Encore Wire Corporation
Q4 2020 Earnings Call Transcript

Published: 17 Feb 2021

[Operator:]

Welcome to the Encore Wire Reports Fourth Quarter and Full Year 2020 Results Conference Call. My name is Jenny, I'll be your operator for today's call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. Please note that this conference is being recorded. I will now turn the call over to Daniel Jones. Mr. Jones, you may begin.

[Daniel Jones:]

Thank you, Jenny and good morning and welcome to the Encore Wire Corporation quarterly conference call. I'm Daniel Jones, President, CEO and Chairman of the Board of Encore Wire and with me this morning is Bret Eckert, our Chief Financial Officer. Thank you for joining us on the call and for your interest in Encore Wire. We appreciate your continued investment, confidence and support during these uncertain times. The health and safety of our employees and their families remains our top priority and we are following CDC guidelines in maintaining safe working conditions, while we continued to serve our customers during this critical time.

[Bret Eckert:]

Thank you, Daniel. In a minute, we will review Encore's financial results for the fourth quarter and year ended December 31 2020. After the financial review, we will take any questions you may have. Before we review the financials, let me indicate that throughout this conference call, we may be making 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 Generally Accepted Accounting Principles, including EBITDA, which we believe to be useful supplemental information for investors are posted on our website. Net sales for the fourth quarter ended December 31 2020 were $380.8 million compared to $302.3 million for the fourth quarter of 2019. Copper unit volume measured in pounds of copper contained in the wire sold, increased 4.3% in the fourth quarter of 2020 versus the fourth quarter of 2019. Gross profit percentage for the fourth quarter of 2020 was 15.4% compared to 11.8% in the fourth quarter of 2019. The average selling price of wire per copper pound sold increased 21.1% in the fourth quarter of 2020 versus the fourth quarter of 2019, while the average cost of copper per pound purchased increased 18.9%. Net income for the fourth quarter of 2020 was $24.1 million versus $10.5 million in the fourth quarter of 2019. Fully diluted net earnings per common share were $1.17 in the fourth quarter of 2020 versus $0.50 in the fourth quarter of 2019. Net sales for the 12 months ended December 31 2020 were $1.277 billion compared to $1.275 billion during the same period in 2019. Copper unit volume measured in pounds of copper contained in the wire sold, decreased 5.4% in the 12 months ended December 31 2020 versus the 12 months ended December 31 2019. Gross profit percentage for the 12 months ended December 31 2020 was 15.2% compared to 13% during the same period in 2019. The average selling price of wire per copper pound sold increased 4.7% in the 12 months ended December 31 2020 versus the 12 months ended December 31 2019, while the average cost of copper per pound purchased increased 2.6%.

[Daniel Jones:]

Thank you, Bret. As we highlighted Encore performed very well in the fourth quarter and year-ended December 31 2020. Our low-cost structure, one location model and strong balance sheet have enabled us to withstand difficult periods in the past and they're continuing to prove valuable dwell. I'm very proud of our, each of our employees have rallied during this crisis and I want to thank our employees and associates for their tremendous efforts. We also thank our stockholders for their continued support. Judy will now take questions from our listeners.

[Operator:]

And our first question comes from Brent Thielman from DA Davidson. Please go ahead.

[Brent Thielman:]

Good morning, Daniel and Bret. Congrats on a great quarter. Daniel, I'd love to just get your assessment of whether the current demand environment is today? And I suspect we could see some issues with the weather across the country here in the first quarter. But - maybe what are your customers telling you about beyond that?

[Bret Eckert:]

You're talking about currently, in Q1?

[Brent Thielman:]

Well. I think, yeah, maybe in terms of what's happening across the country in Q1 thus far in the business, but maybe just sort of generally speaking what your customers are saying about the demand environment?

[Daniel Jones:]

Yes. I guess back in March or so of 2020, the feeling was that, there was a huge uncertainty obviously with COVID and the effects and what have you. But as the states that were closed and metropolitan areas that were closed down to construction deliveries opened back up, you can see that we did very well later in the year Q3, Q4 specifically. And so that demand really is good, it's continuing to be good. There is no question that the current weather that's impacting Texas along with many other states, it's going to have some type of effect for sure on slowing some stuff down for this week, but it will simply push this week's stuff into the following week and the sense of urgency will be there and without saying too many forward-looking things, I expect it to continue. Residential was really strong in 2020, it looks like there's quite a bit of time frame left in that growth area. The commercial industrial piece, we are seeing positive results. The aluminum piece is showing some positive signs and so with the tightness of raw materials specific to copper, but not to forget or diminish your discount the other raw materials. There is a true tightness and so it forces some discipline in the market, which as you know, Bret, being with us for many years, we performed incredibly well when there's processing discipline in the market.

[Brent Thielman:]

Daniel, with copper running - have you seen any - has that benefited the aluminum piece to any degree?

[Daniel Jones:]

I think there's always some sentiment that would support that for sure. As you know though, as copper gets super expensive, there's a lot of discussions around and there's many times there's discussions around substituting aluminum and what have you. The good thing in this scenario has been, for us anyway that there is a nice mix of both. The demand has been strong enough in 2020 to support the higher prices on the copper. We hadn't seen a really tremendous amount of substitution. Even we ran our guess, Brent, maybe March was the COMEX low around $211 or $210 some like that and then we ran up to ended up the year. It looks like the average and December was over $350. So when you have that type of run on COMEX and we also had some price increases along the way with aluminum and in supply chain disruptions what have you. The focus on the metal itself is less intense, which is counterintuitive. But it's more about who has the product and who can get it delivered when it's needed. So the price and delivery equation is still predominant in the industry and one without the other is no good.

[Brent Thielman:]

I guess the question, as you ramp up the service center starting up here in the first half of the year. How should we think about the impact to your costs - cost of goods sold SG&A, since I suspect, it's going to take a few quarters to be running at an optimal level.

[Daniel Jones:]

Yes, I would think so. I mean, we've already committed to some training in employee wise, people head count, whatever. We've already started that process for the move and to get people up and running a little bit quicker. But where we were with the service piece and requirements on a lot of the market demands that we're in a fight with today. You still have to have that delivery piece and the order complexion and request in the market today are significantly more complicated than they were in those three, four years ago from the way that the product needs to be delivered. There's a few services that we offer on the front end. That just four, five years ago, may have been performed at some other step in the supply chain. So we had to have some loosening up if you will and some flexibility and some floor space to process some of the larger jobs that have come around. I think with the fantastic job that the sales team and the operations folks have done in the second half of 2020 into Q4, I think that, that's going to continue.

[Brent Thielman:]

Okay. Fair enough, last question for me. Yes copper keeps moving up and you've mentioned, it sounds as though it's forced in some discipline around the industry, Daniel. I wonder, if it's allowing you to be more selective in the types of orders and jobs you want to take on and allowing you to put up the sorts and hopefully, it's helping you put up sorts of margins here, but not appear today.

[Daniel Jones:]

Yes, I think that's a fair assumption. We always try to be super selective. We have fantastic customer base, our distribution model lends itself to the higher quality distributors and I think it's important to point out that our receivables is high as they are, they're all current, which is a testament to the quality of the customers that we've had through the COVID whatever in 2020 the challenges they have, they are still paying their bills on time. So the quality of the customer and the quality of the individual job itself that we go after. It's not by accident, we're not blindly chasing any order that comes across. We have a fantastic group of folks here and they do a fantastic job of going after the orders that we specifically won. And as you know from - been familiar with us for years, what we're really trying to do is, is maintain that integrity on that order from start to finish and charge for it. So there is no question that this type of tightness and delivery expectations and - the whole entire supply chain from raw copper all way through finished goods has been disrupted somewhat. So there is no question, you're going to have the ability to continue to charge and do the things you got to do. But there is a high little higher quality, we've upgraded some distribution in some markets. The sales team upgraded some sales representation in a few markets and we'll continue to do that as best we can.

[Operator:]

Our next question comes from Julio Romero from Sidoti.

[Julio Romero:]

So, you mentioned earlier that residential was very strong at 2020. Can you maybe talk to the mix of resi versus non-resi in the quarter or the year and whether that end market mix continue to '21?

[Bret Eckert:]

Yes. Good question, Julio. This is Bret. In the fourth quarter, our resi was 29.7% on a full year basis. Residential was about 27%. On a full-year 27% resi versus 21.8% in full year 2019 and then fourth quarter residential 29.7% versus 20.7% in the fourth quarter of 2019. So it was definitely a heavier emphasis as COVID kind of took its grips and people started buying RVs and second homes or remodeling instead of going to pairs.

[Julio Romero:]

That resi-mix is a little bit higher than traditionally, I think it's been in the past. So I guess, do you think that mix kind of continues to trend upward for resi or see a steady state to '20? Just how do you see that mix evolving?

[Daniel Jones:]

Yes, I mean, sitting here today, Julio. We think it's the opinion of our sales leadership also that through the end of 2022 we see it being pretty strong.

[Julio Romero:]

Okay. Yes, I think Brent asked it earlier, but on the repurposed service center opening in second quarter. Just trying to think about how specifically that impacts the P&L this year? I think you did mentioned it, it allows you to be more efficient and charge more perhaps for that better service. Is there anything I missed there in terms of P&L impact '21?

[Daniel Jones:]

I think you've hit it, Julio. I mean, obviously you've got some incremental costs depreciation and otherwise, you'll have some incremental heads. But it's not a huge add, even though the square footage is so much more, really is the layout. As much more efficient, everything comes in on the south end and goes out on the dock doors in the north end. So it is the cut lines - are being staged exactly how we want to stage them. And so, I think we'll see ourself touching product less, which is why you were able to almost double your square footage and not incrementally add that many heads. And so our ability to move more product with the value prop that we hold in the market is something we're going to look to do as we get our feet under us in the 3 to 6 month period. So I think you're thinking about the right way and our goals to - we're always been focused on being a low cost provider and that won't change with the new service center.

[Julio Romero:]

Your inventory dollars of $92 million in an year. At first glance, it looks a little lean on a unit basis just given where the copper is, a fair assumption?

[Daniel Jones:]

There was a big push. I mean, we grew it a little bit all in, in our LIFO and that kind of skews things a bit. But it's pretty consistent year-over-year. You know, it was - there was a lot of demand as you can see in the third and fourth quarter. And so we were raced in that entire quarter to continue to keep up with orders. And so inventory at the end of the day finished fairly constant year-over-year.

[Julio Romero:]

Overall it was a great quarter and your spreads rose sequentially into what's typically a seasonally weaker fourth quarter and you sound very optimistic. Is there any reason why the spread, you saw in the fourth quarter can continue into 2021?

[Daniel Jones:]

Julio, we talked a little bit about this. We've had a lot of discipline as we approach the market. You look at what COMEX copper is doing and kind of what you can read out there and see the trends. That's always been an environment that has been supportive for us. And so we will continue to be very focused on that aspect of it and obviously our goal is to continue that. It certainly seems that the underlying margin is going to support that.

[Operator:]

Now we have no further questions at this time.

[Bret Eckert:]

Okay. Jenny, thank you and thank you folks for joining us and we look forward to next call. Thank you.

[Operator:]

Thank you, ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.