Encore Wire Corp (WIRE) 2009 Q2 法說會逐字稿

Good morning and welcome to the Encore Wire Second Quarter Earnings Call. As a reminder, all lines will be on listen-only mode and we there will be a Q&A session at the end of the call. (Operator Instructions).

At this time, I would like to turn the call over to Mr. Daniel Jones, President, so that we may begin our call. Go ahead please, Mr. Jones.

Thank you, Reyna. 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.

We continue to announce earnings in the midst of a tough competitive environment and our industry in the slump and the overall U.S. economy. While we certainly want to produce more profit than we currently are, our results must be viewed in the context of the current economic and industry conditions.

The slowdown in construction activity in the United States continues to impact our industry adversely, as it has over the last three years. Our unit volume shift in the second quarter of 2009 decreased 9%, versus the first quarter of 2009; it should be noted that this 9% sequential unit decline compares to the first quarter of 2009 during which we had a 9% sequential increase in units versus the fourth quarter of 2008.

The current financial crisis has raised uncertainty amongst builders across America. Uncertainty has also affected our competitors and created a volatile pricing environment in our industry that actually compressed the spread between what we paid for a pound for copper versus what we were able to charge for wire that contained a pound of copper.

In the second quarter of 2009, this spread fell by 9.4% versus the second quarter of 2008, and it fell by 5.1% versus the first quarter of 2009.

We attempted to lead and support the industry with several price increases during the quarter, but met limited success as the average price of wire sold increased only 21% while the copper cost increased 34% 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 chain makes Encore's excellent order-fill rates valuable to customers who are gravitating towards adjusted-time inventory.

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

Making a profit in this economy is an impressive accomplishment and we thank our employees and associates for their tremendous efforts. We thank our shareholders for their continued support. Frank Bilban, our Chief Financial Officer, will now discuss our financial results. 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 Encore's financial results. This release is available on the Internet or you can call Denise List at 800-962-9473 and we will get you a copy.

Before we review the financials, let me indicate that 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.

Now for the financial results; net sales for the second quarter ended June 30, 2009 were $159.4 million, compared to $322.8 million during the second quarter of 2008. Lower prices for building wire sold in the quarter ended June 30, 2009 accounted for most of the decrease in net sales dollars, declining 38.1% per copper pound sold versus the same period in 2008.

Unit sales in the second quarter of 2009 decreased 20.2% versus the second quarter of 2008. Sales prices fell primarily due to lower copper prices and building wire industry competition.

Net income for the second quarter of 2009 was $600,000 versus $1.3 million in the second quarter of 2008. Fully diluted net earnings per common share were $0.03 in the second quarter of 2009, versus $0.06 in the second quarter of 2008.

Net sales for the six months ended June 30, 2009 were $303.8 million, compared to $604.6 million during the same period in 2008. Again, lower prices for building wire sold in the six months ended June 30, 2009 accounted for most of the decrease in net sales dollars; declining 42.6% versus the same period in 2008.

Unit volume in the six months ended June 30, 2009 decreased 12.4% versus the same period in 2008.

Net income for the six months ended June 30, 2009 was $5.2 million, versus $15 million in the same period in 2008. Fully diluted net earnings per common share were $0.22 for the six months ended June 30, 2009, versus $0.64 in the same period in 2008.

On a sequential quarter comparison, net sales for the second quarter of 2009 were $159.4 million, versus $144.5 million during the first quarter of 2009. Unit volume decreased 9% on a sequential quarter comparison.

Net income for the second quarter of 2009 was $600,000 versus $4.6 million in the first quarter of 2009. Fully diluted net income per common share was $0.03 in the second quarter of '09, versus $0.20 in the first quarter of '09.

As usual, the real story behind our earnings fluctuation 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 highlighted earlier, our spreads were down year over year, and also on a sequential quarterly comparison.

Informed investors who have followed us for some time and understand the dynamics of our business have focused on the spread as the key driver of our earnings and also understand that LIFO adjustments are consistently applied under GAAP. LIFO accounting merely serves to bring the latest cost of materials into the statements and allows these spreads to be accurately included in our results.

It is our low cost structure that continues to enable us to produce earnings in these turbulent times. We continue to maintain our strong balance sheet. The only long-term debt we have as of June 30, 2009 is $100 million in long-term notes due in 2011, with our $150 million revolving line of credit at a zero balance.

In addition, we had $232.3 million in cash as of June 30, 2009. We also declared our eleventh consecutive quarterly cash dividend during the second 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 this taped replay, please call 866-551-4520 and enter the conference reference number 253193#.

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

Thank you, Frank. As Frank highlighted, Encore performed well in the past quarter. We believe we are well-positioned for the future. And Reyna, we would now like to entertain the questions, please.

Thank you. (Operator Instructions). Our first question is from Liam Burke. Go ahead, please.

Good morning, Daniel; good morning, Frank.

Hey, Liam.

I know this is tough in terms of end markets. I mean that it's no secret that both the residential and commercial are beginning to soften, creating other issues aside from the spread. But if I segmented commercial, are there any pockets doing any better or any worse, vis--vis last year?

There are a few pockets, Liam, where we're seeing some positive numbers. They're more of the specialty cables that we manufacture, rather than just the broad sense of the term building wire. We've been able to maneuver through and use our flexibility, our strengths, to write those orders and it's more specifically driven on the commercial side, by hospitals and schools and government buildings. And schools would cover everything from an elementary/preschool type campus, all the way up to major colleges that seem to be expanding, pretty much nationwide.

Okay. Because if you looked at the commercial unit volumes, they were down-- they weren't down certainly the amount that residential was, but-- usually the wire goes in at the tail end of the building project, so the business would have held up as the commercial business was softening. Are we seeing any of that here, or has that run its course?

Well, it's hard to predict. I mean I think you can do enough research to support either conclusion. But one of the things that we're seeing in the field and having been on the road as late as yesterday with customers, there's some cautious optimism there. But again, there are jobs that are going on. We saw the real cutback in inventory at the distributor level to maybe unprecedented type levels for us, and then as that started to turn a little bit to the positive side, they started to bring wire and some orders back in.

So it's tough to say exactly where it's headed. But there are some positive signs out there. Most of the larger distributors that held on to some inventory have seen some gains. The guys that ran themselves completely out of inventory for fear of the volatility of the price of building wire going forward and unable to try to predict pricing patterns going forward, those guys are trying to play a little bit of a catch-up game, I believe, at this point.

Great, thank you.

Our next question is from Robert Kelly. Go ahead, please.

Good morning, Daniel and good morning, Frank. Just a question on the mix now between residential and commercial; what was that in 2Q?

In the second quarter, the commercial was just over 80%.

Okay. And then for 2Q as well, your cash flow from operations and CapEx, if you would?

The cash flow from operations in the second quarter was $5.7 million and the CapEx was $3.8 million.

Do you-- are you still sticking with a budget of $18 million or so for '09?

We-- last quarter I believe we said $18 million to $21 million was the range we were shooting at. I think with a couple of things that have come up, today our best guess on CapEx for '09 is $23 million to $25 million.

Okay, great. And then just on the pricing; selling price increases, you were able to raise prices to some degree to combat higher prices in 2Q. Thus far, in July, have you gotten your head above water? Were you able to recover the last 13% that you hadn't covered in 2Q? How do we think about that?

Well, I'd like to tell you a lot about that. Unfortunately, it's in the forward quarter. But to answer it more directly, Robert, we are in the midst of a couple of consecutive price increases right now. And I would say that the second one is too early to say yes or no on, but we are still pushing the price increases through.

And again, along those lines, it's tough to discuss just openly the pricing strategies and what have you. But it's not hard to run the numbers on the raw materials and find out where the sell prices need to go.

Understood. It seems in the last two years or so, you have difficulty when prices are rising, but you do a little bit better should prices drift down or collapse like they did in the second half of '08. Are you feeling confident if prices were to kind of see their seasonal drift back; you would be able to lower prices slower as we've seen in the last two years or so?

Yes and no. Historically, prior to the last two years, the market was-- or it was much easier to increase prices as your raw materials were increasing. And I'm going to have to answer this one carefully. But there was a-- I guess there's a change in the thought process maybe at one or two of the competitors, that that didn't make sense to them. So the last couple of years, since they've been very active in the market, it's been much harder to increase prices in line with copper. Maybe they feel copper is too high or too low or they guess-- I'm not sure-- I don't have the insight that I would love to have there.

But to answer your question, the yes and no portion is yes, it's much harder to get price increases through today. It's almost as if we're in a market where they're running the sales desk much like a trading desk, based on volume rather than profit. But listen, that's not a new situation. We've gone through this in the past. This one just seems to be lasting a little bit longer.

Okay. Thanks, guys.

Yes, sir.

You're welcome.

Our next question is from Keith Johnson. Go ahead, please.

Good morning.

Good morning, Keith. How are you?

I'm doing okay. Just a couple of questions here; I guess first off, could you talk a little bit about the trends through the quarter both from maybe a demand standpoint-- in other words was it stronger earlier in the quarter and then maybe from a bottom-line standpoint?

Yes, we can do that. April wasn't so bad. May was horrible and June was a little bit better; each relative to each other, within the quarter. The pricing environment in June, from my perspective, was more on the upside-- the effort to get the prices up; because again, May was nasty.

From a volume standpoint, it's almost too strong of a word to use today to even say volume; there's just no volume to be had. But on the orders that are there, the day-to-day business that is there, all of those are being-- from a pricing standpoint is being scrutinized to the point where folks are buying really exactly what they need and sometimes they wait to buy, even though the product was needed, because the volatility is so-- the elasticity in pricing versus volume is kind of inverted today. And I hope that's not too confusing of an answer, but that's kind of where it ended up.

June seems to be a little bit stronger in those two topics; pricing and volume.

Okay. I don't know if there's a way you can answer this, but if you looked at kind of where you were in June and you looked at kind of where your pricing was relative to maybe where the copper market was on a monthly average; is there a way you could tell us maybe how far you were behind or maybe had you caught up and I think there was a question earlier about had you gotten back above water; maybe not looking in the forward quarter where we are today, but maybe if you just took June as a snapshot?

Well, you saw the earnings that we put out of $0.03. June was around break even; maybe a little bit better.

Okay. And what about-- I think there was a question earlier about maybe how the commercial markets are looking-- if you look out into 2010, maybe from some of the markets where you're seeing in the commercial side some positive trends on specialty cables; is there any benefit that you guys would look for out of the stimulus money as it gets into the system from government buildings or institutional buildings qualifying for some of that money?

We talk about that around here a little bit-- not a whole lot, but we're trying to get ahead of those projects as well. But as of this phone call, I just can't tell you that there has been any credit from our sales folks given to the stimulus money, as far as projects or what have you. But going forward, there certainly seems to be, at least at maybe a mid-level type atmosphere, of projects going forward.

Okay. And you made a comment I think on inventories being very lean. How does the inventory in the channel look, relative to what-- sequentially from the first quarter?

I think it's lower, somewhat. Most of the distributors that I'm in personally-- and I was in one yesterday in Northeast-- they're just super lean. And the fear is that they purchase the product one day and then two days later the price or the value of that has decreased significantly and they just don't want to have it on the shelf. They like to purchase it and have us deliver it and they invoice for it and get paid rather than the traditional cycle of going through distribution. They just don't want to hold it on the shelf.

Okay. Alright, thanks a lot.

You're welcome.

Our next question is from [Steve Boyer]. Go ahead, please.

Hi, Danny.

Hey, Steve.

How are you, sir?

It's good to hear from you.

It's good to talk to you. Is there anybody formally following you from a research standpoint? I mean Yahoo finance is kind of vague. It says one analyst follows you and they had a $0.25 estimate. I can't imagine they could be that far off, but I was just wondering-- is there anyone following you?

Maybe not in the traditional sense. We've got some guys that do a fantastic job and stay close to us and do their homework in the traditional sense. And we have one or two that write opinions that Frank and I are kind of confused as to where they got their information. So it's really-- but in fairness to those guys too, Steve, we don't really give guidance. You've followed the story for quite awhile now.

A long time; yes.

- and very familiar with how we go to market and stuff. But there's no one that really is-- there's one or two, like I said, that really stay and contact and there's a couple that write opinions that don't.

Yes. Is the book value around 17 a true liquid book value-- tangible book value?

Absolutely.

Yes, sir.

Okay. Keep your chin up; it's tough time.

Hey thanks; I appreciate the call.

It's good talking to you.

You bet.

Bye-bye.

(Operator Instructions). We have no more questions-- actually; we have one more question from Michael Coleman. Go ahead, please.

Hi, good morning. How are you?

I can't believe you took so long. Where have you been?

Last quarter we were talking a little bit about potential of disruptions within your channel on smaller, private distributors. I was wondering if you have any update there or whether you've seen any kind of mix shift within your channel to certain distributors-- obviously you're not going to name distributors-- but if you've started to see any mix shift within the distributors from smaller to larger or what have you.

That's a good question, Michael. There have actually been both. The smaller, independent guys that are strong in their market continue to be so. The national chains that may have went on a purchasing or expanding mission, have cut back in some market areas where maybe they had overlap between the original brand or location and a secondary location that may have been picked up in an acquisition. So we've actually seen both.

There's really not a huge differentiation between the chain and the strong independent in the marketplace today. Where we're seeing the change in customer base is with the fringe guys that maybe didn't have a super strong identity or on the other hand, maybe they were a very strong residential house and are going through some transition toward the commercial or industrial side. But overall, the A players are still the A players.

Okay. Thanks and good luck.

You bet. Thanks, Michael.

We have no more questions at this time.

Well, we certainly appreciate the call and Reyna you did a great job and we look forward to taking your questions on the next call. Thank you.

Thank you.

Thank you ladies and gentlemen, for attending. This call is concluded. Have a wonderful day.