Encore Wire Corporation
Q1 2018 Earnings Call Transcript

Published: 6 May 2018

[Operator:]

At this time, I would like to welcome you to the Encore Wire first quarter earnings conference call. My name is Ellen and I will 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. [Operator Instructions]. Please note that this conference is being recorded. I will now turn the call over to Daniel Jones, Chairman, President and CEO. Sir, you may begin.

[Daniel Jones:]

Thank you Ellen. I am Daniel Jones, President, CEO and Chairman of the Board of Encore Wire and with me this morning is Frank Bilban, our Chief Financial Officer. We are pleased with our results in the first quarter with some key items to note. Net sales dollars increased in the quarter, driven primarily by the higher copper raw material prices. Copper margins increased strongly in the quarterly comparison to 2018 versus 2017. One of the key metrics to our earnings is the spread between the price of copper wire sold and the cost of raw copper purchased in any given period. The copper spread increased 10.1% in the first quarter of 2018 versus the first quarter of 2017. The copper spread expanded as the average price of copper purchased increased 18.3% in the first quarter of 2018 versus the first quarter of 2017, while the average selling price of wire sold increased 15.6%. The percentage change on sales is on a higher nominal dollar amount than on purchases. Therefore, spreads change on a nominal dollar basis. Unit volumes in the first three months of 2018 decreased 7.9% in copper pounds shipped versus the first three months of last year. We believe volumes were impacted primarily by rough winter weather that slowed construction projects, particularly in January. U.S. economy appears strong, as is construction activity. We believe that some of our financially stressed competitors have struggled and acted erratically in what we consider a strong business environment. Based on discussions with our distributor customers and our contractor customers, we believe there's good outlook for construction projects for the next year and beyond. We continue to strive to lead and support industry price increases in an effort to maintain and increase margins. We believe our fill rates continue to enhance our competitive position. As orders come in from electrical contractors, the distributors can count on our fill rates to ensure quick deliveries from coast to coast. We believe our performance is impressive in this environment. We thank our employees and associates for their efforts. We also thank our stockholders for their 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 the financial results for the quarter. After the review, we will take any questions you may have. Each of you should have already received a copy of our press release covering Encore's financial results. This release is available on the internet as well or you can call Elizabeth Campbell at (800)-962-9473 and we will be glad to get you a copy. Before we review 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 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 the financials. Net sales for the first quarter ended March 31, 2018 were $291.4 million compared to $279.4 million during the first quarter of 2017. Copper unit volume, measured in pounds of copper contained in the wire sold, decreased 7.9% in the first quarter of 2018 versus the first quarter of 2017. The average selling price of wire per copper pound sold increased 15.6% in the first quarter of 2018 versus the first quarter of 2017. Copper wire sales prices increased primarily due to the higher price of copper purchased, which increased 18.3% versus the first quarter of 2017. Net income for the first quarter of 2018 was $11.4 million versus $13.6 million in the first quarter of 2017. Fully diluted net earnings per common share were $0.54 in the first quarter of 2018 versus $0.65 in the first quarter of 2017. On a sequential quarterly basis, net sales for the first quarter of 2018 were $291.4 million versus $301.3 million during the fourth quarter of 2017. Sales dollars decreased due to 3.9% unit volume decrease of copper building wire sold offset by a 1.3% increase in the average selling price per pound of copper wire sold on a sequential quarter basis. Copper wire sales prices increased primarily due to an increase of 2.2% in the price of copper purchased. The net income for the first quarter of 2018 was $11.4 million versus $28.5 million in the fourth quarter of 2017. Fully diluted net income per common share was $0.54 in the first quarter of 2018 versus $1.36 in the fourth quarter of 2017. Our balance sheet is very strong. We have no long-term debts and our revolving line of credit is paid down to zero. In addition, we have $107.8 million in cash at the end of the quarter. We also declared another cash dividend during the quarter. We want to remind you, this conference call will be available for replay after the conclusion of this session. If you wish to hear the tape replay, please call (888)-843-7419 and enter the conference reference 6783418 and the pound sign ar you can visit our website where the call is available. I will now turn the call back over to Daniel Jones, our Chairman, President and CEO. Daniel?

[Daniel Jones:]

Thank you Frank. And as Frank highlighted, Encore performed well in the past quarter. We believe we are well positioned for the future. And Ellen, we will now take questions from our listeners.

[Operator:]

[Operator Instructions]. Our first question is from Brent Thielman from D.A. Davidson.

[Brent Thielman:]

Hi. Good morning guys.

[Frank Bilban:]

Good morning Brent.

[Daniel Jones:]

Hi Brent.

[Brent Thielman:]

Daniel, it sounds like January was more of an outlier for volume. Can you just talk a little bit about kind of the trends through the quarter? And I guess kind of the second part of the question here, this down 8% for unit volume. Is that representative of the market as you see it? Or is there a little more to it maybe from a competitive standpoint?

[Daniel Jones:]

Right. January clearly was the weak point as far as volume went. And sticking to Q1, it's not representative of the way business was or is going. I think it's the best way I can answer it. There were jobs that we had. We had the product. We were ready to ship. It's all sold. It's all buttoned up. Job sites were not physically able to take the material and/or physically able to get delivery to the job sites. So it was pretty significant. It was quite a bit of volume that, again, we invoice when we ship. So the way the sales ran, clearly, January was an outlier.

[Brent Thielman:]

And Daniel, was that mostly the Northeast or other areas of the country?

[Daniel Jones:]

Well, we even had some in the state of Texas, believe it or not. There were some job sites that were too wet. There was too much water, what have you. But there really wasn't one specific geographic area. It seemed to be different pockets around the country. It could be, we even had some mudslides. I mean, there was quite a variety reported back as to pushing those deliveries out, cleanup. And when our product enters into the construction cycle, that cycle is completely disrupted. So some of the job sites had to go backwards a little bit and things were pushed out into as late as March and beyond March on some of those deliveries that were scheduled early.

[Brent Thielman:]

Okay. And then any status on the antidumping duties with respect to aluminum? I guess, particularly any sense of a timeline there in terms of an announcement? And Frank, do you have the aluminum wire sales as a percentage for the quarter?

[Frank Bilban:]

Sure. Aluminum for the quarter was 6.8% of dollar sales.

[Brent Thielman:]

Okay.

[Daniel Jones:]

On the tariff piece, Brent, the 232 that came out and then was amended and followed up with the 301, the attention immediately became from other industries that are impacted, in their mind, maybe negatively in some fashion, whatever. We are on the other side of that. We are all for the tariff to include insulated aluminum building wire. We have got two companies that we have talked about in the past on the calls without naming them specifically that continue to bring in product from China at well below raw material cost. We had an increase through the quarter per pound of aluminum and saw the price erode to near breakeven levels. That's not something that we are excited about. It's not something that's new. We went through this in the past. 14, 15 years ago, we had some issues in the markets from China. It has to be dealt with. I think the correct industry associations or there's some activity there. It seems to be pretty good from The Aluminum Association specifically. There's other organizations that represent a broad range of industry members that are not so quick to act in that direction. But we are clearly participating in providing factual information to the right associations to get this thing addressed. It's not positive for anyone. And it's really not even necessary. Business is really good in the U.S. Once the weather cleared and as you guys probably know, aluminum typically favors outdoor installation versus under the roof of a house or a building. So there's a lot of things going on there that I think will clear themselves up in pretty quick fashion, but I appreciate the question on the tariff. Our position is we need to clean up this Chinese product that's being imported and passed right through with zero value added into our industry on a daily basis.

[Brent Thielman:]

Okay. I appreciate that color, Daniel. One more, Frank. The tax rate was higher than I was thinking about for the quarter. Is 24% what we should thinking about going forward?

[Frank Bilban:]

Well that 24% is a compilation of the 21% federal rate and a 3% add-on for all the state and local taxes we pay to all the various jurisdictions we conduct business in, which was consistent with where we were last year. We had a federal tax rate of 35%, but the Jobs Creation Act, which we were a big user of that deduction, brought us down to about 30%, 31% and then the 2% to 3% add-on got us back to 33%, 34%. So net-net, you have got to the right place. Does that make sense?

[Brent Thielman:]

Yes. I mean, are you thinking 24% going forward? Sorry.

[Frank Bilban:]

I think that's about right.

[Brent Thielman:]

Okay.

[Frank Bilban:]

As far as we know at this point, yes.

[Brent Thielman:]

All right. I will pass it on. Thank you.

[Operator:]

Our next question is from Julio Romero from Sidoti & Company.

[Julio Romero:]

Hi. Good morning Dan and Frank.

[Daniel Jones:]

Hi Julio.

[Julio Romero:]

So just a follow-up on volumes. Would it be fair to say that you guys saw a positive shipment growth in February and March?

[Daniel Jones:]

Correct.

[Julio Romero:]

Okay. That's helpful. And in past quarters when you have seen this type weather impacts, does that missed volume just get pushed to the right of the calendar? Should we expect you to recoup that volume in subsequent quarters this year?

[Frank Bilban:]

That's exactly what occurs.

[Daniel Jones:]

Yes. That's exactly what occurs. Typically, it's in the first 45 to 60 days pushed out. Some will leak over the next 30 days type thing. And the thing is, the product is purchased. It's ready to go, but again, we don't invoice it until we ship it. We don't ship it until they can unload it. So in that scenario, 45 to 60 days out is typically when the volume gets pushed too.

[Julio Romero:]

Got it. And just switching over to aluminum. Maybe you can give us a sense on how price volume spreads trended in the quarter? At least directionally, if you can?

[Daniel Jones:]

Yes. Similar trends, but again the aluminum volume piece is a big part of the story. There's some posturing in the market when a quote comes out. If it gets to the point where it's below breakeven for us in some manner, we may pass on it, right. So we are taking the orders that we feel are strategic for us to not lose out on the copper business. And then some of the standalone aluminum type orders get beat up pretty good in the marketplace, we may choose to pass. There's an art to it and there's a science. And unfortunately, we have got a couple of importers that are doing some things in the marketplace that are super disruptive. And then occasionally, but for the most part, I have to say, in the first quarter the flip side of that is we had very disciplined business in the first quarter as far as copper goes. So the one or two guys that we compete with consistently from the copper standpoint that also ship and sell aluminum, very disciplined in the first quarter. I think it's a temporary situation on the aluminum piece. It just can't continue as it is based on someone importing, adding zero value and just basically cutting price.

[Julio Romero:]

Got it. And just lastly as a housekeeping question. I think SG&A as a percentage of sales was up, I think, 120 basis points year-over-year. Anything unusual that drove that? And maybe how you see that margin going forward?

[Frank Bilban:]

Well, there was a couple of little things. One of them was freight. As a lot of people were talking about even at your conference, Julio, in New York, freight is up nationally and we saw, on an apples-to-apples basis, about a $0.07 impact of increased freight rates in the quarter. We saw a couple of little things with stock options and a sale of some land we did last year that we didn't repeat this year that also added to the SG&A. But Daniel might want to add some color on the freight.

[Daniel Jones:]

Well, the freight thing in the first quarter, again the volatility in the market and getting trucks in and holding trucks that can't ship, can't deliver, what have you and with the increase in overall business around the country, there's several loads per available truck in the marketplace. So there was some posturing, obviously by carriers and trucking companies and there was some laws that were instituted and changed as far as electronic logs and there was a lot of impact to the trucking industry exclusive of and including products that we ship in the 50 states. So the available equipment in the U.S. on a truck basis which we ship, all of our outbound freight is by truck. We do not ship outbound by rail because the delivery requirements and the lead times that are required. So there was some adjustment there. Some new companies are starting to pop up out of that demand, more so February, March than January. We put in some price increases. Some of them held, some of them didn't through the quarter. And two or three of those specifically were geared toward the increase in the freight rates. The good thing about it is, it's an industry issue. The bad thing about it is, trucks are tight. They get to name what they agree to haul the freight for type deal. So in that scenario, we have been able to establish rates going forward and build those into the pricing that we quote into the marketplace. So the freight issue, you can read anything you want to about it in the news. It's an issue, no question. But for the service levels that we require, we are going to pay a little bit more. In the meantime, as indicated, we are going to build that into the price and keep going.

[Julio Romero:]

Got it. And maybe just one last one just to your point about price increases. How do you see the appetite with your customers for passing along? Obviously, there's cost inflation in the industry. How do you see the appetite from your distributor customers in terms of absorbing those increases?

[Daniel Jones:]

Yes. Julio, it's been really positive, actually. We are in the field quite a bit with folks, job sites, negotiations, whatever, for huge business, whatever and so, from a volume standpoint. In those conversations, there's only two topics that sell building wire and one of them specifically is delivery and they get that. They understand it. They see it. They are dealing with the same issues on other materials that come in. I believe that freight pretty much across the board, flatbeds, drive-ins, refrigerated trailers, whatever the situation is, there's increases. So they get it. They see it. It's not a huge discussion topic as it was in, say, late January, mid- part of February. It was kind of a shocker to make the argument for freight increases because, typically in our industry, at least from my 29, 30 years, has been price increases that are blamed on raw material cost or copper or whatever it might be, unless there's actual pain and recognition for that cost on their side, you are not able to pass it through. Fortunately for us, they see this across the board in other products and categories. And so, the freight conversation has been, I don't want to say it's easy, but it's been relatively business like with the customers. They see it.

[Julio Romero:]

Appreciate it. Thank you for taking my questions, guys.

[Daniel Jones:]

You bet. Thanks Julio.

[Frank Bilban:]

Thanks Julio.

[Operator:]

The next question is from Brad Evans with Heartland Funds. And it looks like Mr. Evans has dropped. We will go to the next question. It comes from Bill Baldwin with Baldwin Anthony Securities.

[Bill Baldwin:]

Hi. Good morning.

[Daniel Jones:]

Hi Bill.

[Frank Bilban:]

Hi Bill.

[Bill Baldwin:]

I wanted to just see what kind of color you could offer regarding your CapEx budgets or plans for this year? And then kind of the nature of some of those programs?

[Frank Bilban:]

Okay. Well, I will start with a number. Right now, our best estimate at this point of the year is that we will spend between $28 million and $33 million.

[Daniel Jones:]

And Bill, we haven't announced anything publicly yet. We have got some projects that we are looking at, working on. As you know, we have got a pretty aggressive attitude toward what we can do from a service and offering standpoint and that's probably what I should leave it at until we make any announcements. We are looking at different areas, specifically in the service and offering categories. There's a couple that are pretty hot. One will probably win out over the other. I like to do one project at a time and that's kind of where we are at.

[Bill Baldwin:]

Okay. Very good. Thank you.

[Daniel Jones:]

Yes, sir. Thank you. Thanks for the call.

[Frank Bilban:]

Thanks Bill.

[Operator:]

The next question is a follow-up from Brent Thielman from D.A. Davidson.

[Brent Thielman:]

Hi. Thanks guys. A quick follow-up. Frank, can you remind us sort of where you are at in terms of the buyback authorization? What you have got left on there? And I guess, just given what seems to be sort of short-term headwinds here in the quarter, any thoughts on the reaction of the stock today, context to that?

[Frank Bilban:]

Well, number one, we have a 10b5-1 plan in place where the company adjusts at almost every Board meeting or discusses, at least, adjusting the strike point at which the company will automatically buy back stock. It's supported at certain levels that the Board deems appropriate. Number two. We can always go back into the market and buy more with a quick board phone call and that's always an option. Number three. I think at least on my behalf, I think the market is somewhat overreacting today, but that's their call. It might be a buying opportunity for some people. The bottom line is, as Daniel emphasized, I think a key takeaway here is to have volumes on the copper side, which is 94% of our business, 93%, let's say, go up, our volumes go down 8% but spreads go up 13% really tells us something positive about what we and the industry were doing with pricing on the copper side and we were quite enthusiastic about that.

[Brent Thielman:]

Okay. Great answer, guys. I appreciate it. Thank you.

[Frank Bilban:]

Thanks buddy.

[Daniel Jones:]

Thank you.

[Operator:]

And our next question is from Brad Evans from Heartland. Please go ahead.

[BradEvans:]

Sorry about that guys. I had a little bit of technical problem there.

[Daniel Jones:]

Well, we are fighting it on this end too. I mean, we don't even we have a good line. We couldn't hear you guys earlier. But hey, we are getting through it. Evidently, these lines we are on must be aluminum or something. I don't know.

[Brad Evans:]

We will have to wait for the algorithms to read the transcript of this call for them to find out that Frank thinks the stock's a buying opportunity. So obviously, the market's reacting to the headline miss and obviously volumes, everybody's keen on the volume. So let me try to skin that cat a different direction here. Frank, do you happen to know what copper volumes were down linked quarter from the fourth quarter to the first quarter? What were copper volumes on a linked quarter basis, please?

[Frank Bilban:]

Yes. On Q4 to Q1?

[Brad Evans:]

Yes, sir.

[Frank Bilban:]

Copper volumes were down 3.9%.

[Brad Evans:]

Got it. Okay. So down 4%. So help me understand this a little bit then and this might help people kind of put the puzzle together. So accounts receivable were up 9% from the fourth quarter to the first quarter. Revenues were down 3%. So likely in lockstep with the volume number on the copper side. So that obviously paints a picture of a significant ramp into the latter part of the quarter in terms of volume.

[Frank Bilban:]

That's a great question and you just answered it. That our AR is not only a function of the total sales for the quarter but how the sales were loaded in the three months. And to Daniel's earlier response, January was very bad in terms of volume.

[Brad Evans:]

That's my point. So Frank, my point is, I mean, volumes were down double digits in January maybe upwards as much as 15% year-over-year?

[Frank Bilban:]

Yes.

[Brad Evans:]

And so March volumes would could have been up as much as 15% year-over-year?

[Frank Bilban:]

Well, February and March certainly returned to a more normal basis. And so, in that we give terms in this industry that easily extend 45 to 60 days or more. If you are selling in the last 45 to 60 days of the quarter, that money is still sitting on our balance sheet in receivables as opposed if we would have had a huge first month of the quarter and we would have collected some of that.

[Brad Evans:]

Okay. So just to be clear then, so the linearity within the quarter, obviously, January very weak and February and March much stronger. So the optimism you may have for end market conditions really reflected in the pacing of the business as kind of the quarter progressed and as you exited into the second quarter. Correct?

[Frank Bilban:]

Correct.

[Daniel Jones:]

Well said.

[Brad Evans:]

Okay. So the other observation I had on the quarter, which I thought was kind of well, to say the least was highly encouraging was volumes in the quarter were pretty weak and historically in that environment, you would see competitors bringing the knives out and really having an impact on spread and so for volumes to be down and spread to be up, I mean, that really paints a picture of an improving competitive dynamic perhaps.

[Frank Bilban:]

Yes, sir. As I mentioned earlier, I am just telling you, we have got a few competitors out there that are doing great things and to complement those guys, hey, when the shoe fits, wear it, right. So really good from that perspective. Those guys are doing a good job. Everybody's shipping like they are supposed to. Everybody's getting paid like they are supposed to. And then you have got a couple of outliers in this aluminum piece on the import deal that need to be addressed. And just to back up a bit, Brad, you hit it on the quarter. I mean, look, I would like a way to explain it somehow better, but the fact is and we are pretty transparent about this, January was awful from a volume standpoint. However, the spreads in the quarter held. That's to the credit of the discipline in the market on the copper side. It magnifies the issue that we have with the other guys on the aluminum piece that are doing the importing. They clearly have no direction, from my perspective and this is just an opinion, but when business is this good and things are going along like they should, I don't know what their motivation is. I don't know if they are trying to get larger and poorer or what the issue is, but that's not my style.

[Brad Evans:]

Okay. Thank you for that. I really appreciate the color. And then my last question really is just along the lines of clearly, at least on the copper side, it seems like metal volatility perhaps, amongst other things, are causing some better competitive dynamics. Daniel, I am curious, where does aluminum have to go where, on a pricing perspective, from a raw material perspective, where copper becomes a preferred metal versus aluminum in the marketplace? I mean clearly, we have seen this huge spike with the Rusal news on aluminum price. I gather that that does have a positive benefit in terms of perhaps favoring copper?

[Daniel Jones:]

Well, I favor copper anyway. But to answer your question more directly, even to point out specifically what was going on with copper in the quarter. Copper trended down in the first quarter and we still had that price discipline. So that's another phenomenal sign. When you start the quarter at $3.19 COMEX and you end up March at $3.06, $3.07 and still have your spread, that's really indicative of the business environment, which exaggerates again and puts the focus on what the heck are these guys doing withon aluminum piece? Today, we don't have the pressure, if that's the right term to use. When the jobs come out and you start the quote process, if they start off copper on the feeder, we stay with copper throughout the project. As you know, in the past, you get, I don't know, $0.85, $0.90 aluminum and you get $3.20, $3.25 copper, then the discussion starts about should we use aluminum conductor versus copper on some of the larger sizes. And so there's a lot of discussion in that valuation, if you will, to go from one to the other. That's not the case in the market today. If we start quoting copper, we stay copper throughout. That's another good sign. So even though the aluminum piece is what it is, it's not on an across the board scenario. It's on the product categories. They are the A, B, C items on an inventory situation, not the deeper aluminum products that you can't get type deal. So there's a lot going on there, Brad, but we are not seeing the push, the switch or to substitute at this point.

[Brad Evans:]

Super. And I just had one last one that occurred to me. So I mean anybody who is surprised that freight costs were a headwind has obviously just crawled out from underneath a rock. So someone said headwind in the quarter is what it is. At the end of the day for Encore, based on your fill rates and superior customer service, I mean, at the end of the day, demand being reasonably good and freight being tight, I mean, that's a recipe for Encore to take market share, is it not.

[Daniel Jones:]

Well, I am supposed to only speak to the first quarter, but the best answer to what you said is, yes.

[Brad Evans:]

Thanks guys. Have a good, well, looking forward to the second quarter. Thanks for your time.

[Daniel Jones:]

Thank you Brad.

[Frank Bilban:]

Take care Brad.

[Operator:]

And we have no further questions at this time. I would like to turn the call back to your host for any closing remarks.

[Daniel Jones:]

Well, we just appreciate everyone who joined in the call and we look forward to talking to you again next quarter. Thank you.

[Operator:]

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