Encore Wire Corp (WIRE) 2009 Q1 法說會逐字稿

Hello and welcome to the Encore Wire first quarter 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, President and CEO to begin. Please go ahead.

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

We are pleased to announce these earnings in the midst of the tough competitive environment we are experiencing in our industry and the slump in the overall US economy. Despite the abundance of negative news in the media, our unit volumes were down only 4% in the first quarter of 2008 to the first quarter of 2009, and increased 8.5% in the first quarter of 2009 versus the fourth quarter of 2008.

The current financial crisis has raised uncertainty amongst builders and buyers of buildings across America. This uncertainty has also affected our competitors and created a volatile pricing environment in our industry that compressed the spread between what we paid for a pound of copper versus what we were able to charge for wire that contained a pound of copper. In the first quarter of 2009, this spread fell by 23% versus the first quarter of 2008, and it fell by 41% versus the fourth quarter of 2008.

We attempted to lead the industry with several price increases during the quarter but met limited success, as the average price of wire sold dropped 26% while copper cost declined only 16% on a sequential quarter basis. Our reps in the field also tell us that the volatility of copper over the last year coupled with declining industry volumes has caused many of our distributor customers to lean down their inventory levels. The low inventory levels in the distribution chains makes Encore's excellent order fill rates more valuable to customers who are gravitating towards a just-in-time inventory.

We believe our volume decreases are less than total industry and we believe that we were able to get a slight premium for our service level from customers who realize they are saving money from by buying from us.

Making $0.20 per share in this economy is an impressive accomplishment and we thank our employees and associates for their tremendous efforts. We want to thank our shareholders for their continued support. Frank?

Thank you, Daniel.

In a minute, we will view 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 our financial results. This release is available on the Internet or you can call [Denise Lis] at 800-962-9473 and we will get you a copy.

Before we review the financials, let me indicate in these 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 press releases.

Now the financial results. Net sales for the quarter ended March 31st 2009 were $144.5 million compared to $281.8 million during the first quarter of 2008. Total dollar sales and average selling prices fell due to declining copper prices. Net income for the first quarter of 2009 was $4.6 million versus $13.6 million in the first quarter of 2008. Fully diluted net earnings per common share were $0.20 in the first quarter of 2009 versus $0.58 in the first quarter of 2008.

On a sequential quarter comparison, net sales for the first quarter of 2009 were $144.5 million versus $180.2 million during the fourth quarter of 2008. Net income for the first quarter of 2009 was $4.6 million versus $16.7 million in the fourth quarter of 2008. Fully diluted net earnings per common share were $0.20 in the first quarter of 2009 versus $0.72 in the fourth quarter of 2008.

As usual, the true story behind our earnings fluctuations is in the spread between what we paid for a pound of copper versus what we were able to charge for wire that contained a pound of copper. As Daniel indicated, in the first quarter of 2009, this spread fell by 23% versus the first quarter of 2008, and it fell by 41% versus the fourth quarter of 2008. These spreads close in the comparison periods of 2008 and then fell back in 2009 amidst the price cutting be witnessed in the industry in the first quarter of 2009.

Investors who have followed us for some time and understand the dynamics of this business have always focused on the spread as the key driver of our earnings and understand that LIFO adjustments are consistently applied. LIFO serves to bring the latest cost of materials into the statements and allows these spreads to be accurately included in our results in a timely fashion. Our low cost structure enables us to continue to produce earnings in these turbulent times.

We continue to maintain a strong balance sheet. The only long-term debt we have as of March 31, 2009 is $100 million in long-term notes due in 2011, with a $150 million revolving line of credit standing at a zero balance. In addition, we have $230.7 million in cash as of March 31, 2009. We were also pleased to declare our 10th consecutive quarterly cash dividend during the first quarter of 2009.

We want 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, please call 866-551-4520, and enter the conference reference number 247273#. This information is also posted on the Internet.

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

Thank you. As Frank highlighted, we feel Encore performed well in the past quarter. We believe we are well positioned for the future. And Eric now we would invite the questions, please.

(Operator Instructions). First up is Michael Coleman with Sterne, Agee. Please go ahead.

Good morning.

Hi Michael.

Daniel, normally you get a seasonal lift in volumes from your first quarter to the second quarter. Kind of given the environment and what you are seeing in April, does this pattern hold, or to what degree is this pattern muted in the kind of environment that you're seeing?

Well, during the first quarter, Michael, January and February were what they were and March actually picked up a little bit toward the end. So with that said, and discussing the first quarter, it appears to be headed in the right direction.

Okay, in the first quarter, given the volatility in pricing and so forth, are you seeing contractors delay purchases or defer purchases?

You know, that has been going on for 12, 18, 24 months now, but it seems to be possibly in some areas it is about as lean as it could get and it's run its course. And in other areas, we are still seeing the growth and the orders coming in, specifically job-related to universities and schools and hospitals and municipal type buildings. So it really, as far as cutting back, we have been in the same environment now for about 18 to 24 months.

Okay. In terms of project activity or large projects that you know about kind of in the pipeline, what are you seeing there in terms of out of the next couple of months?

The ones that were put on hold you know are starting to leak back out into the market. We have had some competitors receive orders back you know over the last year or so. But that seems to have run its course.

What we're seeing in the market today more specifically is jobs that are out there are pretty quick to be cut. They are in the market to buy. The manipulation or the back and forth or the shopping, the games that used to be played are not being played.

When people come to the table now, Michael, it seems that they are ready to purchase the wire, which really helps us, it helps our model. It is the way for us to go to market. So I think the activity today, and as I stated at the end of the first quarter, seems to be headed in a positive direction, both volume and in the process, the order process.

Okay, thanks.

You bet.

Next up is Robert Kelly with Sidoti & Company. Please go ahead.

Daniel, Frank, good morning.

Hey, Rob. Good morning.

Question on startlingly strong sequential quarter volume growth, what was the primary driver?

Well again, we saw some good strength toward the end of the quarter and it appears that, from our standpoint, that the folks that we like to go to market with are seeing some successes with obviously their contractors going forward. The games of guessing on copper and waiting to see what copper is going to do and what have you, when things get as tight as they have gotten on the margin side and the spread side, the games that typically are played in the market tend to dry up and go away.

It is a very serious market right now, the sell side. When we're in the field, traveling last week, I was able to speak with several customers. You know their business is good relative to where they where. You know I don't know that anyone can compare back 2006 or 2005 levels, but recent history, their order level is good. People are getting paid on time, we're getting paid on time, and those are a couple of good keys.

Okay. You had mentioned the inventory downstream at the distribution level, is that a matter of them going even lower on the weeks that they're carrying on is that just a function of the end market demand?

You know I think it's a mixture of both. The volatility, more than anything, has kind of made believers out of folks that they can't outguess which direction copper is going, and one of the things we try to do in the field is sales people, myself included, has tried to convince these people it is really -- you just can't depend on which direction you think copper is going to go.

It is too risky and even if you do get it correct and predict the exact percentage that copper ends up going down for that particular time period, that doesn't mean building wire prices are going to follow exactly, which is something that we did have in the first quarter. The sell price deterioration exceeded the decrease or the decline in Comex pricing.

So you just cannot outguess copper. And for the most part, we have made believers out of the customers that we call on and again it is back to seriousness in the market. We try to help our customers with their service levels from here and quite frankly we push that. We feel like that is one of our strengths is having the service levels that we try to maintain and it allows the customers to kind of smooth out if you will some of the volatility.

Okay great. You had referenced I guess order flows starting to stabilize a bit in the back of the March quarter. Selling prices also starting to stabilize?

Yes, a little bit. Again, you get a swing in copper of $0.10 or $0.15, and if it is going down, and you initiated a price increase, you obviously lose the traction that you had going into it. But overall, prices have improved a little bit, and again with the serious approach to the order book, it appears that we are getting some traction on the volume side.

Okay. And then just one final one, SG&A management, is that kind of run rate, the $10.6 million we saw in 1Q, should we expect that for the balance of the year?

That should be pretty close, Bob. I mean again that is not --- here's the key, and again SG&A is a little bit deceptive, because in the S part, there is really only two accounts, and that is freight and commissions. And if copper and our sales prices rise, the commissions, which are a percentage based factor, will go up in terms of dollars. And so that won't fix the $10 million run rate. And we would be happy to see that, we would be happy to see the more commissions on higher sales.

The freight, as it did last year, can spike up due to extemporaneous factors, namely diesel prices and the diesel [adder] we're paying, and this year it has come off a little. So, the G&A portion, which is the small portion is very small, and that is relatively fixed.

So the year-over-year decline here for SG&A in 1Q is more of just price and volume driven?

Yes.

Okay. Thanks guys.

Thank you.

Next this Keith Johnson with Morgan Keegan. Please go ahead.

Good morning.

Hi Keith.

Just real quick, kind of following up on that SG&A comment, could you break out -- or question -- could you break out the selling and G&A piece for the first quarter?

Sure. In Q1 of 2009, the selling part is $7.6 million and the G&A part is $3 million. And again the selling is $3.8 of that $7.6, or half exactly is freight.

Okay, right. Appreciate it. And I guess you made the comment that, or the comment was made earlier about getting paid on time, so I guess there was no issues on the receivable side of the business or anything along those lines in the first quarter?

No.

Okay. I was wondering, back to the volume question, were the regions on the commercial side of your business that may have looked better than other regions of the country, or were there -- I think there was a question earlier about large projects -- was there a timing on some large projects and they have helped volumes in the first quarter?

No, not really. Most of the larger projects are broken up into phases. What I mean by that, Keith, is in the past it wasn't uncommon for the copper or the building wire price to be firm through a longer time period.

We have been super aggressive in the market trying to convince the distributors to shorten that timeframe because of volatility. Rather than going into six months type pricing situation pricing situation, we are really encouraging them to go quite a bit shorter with the pricing.

So again, it is hard to say exactly what you give credit to. It is more of a combination of a lot of little things, but there was not any one huge marquee type job that put us over any specific number and volume. It was just actually appears to be some pretty decent type of activity out there relative to the prior 18 months.

Okay. And I know you guys have mentioned several times this morning about buyers, maybe looking at things differently and being very serious when they come to the table. I was trying to I guess get my arms around kind of the customer psychology and how even though copper was down a lot year-over-year, it did move a lot within the quarter, and then I guess continued into the first part of April.

And in the past, I've guess the way I always understood the market is when those move happen, you do have customers say, well, I and not going to sit around, maybe I will take a little bit more, because I don't want to get caught holding -- buying more expensive copper, basically back to the old mentality of timing the market. Was there -- did you detect any of that in the move in copper from I guess a $1.30 or so range in January position I guess to $2.20 there for a short period of time?

Yes. In the quarter itself, there were times when we had a two or three, four days run on copper which certainly helped to support the price increases that we were trying to put through the market, there is no question.

Okay. And do you think that help support some of the moment on the volume side to some extent?

Sure. Had to a little bit, yes.

Okay.

Yes.

Okay. And what about I guess on the CapEx, I was wondering if you could -- what it was for the first quarter and maybe kind of have you guys are looking at 2009 in the current environment?

Right now, through Q1, we were at $12.2 million, and right now the best guess we have is in the $18 million to $21 million range depending on the timing of some of the projects Daniel is looking at later in the year -- in the third and fourth quarters and depending on the timing of those payments.

Okay, and you said first quarter spending was $12.2 million?

That's correct.

Okay. So I guess maybe large projects, we could look forward to maybe some benefit later in the year that may have occurred in 1Q?

It is really kind of spread out amongst several miscellaneous things.

Okay, all right, thanks and good luck.

You bet. Thanks Keith.

Next up is Joe [sic] Nathan with Restoration Capital. Please go ahead.

Hi guys. It is Gil Nathan from Restoration. Sorry, real quick, that CapEx number was what?

$12.2 million.

For Q1?

Yes sir.

Okay, thanks. A question for you on inventory, how much in finished goods, in work in progress is actual copper versus -- what is the finished goods number that we're looking at in the inventory breakdown?

You're talking in dollar terms?

Whichever you prefer, it doesn't matter.

Well, generally copper makes up 70% to 80% of our finished goods, and we're pulling that number right now, but you can count on that, and that would be in the Q again.

And what is the poundage on that?

We generally hold about six to eight weeks worth of inventory, so we don't usually get into the volumes and talk about our sales volumes or production volumes. But in that, we turn our inventory on average six to 10 times a year. You can pretty much count on six to eight turns.

Okay, great. A question for you, on the commercial construction site, you guys decided to that you're seeing maybe a little pick up on maybe more municipal type product projects, but the environment for commercial real estate side of it, office and apartment type buildings, it seems that there is a big slowdown going on there. How much of an impact do you think that has for you and how much can it be offset by some of the more municipal type projects or energy type projects?

Well, Gil, we have gone through specific slowdowns in the past and there is products to address those and then obviously we're constantly -- I mean continually and aggressively attacking cost and looking at opportunities on the sales side.

So we have you know products that move differently within segments. We tried to move those products within a segment to particular customers or not particular customers, but to answer your commercial real estate question more specifically, I'm not sure what the exact impact would or wouldn't be based on those reports that you're seeing. But we have seen a pickup, it is not substantial, and it is relative to recent history, but it seems that the activity in the market for our commercial and industrial product has picked up, which is reflected in our volumes.

Okay and one last question. On a gross margin kind of level you guys talked about spread, do you see the gross margin being sustainable even with copper picking up or improving over the next couple of quarters?

It is hard to see that far out, depending on where you opinion is that copper is going to go or not go. But you know we typically do better in an increasing steady, copper rising market. If that, I would expect the earnings based on historical earnings to be better.

Our approach to the market has been to continually attack the cost side and maximize every sales opportunity that we can. Again, having said that, the volatility has changed the buying patterns or buying habits or behavior on the distributor side. So as we sit today, the things are -- the market is showing positive signs. Again, there is not those long-term lock-up type deals where the risk is super huge. So it is more of a, you know, a market that fits our model pretty well. Having said that, we are somewhat bullish here on copper for various reasons. As long as the things continue as they are in the market today, I see no reason for us not to continue to grow that.

Okay, thanks a lot, guys.

You bet.

(Operator Instructions) Gentlemen, we do have a few more questions -- just be one second.

Next up is Louis Corrigan with Kingsford Capital. Please go ahead.

Hi. Could you talk about the LIFO impact on the quarter, was it a benefit, or did it hurt you?

There was a slight benefit of $5.3 million for the quarter early in the quarter. That was a benefit and as the quarter wore on, it swung back the other way and almost zeroed it out.

But so the net benefit for the quarter was $5.3 million?

That's correct.

Okay. And I noticed that your prepaid expenses were up quite a bit sequentially. It is actually at a level that it hasn't been in a while and I wonder what was part of that?

There's just two things really. Number one is timing as always. When you get copper in here, and when you don't, and whether sometimes the miners will pre-ship and April copper and we accrue it and haven't paid for it yet, or pay for it yet and so forth, it will be prepaid. And we moved one asset for sale into current status, which is in the other assets.

And how much was that, was that a couple million or?

Yes. About $3 million.

Okay. You know I'm thinking back to your last call which was I guess about six weeks into the quarter and it sounded like that you were seeing relatively stable prices in a pretty contained competitive environment. And since that point, copper had gone up, and usually that is in an environment where you you're able to pass along higher prices.

And I guess I'm curious what happened in the last six weeks of the quarter to sort of unleash a more competitive environment? And I guess that is especially true given that you saw that the volumes pickup later in March, which I think, would tend to make the pricing even better.

Yes. You know again it is tough to predict what our competition is going to do or not do. We are somewhat reactive in the market. Obviously February was pretty weak. From that standpoint, we weren't able to hold any pricing of any consequence on the increase side in February. It did -- the pricing decreased faster than copper went down and then it improved in March. That is the part in the quarter.

From Q4 of 2008, I think that quarter, copper average was around $1.75 to give you some life there. For the first quarter of 2009, average was about $1.56, $1.57. So there was about a $0.20 swing on the downside from Q4 to Q1. With that kind of steep downside, you can't hold the pricing.

So is that wrong, I'm just looking at the price of copper out there, I mean it went up from the beginning of the quarter to the end of the quarter. Is that -- do you have to look at it on some sort of two-month line basis or --

That changes. It depends on the market that you are in. But again you have people predicting copper going down that we compete with, so they're going to cut prices to move inventory before they get caught on the way down. Then copper turns back up, you get a price increase in place, then copper $0.10 the next day, you lose the traction on the price increase. You put another one out at the end of the week, try to make it effective on Monday. Same kind of thing repeats itself. So we had three or four, maybe five different price increases from mid to late February through March.

Okay. Thanks very much.

Next is Bill Baldwin with Baldwin Anthony Securities. Please go ahead.

Good morning, Daniel and Frank.

Hi Bill.

Can you talk a little bit about what is going on in terms of any of your competitors shedding any capacity or has there been any capacity rationalization in the industry in the past six to 12 months or more recently?

You know, in general, yes. Specifically we would rather not say too much but because I can see on the screen that they are on here with us.

Okay.

Which is fine, but you know...

[Feb] is a one-way street. We are all private, you are public.

Yes sir, and I would invite them to go public. But when you see what happens in the industry on the demand side, and you are somewhat familiar with our story and I appreciate that, but we will run the plants and to try to maintain some balance between what we are actually selling at that moment and inventory levels. We don't specifically set the plant up to run X number of copper pounds and try to push that into the market. That is just not our style.

We have had some turnovers in the market from a competitor standpoint, management in different areas, and that has caused some turmoil. Changing reps in a particular territory is not always good for that territory. We haven't changed our reps. I'm speaking of competitive changes from the sales standpoint. So that really hasn't helped the market.

Maybe from the capacity side that you're talking about earlier, there has been some talk and some rumors and you get feedback from different industry partners, that kind of thing. But my guess is that most of them, have cut back in some fashion, either from six days to five, or five and a half to five, or five to four, and I think that is what would happen, is they would throttle back, and possibly not push so much product into the market.

Let me rephrase a little bit, Daniel. Let me ask you this. Do you think that during this period we'll see permanent reduction in capacity in the business?

You know we are in that same slot that we have been in the past. Next month will be 20 years for me at Encore, and I have seen seven or eight significant competitors go away. And typically, it is during one of these times where you get some, you go through the cleansing process or retrenching or whatever the hot word is of the day. But it appears to me that there is one or two guys out there that really should be doing something different than selling building wire.

Amen. That would be great. I mean you guys are by far the most efficient operators in the business.

Thank you, sir. I appreciate it.

And you are making money in this environment. I've got to believe that the ones that are not so efficient have got to be having a real tough go over there, yes. Thank you much. Good luck to you and look forward to watching your developments going forward.

Thanks Bill.

Next is Eric Marshall with Hodges Capital Management. Please go ahead.

Good morning guys.

Good morning.

Hi. Not to beat the dead horse here asking more questions on pricing, but the weakness that we did see in building wire prices in the first part of the quarter, do you think part of that was just maybe some inventory reductions, not only in the distribution channel, but also with some of your competitors due to just need to reduce working capital because of balance sheet issues?

Yes.

And to the extent that that is kind of -- we kind of pass that, or do you think that could continue?

You know again -- yes, the answer is yes. The short answer is yes.

Okay.

We have seen some improvement. You know the last 10 to 15 days of March were better than the first part of that month, which was better than the first part of the quarter. And today as we sit factually, as I know it, things are going along okay.

And then did you guys give a CapEx number for 2009?

We said that the current estimate, Eric, is in the $18 million to $21 million range.

And is it all maintenance related? Or does any of that...

I wouldn't say it is all maintenance, but there is no one huge project to point to and really talk about.

Okay. So it's not really -- not really expansionary, maybe some enhanced efficiencies and maintenance?

Exactly.

Okay. And what was it last year?

Last year we spent right on the order of I think $18 million, but we are double checking the numbers as I speak.

Okay. Thanks a lot guys.

You bet.

Next is Michael Coleman with Sterne Agee. Please go ahead.

Hi Daniel. All these years we have focused a lot on potentially losing a customer with Southwire being the largest, and [Wire] second, and then maybe Cerro. There has already been a fair amount of concentration. So I guess how much of a benefit do you think it would actually be to you if a number four or number five would at best high single-digit market share went down in the market? Do you think that is an actual benefit longer term or is that something that just isn't that big of a deal anymore given the concentration?

Well, the short --

Yes, go ahead.

Yes. The short -- sorry to interrupt you, Michael. Short-term, it would be fantastic because the uncertainty that could lead to in the market. Long-term, it would be good because the other two guys that you mentioned participate on the retail side to a pretty large extent and as you know our space is in the wholesale electrical distribution market. That would be super helpful if we lost a number four, that would be great.

Okay. Thinking about it on the other side, you mentioned earlier your channel partners are doing better supporting them, service and so forth, could you get consolidation in the electrical distribution channel, is that a benefit to you on the volume, and how does that play out on the pricing side?

You know that is a great question. That is our customers' distribution this side has gone through significant changes over the years. Most recently in the last 10 to 12 months, there has been some -- there has been some favorable changes for Encore. It does help on the pricing side and it does help for us to on the volume side; as you can see from the fourth quarter the first quarter, our volume was up.

So you know those types of things -- look, we are very selective in who we sell out there and there are reasons behind that. And typically obviously or maybe not so, we choose the good guys. The good guys are going to win in the end. So I really believe that the quality of our distribution and the quality of our sales reps is the only real reason as to why we're up in volume from fourth quarter to first quarter. We're taking advantage of what is happening in the marketplace.

Thanks. Do you happen to know what kind of exposure or what kind of mix you would have to a regional independent that is perhaps undercapitalized in this market, that may be losing out in the distribution?

You know, we feel like sitting here that we are very close to those customers that we sell to, as close as you can get. You know we are in the field with them on a weekly, daily basis. To answer your question, I don't know of any of our current customers that are having that type of problem as you described it.

Okay, thanks.

All right. Gentlemen, that appears to be all of the questions for today.

Super. Thank you very much and thank you guys for questions. We're, as Frank indicated, there is a replay, you guys can call and get. We are available at the office anytime, and if you see some orders out there that you like for us to look into, feel free to give me a call at the office.

Thank you for your attention, ladies and gentlemen. This conference has concluded. Thank you.