Encore Wire Corporation
Q1 2010 Earnings Call Transcript

Published: 1 May 2010

[Operator:]

Hello and welcome to the Encore Wire first quarter earnings conference call. As a reminder, all lines will be on a listen-only mode, and we will conduct 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 and CEO.

[Daniel Jones:]

Thank you Ross. Good morning ladies and gentlemen and welcome to the Encore Wire Corporation quarterly conference call. I am Daniel Jones, the President and CEO of Encore Wire, and with me this morning is Frank Bilban, our CFO. Unit volumes decreases caused by the drop in construction activity continued to create turmoil in our industry during the quarter. A competitor exited the market by selling out to another competitor. Despite the continued volume decreases, there were positive developments, including the increase in spreads during the past quarter. The spread between the price of wire sold and the cost of raw copper is a key metric in this industry, and a key driver of the level of profitability. With our lost cost structure, there is strong upside leverage when the spread expands. On a sequential quarter basis, the average cost of copper purchased increased by 10.7%, while the average price of wires sold increased by 14.1%, increasing the spread by 28.6%. Our pretax loss of $4.1 million is $2.5 million net of income taxes, includes a one-time pretax charge of $2.6 million, $1.7 million net of income taxes associated with the debt retirement we executed in January. This positive change in sequential quarterly earnings occurred despite the 13.3% decrease in unit volumes sold. We produced these results in this difficult environment due to our low cost business model and aggressive cost cutting in all facets of our operation. We believe our superior order fill rates continued to enhance our competitive position as our electrical distributor customers are holding lean inventories in the field. The low inventory levels in the distribution chain make Encore’s excellent order fill rates 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 we are able to get a slight premium for our excellent service level from customers who realize they are saving money by buying from us. Despite our desire and effort to do better, our performance is impressive in this economy, and we thank our employees and associates for the tremendous efforts. We also thank our shareholders for their continued support. Frank Bilban, our chief financial officer will now discuss our financial results. Frank?

[Frank Bilban:]

Thank you Daniel. In a minute we will review Encore’s financial results for the quarter. After the financial review we will take any questions you may have. Each of you should have received a copy of Encore's press release covering Encore's financial results. This release is available on the Internet or you can call Denise List 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 quarter ended March 31, 2010 were $175.2 million compared to $144.5 million during the first quarter of 2009. Net loss for the first quarter of 2010 was $2.5 million versus net income of $4.6 million in the first quarter of 2009. Fully diluted net loss per common share was $0.11 in the first quarter of 2010 versus earnings of $0.20 in the first quarter of 2009. Unit volumes measured in pounds of copper contained in the wires sold during the period declined 30.6% in the first quarter of 2010 versus the first quarter of 2009. However, the spread between the cost of the pound of copper purchased and the price of a pound of copper sold increased by 12.3%. The 2010 first quarter results also include a $2.6 million pretax charge associated with the early retirement of long-term debt that the company paid off in January. On a sequential quarter comparison, net sales for the first quarter of 2010 were $175.2 million versus $177.1 million during the fourth quarter of 2009. Net loss of the first quarter of 2010 was $2.5 million versus a $1.9 million net loss in the fourth quarter of 2009. Fully diluted net loss per common share was $0.11 in the first quarter of 2010 versus a $0.08 net loss in the fourth quarter of 2009. Unit volumes declined 13.3% in the first quarter of 2010 versus the fourth quarter of 2009. However, the spread between the cost of a pound of copper purchased and the price of a pound of copper sold increased by 28.6%. We continue to maintain our strong balance sheet. We paid off our long-term debt and our $150 million revolving line of credit has a zero balance. In addition, we had $130.4 million in cash as of March 31, 2010. Our bank covenants were amended in the quarter to take current economic conditions into account. We also declared our fourteenth consecutive quarterly cash dividend during the first quarter of 2010. 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 866-206-0173 and enter the conference reference number 253 426 and the pound sign. I will now turn the floor back over to Daniel Jones, our president and chief executive officer. Daniel?

[Daniel Jones:]

Thank you, Frank. Ross, we are now ready for the question-and-answer session.

[Operator:]

Okay sir. (Operator instructions) We do have one question, which comes from Liam Burke at Janney Montgomery Scott. Please go ahead.

[Liam Burke:]

Good morning Daniel, good morning Frank.

[Daniel Jones:]

Good morning.

[Liam Burke:]

Daniel, do you have a breakdown of revenues or year-over-year revenue comparisons for the residential and commercial markets?

[Daniel Jones:]

Again, I have it in percentage terms.

[Liam Burke:]

That is fine.

[Daniel Jones:]

Residential in the first quarter of 2010 comprised 25% of our sales, and we will get you the revenue numbers shortly if we can, and the first quarter of last year residential was 18%, it was at 18% last year and 20% this year.

[Liam Burke:]

That is fine, thank you. And Daniel obviously with volumes down the way they are, you are showing some positive movements on the spreads, (inaudible) numbers are looking to be less worse which bodes better for the future. Is there anything more near term either in terms of geography or pockets of being the residential or commercial that are getting better for you?

[Daniel Jones:]

A few of the pockets commercially Liam seem to be really large jobs, pretty high profile jobs, there are still some activity at the universities and schools as far as the expansions go, there are still a little bit of the government buildings going on on the commercial side and then residentially there are areas for whatever reason that seemed to be picking up somewhat, again none of it is fantastic, it is all relative but it is still positive.

[Liam Burke:]

Great, thank you.

[Operator:]

(Operator instructions) We have one more coming into the queue, hang on one second, our next question comes from Kerry Rigdon at Mayberry Partners. Go ahead please.

[Kerry Rigdon:]

Good morning gentlemen.

[Daniel Jones:]

Hi Kerry.

[Kerry Rigdon:]

Just a quick question, there was a competitor that went out of the market space, was that early in the quarter, late in the quarter, and how would you characterize the change in the space after that exit?

[Daniel Jones:]

It was early, Kerry and I guess the best way to describe it would be the company that went out, I think it was maybe somewhat obvious that there was a lack of discipline, if you will, and certainly with the new owner, we are looking forward to increased discipline. They run a good company, it is probably time for the guys that got out to get up – they did a good job with what they did but there is no question that their path to market was a little bit extreme at times and certainly did not agree with the philosophies that we have. So we see it as a positive.

[Kerry Rigdon:]

Terrific. One additional question, you commented about the inventories at the distributor level and I know that has been a characteristic that has been out there for a while. Have you seen any change in that even if it is ever so slightly one way or the other where distributors are taking a little bit more inventory or that remained fairly flat for the past few quarters?

[Daniel Jones:]

We have actually started to see a little bit of a pick up in that category. There are some restocking, we feel certain, went on in late March, which was good. There was some seasonal maybe thought process there as well as some slight gains in business. I think most of the larger distributors that we sell to seem to be pretty optimistic going forward although maybe a little cautious, but they are still optimistic and we have seen a little bump in their inventories.

[Kerry Rigdon:]

Terrific. Thanks guys.

[Operator:]

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

[Louis Corrigan:]

Hi, you may have already mentioned this but I was curious if there was a LIPO benefit in the quarter.

[Frank Bilban:]

No there was a LIPO expense in the quarter of $8.5 million.

[Louis Corrigan:]

And that was the math for the whole quarter.

[Frank Bilban:]

Yes.

[Louis Corrigan:]

Okay. I noticed that the prepaid expenses are up quite a bit, are those prepaid purchases of copper or what exactly is that?

[Daniel Jones:]

Yes, that is primarily copper coming in at the end of the quarter.

[Louis Corrigan:]

How much of that is copper?

[Daniel Jones:]

Almost entirely copper.

[Louis Corrigan:]

Okay and I noticed that your payables were up quite a bit sequentially even though the inventory was obviously at a very low level. How did you manage that?

[Daniel Jones:]

That is really due to tightening if you look at the December quarter and this is pretty standard for us at year end, we tend in general and we did again this year in Q4 to take a fairly long shutdown of one to two weeks, and in anticipation of that we really kind of drained down our purchases in December as you can imagine, and so your payables at December if anything lined up being lower than usual.

[Louis Corrigan:]

Okay, I guess I am just confused though, because the inventory is at such a low level and looking at the period a year ago when the inventory was much higher, the payables are $18 million up year over year.

[Daniel Jones:]

Again that is just the timing of purchases in the quarter. If you have inventory on the floor it just depends, it could be the same, it could be up, it could be down, but we bought – with all the payables being up and the accruals at month end is telling you is that we got a lot of copper in, in the last couple of weeks of March.

[Louis Corrigan:]

Okay, thank you.

[Daniel Jones:]

You are welcome sir.

[Operator:]

(Operator instructions) We have one more question, and it comes from Brad Evans of Towerland [ph], go ahead.

[Brad Evans:]

Good morning everybody.

[Daniel Jones:]

Good morning, Brad.

[Brad Evans:]

I am just curious you mentioned Frank the improvement in spreads in the quarter, I am curious if you can articulate if that has continued into April and if that improved.

[Frank Bilban:]

We really cannot talk about April in the first quarter call. It would be glad to cover that in more detail on the next call. We do not want to say too much anyway competitively as I see that four of our five main competitors are online.

[Brad Evans:]

Understood. And Frank, can you give us the year-over-year volume changes for both commercial construction as well as residential?

[Frank Bilban:]

Q1 to Q1?

[Brad Evans:]

Yes sir.

[Frank Bilban:]

Residential Q1 to Q1 was down 25% and commercial was down about 33%.

[Brad Evans:]

Okay, thank you very much.

[Frank Bilban:]

You are welcome.

[Daniel Jones:]

Thank you Brad.

[Operator:]

(Operator instructions) Gentlemen that appear to be all the questions at this time.

[Daniel Jones:]

Ross, thank you very much for handling the call and thank you folks for calling in and participating, and we encourage you to call again next time. Thank you so much for the support.