Encore Wire Corporation
Q2 2017 Earnings Call Transcript

Published: 5 Aug 2017

[Operator:]

Welcome to the Encore Wire Second Quarter Earnings Conference Call. My name is Vanessa 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. And I will now turn the call over to Mr. Daniel Jones, President. You may begin, sir.

[Daniel Jones:]

Thank you, Vanessa. Good morning, ladies and gentlemen, and welcome to the Encore Wire Corporation quarterly conference call. I'm Daniel Jones, the President, CEO and Chairman of the Board of Encore Wire, and with me this morning is Frank Bilban, our CFO. We're pleased with our improved results in the second quarter and on a year-to-date comparison. There are some key items to note. Net sales dollars increased significantly, in both the quarterly and six month comparisons of 2017 to 2016. The increased top-line was driven by both higher copper raw material prices as well as increased unit sales volumes. Unit volumes in the first six months of 2017 were up 8.1% in copper pounds shipped versus the first six months of last year. Margins increased in both the quarterly and six month comparisons of 2017 versus 2016. 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 5.5% in the second quarter of 2017 versus the second quarter of 2016, and increased 6.2% on the six month comparison. The copper spread expanded 5.5% as the average price of copper purchased increased 19.2% in the second quarter of 2017 versus 2016, while the average selling price of wire sold increased 14.4%. Copper spreads improved in the fourth quarter of 2016 and have held fairly well through the second quarter of 2017. It appears that the industry consolidation of a copper competitor that took place last year and damaged margins in the second and third quarters of 2016 may be resolving itself. US economy appears to be strong, as is construction activity. We see building cranes across the country, as we travel to various meetings. It's interesting to see some financially stressed competitors having trouble and acting erratically in this strong business environment, when volumes are good and margins should also be strong. As evidenced in the past, strength in copper forces market discipline. Based on discussions with our distributor customers and their contractor customers, we believe there is a good outlook for construction projects for the near future. We continue to strive to lead and support industry price increases in an effort to maintain and increase margins. We believe our superior order fill rates continue to enhance our competitive position. As orders come in from electrical contractors, the distributors can count on our order fill rates to ensure quick deliveries. We believe our performance is impressive, and we thank our employees and associates for their tremendous 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 Encore's financial results for the quarter. After the review, we'll take any questions you may have. Each of you should have already received a copy of Encore's press release covering the financial results. This release is available on the Internet, or you can call Denis McCarthy at 800-962-9473, and we'll be glad to get you a copy. Before we review the financials, let me indicate that throughout this 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 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, the financials. Net sales for the second quarter ended June 30, 2017 were $291.5 million compared to $238.8 million during the second quarter of 2016. Copper unit volume, measured in pounds of copper contained in the wire sold, increased 8% in the second quarter of 2017 versus the second quarter of 2016. The average selling price of wire per copper pound sold increased 14.4% in the second quarter of 2017 versus the second quarter of 2016, driving the 22.1% increase in net sales dollars. Copper wire sales prices increased primarily due to the higher price of copper purchased, which increased 19.2% versus the second quarter of 2016. Net income for the second quarter of 2017 increased 39.5% to $10.9 million versus $7.8 million in the second quarter of 2016. Fully diluted net earnings per common share were $0.52 in the second quarter of 2017 versus $0.38 in the second quarter of 2016. Net sales for the six months ended June 30, 2017 were $570.9 million compared to $464.4 million during the same period in 2016. Copper unit volume, measured in pounds of copper contained in the wire sold, increased 8.1% in the six months ended June 30, 2017 versus the six months ended June 30, 2016. The average selling price of wire per copper pound sold increased 15.6% in the six months ended June 30, 2017 versus the six months ended June 30, 2016, driving the 22.9% increase in net sales dollars. Copper wire sales prices increased primarily due to the higher price of copper purchased, which increased 20.8% versus the six months ended June 30, 2016. Net income for the 6 months ended June 30, 2017 increased 49.4% to $24.6 million versus $16.4 million in the same period in 2016. Fully diluted net earnings per common share were $1.18 in the six months ended June '17 versus $0.79 in the same period in '16. On a sequential quarter comparison, net sales for the second quarter of 2017 were $291.5 million versus $279.4 million during the first quarter of 2017. Sales dollars increased due to a 7.2% unit volume increase of copper building wire sold, offset somewhat by a 2.7% decrease in the average selling price per pound of copper wire sold on a sequential quarter comparison. Copper wire sales prices decreased primarily due to a decrease of 1.7% in the price of copper purchased. Net income for the second quarter of 2017 was $10.9 million versus $13.6 million in the first quarter of 2017. Fully diluted net income per common share was $0.52 in the second quarter of '17 versus $0.65 in the first quarter of '17. Our balance sheet is very strong. We have no long-term debt, and our revolving line of credit is paid down to 0. In addition, we had $85.9 million in cash at the end of the quarter. We also declared another cash dividend during the quarter. I'd like to point out, this conference call will be available for replay after the conclusion of the session. If you wish to hear the replay, please dial [phone] and enter the conference reference number 7490227#, or you can visit our website. I'll now turn the floor back over to Daniel, our Chairman, President and CEO. Daniel?

[Daniel Jones:]

Thank you, Frank. As we highlighted, Encore performed well in the past quarter. We believe we're well positioned for the future. Vanessa will now take questions from our listeners.

[Operator:]

[Operator Instructions] And we have our first question from Greg Eisen with Singular Research.

[Greg Eisen:]

Thanks, good morning Dan and Frank. I'd like to start with asking about aluminum. Could you tell us what percentage of sales was represented by aluminum wire sales this quarter?

[Daniel Jones:]

Aluminum in the quarter was down to 8.7%, and that was driven primarily by the increase in copper pounds and dollars due to the increase in copper commodity prices.

[Greg Eisen:]

So it wasn't so much a drop in aluminum as copper with prices up that drives up its percentage contribution there?

[Daniel Jones:]

Right. Correct.

[Greg Eisen:]

Okay. Yes. Could you discuss briefly, were aluminum prices up or down and meaningfully this quarter?

[Daniel Jones:]

Aluminum prices -- and do you want me to compare them to the second quarter of last year, I presume?

[Greg Eisen:]

Sure.

[Daniel Jones:]

Aluminum prices were actually down 3%, and the spread was also down, but the aluminum volume was up 12.7%.

[Greg Eisen:]

That's good. Turning to -- back to the copper side of the business. Could you talk a little bit more about the competition in copper? You mentioned in the prepared remarks about what's happened with pricing due to a disruption last year, it seems to have worked itself out, and it's no longer really giving you problems. So that should be good for margins. But you mentioned that it's interesting that you have some financially stressed competitors. Are they acting erratically in pricing? And is this something we should factor into expectations over the next -- over the second half of this year? Is this going to kind of drag on and be a problem or is this just something you're just noticing out of the corner of your eye?

[Daniel Jones:]

Well, it's a great question. Those are two separate companies that are in the market. And we had one, for whatever reason bought another company and whatever, and it was very disruptive in the markets while they sort it out. Sales reps and who is going to be the boss, and what have you, and that seems to -- at least from that perspective, it seems to abate it somewhat. The other scenario that we see in the market, we have a competitor that -- in this market as good as things are business wise, volume wise, we've had quite a few price increase attempts and what have you in the market, some of it stuck, some of it's not stuck. It just doesn't make a lot of sense at what they're doing, until you start to read some of their -- some of things that they're putting out publicly. But having said that, again, business is good, strength in copper, at least in the past has forced discipline and we're seeing that. June, specifically to Q2, started off around $2.50 something in COMEX and ended up about almost $2.70 in COMEX during the month. So that type of movement and timing forces discipline in the market. And again, as busy as things are with the demand side and the complicated jobs that are out there and the size of the jobs, customers are better at if you will ignoring some of the price offerings and focused a little bit more on the delivery side. In that scenario, we always do very well. So I don't know if that answered your question completely, but the competitive landscape for us looks pretty good. Again, the increase in raw material cost, I think PVC, it's not a secret. It's climbing and becoming a little bit more expensive and a little harder to get that we use for insulating compound. And it doesn't get the attention that copper does obviously but that's a good thing. Raw materials, anytime you have that type of bias if you will, or trend on the upside for copper, it substantiates the price increases, and again, forces discipline in the market that otherwise may or may not be there for whatever reason. It's not a new story for my 28 or 29 years whatever it is now to see competitors kind of come in and do things and act erratically and prove that they're clearly not doing those things with their money or they wouldn't make those decisions. But a lot of that's cleaned itself up, it looks like, and things are good.

[Greg Eisen:]

Okay. Could you talk about how the quarter went sequentially in terms of the price increases? Both on the cost side and obviously it flips over to the revenue line on copper wire products, April to May to June. You explained how June was up right from the beginning of the month to the end of the month. But was that a continuous increase through the quarter? And how does July look so far? It's over, I guess. We're already August 2.

[Daniel Jones:]

Yes, yes. Right, right. April was pretty flat. It started out about $2.59, $2.60, ended up about $2.59, $2.60. It had a few gyrations early but for the most part April was pretty flat. May started off pretty good. Had a little bit of a dip and then rebounded pretty strongly. And as mentioned, June basically increased from the beginning of June to the end. You get that kind of stability or a bias, maybe. I don't think it's even a trend any more, but you get the bias in the right direction on the upside and then it substantiates our genius on timing of price increases, if you will. So in that scenario, the quarter in starting at $2.59-ish ended up at $2.69, $2.70. So that's a good thing. As far as July goes, I'll have to comment on July when we do the Q3 call. I would love to tell you a lot of stuff but they don't like me to do that.

[Greg Eisen:]

I understand. One last question. You talk about...

[Daniel Jones:]

I would like to talk about those competitors too, but they don't like me to do that.

[Greg Eisen:]

Yes, I get it. I get it. One last question, if I may, about foreign competition, we -- I guess different people have asked you over the quarters about signs of foreign competition, foreign imports of product. You sell a heavy product. Importing it at shore, but there's been importations. And you've talked about in the past. What have you seen this past quarter in terms of foreign imports? Can you give us your planning?

[Daniel Jones:]

Yes. There's a lot of action for this one. It's a great topic and a great question. There was a lot of activity in Q2, publicly, industry-related, what have you from a lot of different associations getting knee-deep in the aluminum conversation about imports and dumping finished goods in the market and so and so forth. And I think, there may be three or four industry associations that are really doing a fantastic job chasing those comments and questions and whatever down and coming back with good feedback and good hard data and in that scenario, again, for the most part, that issue of the aluminum imports, it continues somewhat. There's a couple of companies out there, competitor-wise on just the aluminum piece. They are not necessarily doing things the way I'd like them, but, again, they've got their own motivations for doing whatever. But the good thing is, for us specifically, the aluminum piece, as Frank mentioned earlier, the volume's up, the prices competitiveness is what it is. And we feel like that's going to clear itself up. The import issue on the aluminum stirs up one of the competitors that's not doing so great out there and may depend pretty heavily on aluminum. So they react pretty quickly. That's not as bad in Q2 toward the end as it was in the beginning. So that looks positive. Only time will tell what happens in Q3. But in Q2, the bias or the trend on the aluminum piece was looking better. On the copper side, we just don't run into that same scenario on copper, like we do on aluminum.

[Operator:]

[Operator Instructions] And our next question comes from Bill Baldwin with Baldwin Anthony Securities.

[Bill Baldwin:]

Good morning Daniel and Frank. Can you talk a little bit about product mix trends that you've seen this year, Daniel? Are the size -- you mentioned size and complexity of projects, are they leading more to higher margin type products as far as a tray cable or an armored cable, things of this nature?

[Daniel Jones:]

Yes. I mean that's -- thanks for the question, Bill, and that's good insight. There is some complexity to the orders that wasn't there. And I don't want to mislead you in the wrong direction, but what that means for us and what I intend to explain is the orders are basically buying our entire catalog. It's not a scenario where it's one or two products or three products per truckload. It’s a -- they are buying the full catalog, which is super helpful. The A and B and C items in inventory, everyone does pretty well with, it's the depth of inventory items that we think we're better most of the time than other folks as best we can tell and that's helpful. Typically in the past, we're able to -- two things are important, price and delivery, right? And we focused on the delivery piece in Q2. That was evident. We were able to do some things on some jobs and ignore some of the cost cutting if you will to some extent. I'm not jumping up and down and telling you that it was a big deal, but it is a big deal, when you can charge a little bit more for stuff rather than get down in there and fight it out price-only type stuff, which is not something that we really enjoy. Occasionally, we have to do it and take the gloves off and what have you. But again, when copper trend or bias is on the upside, it forces some discipline from the competition. And in that scenario, we typically do better. So the overall orders themselves there's a few more line items, the average order size ticked up a couple of thousand pounds and that's always a good sign.

[Bill Baldwin:]

Very good. Were your plans running efficiently during the quarter, Daniel? Did you have any operating issues there?

[Daniel Jones:]

Yes, we ran very well. We've got some pretty aggressive programs we're working on. And we're starting to see a lot of positive numbers come from that. As you know, in Texas, in August, it gets a little bit toasty, we've been blessed with some really good weather and the good Lord's blessed us with a lot of rain recently. So in that scenario, it's not as hot in the past, but we're about to hit that stretch. And we think, we're going into it in really good shape. The plants look great. They're super clean, and we've got the right guy and the right girl in the right position and things from the plants are looking really good.

[William Baldwin:]

Super. And lastly, Daniel, can you give us any color on what your CapEx focus is this year? And as far out as you're looking right now?

[Daniel Jones:]

Yes, we -- Bill, we haven't announced anything, so I really don't have a lot to give you. But CapEx year-to-date was $11.3 million. So for us that's...

[Frank Bilban:]

Excuse me, $10.2 million.

[Daniel Jones:]

Yes. For us that -- end of 2016 and into the first six months of 2017, that's a little bit less than what we normally do. Both of those things are by design. We do have some 357 plans that we're going forward with. And for the most part, this equipment stuff that we've done through the second quarter, we are going to continue into that. But we have not announced anything big at this point.

[William Baldwin:]

All right. I think the last time we talked to you, you were working on some capacity expansion in the armored cable, has that been completed?

[Daniel Jones:]

Yes, we cleaned some of that up and we've done some stuff back there. And we think we're sitting in good shape. And we take advantage of -- we hope what we're seeing is going to continue.

[William Baldwin:]

Well, very good, I tell you. I got one more kind of housekeeping question. I noticed in looking back historically, going back quite a ways to the mid-2000s, that normally the spread in the second quarter is generally the lowest quarter of the year. I think there's only been one year when that wasn't the case and that might have been 2005 or 2006. And then the spreads in the second half are generally, it's fairly significant higher than second quarter. Is there any seasonality that, that would account for that? Or it's just -- that's just the way that it's following over the last 12 years?

[Daniel Jones:]

Well -- and that's a great insight, Bill. What we have seen or what I've seen, I should say, in the past is July is typically a vacation month domestically, and August is typically a vacation month abroad. So in that scenario, back when we had 30-some-odd competitors, the industry would basically shut down the week of July 4. I mean, just take the week off. That's not necessary the case with the five or seven competitors that we have today. There's still some of that but I don't think companies completely shut down. But having said that, there still is that vacation feel in July. And the vacation continues into August, if you will, and then, as you know, things happen and school starts and people go back to work and what have you. And typically, as you've mentioned, things fire back up and run like they're supposed to, and here you go and you start it again. But that's great insight. That's something we don't talk about that much, but the dips that we typically see are in the second quarter in the summer.

[William Baldwin:]

Thank you.

[Unidentified Company Representative:]

You bet, thanks Bill.

[Operator:]

And thank you. We do have another question in queue from Brad Evans with Heartland Advisors.

[Brad Evans:]

Daniel, Frank, good morning.

[Daniel Jones:]

Brad how are you doing?

[Brad Evans:]

Great. How about yourself?

[Daniel Jones:]

Great.

[Brad Evans:]

Thanks for taking the call. The question is, you sound pretty optimistic about the business going forward. So appreciate that color. And I know that you -- as you've indicated you don't like to give forward guidance into July, but the -- you intimated and indicated that the move we saw in copper through the month of June has helped to bring some discipline back in the marketplace. So I would gather that this rather sizable move in copper prices that we have seen in July has probably only reinforced manufacture discipline into a fairly elevated copper price environment. Is that a fair mosaic to build?

[Daniel Jones:]

Yes, I mean I think you're speaking fractionally, when you say what copper has done and whatever, so I can say, yes. Yes.

[Brad Evans:]

And I'm just curious, Daniel, what are you hearing from your cathode suppliers on the copper front? I mean, we've been reading a number of stories where there is expectation that the copper market moves into a bit of a deficit into 2018 and '19. Are you -- I'm curious what free port is telling you in terms of -- and other suppliers. And maybe what the scrap market is telling you as it relates to your -- any unique view you might have into the copper market at this point?

[Daniel Jones:]

Yes. Well, and that's a great question, Brad. What typically the discussions will occur. You read a lot of things that we read and track a lot of things that we track, I'm sure. And if copper goes up, it was China, if copper goes down, it was China. And some technical factor article will come out and substantiate in their mind one way or the other. I am more of a fundamentalist, and fundamentally, the things that we're seeing -- actual cathode being delivered in lead times and what the miners are talking about. They go through their cycles, as anyone else in any business and depending on timing of those cycles and the opportunity to make a little bit more money as we all want to do. All that stuff put in the blender and high speed and pour out the drink. And the drink is, for us currently, we have an optimistic outlook on copper. We don't have issues getting copper from our copper vendor. Our copper vendor is, without a question, the best match for us as a company, they're phenomenal, the delivery is great, the quality is exceptional, their people are fantastic, so on and so forth. In that scenario, if there's folks out there in the industry, they may or may not have the -- a super strong balance sheet. They may not be as good as match. I don't know, I'm just saying. You have to bank wire the money for the copper most of the time before it even ships. So we don't play in that scenario. All of those things being said, it's not necessarily a shortage, if you will. But things are good. Things are tight. Business is good. If you want to go in the market and pick up a couple of million pounds of copper, you can go and do that. If you want to pick up three or four, I think you can piece together that order and get that done. Scrap deliveries right now are decent. They're not fantastic, but they're not super tight. Everything seems to be running really well and lining up really well. And what that leads to is -- and it's not just how much copper is above ground when you look at the inventories, it's also the rate of consumption that you have to consider. And we start to get around eight or nine or 10 days consumption. It feels tight. May not necessarily be as tight, but it feels tight. We were operating at 11 or 12 days' supply above ground. You start to take it in and chew it up a little bit faster. You get under that 10-day mark, things start to feel a little bit better. Now in that scenario, what that does, again, it pushes prices up a little bit in a bias, not necessarily a trend, and it forces the discipline on the building wire prices. So for us from a building wire price standpoint, which is what we're delivering, we're not delivering copper as much attention as we give it, we still have to deliver the building wire. The pace of the jobs and the complexity of the jobs is kind of forcing some discipline also, that is. If you take an order for something, and you don't deliver it, that creates a sense of "Hey, maybe we need to take a look at this." And so it all kind of blends in together, Brad. But specifically, just to the metal alone, things are good. It's not super tight, but there is a little bit of -- the top button is not buttoned or zipped up super tight but it's tightening. I mean, it just -- from normal course of business, it looks good.

[Brad Evans:]

Okay. Let me just sneak one more in and then I'll cede the floor to other callers. I'm just curious with the current administration, obviously, lasered in on protecting domestic industry, the 232 issue with perhaps steel and I know they're focused on aluminum as well. Are you aware of any trade cases that are pending? Or that might be a positive for your business at this point?

[Daniel Jones:]

There's a lot of discussion. And years ago, we went through this kind of dumping scenario, and I'm guessing it took 24 to 30 months to get some answers. This time around, when we met as industry organizations and discussed and shared information and what have you along those lines, it was less than 30 days that Wilbur Ross put an opinion out. So I'm not super -- one way or the other on what's going to happen or not happen from that standpoint. And you typically can't depend on whichever administration's doing whatever. We have to do our own thing here. But I will say, it's super encouraging when you have a few industry meetings, and you get some action in three or four weeks, where in the past, it would take two or three years. So that's personal experience and that's about all I can tell you about the political aspect of that. I don't know what's going to happen from those guys. I just know they acted quickly, their word was good and their handshake was solid. They didn't bring a bunch of 14 or 15 handlers in to get stuff done. Two guys showed up, took up the information and we had some action, like I said, in three or four weeks. That has to be promising to our industry. I mean come on, nothing happens up there in three or four weeks. So that is a significant positive change from an industry standpoint that I saw firsthand as it relates to discussing what's going on with aluminum and steel. We didn't have a whole lot of info on the steel piece but we sure provided as much as we could on the aluminum side. Quick action, decisive action, not sure what that means yet, but they sure did react quickly for us.

[Operator:]

[Operator Instructions] And gentlemen, it seems we have no further questions. I will now turn the call back over to you, Mr. Jones, for closing remarks.

[Daniel Jones:]

Well, thank you. And you've done a great job for us today and we really appreciate it. Thank you, guys and girls for calling in. And we look forward to talking to you again in Q3. Thanks a lot.

[Operator:]

And thank you, ladies and gentlemen. This concludes today's conference. We thank you for participating. You may now disconnect.