Encore Wire Corporation
Q3 2016 Earnings Call Transcript

Published: 30 Oct 2016

[Operator:]

Welcome to the Encore Wire’s Third Quarter Earnings Conference Call. My name is Karen and I will be your operator for today’s call. At this time, all participants are in a listen-only mode. Later we'll conduct a question-and-answer session. Please note that this conference is being recorded. I will now turn the call over to Daniel Jones, Chairman, President and CEO. Please may begin.

[Daniel Jones:]

Thank you, Karen. Good morning, ladies and gentlemen and welcome to the Encore Wire Corporation quarterly conference call. I am Daniel Jones, the President, Chief Executive Officer and Chairman of the Board of Encore Wire and with me this morning is Frank Bilban, our Chief Financial Officer. Looking at the third quarter results, there are some key items to note. Unit volumes were up 1% in copper pounds shipped and 4% aluminum pounds shipped over the third quarter of last year. Margins, however, declined in both copper and aluminum wire sales. 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 decreased 10.3% in the third quarter of 2016 versus the third quarter of 2015, but increased 1.3% on a sequential quarter comparison. The copper spread contracted 10.3% as the average price of copper purchased decreased 10.9% in the third quarter of 2016 versus the third quarter of 2015, and the average selling price of wire sold decreased 10.7%. Bear in mind, the percentage drops on sales are on a higher nominal dollar amount purchases and therefore spreads drop on a nominal dollar basis. Aluminum spreads were down 17.9% in the third quarter of 2016 versus the third quarter of 2015 and 3.6% in the third quarter of 2016 versus the second quarter of 2016. The margin declines were due to the competitive pricing environment in the industry. We've previously noted that the timing of price increases by the industry is critical and announcing price increases just ahead of a week of soft copper commodity prices can result in price increases having difficulty gaining any traction. While this is usually true, there are two other competitive factors currently at work in the market. One of our largest competitors announced the purchase of a smaller competitor during the quarter and while these industry consolidations generally lead to better industry margin discipline in the long term, in the short term it can lead to erratic pricing if the selling company pumps sales volumes into the market pre-sale and dumps remaining inventory post-sale. In addition, we believe a different, financially stressed competitor, has been acting erratically in the aluminum wire market. We believe both of these factors have impacted our spreads negatively. We also took a non-recurring write down of assets in the quarter that affected EPS by $0.05 per share. Based on discussions with our distributor customers and their contractor customers, we believe there is a good outlook for construction projects for next year, although we are steering through headwinds generated by the concern about the political landscape going forward. We continue to strive to lead and support industry price increases in an effort to maintain an increase margins. We believe our superior order fill rates continue to enhance our competitive position, as our electrical distributor customers are holding lean inventories in the field. As orders come in from electrical contractors, the distributors can count on our order fill rates to ensure quick deliveries coast to coast. We believe our performance is impressive in this economy and environment and 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 results, Frank?

[Frank Bilban:]

Thank you, Daniel. In a minute we'll review Encore's results for the quarter. After the financial review,, we'll take any questions you might have. Each of you should have already received a copy of the press release covering Encore's financial results. This release is available on the Internet or you can call Dennis McCarthy at 800-962-9473 and we'll 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 you each to the company's SEC reports and news releases for a more detailed discussion of these risks and uncertainties. Also reconciliation 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, 2016, were $237.2 million, compared to $262.8 during the third quarter of 2015. Copper unit volume measured in pounds of copper contained in the wires sold increased 1% in the third quarter of '16 versus the third quarter of '15. Aluminum unit volume was up 4% in the third quarter of 2016 versus the third quarter of 2015. Aluminum building wire sales constituted 10.6% of net sales dollars for the third quarter of 2016 versus 10.5% in the third quarter of 2015. The average selling price of wire per copper pound sold dropped 10.7% in the third quarter of 2016 versus the third quarter of 2015, driving the decrease in net sales dollars. Copper wire sales prices declined primarily due to the lower price of copper purchased, which declined 10.9% versus the third quarter of 2015. Net income for the third quarter of 2016 was $6 million versus $14.5 million in the third quarter of 2015. Fully diluted net earnings per common share were $0.29 in the third quarter of 2016 versus $0.70 in the third quarter of 2015. The third quarter of 2016 includes a nonrecurring charge to selling, general and administrative expenses of $1.6 million or $0.05 of net earnings per share, while the third quarter of 2015 included a positive net tax refund of $300,000. Net sales for the nine months ended September 30, 2016, were $701.5 million, compared to $766.8 million during the same period in 2015. The average selling price of wire per copper pound sold dropped 14.6% while copper unit volume sold increased 6.5% in the nine months ended September 30, 2016, versus the nine months ended September 30, 2015. Copper wire sales prices followed the price of copper purchased, which declined 18%. Aluminum building wire sales constituted 10.3% of net sales dollars for the nine months ended September 30, 2016, versus 9.8% in the nine months ended September 30, 2015. Net income for the nine months ended September 30, 2016, was $22.4 million versus $36.7 million in the same period in 2015. Fully diluted net earnings per common share were $1.08 for the nine months ended September 30, 2016, versus $1.76 in the same period in 2015. On a sequential quarter comparison, net sales for the third quarter of 2016 were $237.2 million versus $238.8 million during the second quarter of 2016. Sales dollars decreased due to a 2.4% unit volume decrease of copper building wires sold, offset by a 0.9% increase in the average selling price per pound of copper wire sold on a sequential quarter comparison. Copper wire sales prices increased slightly due to an increase of 0.7% in the price of copper purchased. Net income for the third quarter of 2016 decreased to $6 million versus $7.8 million in the second quarter of 2016. Fully diluted net income per common share was $0.29 in the third quarter of 2016 versus $0.38 in the second quarter of 2016. Our balance sheet remains very strong. We have no long-term debt and our revolving line of credit is paid down to zero. In addition we have $79.9 million in cash at the end of the quarter. We also declared another cash dividend during the quarter. I want to remind you this conference call will be available for replay after the conclusion of this session. If you wish to hear the taped replay please call 888-843-7419 and enter the conference reference 8140369 and the pound sign or you can visit our website where we have it posted. I will now turn the floor back over to Daniel Jones on Chairman, President and CEO, Daniel?

[Daniel Jones:]

Thank you. As Frank highlighted, we performed well in the past quarter and we believe we're well positioned for the future. Karen we'll now take questions from our listeners.

[Operator:]

Thank you. [Operator Instructions] And our first question comes from Brent Thielman from D.A. Davidson. Your line is open.

[Brent Thielman:]

Hey, good morning Daniel and Frank.

[Daniel Jones:]

Hey, how are you doing Brent.

[Brent Thielman:]

Doing well, thanks. Hey Daniel outside of the two competitive factors you called out here particularly with the quarter, how would you characterize the actions of the rest of the actors and the copper and aluminum side the business? W

[Daniel Jones:]

Well, the volatility from a pricing standpoint you had copper moving within the quarter from I don't know $2.21 down to $2.06 within the quarter. You could try to initiate price increases or even follow-up price increase on the copper side and it did make a lot of difference. It was so much chaos in the market during the day -- during the week from one quote to the next. It discrete a lot of doubt, there was a lot of confidence to go forward from the customer's standpoint. We verified that on several occasions and some of the order or some of the demand was pushed out, some of the more urgent stuff. You had to take advantage of as quickly as possible. There were orders that we walked away from that were below breakeven and it was orders that we took at lower prices than we wanted to. Within the quarter it was pretty chaotic. It started a little bit prior to the third quarter, just not as substantial, but clearly in the third quarter the chaos was -- had to do with pricing.

[Brent Thielman:]

Okay. Appreciate that and then, I am wondering if you might be able to comment on your past experiences you made situation more competitive or get acquired. How long do you typically see that sort of inventory believe into the market?

[Daniel Jones:]

Well, we went through in 2002 with General Cable. I think it was 2007 with Essex and 2009 or 2010 with ARW and prior to that I've seen going back to late 80s we saw with layer and a couple triangle nearly '96 there has been -- this is not a new cycle. It used to have maybe 20-25 competitors in the market when I started back in '89 and today we're probably down to a handful six or seven or so. But in that vein and more directly answering your question, it depends on the volume and the structure of the deal. You hear things and see things and you get the information from different sources most of the time, looking back at our earnings history and break it down by quarters, it's usually a done deal and the following quarter ends up back to whatever normally is for this industry. And in that scenario, if it started at some point in the second quarter and hopefully cleaned itself up and in Q3, don't really want to discuss Q4 yet, just stay in the guard rails and talk about Q3, our guys, our sales office, the team around here did a phenomenal job navigating those issues. We've seen it before. The good thing is its temporary, at some points there won't be enough to go around and it picks back up. So it's a long answer to your question, but we think it's over. We think that Q3 was the end of it and we'll move forward.

[Brent Thielman:]

No that's helpful Daniel and then just lastly, your comments, the feedback from customers has been pretty good, just around next year but sounds like the election among other things is causing some uncertainty, is that mean or should we take it this political landscape is causing customers a holdback on projects today and things are slipping a little bit to the right until we get some clarity there and how can we think about that?

[Daniel Jones:]

Great question too Brent, what we're saying and we just -- I just spend some time with the sales guys -- with a couple of groups that represent a significant amount of sales volume for us to different customer groups and certain talking with those guys for a few days, look everybody's not be -- everyone's busy, there is projects out in front, we've had phenomenal weather. Things are going along great net fashion, but in that same conversation at some point, someone interjects the election or Trump, or Clinton or in some fashion it comes out and that waters down the conversation a little bit. We're not seeing it actually delaying orders from that standpoint. It's just -- it comes up in the conversation and takes the space with some something else that you could talk about, but quite frankly it's positive. It's almost as if we're talking business and its super positive and then the other election or something in the news about the candidates starts to take over the conversation a little bit from a negative perspective. That's the reason for the comment. How much it affects pricing or volume remains to be seen, but for the most part, jobs are already financed, projects are already financed by the time our product enters into the jobsite. So in that vein, I think things are going along relatively well and most customers are upbeat. There seems to be a decent backlog of business with the contractors that we have relationships with and speak to through our distribution partners. And again though it just the only caveat would be the conversation usually involves the Presidential Election coming up. So I think business is good. Whether you like it or not, one of them is going to be President it looks like. So I think we're past almost two years cycle of campaigning. I'm not sure why it takes that long. I think we could learn what we've learned about these two in 60 or 90 days but we got two years of this campaigning and it just enters into the conversation and derails it for a little bit.

[Brent Thielman:]

I appreciate all that and best of luck this quarter. Thank you.

[Daniel Jones:]

Thanks Brent. Appreciate your support.

[Operator:]

Thank you. And our next question comes from Michael Conti with Sidoti. Michael your line is open.

[Michael Conti:]

Hey. Good morning.

[Daniel Jones:]

Hey Mike.

[Michael Conti:]

Yes, just to follow-up on the construction question, just want to make sure I'm understanding correctly, so you're saying that we should not expect to see an acceleration of volume shipments to service these projects once this election overhang is over, is that the right way to think about it?

[Daniel Jones:]

I don't know if that's how I am thinking about it. I understand what you're saying but in my mind business is good today. As far as the third quarter goes sticking to the third quarter call, we had quite a few challenges but looking forward, business is good. As far as what affect the election is going to have I think the term used was acceleration. I don't know how to predict that sitting here today, but I do know that our contractor customers and folks that we've partnered with over the years through distribution, have a very healthy backlog of business. They're super busy, there is a lot of There is a lot of activity around projects and discussion of projects going forward. We just don't have a scenario of whether or something that you can throw at that to slow it down. The only what if again it's come up in conversation has been the election. Now whether or not that accelerates it or doesn't accelerate it, I don't know the answer to that. I just know we're busy, we're getting busier. Our customers are super busy. It's a very positive environment from that standpoint.

[Michael Conti:]

Okay. And then aside from a good backlog, are your customers saying anything about capacity constraints on their ends of any labor constraints on their and that maybe limiting the amount of volume that they can accept from you and then think of that as maybe being relating it to a longer construction cycle.

[Daniel Jones:]

That's a great point Michael. A lot of the conversation typically about expanding any business I think is about who is going to run it from a people standpoint. So the distributor customers that we met with the last couple of weeks are very focused on training people as we are here, getting ready for growth and what have you, you have to have obviously goes without saying, you need to have people trained and whatever. But I think the feeling in the market is from me with the customers that their customers are busy, we're busy, there's always going to be that management piece of training your people. There is plenty of resources to help get that done is the feeling and I really didn't -- I really didn't have a conversation that I can recall where there was something brought up as the one event it had to repair something that was or wasn't broken. The only negative against to repeat it, the only negative in conversation so far with customers it has been only the election part, there was some -- there is obviously with our larger competitor buying a smaller competitor, it was going to be some realignments in some markets on whose partnered with whom and not everybody that was buying from the smaller one wants to buy from the larger and vice versa. So once all of that indecision change and shift in business and whatever, okay all of that is in the market. Our consistency and reputation of being consistent with delivery and what have you, I see it as positive. I think even from the customer standpoint, the feedback we got last couple weeks directly face-to-face things are positive, I did not see a people shortage as much as I've heard people talking about their training programs and excitement surrounding their -- the things they're doing for their people. So I think it's positive.

[Michael Conti:]

Okay. And then just turning to capital allocation just really want talk more about M&A the opportunity is out there that you're seeing just given good amount of transactions all open past five years and then maybe any new product introductions limit competitive pricing pressure. Really just want to drill down maybe some areas where you do see growth and opportunity in which you're currently not in now.

[Daniel Jones:]

That's a great question. Again you guys are helping moving this along but as far the M&A, if there was something there that fit and adds to the value that we bring to our customers we would love to do that, but again the key there is fit. I don't want to get larger and poorer of CNET repeat itself in this industry four or five times now and we actually don't compete with three or four of those companies anymore that are not around. So it fits what we're doing and makes us say a better company, but just get larger and poorer that's not me. The answer to your question of new product offering, we have a pretty full catalog. We're always looking for opportunities. There's a couple that we're pretty heavily focused on right now to see if there's something there for us, but we did not announce anything in the quarter. And the last part of your question, there's a lot of room for us to grow within the market that we're serving. We did shift some things, the first part of this year away from one market segment and refocused in another and we're seeing growth in unit volume in that area and I am looking at the screen. We've got three of four of our competitors, I don't really want to get too specific on what we did, but it's working. Look things are going along well, we've got the right guy and the right girl in the right opposition with solid backups and we're ready to keep moving this thing forward.

[Michael Conti:]

Great. Very helpful.

[Daniel Jones:]

You bet.

[Operator:]

Thank you. And our next question comes from Bill Baldwin with Baldwin Anthony Securities. Bill, your line is open.

[Bill Baldwin:]

Okay. Thank you. Good morning Frank and Dan.

[Daniel Jones:]

Hi Bill.

[Bill Baldwin:]

Couple of items. First would you describe what's going on in the aluminum market is somewhat temporary Dan or is this something that is hard to put a timeframe around.

[Daniel Jones:]

Well we're hoping it's wrapped itself Bill. We saw a significant downward pressure on the aluminum pricing starting in the later part of the first quarter this year. Picked up some steam in Q2 a little bit and then it seems like the industry caught the disease in the third quarter and there's investigations going on. There is all kinds of conversations surrounding who's doing what and what have you. Just in my opinion that built up in house here. There is some importing of aluminum that's come into the market that is significantly too cheap that's being addressed as we speak. As far as the manufacturing competitive piece domestically, we've got a competitor in the aluminum market that for whatever reason feels the need to discount their product significantly in Oregon. Navigating that as our sales offices has done has been fantastic. We've seen it before. We've gone through it cyclically before. This one has all of the characteristics of the last couple of cycles we went through. It's an attempt I believe to buy market share. This is no different than a cereal company or gas station cutting their price. You're going to get one box or one tank full and then the entire market lowers and then you're out back to doing business the way people like to do business. So we think it's temporary. We're seeing some signs of that already. We had a really good end of Q3, the last couple weeks of Q3. A lot of things were wrapped up, cleaned up and I think it's because a lot of things were made public. And as you know, some people are being stupid when it becomes public they don't like that to be exposed. So they either clean it up and discipline is forced or they start to do things that appear to be smarter. So that's my answer on the aluminum.

[Bill Baldwin:]

I appreciate the insight Dan it's helpful. Secondly by the plant's operating efficiently for you and do you have any areas Dan where you got limitations, where you're running it they're close to capacity in certain product areas and if so the debottlenecking efforts going on, capital spending going on to alleviate that.

[Daniel Jones:]

We're always upgrading equipment. That's an ongoing project as you know from truing a place. It's in constant change. As far the efficiency goes, we moved some things around in the latter part of 2015, the first part of 2016 and we feel like the efficiency piece is exactly where we want it. we're geared up with the right guy and girl and with the right equipment and we think with the right product offering today to take this thing to the next level. As far as capacity goes, again great question, you've been through the plant. We set ourselves up based on 100% order fill, which means we have to have some flexibility built into our production capacity. So your day bill, I have no concerns about the efficiency numbers nor the capacity numbers, we're ready, we're sitting here in great shape and in to repeat the meetings with the customers last couple of weeks were fantastic. Their customer's books are full. Our distributor customers are getting paid on time. Some of them were even bragging about cutting a few days out of their receivable, which is a very positive sign for us. So we think the efficiency in capacity coupled with those customers that are fantastic in the industry, but let's go the wholesale distributor piece is very good for us.

[Bill Baldwin:]

In the non-res market Daniel, with I guess the number of developments capital spending in petrochemical and industrial area does that skew your product demand toward some of your heavier higher-margin products?

[Daniel Jones:]

It did a little bit, there was some move as you can predict, the oil and gas piece was clearly built in regionally but other parts of the country and even now going back into talk about the third quarter specifically, even though we had the chaos that we had, there were some significant wins within the quarter also that had to do with folks that really sat down and put a pencil to value that's behind maybe paying a little extra for a product, but the lower cost to market model that we have, there are some wins there. And posturing in a market again with the competitive change like I said, we went through it over the years most recently in 2010 with ARW but there really without being too specific product with product categories, there are some categories that are doing very well numbers wise and the margins are good. It's not all just a fight on the higher visibility stuff, but I don't want to go too far. I hope that answers your question, but yes, we're doing a very well with some of the other products.

[Bill Baldwin:]

Let me finish with just a question, when you have applications that are -- can be filled by either copper building wire, aluminum building wire, how generally does the customer make the decision on which you which product to go with copper or aluminum? How that's analyzed and looked at?

[Daniel Jones:]

I want to be very clear and state very openly, I prefer to ship and sell copper. Copper is first and foremost for us here, the aluminum is a great expansion to our product offering to help us continue to grow the copper side, but what happens more directly to your question here's the answer. It has to do with a term that has been kicked around all over the place but it's mostly true sometimes, what they'll say is they want to value engineer the job. What that means more specifically to your question is they can take the copper feeder, replace it with aluminum feeder and lower the purchase price on the overall material list of wire that's where it ends because from that point forward, the conduits is going to be upsized, the logs, the terminations, there's a lot of things that have to occur to make the aluminum perform the way the copper performs. So that's basically what happens. Somebody comes in and they're going to value engineer and they take the list of material and the easiest thing to do upfront is to try to convert the feeders from copper to aluminum and then upsize the circular mill size. At least to some other things there are some costs that are increased in other areas, but what it comes down to is it's the management's decision or an owner type decision on which one you would like to have in your project going forward, but not something that we push. We literally push the copper.

[Bill Baldwin:]

Thank you very much.

[Daniel Jones:]

You bet, Bill. Appreciate your support.

[Operator:]

Thank you. [Operator Instructions] And our next question comes from Fritz Mowery from Mowery Capital Management. Fritz, your line is open.

[Fritz Mowery:]

Thank you. Hi Daniel. Hi Frank.

[Daniel Jones:]

Hey Fritz. How are you doing buddy?

[Fritz Mowery:]

I am good. Thank you. I guess one of my question is M&A, that's good to hear. I wanted to not to belabor this point, but I've had several questions like this one of the conference calls and it goes back to the Clinton Trump issues, have you and your senior staff had talks about what happens either way and that what it might mean either to labor cost or insurance cost and how you would address that?

[Daniel Jones:]

Superficially over ones you're something of that nature, but again controlling the controllable is where we think we're really good and as far as changing a position one way or the other, based on who gets in, the answer would be no. We're going to do our thing Fritz as you know as we've done in the past and be as flexible as we can and take it on as it comes. I think we could have a political discussion maybe some other time about whichever whatever but they'll be in effect at some point whichever and we'll have to address at the time, but to predict it we're already super conservative, you can check our balance sheet but I just don't know what we would do differently honestly.

[Fritz Mowery:]

Okay. And you seem to be talking about this third-quarter, talking about the pressure on pricing and looks like there was price war going on by one of the people in your industry really cutting prices significantly and possibly and that tends to price where's it seems like tend to increase demand. I'm curious that you see an increase in demand or are did demand slows as well.

[Daniel Jones:]

Well it's unfortunate for our industry, but you for 27 years and of our cofounders used to tell me that it was the same going back to the 50s, early 50s, when we have a competitor that offers by email, or fax, or text, or Twitter, or Snap Chat or Instagram or however they put their prices out there when it's a cheaper price offered in the market that does not initiate a purchase order, what happens it triggers all kinds of chaos for people to call the people that they want to buy from and see if they’ll match or meet those lower prices that were offered for no apparent reason other than whatever their own situation is, I can just tell you a lot of money here is mine and to call up someone and offer a cheaper price is not going to happen. It doesn't stimulate a buy because it causes people to doubt. In fact a lot of our customers have inventory on the shelf and you call up and offer a lower price and what they bought at last week, that will run those guys out. There is no way to see it, but it is a little counterintuitive, a lower price offer doesn't necessarily stimulate a purchase order and we did that a lot. It happened like I said 27 years that was all the time. The good thing is folks that go to market with price are the ones that earlier that we don't compete with any more.

[Fritz Mowery:]

So you mentioned you feel like you're pretty much at full capacity or -- all right, you did not, okay.

[Daniel Jones:]

No, we're not at full capacity. We have flexibility built in, as the product mix changes on the purchase order, we can react. We're at 100% is our fill rate and delivery, we're not at 100% capacity.

[Fritz Mowery:]

Got you. Okay. So you feel like your labor staffing is intact to handle everything that you have coming in hopefully in the fourth quarter being -- hopefully being better and your labor is positioned well.

[Daniel Jones:]

Yeah I think so. We've got a very talented team around here obviously. We've got sufficient numbers. We could hire 30 or 40 people today. We're always in that situation as far back as I can remember we're hiring people. Today you hire 15 or 20, you're going to keep 10 or 15 of them that's a good number. It's a very positive, I think it's a very positive environment for us today to get good quality people. We've got to chance to do some upgrades in some departments and we're doing them, People, plant and equipment, the market itself specifically from the third quarter looking forward, it looks great, it looks fantastic to me, we're in good shape.

[Fritz Mowery:]

So no significant changes in the labor cost then.

[Daniel Jones:]

We've got a great team.

[Fritz Mowery:]

Okay. The last question, and I appreciate, this is great. do you or could you do any hedging on your raw material price?

[Daniel Jones:]

The best hedge that we have that we talk about publicly is we turn our finished goods once a month. We buy on a month average and we tip our inventory once a month that's the best answer for that.

[Fritz Mowery:]

Okay. Thank you very much. Have a good luck n the quarter.

[Daniel Jones:]

Great to hear from you Fritz. Thanks a lot. You bet.

[Operator:]

Thank you. And we have no further questions in queue.

[Daniel Jones:]

Karen, thank you. We appreciate everyone's participation and we'll talk to you next quarter.

[Operator:]

Thank you, ladies and gentlemen. This concludes today’s conference. Thank you for participating and you may now disconnect.