thank you. Last question -- could you give a breakdown in terms of the product mix between commercial and residential? Has that changed in the last quarter or is it still holding fairly steady?

It's almost identical, Kerry. We are running residential in the 26%, 27% range.

Okay, terrific. Thank you, gentlemen.

Thanks for the questions.

Michael Shinnick, First Source.

The question that I have today is around the competitive environment. Dan, you've commented on that in the past. Obviously, it continues to be challenging. Can you share any insights as to competitor behavior? Are you seeing any changes?

And then secondarily, do you foresee any M&A or consolidation opportunities in the space? Either that you're interested in participating in or that you think others will?

Mike, you know, you see things in the market each day and each week, and you get some stability and you think it's there. And then you pick up a fax from a competitor that's some type of gimmick in the market. It's almost to the point of just major frustration when you read something like that.

But as far as the overall competitive environment, I think folks are doing what they think they need to do to survive or get by. I don't agree with their approach, and you can plug-in any one of them. For the most part, though, we've seen a little bit better discipline in the last 45, 60 days, other than, like I said, a couple of gimmicks that came out. They're not new. We've seen those things in the past, over the last 19 years, that's happened before.

The M&A question, I just don't know a good answer to that. We've consistently, over the years, kept our eyes and ears open, and if something were to fit and complement what we have and what we're doing here, we'd be interested. When we look at something and it takes away from the model that we have here, then we're not interested.

And as far as losing a competitor or a few of the other competitors may be merging in some fashion, I just don't know of any concrete news that I can provide for you. But certainly at these levels in the market in the past, when we've been in this position cyclically, we typically either lose somebody or there is some type of structural change in the industry. And my feeling today is, is we'll have some type of structural change in the future -- near future, short-term, what-have-you -- there will be some type of change.

That's helpful. Thank you and thanks for your focus on operating profits.

(OPERATOR INSTRUCTIONS). Gil Nathan, Restoration Capital.

I just was wondering, you talked -- Dan, you were just talking about it -- how long do you think it will take to flush some of these guys out of the market? Do you think there's anybody on the fringe right now? Because you guys have a pristine balance sheet and that's definitely, in the past, helped you get through these downturns in the cycle. I mean, how long do you think these people can hold out at making pretty much nothing on copper wire?

You know, Gil, it's hard to say because they're all private -- the folks that we compete with, it's tough to get good numbers. You hear things, some of them are rumors, some of them are speculation, obviously. But it's hard to say. There's a few guys that we feel like they're going to be there, and there's one or two that we feel like probably should go away.

And that list could change a little bit here and there. But for the most part, the guys in the market that perform on a business-like level and basis, I think it's going to work. The folks that react very emotionally one way or the other, probably should either sit on the sidelines or get out or do whatever it is that they feel they do best. And I really just don't have a good feel where they're at financially, other than to tell you the market has been incredibly tight. And if you're not the low-cost guy in this market, it's just tough to make any money.

And for the guys trying to make it up on volume or buying volume or whatever it is that they're trying to do, if you're losing a little bit on a little, you're going to lose a lot on a lot. So, this is a classic example of when there's some type of rationalization in the market, typically we lose somebody. There's a structural change. And I just feel like -- you know, we've had about a year, year and a half of this, and in the past -- Gil, to be more specific -- in the past, we've seen folks hang on for a year or two; we've seen them go pretty quickly.

Right. No, that's -- you would think that they're kind of getting close to their breaking point.

I'm wondering on the pricing side, guys -- obviously, you talked about copper moving around a lot. And in the past, you said changes in pricing to customers has moved even day to day, minute to minute, hour to hour, depending where copper is. How is it going? Have you had any luck passing along price increases? Because at the end of the quarter, copper ticked up nicely for you guys, but it's come all the way back. I'm just wondering -- I know July is very, very slow, but -- seasonally, so, I don't know if it matters, but I'm just wondering if pricing is really sticking or is someone out there -- is the marginal guy just really driving the price?

Well, we've had three or four Q2 price increases. And as long as everyone tracks copper; they don't necessarily track the other raw materials, but they track copper and relate that to the validity of a price increase, typically.

We had three or four in the second quarter and we received a little benefit in June. We didn't receive any benefit in the other two months on the price increase attempts and -- you know, but our customers and their customers, everyone's margins are tight; everyone's tightened their belts. There's not a whole lot of wiggle room for anyone. So, no customer likes a price increase unless all customers get a price increase, and then they want to have a perceived advantage.

The smaller guys cutting prices or maybe the shorter line manufacturers cutting prices -- that list is constantly in turnover. One month it's one guy, one week it's the other guy and so on, so forth. But typically, today for us, the pricing does change moment to moment and phone call to phone call, and certainly day to day. And that environment, again, is due to the volatility in the raw materials and just the basic overall news that you read each day.

Each buy is being scrutinized. They're buying enough to get by. The distributor inventory chain is somewhat empty. So when they do buy, the demand on service and delivery is instant. So, that part of the environment really hasn't changed that much, although I will give credit to the industry in June to where there was some price discipline.

And one last question on kind of the motivation of your customers, is -- did you see people in this past quarter wait until the end of the quarter? Because you said the inventory is pretty low. Are they just waiting till the last minute and saying, okay, wherever copper is, I can't get blamed because copper is at this price at the end of the quarter, so I'll buy then. Or were they buying throughout? I'm just trying to see if there's any pattern from these guys or any expectation you guys can have to kind of wait until the end of the quarter, too.

I think that's speculation, but I think that's good speculation, truthfully. The guys wait till last-minute, until they absolutely can't wait longer to get the product, typically. There's certainly occasions on some of our customer's parts where they're doing some things proactively that are non-gimmick, that are tried-and-true business practices that are helpful. But in general, I think your idea is true. These folks are waiting until the last minute.

Okay. Good luck, guys. You guys are doing a good job. Keep it up.

Robert Kelly, Sidoti.

Thanks for taking my questions. Do you break out the volume by product line on a year-over-year basis? And if so, could you?

Well, we stick to the commercial and the industrial breakout. And as far as going into specifics on each individual category, we really don't.

How about armored cable? Are you continuing to see big volume jumps there?

Not big volume jumps, but we're happy with where we're at. It's about what we expected in today's environment. The plant is running fantastically well. Our folks that put that plant together and the guys that are taking care of the equipment here do a great job. And we're actually in that product category, with everything that we're seeing right now seems to be pretty positive for us going forward.

And then actually the utilization, at what rate are you running the plants during Q2?

We're running the plants -- some of the equipment we're running four days a week. Some of the equipment we're running five days a week. And then we use Saturday mornings occasionally to do some catch-up here and there, but for the most part, four and one-half to five days a week.

So cutting back on the supply really hasn't benefited pricing all that much, just a little bit in Q2?

The only way to answer that is, you know, yes. I mean, that's -- yes, that's the answer. But we're really focused on the service side of it first. And then obviously, our inventory turns are something that we pride ourself on. But it's more of a service level type issue. It doesn't make sense to try to lock into a copper pound throughput to drive your budgets. We've seen folks do that in the past and consider that to be somewhat retarded. If the market can't take it, why stick it in the warehouse?

So we really focus on trying to match up what we're running to what the folks that we sell to, and have identified as good customers, are buying.

Is the assumption correct that your competitors might be doing -- might be running fuller, not backing off production to limit the supply available in the market? Is that the sense you get from the field?

I've only been in a couple of the competitor's plants this year. But in the past, there's folks that budget to that copper pound number and there's folks that don't. So, it's really hard to say. I really don't have a good feel for that, other than to tell you -- speculation and rumor again, because they're not public -- but I would guess that the good operators have cut back and some of the not-so-great operators are probably running six or seven days a week.

Okay, great. If you would, maybe the trend that you guys talked about it in the release, the margin trend being lower earlier in the quarter then improving in the back half. In the early part of the quarter, are we talking breakeven operating income? Or are we somewhere's lower and you kind of pulled out the $0.06 in the back half of the quarter? Just some help there.

I actually made a note of that before I came in here. April was bad, May was worse, and June was better.

Okay, great. And then just some -- EBITDA and CapEx -- or D&A and CapEx for the quarter?

Okay. Depreciation for the quarter was $3.2 million. EBITDA, I hesitate to answer the question, you've answered it, but my lawyer and auditor friends will tell me to first say that it's a non-GAAP financial measure, which is constructed by adding earnings before interest, taxes, depreciation and amortization together. And in our case, we have no amortization of goodwill.

Having said all of those caveats, it's a very clean number here at Encore Wire. And it was $6.6 million during the quarter.

And CapEx?

CapEx is at about $9 million for the six months and about $5 million for the quarter.

Thanks, guys.

Thank you. Appreciate it, Robert.

Wilson Jaegglie, Southwell Partners.

A couple of questions here. The historical seasonal demand here in volume between the first quarter and the second, what is -- I know, obviously, we're in a cyclical business here, but on a seasonal basis, how does that volume vary between those two quarters, normally?

You know, Wilson, I'm not sure what's normal any more. We've had -- again, I mean, there's been the volume changes from one quarter to the next. We typically have seen in the past, where the third quarter, volume-wise, if there is anything normal, has usually been the strong quarter of the year.

Okay. And is -- which would be normally -- the first or the second quarter, which would normally be a stronger quarter?

Normally, it's the second quarter.

Second quarter. So, the second quarter and better than the first, and the third quarter better than either of those.

That would be -- in general, yes. I'm sure there's specifics where that's not true, but in general, yes.

Okay. Let me ask you about aluminum here and substitution in the marketplace. With the high price of copper here over a long period of time, what are you seeing happening here in the aluminum wire business as a competitor for you?

There's some of that. To what magnitude, I don't have a good number for you. The aluminum guys will tell you it's a big number and the copper guys will tell you it's a not-so-big number. But there's some of that. But again, in the volatility, we've seen jobs go copper quote. They wait to see what's going to happen. Copper runs up; they go get an aluminum quote. They wait to see what's going to happen; copper comes back down, it goes back to copper.

So, there definitely is a lot of discussion about it -- a lot being a relative term -- but it comes up. It comes up on occasion, specifically on the large feeder cables where there's an opportunity, I guess, on a material cost basis to be some savings on the aluminum product. There's arguments both sides of that. I think you can do enough research to support either conclusion.

Do you have the capacity to deliver aluminum wire?

The direct answer to that is yes. There's a long story beyond that, but the direct answer to your question is yes.

I mean, does that make sense to be able to switch between the two metals here and supply what the market seems to want, as it varies from time to time?

We choose to stick with what we know and what we're good at. And I would rather fight the aluminum question than to give in.

Okay. You mentioned several gimmicks here that you're seeing that seem to cause a particular burr under your saddle. What are these so-call gimmicks out there? What's happening in the marketplace?

I'd rather not speak specifically to what they are. They're just -- they're things that we've seen come up in the past. It just -- it's not -- I'd rather not go into detail about it.

Okay. Thank you very much.

Yes, sir.

(OPERATOR INSTRUCTIONS). That appears to have been our last question.

Well, thank you very much for the questions and the interest. And Julia, you've done a great job. Thank you very much.

Thank you. This conference is now concluded.