Encore Wire Corp (WIRE) 2009 Q4 法說會逐字稿

Hello and welcome to the Encore Wire fourth-quarter conference call. As a reminder, all lines will be on listen-only mode and there will be a Q&A session at the end of the call. (Operator Instructions). At this time, I would like to welcome and turn the call over to Mr. Daniel Jones, President of Encore Wire. Go ahead, please.

Thank you, Amanda. Good morning, ladies and gentlemen, and welcome to the Encore Wire Corporation quarterly 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, and we have several others in the room as well.

Our unit volume decreases caused by the slowdown in construction have created a volatile pricing environment in our industry. They've compressed the spread between what we paid for a pound of copper versus what we are able to charge for wire that contained a pound of copper.

In the fourth quarter of 2009, the spread fell by 48.2% versus the fourth quarter of 2008, and it fell by 27.1% for the full year of 2009 versus 2008. We attempted to lead the industry with several price increases during the quarter, but met strong competitive price cutting as the average spread fell 8.8% on a sequential-quarter basis.

We managed to earn $3.6 million this past year in a difficult environment, due to our low-cost business model and aggressive cost cutting in all facets of our operations. Our staff has worked diligently to control costs effectively while maintaining the service level to our customers Encore is known for.

Our reps in the field tell us that the volatility of copper over the last year, coupled with declining industry volumes, has caused many of our distributor customers to maintain very lean inventory levels. Low inventory levels in the distribution chain make Encore's excellent order-fill rates valuable to customers who are relying on a just-in-time inventory.

We believe that our volume decreases are less than total industry and we believe we are able to get a slight premium for our excellent service level from customers who realize value. We thank our employees and associates for their tremendous efforts. We also would like to thank our shareholders for their continued support. Now I'll turn it over to Frank to go over the financials.

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 the [Denise Liss] at 800-962-9473 and we will get you a copy.

Before we review 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, the financials. Net sales for the fourth quarter ended December 31, 2009, were $177.1 million, compared to $180.2 million during the fourth quarter of 2008. Unit sales in the fourth quarter ended December 31, 2009, decreased 13.1% versus the fourth quarter of 2008, offset by higher prices for building wire sold in the quarter. The average price of building wire sold increased 13.2% per copper pound sold in the fourth quarter of 2009 versus the fourth quarter of 2008.

Sales prices rose primarily due to higher copper prices. However, the intense building-wire industry competition did not allow wire prices to rise as much as copper prices. Copper prices rose 57.1% in the same-period comparison.

Net income for the fourth quarter of 2009 was a loss of $1.9 million versus positive income of $16.7 million in the fourth quarter of 2008. Fully diluted net earnings per common share were a loss of $0.08 in the fourth quarter of 2009 versus earnings of $0.72 per share in the fourth quarter of 2008.

Net sales for the year ended December 31, 2009, were $649.6 million, compared to $1,000,081,000 during the year ended December 31, 2008. Lower prices for building wire sold in the year ended December 31, 2009, accounted for the bulk of the decrease in net sales dollars, declining 28.8% versus 2008.

Unit volume in the year ended December 31, 2009, decreased 15.6% versus 2008. Net income for the year ended December 31, 2009, was $3.6 million versus $39.8 million in 2008. Fully diluted net earnings per common share were $0.16 for the year ended December 31, 2009, versus $1.70 in 2008.

On a sequential-quarter comparison, net sales for the fourth quarter of 2009 were $177.1 million, versus $168.7 million during the third quarter of 2009. Unit volume decreased 3.1% on a sequential-quarter comparison while the average selling price of wire increased 8.5%.

Net income for the fourth quarter of 2009 was a loss of $1.9 million versus a positive $300,000 in the third quarter of 2009. Fully diluted net income per common share was a loss of $0.08 in the fourth quarter of 2009, versus positive earnings of $0.01 in the third quarter of 2009.

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 dramatically year over year and also slid on a sequential quarterly comparison.

Informed investors who have followed our stock for some time and understand the dynamics of this business have always 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.

Our low cost structure continues to enable us to produce earnings in these turbulent times.

Our balance sheet remains strong. We ended 2009 with $226.8 million in cash on December 31 and $100 million of debt on our senior notes. As we announced previously on our press release on January 15, 2010, we paid off the entire balance of the senior notes and are now debt-free, leaving us with over $100 million in cash and our $150 million revolving line of credit untapped.

We also declared our 13th consecutive quarterly cash dividend during the quarter.

We'd like everyone to know that this conference call will be available for replay after the conclusion of this session. If you wish to hear the replay, please call 866-206-0173 and enter the conference reference 251159#.

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

Thank you. As Frank highlighted, all things considered, Encore performed very well in the past. We are never happy about a loss, but we believe we are well positioned for the future. We will now take questions from our listeners, Amanda.

(Operator Instructions). Liam Burke, Janney Montgomery Scott.

Daniel, could you give us some of the thought process as you went through the quarter? Obviously, you weren't getting the minimum margin you needed to make money on the wire from the distributors. How do you decide whether or not to take the price that's out there versus turning down the deal, saying, sorry, there's not enough profit in it for us?

Right. Most of the damage, Liam, occurred in October. We had copper running about -- I think it ran somewhere around $0.20 a pound from beginning to end, and we had some competition that felt like copper should be $1.50 or $1.75, somewhere in that range, and they were out explaining why copper was going to go down. So in that timeframe, we lost a significant amount of sale price in October with copper going the other direction.

So it somewhat cleaned up in November and December, but when that happens, you fight for each order that you can break even on or make any money on the order whatsoever. They're just -- it was very far and few and far between in that month, but the decision that you look at is we can sit out completely or step in and support some of the customers that are with us until things return. And as I mentioned, November and December were a little bit better than October. But, you can't just completely shut those customers out.

Great. And there was an announcement that AIW was going to be acquired by Southwire a few weeks ago. It looks like you've got the first step in consolidation of the market. How does that affect your outlook for 2010?

In the past, it's -- the immediate effect is it's a good thing. Long-term effect, we'll have to wait and see.

We view it overall, though, as a positive for the market itself, and again, we have a few competitors that operate differently when you have one or two competitors that seem to try to maintain and establish some discipline in the market. I think that the fact that South taking over the AIW plants will be a good thing, long term, in the market for us.

Keith Johnson, Morgan Keegan.

Just a couple of quick questions, maybe just kind of from a housekeeping standpoint. What should we think about for 2010 capital -- for CapEx spending?

Right now, what we have on the docket, Keith, is running in the $16 million to $20 million range. And you know, as Daniel and the staff come up with additional projects, that could go up a little.

What about -- could I get breakdown on volume changes in the residential market and the commercial market for 2009 versus 2008?

Are you looking at the quarter to quarter or the year over year?

Year over year, I'm sorry.

Year over year, residential was down 36% and commercial was down almost 9%. As we indicated in the last-quarter call and we're seeing it a little more going forward again, the comps on residential are getting a little better. As you can see third quarter to fourth quarter, residential was down on a consecutive basis only 5.5%. It appears that for the last five quarters, starting in Q4 of 2008, that residential kind of is forming a bottom.

When I look at the down 9% in volumes on commercial and then read about all the more significant declines in nonresidential spending -- or starts, how should I think about commercial volumes if we look into the first half of 2010? Do you guys think that there is a significant drop kind of coming because building wire is sort of a latter-stage construction process or is their market share being gained in the commercial channel or how should we kind of think about that?

Those are great questions. I didn't really know we were going to discuss 2010. My report was on 2009 (multiple speakers) quarter, but I'm more than happy to answer that question.

What we're seeing today is January and February are okay. They are not great. They are okay. Things are going along fine.

Again, October was the key to that fourth quarter. There was really very little business to be had. Copper prices were going up, sale price was going down, and that pretty much summed up the month of October.

As far as if we compared volumes going forward to October, I'll tell you I think all the numbers are going to be positive. If you look at going forward versus 2004, I don't think we'll get back to that volume yet.

Gil Nathan, Restoration Capital.

My question about the -- your competitor being taken over by Southwire was obviously answered. My question now is copper prices have been down for the last couple weeks. Are you seeing pricing pressure again? I know you've tried to implement the price increases and it's been kind of tough, but how has it been? You said that one competitor was pricing at $1.50 copper back in October. Is that happening at all anymore or where do you think that's kind of headed if copper is stable?

The last couple of days, copper has actually been up. But overall, the gist of your question, I guess we could move it based on whatever timeline, but in general, the price cutting that we saw in October started to dry up in November and was not there as much in December.

And as we continue to go forward, rather than seeing the price cutting that we were seeing in Q4, it's kind of -- when copper is down $0.03 or $0.04, $0.06 today and back up $0.03 or $0.04, $0.06 tomorrow, there's more sitting on the sidelines, so to speak, rather than quick to jump to a lower price, and evidence of that is a price increase that was announced yesterday by one of our competitors. We were able to pick up in the marketplace, so there is more discipline today than there was in October.

But, again, November and December, there was more discipline than October. So, I'm trying to stay on track and discuss the fourth quarter in 2009 is the reason for my answer.

Looking back, Frank mentioned a bottom in housing that you think is starting to happen. I'm just wondering, do you see an abnormal amount of residential construction based on the first-time homebuyer tax credit, like we saw some of the builders increase inventory a little bit seasonally. It's not very normal. So I'm just wondering if you guys saw that, too?

It's possible that that contributed to some of it. I don't think it's all of it, but one of the -- in the residential construction side, in the field, what we're seeing is, when we travel around, there seems to be a pick-up in knocking down houses and building a new one on existing lots.

How that's reported and to what credit you would give that type of construction, I really am not sure. But we are actually seeing that in some of the major cities around the country. Not on the volume level, again, that we were at in 2006 or 2007 when it peaked, but there is pockets of activity.

Some of the, I guess, projects have changed hands. Maybe there are two or three investment generations removed, but we are seeing some activity. It's not huge. It's not large numbers in volume, but there is activity out there.

Okay. And just a last question. For 2009, what do you think your average capacity factor was?

I don't think it's any secret. We were running, basically, four days a week in most departments. We'd like to run six or seven. But I'm not going to force inventory or copper pounds through for the sake of cutting the price to move the volume in the marketplace. So we were running at about four days for 2009.

Brian Kowalchyk, Patara Capital.

Frank, I think that -- when you answered the questions regarding the unit volumes on a year-over-year basis, was that for the full year of 2009?

That's correct.

Could you perhaps provide that detail for the fourth quarter on both a sequential quarter and year-over-year basis, please?

Sure. Q4 sequentially to Q3 of 2009, residential was down, as I indicated, 5.5% and commercial was down about 1.5%. On a fourth quarter of 2009 versus fourth quarter of 2008 comparison, residential was down 9% and commercial was down 15%.

That's helpful. Thank you very much. Could you tell me what the impact, if there was, of any LIFO adjustment within the quarter?

For the quarter, we took a charge to earnings of $5.2 million for LIFOs.

And was there any LIFO liquidation benefit or detriment?

Actually, we did have some benefit of going back into old layers, kind of inadvertent. We really are trying to hold inventories pretty constant. But as you know, and we've indicated, there was a little bit at the tail end with an upsurge in orders in late December when we were shut down.

So there was a LIFO liquidation benefit in the quarter?

Yes, sir, a little bit.

We can get that out of the K?

Yes, we're putting that all together.

Okay, that's helpful. And just overall, can you give us a sense as to your thoughts on the overall health of the other remaining competitors out there in this environment?

The list continues to shrink. This is my 21st year here at Encore. And I can think of six or seven, most of them larger than us at the time, that are not around anymore in this market.

You know, the guys that are still out there, it's -- Southwire is a well-run company, well-funded, I'm sure, very active in the marketplace. Cerro is owned -- parent company is Berkshire Hathaway. I don't think they're going anywhere. You know, and then there's a handful of other competitors that may be short-lined or parent companies, you know, in Mexico, what have you, but the field is narrowed, and Brian, I don't -- it would be great if we had a public competitor. It would be great, and I would welcome them all to go public. That would be wonderful.

But we don't have -- it'd be supposition on our part, but what we're hearing in the marketplace is, and knowing what we know about cost structure in the plants that we compete with, I would guess that their structure would lend itself to -- the guess on our part would be they're not doing so hot.

Sure, understood. That's kind of what we were thinking here as well. And maybe one last one for Frank. Could you perhaps provide a little more color on the breakout of your SG&A in terms of the component parts?

In which period, Brian?

I'm sorry, Q4.

Q4. You bet. Q4, freight again, and you'll see this in the Q -- in the K, rather, was 2% of sales, or $3.5 million. Commissions were 2.6%, right in line about $4.6 million, and the remaining G&A was about $3.3 million, and then we had a $75,000 accrual for bad debts.

And that run rate on the G&A seems to have ticked up a little bit. Is that due to the audit preparation and end of year Sarbanes stuff?

Yes, that, and some legal.

Legal? Okay, that's right, I forgot about that. Okay, gentlemen, thank you very much.

Robert Kelley, Sidoti & Company.

Do you know offhand what AIW's market share was prior to their acquisition?

You know, I don't have a good handle on that. We competed with those guys on the commercial side. They did not manufacture a full line of residential products. So, I had been through each of their production facilities, except for one. And I just -- I really don't know.

I think I have an idea of what their capacity would have been, and we could probably back into an overall number, but I just don't have an idea of what their market share was.

Thanks. And then, just as far as January, February, you've called that being okay. Are you seeing a little bit of uptick in volume, along with the restored price discipline, or are you still seeing kind of a flattish trend from what you saw in 4Q?

There's been improvement in the discipline. As far as the volume goes, you know, it's very volatile. We'll have a day that's phenomenal and unexpected, and we'll have a day that it's super quiet.

So, overall, it's a little early to say what's going to happen. But what we've seen so far has been moderate volume and better price discipline in the market. Listen, it's not a secret, I don't believe, when I'm telling you that October was not good, and it's presumptuous, but I'm going to tell you if it wasn't good for us, it wasn't good for anybody. So, there has to be some discipline and, typically, in this industry, there is an outside force that moves us to discipline, whether it be copper or PVC is tight or freight goes crazy or what have you, but we rarely put through a price increase and it holds, unless there's some type of outside influence. So, discipline is better today than it was in October.

Kerry Rigdon, Mayberry Partners.

How would you describe the -- on this distributor -- from a distributor standpoint, inventory levels now as it compared to the end of the year, end of 2009?

Based on the size of the orders that were coming in in the fourth quarter versus the average size of an order today, I will tell you that, for the most part, there's exceptions, but for the most part, our distributor customers are not carrying a whole lot of inventory.

I know it's a relative comment, but traveling around, I was out last week, making calls and what have you with the customers, and there's just no inventory in the field to speak of at all. The electrical contractors -- they don't carry any inventory. Distributors are super lean, and I think the reason for some of that is the value of a pound of copper and leaving it sitting on a job site doesn't make a lot of sense.

So, in that chain, from manufacturer to installer, I will tell you I think inventories are super lean. I don't think that's any brilliant statement. I think it's more out of self-defense than anything.

Okay, and concerning the residential side, I know, Frank, you were talking about it looked like as we go back a number of quarters that it looks like there's a flattening of that line, at least a basing. Are there any areas of the country that you're starting to see some improvement or is it pretty constant across the -- from coast to coast?

Well, again, you know there's pockets where it's okay, but if I had to be pinned down to one area that seemed to be talking more positively than the others, it would be in the Northeast. But again, they were the first to go and the furthest to go. So, maybe -- who knows. I'm not good at predicting what's going to happen.

But there's more positive conversation in that area, but they've been beat up for close to three years now, so maybe it's time for them to change or whatever.

That was our last question.

Super, Amanda, thank you. We appreciate all the calls and all the questions and look forward to speaking to you guys on the next call. Thanks a lot.

Thank you, ladies and gentlemen. This call has concluded.