Encore Wire Corporation
Q3 2017 Earnings Call Transcript

Published: 3 Nov 2017

[Operator:]

Welcome to the Encore Wire Third Quarter Earnings Conference Call. My name is Elle, and I will be your operator for today's call. [Operator Instructions]. I will now turn the call over to Mr. Daniel Jones, Chairman, President and CEO. Mr. Jones, you may begin.

[Daniel Jones:]

Thank you, Elle and good morning ladies and gentlemen, and welcome to the Encore Wire Corporation quarterly conference call. I'm Daniel Jones, the President, Chief Executive Officer and Chairman of the Board of Encore Wire. With me this morning is Frank Bilban, our Chief Financial Officer. We are very pleased with our improved results in the third 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 nine month comparisons of 2017 to 2016. The increased top line was driven primarily by both higher copper raw material prices as well as increased unit sales volumes. Unit volumes in the first nine months of 2017 were up 5.6% in copper pounds shipped versus the first nine months of last year. Margins increased strongly in both the quarterly and nine 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 17.8% in the third quarter of 2017 versus the third quarter of 2016, and increased 9.8% on the nine month comparison while increasing 13% on a sequential quarter comparison. The copper spread expanded 17.8% as the average price of copper purchased increased 30.1% in the third quarter of 2017 versus the third quarter of 2016, while the average selling price of wire sold increased 25.7%. The percentage change on sales is on a higher nominal dollar amount than on purchases and, therefore, spreads change on a nominal dollar basis. We took finished goods sales price up beyond our competitors in mid-August and in an attempt to lead industry margin improvement. Our volumes decreased slightly as a result. Our discipline was reinforced with hurricanes hitting the Gulf Coast regions, with the concentration of petrochemical plants in the Gulf area including many plastic plants on which our industry relies, we had to protect our own inventories and support our commitment complete non-time delivery to traditional wholesale electrical distribution. Additional plastics supply threats and disruptions were repeated in September, resulting in our pricing discipline, negatively impacting unit volume slightly but improving our spreads. Our approach was well communicated by our separate sales team and outside sales reps and relationships were managed accordingly. The U.S. economy appears strong as its construction activity. We believe that some of our financially stressed competitors have struggled and acted irratically and what we consider a strong business environment. When volumes are good in margins should also be strong. Based on discussions with our distributor customers and the contractor customers, we believe there is a good outlook for construction projects for the next year. 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 position. As orders come in from electrical contractors, the distributors can count on our order fill rates to ensure quick deliveries from coast to coast. We believe our performance is impressive and we thank our employees and associates for their tremendous efforts. We also thank our stockholders 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'll take any questions the audience may have. Each of you should have already received a copy of our press release covering Encore's financial results. This release is also available on the Internet, or you can call Denis McCarthy at [phone], 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 here today. I refer 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 third quarter ended September 30, 2017, were $292 million compared to $237.2 million during the third quarter of 2016. Copper unit volume, measured in pounds of copper contained in the wire sold, increased 0.7% in the third quarter of 2017 versus the third quarter of 2016. The average selling price of wire per copper pound sold increased 25.7% in the third quarter of 2017 versus the third quarter of 2016, driving the 23.1% increase in net sales dollars. Copper wire sales increased primarily due to the higher price of copper purchased, which increased 30.1% versus the third quarter of 2016. Net income for the third quarter of 2017 increased 132.8% to $14 million versus $6 million in the third quarter of 2016. Fully diluted net earnings per common share were $0.67 in the third quarter of 2017 versus $0.29 in the third quarter of 2016. Net sales for the nine months ended September 30, 2017 were $863 million compared to $701.5 million during the same period in 2016. Copper unit volume measured in pounds and copper contained in the wire sold increased 5.6% in the nine months ended September 30, versus the nine months ended September 30, 2016 The average selling price of wire per copper sold, per copper pound sold increased 18.8% in the nine months ended September 30, 2017 versus the nine months ended September 30, 2016 driving the 23% increase in net sales dollars. Copper wire sales prices increased primarily due to the higher price of copper purchased, which increased 23.8% versus the nine months ended September 30, 2016. Net income for the nine months ended September 30, 2017 increased 71.7% to $38.5 million versus $22.4 million in the same period in 2016. Fully diluted net earnings per common share were $1.85 in the nine months ended September 30, 2017 versus $1.08 in the same period in 2016. On a sequential quarter comparison, net sales for the third quarter of 2017 were $292 million versus $291.5 million during the second quarter of 2017. Sales dollars remain flat due to a 9% unit volume decrease of copper building wire sold, offset by a 10.9% increase in the average selling price per pound of copper wire sold on a sequential quarter comparison. Copper wire sales prices increased primarily due to an increase of 9.9% in the price of copper purchased. Net income for the second quarter of 2017 was $14 million versus $10.9 million in the second quarter of 2017. Fully diluted net income per common share was $0.67 in the third quarter of 2017 versus $0.52 in the second quarter of 2017. Our balance sheet is very strong. We have no long-term debt, and our revolving line of credit is paid down to zero. In addition, we have $101.4 million in cash at the end of the quarter. We also declared another cash dividend during the quarter. This conference call will be available for replay after the conclusion of this session. If you wish to hear the tape replay, please call [phone] and enter the conference reference number 6929977 and the pound sign, or you can visit our website. I'll now turn the floor back over to Daniel Jones, our Chairman, President and CEO. Daniel?

[Daniel Jones:]

Thank you, Frank. And as we highlighted, Encore performed well in the past quarter, and we believe we're well positioned for now and for the immediate future. And Elle, we'll now take questions from our listeners.

[Operator:]

[Operator Instructions] And our first question comes from Brent Thielman from D.A. Davidson. Please go ahead.

[Brent Thielman:]

Hey good morning.

[Daniel Jones:]

Hey Brent.

[Brent Thielman:]

Congrats on a great quarter and [Indiscernible] with a lot of moving pieces.

[Daniel Jones:]

Thanks buddy.

[Brent Thielman:]

Dan, you mentioned some of the uncertainty related to plastic supplies, the impacts in some of those plans down in the Gulf, has that actually caused any direct issues in 3Q or 4Q, we should consider?

[Daniel Jones:]

Specifically, looking back in the quarter the e-mails, messages on the letterheads and whatever we're flying around like crazy, the third week in August, basically through September with force majeure announcements and potential supply disruptions, and what have you -- it's not the first time that we've gone through that, it's the first time for some of our competitors management teams to go through this, but you do things based on the facts as they stand in that moment, whether a disrupture strategy plan or whatever the latest answer might be. But we did not experience here supply disruptions that we had planned going into some of those announcements accordingly. We've got an industry veteran handling our purchasing and she does a phenomenal job and the sales team did a great job protecting our inventories. And you do things from a business standpoint, as far as actual in the market delivery issues, there are specific product categories that are being back ordered by a few of our competitors. I'd only get too off base here Brent, but the price cutting that went on in the industry during the quarter, with those types of headwinds was ridiculous. There's not another word for it. But having said that I think that most of that supply disruption for the most part will cure itself going forward, as factories catch up. I don't know anybody who's not running their plants; I think it will be behind us here pretty quickly as for the supply disruption piece. It wasn't huge, but there are product categories that we're taking advantage of maybe our fill rates and whatever with our wholesale electrical distributor partners and some of the non-traditional distributors, I think will be spread over time, but better in one line, but they'll catch-up.

[Brent Thielman:]

Okay. Well, maybe on the pricing side, Daniel, if I recall kind of through the quarter, price of copper really started to shoot up. Did that force some better acting as that happened amongst some of your competitors -- you disappointed with how the industry responded to that?

[Daniel Jones:]

We know July was -- you had a copper increase, I think actually materials across the board increased in July, it wasn't just copper. We led maybe three or four price increases during that month. We had a couple of head fakes. Couple of our competitors that maybe they're running it, we've had this in the past where somebody has pricing authority within the company that's maybe new to that position, they run it like a trading desk almost based on volume input. That would be short-lived, because again, you get raw material increases like we had in July, August, September, we have forces discipline, it's not necessarily rewarded to be undisciplined. But July was the challenge for the quarter. We took a pretty hard stand in the first part of August. The boost from the hurricane whatever scare was not till late-August and we had already started the process in early August due to just basically lack of margin. I mean there was no discipline really in the market. And business is good, that's the thing, Brent. Volumes are good, business is good and we're only talking the difference here of three or four points overall, and so after July we just made a pretty firm stand, even though we're still billing with some pretty erratic business activity, if you will, from a competitive standpoint. Whatever the excuses are, look this is 28, 29 years of this. It's not new. We've been through before. We'll continue to do things and make good long-term business decisions, not these quick knee-jerk, cut the price [Indiscernible] ordering and deliver part of it, that seems to be the flavor of the day in July. And again, August and September forced some discipline, which has been good.

[Brent Thielman:]

That’s good. Maybe one more. Given the regular dialogue you have with the customers, how do you sort of characterize the optimism going into next year, maybe relative this point in time and the last few years, is it a function of just more certainty out there, lead times extending, any other thoughts there?

[Daniel Jones:]

Yes. There is -- great question. There is more certainty and the time that passes between the discussion phase and in actual get down to business phase has also narrowed or shortened, which is good. Look, people have the money to do these jobs, they are financed, they are in place, they've got commitments, it's rolling along. The only thing that -- this is not my area to get into, but the only thing that really comes up in those conversations that has a negative twist typically is political, it's something that was a headline in the newspaper that day or the next day and it's kind of tongue in cheek or maybe a joke of hey, maybe we put Phase 2 and Phase 3 on hold to see where this shakes out. But lot of business, lot of optimism going forward, and I don't want to say too much of that going-forward, I was supposed stay to Q3, but things are good, things are really good.

[Brent Thielman:]

Okay. Thank you.

[Daniel Jones:]

Yes sir. Thank you, Brent.

[Frank Bilban:]

Thanks, Brent.

[Operator:]

And our next question comes from Andrew Fleming from Heartland Advisors. Please go ahead.

[Andrew Fleming:]

Good morning, Daniel and Frank.

[Daniel Jones:]

Good to hear, Daniel.

[Andrew Fleming:]

Hey, congrats on a great quarter. I was just interested -- could you talk about the linearity of the volumes within the third quarter, I'm trying to grasp the impact of your rising prices?

[Frank Bilban:]

Well, it may not be as severe as you think, but July was very good and August and September were a little bit below that. But bear in mind that generally September -- August, September, October, tend to be three of our big months in the year and so that was slightly muted, but not to any -- I would say less than 10%.

[Andrew Fleming:]

Okay. And then I'm just thinking about the fourth quarter and I'm just looking back at last year's fourth quarter, it looks like copper volumes were actually down close to 9%, last fourth quarter. Can you just remind us what happened last fourth quarter?

[Frank Bilban:]

Q4's are generally lower because of a couple of things. Number one, the holidays and people and projects just naturally back-off, slow down and then of course, across the northern tier of states as you know things -- with the weather get pretty cold, pretty sloppy and to the extent that buildings are closed in. We will see that reflected and also we try to take a price increase up last November-ish and that muted some of our sales, again to a small extent and net-net, you saw that 8% to 10% decrement in sales, which was not alarming to us.

[Andrew Fleming:]

Okay. I am just trying understand if there is anything slightly abnormal last fourth quarter that presents perhaps a easy comp coming forward in this upcoming fourth quarter?

[Daniel Jones:]

We really don't know, not that we recall.

[Andrew Fleming:]

Okay.

[Daniel Jones:]

Come on Andy you know we're supposed to stick to Q3 anyway.

[Andrew Fleming:]

I thought I'll try. All right. Well congrats and good job on the balance sheet as well. It's in a good shape as it's been in the long time.

[Daniel Jones:]

Yes, sir. Appreciate the call. Thank you.

[Operator:]

Our next question comes from Julio Romero from Sidoti & Company. Please go ahead.

[Julio Romero:]

Hi. Good morning.

[Frank Bilban:]

Good morning.

[Julio Romero:]

So, can you speak on what Harvey and maybe Hurricane Irma as well? What type of impact we might expect on volumes, the demand side in the next couple of quarters going forward?

[Daniel Jones:]

Yes, it's maybe a little counterintuitive. The volume from those types of events -- typically, the immediate impact is temporary top cables. It's not a big number that shows up. It's more spread over time as the neighbourhoods start to rebuild if they're going to rebuild. I mean when you look back at New Orleans are still parts of that area that did not -- we chose not to rebuild. So it's not necessarily a walk through a snake scenario as much as would be just kind of spread over time in a gradual uptick, you would think. It's not the first time, they've gone through it. Probably a little bit different this time in volume in the area that was affected, but it's typically not a surge of any type of demand. It's more of a spread out over time, because you can imagine, people flock to that area, they cleanup to trash haul off. The numbers are staggering on some of that stuff, but the rebuild is a lot slower, more gradual through an inventory most of time. Some of the larger jobs in that area, things have to completely dry out before they continue on with their process. But for the most part, Julio I would say, It's a gradual -- I guess if you track it specifically through that area, you might give the credit to one thing or another on the construction piece, but it's never really just a search, it's more of a gradual over time.

[Julio Romero:]

Got it. That makes sense. And given that we're heading into the seasonally weaker Q4 and Q1, any color on how amenable market place maybe towards additional price increases, given the current trajectory of copper price?

[Daniel Jones:]

Well I'm supposed to stick to Q3. And in Q3, we were able in the August and September months to kind of substantiate some of the price increases with some force discipline in the market. As far as Q4 and Q1, I have my own opinions about where copper is going to be or not be. And I'm very optimistic on business and super bullish on copper. And I probably shouldn't say too much about that, but business is good. We've got really good competitors out there. You just got a couple that are not in super good shape. They've earned it and own our price, just leave it at that.

[Frank Bilban:]

Understood.

[Daniel Jones:]

It's super hard for me to stay to Q3, I just want you to know that, but that's what I am supposed to do.

[Julio Romero:]

Right. Now fully understood. And you had a slightly lower effective tax rate this quarter, is that -- I know if you can speak on that at all or…?-

[Frank Bilban:]

Well, yes. And these calculations get a little complicated with a lot of moving parts, but to try to summarize Encore Wire is really poster boy for the manufacturing in America tax the Section 199 and it is known by the CPA's who help us with our taxes and therefore as our earnings increase on a taxable level, because you have book earnings and tax earnings. As the tax earnings went up this quarter, we were able to realize a higher credit from the 199 because we manufacture everything here in the United States and that helped to lower our effective tax rate.

[Julio Romero:]

Got it. Got it. I’ll hop back into queue. Thank you.

[Daniel Jones:]

Thank you. We’ll appreciate the call in.

[Operator:]

And we have Brent Thielman from D.A. Davidson back on with the question. Please go ahead.

[Brent Thielman:]

Hey, guys. One more, you build an arsenal of cash here. I know, Daniel, you had some things you've been working on internally that you kind of want to check off this year. I guess first part of it is, are you starting check those boxes and second part, I guess over the course of the next four, five, six months could we hear little more of what you're thinking about doing with that cash?

[Daniel Jones:]

Yes, sir. That's a best answer. We are setting on go. We ramped up. I don't know if any loose ends that we have currently. We're in phenomenal shape, plant and equipment, and more importantly people. I can't bragging off on what our people have done to step it up in 2017 and we are setting on go and we got a couple of ideas going forward. But we did not announce anything in the third quarter, so price, just leave it there.

[Brent Thielman:]

Okay. All right. Appreciate it.

[Daniel Jones:]

Thank you, Brent.

[Operator:]

And we have no further questions at this time.

[Daniel Jones:]

Okay, well Elle, that’s it, we appreciate everyone's participation and we look forward to you joining us again at the end of Q4. Thank you very much.

[Operator:]

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