Encore Wire Corp (WIRE) 2008 Q3 法說會逐字稿

Hello, and thank you for joining the Encore Wire Third Quarter Earnings Conference Call. (OPERATOR INSTRUCTIONS). At this time, I'd like to turn the call over to Mr. Daniel Jones, the President 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 CEO of Encore Wire. With me this morning is Frank Bilban, our Chief Financial Officer.

We're pleased to announce increased earnings in the midst of the tough competitive environment we are experiencing in our industry. The slowdown in construction activity in the United States continues to impact our industry adversely as it has over the last two years. However, we were able to increase our margins despite declining unit volumes and copper prices. We're pleased that our industry exhibited some measure of pricing discipline in response to those two trends.

Copper prices were volatile during the third quarter of '08, starting at a COMEX close price of $3.92 per pound on July 1, and finishing at 2.89 per pound on September 30. Volatility of that magnitude and the uncertainty it generates tends to disrupt our customers' normal buying patterns and has historically contributed to competitive pricing pressure. Our unit volume shipped in the third quarter of '08 decreased over 9% versus the third quarter of '07. Our year-to-date unit volume is also down over 9%. However, the average selling price of wire containing a pound of copper increased by 5.8% while the average cost of a pound of copper purchased increased only 1.3% in the third quarter of '08 versus the third quarter of '07.

This spread increased by 25.2% in the third quarter of 2008, compared to the third quarter of 2007, and increased by 20.8% on a sequential quarter comparison. The increased spread drove our gross margin increase. Our low cost structure and strong balance sheet have enabled us to withstand difficult periods in the past. We believe we will emerge stronger when market conditions improve. We'd like to thank your employees and associates and our board members for their tremendous efforts and our shareholders for their continued support during these challenging times.

Frank Bilban, our Chief Financial Officer, will now discuss the 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 provide you with a copy.

Before we review the financials, let me also indicate that in our initial comments 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 statements 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. Also, reconciliations of non-GAAP financial measures discussed during this conference call to the most directly comparable financial measures presented in accordance with GAAP, including EBITDA, which we believe to be useful supplemental information for investors, are posted on www.EncoreWire.com under "Latest Press Releases."

Now, the financial results. Net sales for the quarter ended September 30, 2008 were $296.3 million, compared to 308.5 million during the third quarter of 2007. Net income for the third quarter of 2008 increased 40% to $8.1 million versus $5.8 million in the third quarter of 2007. Fully diluted net earnings per common share were at $0.34 in the third quarter of '08 versus $0.24 in the third quarter of 2007.

Net sales for the first nine months of 2008 were $900.9 million, compared to $902.8 million during the first nine months of 2007. Net income for the first nine months of 2008 was $23 million versus $31.9 million in the first nine months of 2007. Fully diluted net income per common share was $0.98 in the first nine months of 2008 versus $1.35 in the first nine months of 2007.

On a sequential quarter comparison, net sales for the third quarter of 2008 were 296.3 million versus $322.8 million during the second quarter of 2008. Net income for the third quarter of 2008 increased 507% to $8.1 million versus $1.3 million in the second quarter of 2008. Fully diluted net income per common share was $0.34 in the third quarter of 2008 versus $0.06 in the second quarter of 2008.

Our balance sheet remains strong. The only long-term debt we have as of September 30, 2008 is $100 million in long-term notes due in 2011 with our revolving line of credit paid down to zero. In addition, our $108.5 million cash balance as of September 30, 2008 exceeds our long-term debt, resulting in zero net debt. We also declared our eighth consecutive quarterly cash dividend during the third quarter of 2008.

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 taped replay, please call 866-551-4520 and enter the conference reference number 235401 and the pound sign. I'll now turn the floor back over to Daniel Jones, our President and CEO. Daniel?

Thank you. As Frank highlighted, Encore performed well in the past quarter. We believe we are well positioned for the future. Julia, we'll now take questions from our listeners.

(OPERATOR INSTRUCTIONS.) Our first question is from Liam Burke with Janney Montgomery Scott. Go ahead.

Thank you. Daniel, Frank, how are you this morning?

Great, Liam.

Daniel, the residential construction market speaks for itself. It's been three years of contraction and nobody's expecting anything for 2009. Commercial construction for the first half of the year has been holding its own and even in July it looked like it was okay. Are you seeing a dramatic shift in the commercial construction market at this point or did you see it in September? And how does it look for the rest of the year?

I'm not seeing a dramatic shift, Liam, but certainly there's some apprehension out there. The larger jobs continue. Some of the medium-size jobs may push out into the future a little bit as much as they can stand. But for the most part, they're moving along. The institutional type construction - colleges, universities, hospitals, local schools - seem to be going along pretty well. The retail, obviously, has been down for a little while. But it seems to be kind of holding about flat where it is.

Okay. Thank you.

You bet.

Our next question is from Curtis Jensen, Third Avenue. Go ahead.

Good morning, fellows. Just a quick question. Cash from operations versus CapEx - it looks like your working capital was up a little in the quarter.

Cash from operations - would you like it for the nine months or the third quarter?

Well, nine months is fine.

For the nine months, our cash provided by operating activities is $45.5 million and our capital expenditures for the quarter are--excuse me--for the nine months also, are $12.6 million.

Okay. So what--how do you see CapEx going out through the balance of '08, and if you've thought about kind of your '09 planning yet?

I was just going to say that through '08 we're targeting around 16 to 17 million as a final number.

Okay.

And in '09 we have some projects that we're buttoning up. And I don't see today sitting here anything that's large to report.

Okay, thanks.

You bet.

(OPERATOR INSTRUCTIONS.) Our next question is from Robert Kelly with Sidoti and Company. Go ahead.

Gentlemen, good morning. Thanks for taking my questions.

You're welcome.

If you could, could you just comment on spreads throughout third quarter - how July compared to August and how August compared to September?

They were fairly consistent. We did trend up a little bit toward the end of the quarter.

The trend up towards the end of the quarter, was that due to pricing holding out or raw materials weakening?

It's a combination of both. We had some price discipline toward the end, and obviously we received some relief on copper.

Great. And then, as far as October has fared and copper's been pretty weak here, are you seeing the continuation of the discipline? I mean, it seems like lower prices really won't stimulate demand in this environment.

Well, we are certainly not one to think lower prices ever stimulates demand. But your original comment is correct, yes.

And then, all things equal with copper weakening shouldn't this be a net major positive for Encore Wire?

Historically, we do better as an industry in an upward trending copper market, but we're in for--times today are a little bit different than what I've seen in the past. We have--the election is right on top of us. You've got the overall economic issues to consider. So it's hard to give any kind of guidance beyond the short-term right now. It's hard to say.

Understood. And then, just one final one. With the free cash flow generated, have you stepped in and repurchased shares or is that the plan for the next--the near term here?

We do have a 10b-5 plan in place with a 1 million share buyback. Through the first reported periods of that we bought 270,000 shares. We did not buy any shares in Q3, but pursuant to that plan when things got soft here in October we did buy some stock back at a favorable price.

Okay. Thanks, guys.

You're welcome.

Thank you.

(OPERATOR INSTRUCTIONS.) Our next question is from Michael Coleman with Sterne, Agee. Go ahead.

Good morning, guys.

Hey, Michael.

Say, you mentioned in your press release that you'd sacrificed some volume. Is it--does--can I read that to mean that you think the market was maybe down a little bit more than what your volume showed on a year-over-year basis?

Well, it seems like it, Michael. But there was a few--several--there was a few times and several opportunities that came by where the order was just--or the potential order--the quote was significantly lower than breakeven. So we walked. We let it go to someone else. That percentage of volume that was there that we passed on would best describe or explain the wording in the press release. There were some orders that we walked away from, yes.

Okay. So that would describe your discipline in the marketplace, but not necessarily your competitors' discipline. So as you've seen the prices that you've held up in the quarter or maybe are holding up now, is it really a function of just the timing of how fast those prices adjust, or is it do you think actual discipline in the marketplace?

That's a great question. I think there's a little bit of both. There's a couple of categories of competitors out there. And one category I believe is being disciplined and following the good business practice, based on our opinion. And then, there's others out there that seem to maybe drift off a little bit and try to buy an order here or there. But overall, as an industry, I believe that the pricing discipline that we're giving credit to, I think it's a mixture. Again, copper went down at one rate and building wire prices came down a little bit slower. So I think it's probably a combination of both, Michael.

And that's historically--or that's opposite what historically has been the pattern?

Yes. We've had pockets where it's been positive like this. But in the past--when we had more competitors that are not around anymore--but they seemed to accelerate the price decrease versus the decrease in COMEX, yes.

Okay. In the inventory of $65 million at the end of the quarter, approximately how many pounds--how many millions of pounds of copper does that represent?

Roughly 40.

Okay, thank you.

You bet. Thank you.

You're welcome.

Our next question comes from Louis Corrigan with Kingsford Capital. Go ahead.

Hi. Could you tell me what the LIFO credit was in the quarter?

LIFO credit for the quarter was $14.6 million.

Okay. And so, the way this will work is if copper remains low through the fourth quarter, essentially do you think at the current level of your price discipline that you can operate profitably in the fourth quarter?

Well, we demonstrated our ability to do that in the third quarter. As we indicated in the press release, if you look at what copper did in the third quarter, it came down nearly $1. And what we've done as a management team I think over the last couple years is demonstrate our ability to make money in rising copper prices and declining copper prices. Again, LIFO is just a GAAP measure of making sure that you're matching current prices of wire to current costs of copper. And so, the real story here again is the spread increase, which Daniel was just talking about with Michael Coleman. To the extent that, as we indicated in the press release, copper prices fell and wire prices fell a little slower, that increased our GAAP, or spread as we tend to call it here, and our margins went up and that's good news. We--if that continues in the fourth quarter whether copper goes up, down, or sideways, the whole story here is all about the spread.

Well, let me follow-up again on the question of competitors' pricing discipline. It seems like that this year it's kind of gone back and forth. There have been periods where competitors have been more aggressive. I understand that part of the argument is that there are fewer competitors out there. I guess what--how can we gauge that sort of activity? What do you look for on sort of a daily basis to gauge that? Obviously, the past couple of quarters you passed up some business that wasn't at the rate that you wanted. Is there simply always going to be enough business out there that you can pick and choose and let your competitors accept a lower price, if they're willing to, and essentially not impact you as much?

There's about four questions in there and I'll try to [hit] them all, Louis. There seems to me today to be more discipline than there's been in the prior two quarters, speaking of the third quarter. Why it's there today--the industry itself has not been on an upswing or an up tick since about May or April of '06. When volume or the overall market gets squeezed a little bit from a volume standpoint, I believe--and this again is my opinion, I believe that there's competitors who would like to run their plants to a predetermined copper pound number. It's not always going to work in that manner, if you get the volatility that we've had. And it's not always going to work to cut prices to write an order. [There are] other things involved, and there's some value to be sold to customers, other than just a low price. So I hope that answers all four of them.

It does. Thank you.

You're welcome.

Our next question is from Forrest Tempel with FlyLine Partners. Go ahead.

Hi, guys. Frank, I think I'm going to call you offline, because this LIFO stuff always throws me off. Can you tell me where we were poundage of copper last quarter to this quarter, inventory-wise?

We were actually pretty flat. I mean, we don't publish the exact numbers, but it was about the same. Daniel has done a good job working with our team and pretty much matching what we ship with what we purchase.

Is it down about what we're seeing volumes down year-over-year then? Is it down about 9% or 10% from what you used to carry, 44 or 45 million pounds and now you carry 40?

We might be down 5% to 10%, yes. But we're actually adding SKUs. There are some new SKUs that are being introduced by our sales team. We're kind of broadening our product line wherever we can. And I think we're just doing a good job with the inventory management.

When a LIFO gain comes in, is it taxable?

Sure. All earnings are taxable.

So the 14.6 million is--where do I find that?

It's really just a cost of materials.

No, I mean, where--so it comes in cost of goods sold?

Yes.

Okay. And then, if I--so we have a LIFO pool sitting out there and this is a gain to that, right?

It's a detriment to it.

It takes it down?

Yes, sir.

So where is that account number? What is it now?

It's $82 million.

Okay. And what happens if we run through that?

Well, it will either go to zero and you can actually go the other way.

You can go negative?

Yes, sir.

Okay. I'm going to call you afterwards, Frank, because I just need you to walk me through it. But I got it. Thanks very much.

You're welcome.

(OPERATOR INSTRUCTIONS.) Our next question comes from Michael Coleman with Sterne, Agee. Go ahead.

Maybe I missed this. But, Frank, what is that LIFO pool?

82 million at the end of Q3.

Okay. And the LIFO credit was 14.5 million and your operating income was 12.5 million. Is that correct?

That's correct.

Okay. Thank you.

Our next question is from Gil Nathan with Restoration Capital. Go ahead.

Hey, guys. A quick question for you, Frank, and maybe I'm not understanding it correctly. You guys said you have about 40 million pounds of copper, which is flat quarter-over-quarter?

Yes, sir.

And how is that--how is inventory checked on the price of copper? If your poundage is flat and inventory is flat, wouldn't that imply prices are flat? I'm just confused right now.

I'm confused by your confusion. Price of copper, as we indicated in the press release, was down nearly $1 in the quarter, so prices are not flat.

No, no, no. That's what I'm trying to get at. If prices are down 25% and poundage is flat and inventory amounts--dollar amounts on the balance sheet are flat, what's the missing part of the equation here? What--?

--Dollar amounts are not flat.

Dollar amounts are not flat. The LIFO reserve has been detrimented and basically when you have inventory--what we have on the books is $147 million of inventory at FIFO reduced by an $82 million reserve, which gives you the net of $65 million.

Okay. All right. Thank you very much.

You're welcome.

Our next question is from Paul Connelly with Southwell Partners. Go ahead.

Good morning. Just a follow-up on inventory. I hate to beat this horse here. But if $65 million of inventory representing 40 million pounds of copper--that would be an average price of roughly $1.60. Can you just explain to me how your inventory cost can be at that level when copper hasn't traded at that price since 2005?

Once again, the inventory at FIFO, as I just indicated to the last caller, is at $147 million. That indicates first-in, first-out. Your LIFO pool brings it back to in effect pushing your latest cost of copper, your highest cost of copper, back through the income statement when prices were rising, and your latest costs are lowest cost of copper when you're going through. What LIFO is really doing--and this is true in all companies, it's a GAAP measure. It's just making sure that your income statement is not ballooning or detrimenting your earnings unreasonably versus your current costs. It's marrying current costs of copper and other materials I might add to your current prices that you're getting for wire.

Great. Thank you very much.

(OPERATOR INSTRUCTIONS.) We appear to have no more questions.

Well, Julia and group, thank you very much for the participation. We enjoyed the inventory discussion. If you guys would like to go into that deeper, call us offline here at the office and we'll be glad to discuss it. But again, thank you very much for your participation.

Thank you. This call has been concluded.