Encore Wire Corp.: Squeezed By Competitors

April 23, 2008
Copper wire producer says competition's price-cutting strategies sunk profit.

When the housing market tanked in 2007 some copper wire producers responded by slashing their prices to boost sales volume. Initially, Encore Wire Corp. rebuffed the cost-cutting strategy but was "forced" to match its competitors in the latter part of the year to sell off excess inventories, said Daniel Jones, president and CEO, of the IW 50 Best Manufacturer for 2007.

The result was lower margins and a 73% profit drop for the year and a loss for the year-end quarter.

"Certain competitors continue to respond to the slowdown in residential construction by cutting wire prices in an attempt to maintain market shares, compressing margins below our expectations at this level of copper prices," said Jones in a statement.

Full-year profit fell to $30.8 million, or $1.30 a share, from $115.1 million, or $4.95 a share, in 2006. For the fourth quarter, the company posted a loss of $1.1 million compared with net income of $6.2 million during the year-earlier period.

The slow construction market has hurt the industry because of lower demand for copper electrical wire used for interior wiring in residential and commercial buildings. Encore's residential wire unit sales were down 11.5% in 2007, commercial sales were up 2.9% and armored cable sales increased 419%. In the fourth quarter total unit sales were up 10.1% from the year-earlier period, with residential units up 3.5%, commercial up 11% and armored cable up 85.5%.

The company tried to maintain profit margins in October by increasing prices as copper costs rose. At the time, Encore purchased copper quantities that exceeded its sales volume at the COMEX division of the New York Mercantile Exchange price of $3.59 per pound. That created a problem for Encore as competitors kept their prices low and copper prices fell in November and December to $3.13 and $3.02, respectively.

Encore Wire Corp.
At A Glance

Encore Wire Corp.
McKinney, Texas
Primary Industry: Fabricated Metals Products
Number of Employees: 755
2006 In Review
Revenue: $1.2 billion
Profit Margin: 9.22%
Sales Turnover: 2.63
Inventory Turnover: 11.69
Revenue Growth: 64.8%
Return On Assets: 33.04%
Return On Equity: 54.69%

"With this volatility in copper, we were forced to reluctantly match our competitors' pricing in November and December, selling the remaining high-priced October copper in the next two months," Jones says.

Jones notes that company debt remains low with $100 million in long-term notes due in 2011, with its $200 million revolving credit line paid off. In addition, the company has a net debt-to-equity ratio of 28.2%.

"With our exceptionally strong balance sheet, we have the capability to approach the future confidently while our short-term focus is one of riding out this storm," said Jones in the Feb. 5 statement. "Our low cost structure and strong balance sheet have enabled us to withstand tough periods in the past, and we believe we will emerge strong than most when market conditions improve."

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