Encore Wire Corp (WIRE) 2011 Q4 法說會逐字稿

Ladies and gentlemen, hello and welcome to today's Encore Wire fourth-quarter earnings conference call.

As a reminder, all phone lines are on listen-only mode and there will be time for question-and-answer session at the end of the conference. (Operator Instructions).

At this time, I would like to turn the call over to Mr. Daniel Jones, President and Chief Executive Officer, to begin. Please go ahead.

Thank you Eric. Good morning ladies and gentlemen and welcome to the Encore Wire Corporation quarterly 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.

Pleased to announce strong quarterly earnings in a turbulent economy and the severe recessions currently taking place in the construction industry. As we have repeatedly noted, the key metric to our earnings is the spread between the price of wire sold and the cost of raw copper purchased in any given period. The spread increased 42.5% in the fourth quarter of 2011 versus the fourth quarter of 2010. For the year ended December 31, 2011, the spread increased 33.8% versus the year ended December 31, 2010, driving our increased earnings while unit volumes also increased 6.2%.

The earnings per share of $2.14 in 2011 are the second highest in the history of the Company, while the net sales dollars of $1.180 billion are the highest since 2007 and the third highest in our 22-year history.

Our EBITDA for 2011 was $90.2 million. We achieved the milestones in the midst of the prolonged construction recession. The results are a testimony to our efficient operations and the disciplined pricing environment that drove the improved spreads we discussed earlier.

We continue to support industry price increases in an effort to maintain and increase margins, and we believe our superior order fill rates continue to enhance our competitive position. As our electrical distributor customers are holding lean inventories in the field, and as orders come in from electrical contractors, the distributors can count on our order fill rates to ensure quick deliveries from coast to coast. We have been able to accomplish this despite holding what are historically lean inventories for us.

We believe our performance is impressive in this economy. We thank our employees and associates for their tremendous efforts. We'd also like to thank our stockholders 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 review Encore's financial results for the quarter. After the financial review, we will take any questions you might have. Each of you should have received a copy of Encore's press release covering Encore's financial results. The release is available on the Internet or you can call Tracy West at 800-962-9473 and we will get you a copy.

Before we review the financials, let me indicate that, throughout this conference call, 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 here today. I refer you 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 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 financials. Net sales for the fourth quarter ended December 31, 2011 were $248.3 million, compared to $256.2 million during the fourth quarter of 2010. Prices for building wire sold in the quarter ended December 31, 2011 are virtually flat versus the same period in 2010. Unit volume in the fourth quarter of 2011 decreased 3.4% versus the fourth quarter of 2010.

Net income for the fourth quarter of 2011 increased 259.7% to $16.3 million versus $4.5 million in the fourth quarter of 2010.

Fully diluted net earnings per common share increased 258.4% to $0.69 in the fourth quarter of 2011 versus $0.19 in the fourth quarter of 2010.

Net sales for the year ended December 31, 2011 were $1.18 billion compared to $910.2 million during the same period in 2010. Higher prices for building wire sold in the year ended December 31, 2011 accounted for most of the increase in net sales dollars, increasing 22.2% per copper pound versus the same period in 2010.

Unit volume in the year ended December 31, 2011 also helped to increase net sales dollars, increasing 6.2% versus 2010.

Net income for the year ended December 31, 2011 increased 227.9% to $50.1 million versus $15.3 million in the same period in 2010.

Fully diluted net earnings per common share increased 226.9% to $2.14 for the year ended December 31, 2011 versus $0.66 in the same period of 2010. On a sequential-quarter comparison, net sales for the fourth quarter of 2011 were $248.3 million versus $319.4 million during the third quarter of 2011. Unit volume decreased 13.8% on a sequential-quarter comparison.

Net income for the fourth quarter of 2011 increased 18.8% to $16.3 million versus $13.7 million in the third quarter of 2011.

Fully diluted net income per common share increased to $0.69 in the fourth quarter of 2011 versus $0.59 in the third quarter of 2011.

Our balance sheet is very strong. We have no long-term debt and our revolving line of credit is paid down to zero. In addition, we have $112.3 million in cash as of December 31, 2011. We also declared another quarterly cash dividend during the fourth quarter of 2011.

We also would 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 taped replay, please dial 866-551-4520 and enter the conference reference number 279991.

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

Thank you. As Frank highlighted, all things considered, Encore performed well in the past quarter. We believe we are well-positioned for the future. We would now like to open up the lines for questions from our listeners.

(Operator Instructions). Dmitry Shapiro, Global Hunter.

Good afternoon everyone. Congratulations on a very strong quarter. Given the fact that your Q is not out yet, I have a couple of questions about your margins. Your gross margin during the quarter was significantly higher than we anticipated. I would like to get a sense for the drivers there, because copper prices fell significantly during the quarter, yet your spreads have widened considerably.

That's correct. What we saw in the fourth quarter, as you indicated, was COMEX average tapered off to about $3.40 or so from the prior quarter. What we were able to do was hold some pricing discipline in the market in the fourth quarter mainly due to the volatility. There was a lot of uncertainty in the market. There were orders that folks did not necessarily have time to wait to place on the commercial side. So there was some good volume, but overall the volatility led to some uncertainty, and we held the line on pricing. We didn't see the volume actually worth going after, and we held the line on pricing. We were able to not just copper, I guess I should mention, the other raw materials as well declined, some of the things that we watch that did not decline, they remained flat, like diesel and benzene and nylon for example. But overall, raw materials costs fell a little bit in the fourth quarter and we were able to hold the line on pricing, sales price.

Okay. Also along the lines of my previous questions, did you liquidate any older layers of the life reserve during the quarter which would result in a positive bump to your gross margins?

No. No we did not.

Okay, great. So now that we are about halfway through the current quarter, can you tell us if you're seeing changes in the pricing environment during January and February of this year relative to Q4? Do you think that those Q4 spreads are sustainable, or should we expect margins to normalize to closer to historic trends?

That's a lot of questions run into one. As far as what's going on in the first quarter, I'll have to defer that to the first quarter call and press release.

As far as being able to maintain margins, that kind of remains to be seen. We are still working in the quarter, and I really don't want to give too much information on Q1 yet, because we just don't know what's going to happen in March.

As far as normal margins, well, I tell you, I guess I would have to answer that in the form of a question. I'm not sure what you consider to be normal. There's differing opinions on that, but again, it will be a supply demand type issue. On top of that, the copper volatility and timing. As raw materials move up and down during the quarter, if we are able to hold the pricing discipline, I think the answer to all three of your questions is yes.

Okay, great. My last question, your SG&A expenses declined quite a bit in Q4. Can you tell us more about what specific initiatives have you undertaken to reduce operating costs, and if you believe this new cost level is sustainable?

Well, there's a lot of cost saving ideas that we go through, but if you dissect specifically what you're asking about, I think you'll see the majority of the decline was in legal fees.

Okay, so would you say this level of SG&A is sustainable going forward?

Yes.

This has gotten back to where we normally were trending, yes.

Great. Thank you very much, and congratulations on a very strong quarter again.

Thank you for the questions, appreciate it.

Robert Kelly, Sidoti & Co.

Good morning. In your 3Q release, you took some time to talk about how copper price dropping towards the end of the quarter gave you a big boost in the margin. You did see similar language in this fourth-quarter release. Are we to -- if we were to understand that, are you seeing pricing discipline improve during 4Q? I mean you saw a pretty big jump in the spread sequentially. Are you seeing pricing discipline get a little bit better as 2011 progressed?

Yes. Q4 had -- the idea was and the feeling still is that there was more pricing discipline. The drop from Q2 to Q3 I think was about $0.08 or $0.09 in COMEX, and it was probably $0.50 or $0.60 COMEX pricing drop from Q3 to Q4. So it was a huge drop in COMEX, but, again, I think the bigger contributor at the time for Q4 was that we were able to hold pricing longer; we didn't have to cut prices as quickly in the market. Again, some of it was an in-house decision. We didn't think there would be a benefit to chasing orders that may or may not happen, and so we did probably sacrifice a little bit of volume in Q4 for some profit.

That's a very encouraging development. In the past, you talked about your spread relative to where it's been historically. We kind of bottomed out in the early part of 2010. Where the spreads are in 4Q, are they 50% plus SARS coming all the way back to where they were at peak levels in 2005, 2006? Any help there as far as how much we've recovered off the low?

No, you have -- the spread is virtually tripled off the low in Q4 versus eight quarters ago. It is only about 25% at most, 20% to 25% below the peak spreads achieved back in Q2 of '06.

It's 25% below peak. Thanks guys. Great work.

Keith Johnson, Morgan Keegan.

Good morning guys. Just a quick couple of questions. I guess based on the last caller's question, it sounds like a little bit of the year-over-year volume decline may have been, as you guys suggested, backing out of some lower price points in the market. Did you see any --

I'm sorry, year-over-year was up a little bit but the quarter --

-- quarter --

The fourth quarter is where we sacrificed a little volume, yes.

Was that all in-house decisions or were you seeing -- how did you kind of see the market play out in your various geographies as you moved through the quarter from a demand standpoint?

Again, there was a lot of visible volatility in COMEX. Our customers and users, for whatever reason, try to buy based on what they feel copper is going to do or not do. They obviously think they want to buy at the bottom, so as COMEX is going down, you just -- there's no way to generate demand in that declining period. So when that started to happen, which is obviously out of our control, there's some things that we can do or not do. We made the decision to clean up some inventory in-house that we had, some items that were slower moving. We got rid of some items that had picked up the pace a little bit, inventory turns. We added a little inventory. So it all kind of fit together. The idea was, look, if the customer is not ready to buy, our quotes are typically high. When those orders came back around, maybe it had to be delivered on a short-term basis, that kind of fits our distribution model a little bit better.

So, I don't want to say that it was a -- we were super hard-headed, but we just kind of navigated through the volatility and picked and choose the orders that fit us best from a profit standpoint, but also operationally something we could ship immediately out of self-defense because of the volatility.

Okay. What kind of feedback I guess from your reps out there are you getting as far as kind of construction activity? Are they beginning to see pockets where things are picking up? In other words you referenced these orders that had to be shipped in a short fashion sort of regardless kind of where the price point was. Is that on projects that are beginning to pick up from a demand standpoint, or is there any color you could add on that side?

Yes, that's a good question too. What we're seeing from the guys in the field is just that. We are seeing a lot more activity. The demands that we are pushing back down on the salesforce have increased, we are requiring quite a bit more information a lot earlier in the process. I think that, again, is market-driven.

Geographically, I think it's the areas that you would suspect that are doing pretty well. The Pacific Northwest is good, West Coast, California, Southern Cal, Northern Cal are okay, over into the Carolinas. Georgia, Florida is pretty good. The Northeast is good. In Texas, I don't know that we saw as big a dip as anyone else in construction activity, but we seem to be a little insulated from the bottom. So I mean -- Texas, Oklahoma, New Mexico still going along pretty well, but just in general, the feel is we are a lot busier. Activity level in the sales office is up but, again, that's a combination of we are requiring a little bit more information and trying to get it a little bit quicker in the process. But overall there are some pretty nice projects out there. It just takes a little harder work to win those.

Okay. Last question, as you moved through the fourth quarter, was there any one month that stood out as far as performance or activity level relative to others as you kind of went from -- into October, November, December?

Volume wise, October was strongest. That's typical. September, October generally are good, and November and December came off a little bit.

One thing just add to that, Keith, we had about a $0.10 per pound COMEX jump from mid to late October into November. I think the difference in the two months was about -- ended up being about $0.10. So in -- when copper is trending up, we typically do better. As Frank indicated, from a timing standpoint, that made things kind of line up. So it was good in October, right in leading up to the Thanksgiving holiday. Typically, things that we see here, there's obviously exceptions to this, but most of the time from about Thanksgiving through the last Super Bowl party, there's not a lot of work going on out in the field. Then after the Super Bowl parties are over, we get back to work.

Great, thanks a lot.

Bill Baldwin, Baldwin Anthony Securities.

Good morning, Daniel and Frank. Two questions. Can you give some color on what your plant utilization levels are kind of running at here in the fourth quarter?

Secondly, has there been any additional capacity in the industry taken out here in 2011?

Well, we are running five, 5.5 days basically. Fourth quarter is really not a good time to look because we traditionally shut the plants down a week or 10 days during the holidays for scheduled maintenance and what have you. But all things considered, we are running 5, 5.5 days, which is good. I'd love to be running 6, 6.5 days, but it is what it is.

As far as capacity in the market, I don't know of anyone adding capacity or taking capacity away, either one really. I think it's kind of neutral at this point. We had a larger competitor buy a smaller competitor. The last change in the market is most likely those AIW plants that were rationalized and taken off-line to some extent, but overall I don't know of anyone that is really adding or taking away in the copper building wire side.

Okay, thank you much.

(Operator Instructions). Brad Evans, Heartland Funds.

Good morning. Thanks for taking the questions. I'm just curious. Frank, do you have a preliminary CapEx number for 2012 at this point?

As we announced in the press release in December, we are building a new aluminum plant. I'm looking at it right outside the window here. Our forecast for that plant is in the high $20s million to low $30 million, $30 million or so. Then we'll probably -- our manufacturing guys will be focused on that project the bulk of the year, but there's always some other upgrades and/or replacements that come out. So in that press release, we said we'll probably be spending somewhere between $30 million and $40 million in 2012.

Okay, thanks for that refresh. Are you getting a big tailwind from low natural gas prices in terms of running the plants? Is that a big -- is that moving the needle at all?

It's a small component of our cost here, but it has certainly helped. Electricity, which is tied to natural gas, and natural gas itself, which we use to melt the copper in the rod mill, have both come down significantly over the last couple of years. That has helped, but not something that you would necessarily notice.

It all adds up, okay. I know, in the press release, you said your customers are holding inventories fairly tightly, but do you think there was even further inventory destocking in that late December time frame?

For the most part, I think that there was. When you have the second -- we started out 2011 the first quarter with like of $4.30-something average COMEX, then it went to $4.15 in Q2. It was $4.07 in Q3, and went down to about $3.40 or so for Q4. When you have a $0.50 drop in COMEX -- and I hate to give copper too much credit there -- but again, our customers watch it daily. When it's trending down, they don't want to invest in any inventory. As you get into Q4, the inventory tax management type ideas come into play. Again, most of the restocking that we see at the distributor level and even the installer and end user level, most of that restocking -- and I know it sounds maybe a little goofy -- but most of that starts after the Super Bowl. I don't know anything else to tie it to. That's just kind of what happens.

But definitely Q4 saw some inventory levels that were reduced. Again, that plays into our model. We are pretty quick on delivery and order turnaround. Our fill rates were 100% in the fourth quarter, so we like it. We think it is a good idea for them to hold off on inventory and whatever, so it plays into our model pretty well.

Okay. Just one other thing here just from a housekeeping perspective, Frank, can you give us the fourth-quarter breakdown between commercial and resi in terms of the mix of the business and maybe year-over-year how volume trends you saw there in the fourth quarter?

You're looking at Q4 versus Q4?

That's correct.

In Q4 of '11, residential copper pounds shipped were just under 16%, meaning the commercial was 84%-plus. On a year-over-year basis, in Q4 versus Q4, residential was actually up 12%, which sounds great but I would caution you that that's on a very low base, so small increments make fairly large percentage differences. And -- but it looks good because it looks like perhaps it's bottoming out. Commercial year-over-year, Q4 to Q4, was down about 5.5%.

Okay. One last one for Daniel in terms of I love the discipline in terms of walking away from this price volume. Has that situation ameliorated itself in the fourth quarter? Are you still having to have a stiffer back in that respect?

Things are going along good so far. It's early in the quarter still, but things are going along pretty well.

Keep up the great work guys, thanks.

Cary Rigdon, Mayberry.

Good morning gentlemen. Just more of a clarification. Could you comment on the cash position difference from Q3 to Q4?

Sure. It's actually a great question because we see some of the things in the press at times that misinterpret the swings in cash. Our cash goes up and down overwhelmingly because of working capital requirements and overwhelmingly because of Accounts Receivable.

What you saw in Q3, and we talked about it in Q3 as it drained cash down, was the fact that copper had been very strong. Sales dollars and volumes were very strong, and so at the end of Q3, we had a lot of money tied up in receivables.

On a quarter-to-quarter basis, our AR came down over $70 million primarily because, A, as we indicated, the average price we paid for copper was down almost $0.50 a pound quarter-to-quarter and the timing of the sales, which was not unusual, was that October was our biggest month in terms of sales dollars. By the end of the quarter, you generally collect most of that first month of the quarter sales. So October got paid and November, December were the two months that were left on the books. They were down. We harvested that $70-plus million.

In addition, at the end of the year, as Daniel indicated, right in the last couple weeks of December, we got a little bit of the push on sales that we had the inventory and could ship on short notice. We dragged our inventory down not much but a couple million pounds in December. So you add those two together and bingo, you get $100 million on the balance sheet.

Terrific. Thank you very much.

[Tom Brashear], [Dresden] Capital.

Hello Tom. I think we lost Tom.

I am here. Can you hear me? With the improvement we are seeing in multi-family construction, is the residential sales that you are experiencing improving from that predominantly, and do you expect that trend to continue?

That's a tough question. It's month-to-month really. Some of the residential areas obviously are reported to be growing, and geographically they could be down, so net-net, there may be some room for improvement there obviously, but as Frank indicated, the base is so low, it's tough for us to get super positive about the fluctuations or the volatility in demand for the residential stuff.

But having said that, overall, residentially, it depends on housing. All the numbers that give credit on the way down will also give credit on the way out. So it just depends on which report you read, and who you trust when you read those. But again, we've got a little bit of uptick there. But the base is so low, we are not really thinking that that's any long-term trends or anything yet, other than when you see the positive reports that come out.

Very good. Thank you so much.

Joe Giamichael, Global Hunter.

Thank you very much. Given the fact that -- to follow-up on one of the previous questions -- the working capital needs to fluctuate pretty significantly and there are certainly times that you would see a material drawdown on the cash levels. Given your CapEx rates, it seems that you will still maintain a pretty healthy excess cash level. In terms of value creation, are you considering increasing the dividend? Are there other sorts of potential capital projects out there? How do you intend to redeploy the capital?

We are looking at two things. We are looking at all the options on the stock side, and we are also looking at -- we are in the midst of, as Frank indicated, about a $30 million project. I'd like to at least get that one closer to finished before we start the next one. But we definitely have some ideas. It will depend obviously on timing and market conditions, but as we are going forward here in the middle of this project, we've been able to identify a couple of opportunities that we are going to explore a little bit deeper. But before we get too giddy over the $100 million cash position, I want to point out I am very bullish on copper. If copper ends up running up to $10,000 a ton from where it currently is, you will see that cash go away pretty quickly. So as copper goes up in value, we will consume more cash. Ironically, if the copper value for some reason were to drop and revenues were to come down with it, you'd also see that cash position be depleted. So we don't get too excited about those cash positions other than it allows us the flexibility to do what we want.

Got it. Just along those lines, assuming fluctuations either way, how do you sort of view an appropriate capital structure or sort of a realistic leverage ratio? You guys have shied away from the use of leverage. I'm kind of curious what your outlook is.

We haven't shied away from it when we needed it, but for the past four years in this industry recession, we basically have been in the banks with our revolver, which is always there. So our capital structure has $200 million of revolving credit available. We lowered it about 1.5 years ago, just because we wanted to save some fees on the excess unused portion. We dropped it to $150 million. We did go into the banks in September for a short period of time, and then, as we said, when you're running a $1.2 billion company, and copper, our prime commodity, fluctuates as much as it has, really what I call the motion of the ocean is a $100 million swing either way. And so that, as Daniel indicated, $100 million here and there we don't want to make light of it, but it can swing that far in the quarter. You saw that this quarter.

Long-term, Joe, if we need the money, we have banks who talk to us on a regular basis and we can expand it. If you look back in our history, we had private placements with the insurance industry going back to the '04 '05 time frame for $100 million. When we paid those notes off early a couple years ago, we parted as absolute friends and those companies are eager to help us in the long-term with some long-term debt as well. So we have a plan in place that will accommodate those needs as they arise.

Got it, great. Last question, and I promise I'll get out of the way here. Having been an organic story and having a nice footprint that's fairly easy to manage efficiently at this point, I know there's a number of private assets out there that are being marketed right now. I'm assuming you guys would not look for material acquisitions at this point. Is that a fair assumption?

It is, to the most part, but basically we've got a few things we've looked at. There's a few other things we are going to continue to look at soon. The next couple of months or so we will be kicking some tires, but here's the way I look at that. If there is something out there that fits what we do and will not take away from our successes in the market with the existing customer base, we are going to be all over it. But I don't want to add something -- I don't want to get larger and poorer. That's not the goal. So as we kick the tires on these things, and as you mentioned, organic growth, what typically happens, we look around and see something that makes sense, but so far for the last 22 years, it's made more sense for us to start fresh new, new here, new equipment, new plant, new building, geographic location, makes sense. We haven't really fragmented the management group, and we have been able to hold on to a culture which I think is key to our success.

Got it. You've done an excellent job doing it. Thank you for taking my questions.

(Operator Instructions).

You'd think that Theo Jackson would ask a question.

At this time, that appears to be all of the feedback.

Eric, thank you very much. Callers, we appreciate your participating in the questions. It makes it a lot easier to discuss openly. Thanks a lot.

Thank you very much, ladies and gentlemen. Today's conference is now concluded.