Encore Wire Corporation
Q4 2016 Earnings Call Transcript

Published: 17 Feb 2017

[Operator:]

Hello. And welcome to the Encore Wire’s Fourth Quarter Earnings Conference Call. My name is Jason and I will be your operator. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and please note this conference is being recorded. I will now turn the call over to Daniel Jones, Chairman, President and CEO. Mr. Jones you may begin.

[Daniel Jones:]

Thank you, Jason, and 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 Chief Financial Officer. We're pleased to report a good fourth quarter and a full year and our unit sales were up in both copper and aluminum building wire for the year, despite two competitive issues we noted in our previous quarterly press release. First, our largest competitor announced the purchase of a smaller competitor in the third quarter and historically these consolidations generally lead to improved industry margin discipline in the long run, but in the short run, they can lead to erratic pricing and volumes for us that the selling company pumps any type of sales volumes into the market. In addition, the different financially stressed competitor was acting erratically in aluminum wire market. We will see some relief there in 2017, hopefully, and is also noteworthy that three of our top competitors have had major changes to their executive teams in the last 18 months. This can also lead to some turmoil in the industry as the new teams find their footing in the market. Despite all the turmoil, we believe we had a respectable year and believe the industry and our results can improve in 2017. The overall construction and building wire markets remained steady versus last year. Anecdotal information confirms our belief that there's still large commercial and industrial projects in the pipeline. As stated in the past, 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 wire spread decreased 4.1% in 2016 versus 2015 as the average price of copper purchased decreased 13.1% -- 13.2% excuse me in 2016 versus 2015, while the average selling price of wire sold decreased 10.1%. Similarly, aluminum spreads dropped 11.5% in 2016 versus 2015. We are, however, encouraged by the fact spreads improved during the fourth quarter of 2016 versus the third quarter of 2016. Spreads increased on a sequential quarterly comparison, climbing 10.3% and 3.6% for copper and aluminum wire respectively. 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 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 from coast-to-coast. We believe our performance is impressive in economy that we're in, 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 you may have. Each of you should have received the copies of -- a copy of Encore's press release covering Encore's financial results. This release is also 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 the 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 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. Net sales for the fourth quarter of 2016 were $239.2 million compared to $250.9 million during the fourth quarter of 2015. Unit volume measured in copper pounds contained in the wires sold decreased 8.7% offset somewhat by a 4.4% increase in the average selling price per copper pound sold in the fourth quarter of 2016 versus the fourth quarter of 2015. Sales prices increased primarily due to higher copper prices, which increased 3.3% versus the fourth quarter of 2015. Aluminum building wire sales constituted 10.2% of net sales dollars for the fourth quarter of 2016 versus the same 10.2% in the fourth quarter of 2015. Net income for the fourth quarter of 2016 was $11.4 million versus $10.9 million in the fourth quarter of 2015. Fully diluted net earnings per common share were $0.55 in the fourth quarter of 2016 versus $0.53 in the fourth quarter of 2015. Net sales for the year ended December 31, 2016 were $940.8 million versus $1.018 billion in the same period in 2015. Copper unit volume increased 2.4% in 2016 versus 2015 offset by a 10.1% decrease in the average selling price per copper pound sold in 2016 versus 2015. Sales prices declined primarily due to lower copper prices, which declined 13.2% in 2016 versus 2015. Aluminum building wire sales continued to grow constituting 10.3% of net sales dollars during 2016 versus 9.9% in 2015. Net income for the year ended December 31, 2016, was $33.8 million versus $47.6 million for the same period in 2015. Fully diluted net earnings per common share were $1.63 for the year ended December 31, 2016 versus $2.29 for the same period in 2015. On a sequential quarter comparison, net sales for the fourth quarter of 2016 were $239.2 million versus $237.2 million during the third quarter of 2016. Copper unit volume decreased 6.4% on a sequential quarter comparison, in line with the fact that the fourth quarter is generally a slower quarter in the construction and building wire industry. The unit volume decrease was more than offset by the 8.2% increase in the average selling price of wire per copper pound sold. Net income for the fourth quarter of 2016 increased to $11.4 million versus $6 million in the third quarter of 2016. Fully diluted net income per common share was $0.55 in the fourth quarter of 2016 versus $0.29 in the third quarter of 2016. Our balance sheet remains strong. We have no long-term debt and our revolving line of credit is paid down to zero. In addition, we had $95.8 million in cash at the end of the quarter. We also declared another cash dividend during the quarter. I want to point out that 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 number 9956494 and the pound sign or you can visit our website where we will also have the replay available under the Investor tab. I will now turn the floor over to Daniel Jones, our Chairman, President, and CEO. Daniel?

[Daniel Jones:]

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

[Operator:]

Thank you. [Operator Instructions] And our first question comes from Roresa Mojo from D.A. Davidson.

[Roresa Mojo:]

Good morning. This is Mojo in for Brent Thielman.

[Daniel Jones:]

Good morning.

[Frank Bilban:]

Sure.

[Roresa Mojo:]

So basically, on looking at the volume, what was the cadence of volumes during the quarter, did they accelerate in the second half of the quarter?

[Daniel Jones:]

The answer is yes. We had some copper volatility within the quarter. I think we started out around to 214 to 215 in October going from memory and I think we ended up about 255 or something -- and I'm sorry 256, that's off a little. So, we ended up about 256 in December. That steady gradual October to December 214, 230, 240 up to 256. So, in that scenario, decent weather -- lot of things kind of came together, but it was pretty steady from October, November, through December even from the volume standpoint on the order input.

[Roresa Mojo:]

Okay. And speaking on the volatility, is that causing a demand for aluminum to rise?

[Daniel Jones:]

The aluminum was similar. We started out around $0.81 or $0.82 in the quarter. Raw material cost ended up in the -- around $0.86, $0.87, and volume there was a little more choppy as indicated in the press release. Mojo, we have a competitor too that were little disruptive with the aluminum pricing in the market. I don't want to go into too much detail, but a little more choppy on the aluminum side, but overall, the aluminum finished up pretty strong as well.

[Roresa Mojo:]

And I know you mentioned this in the press release, but is there any changes in the market that's going on with the competitor's consolidation? Is there any on pricing rationalization or anything like that?

[Daniel Jones:]

Well, specifically to the fourth quarter, it got better near the end. Again, uncertainties, inconsistencies, identities in market struggling for whatever they were looking for in some fashion one way the other, but overall again December was better than November and October this was that one as well. We have seen that the inventory push or whatever it's called dried-up toward the end of the year and there is more rationalization, but again when you go from 214 copper to 256 copper that forces some discipline in the market so it looked good towards the end, so there is no question.

[Roresa Mojo:]

It’s real quick. What was the breakdown for residential versus non-residential volume?

[Frank Bilban:]

In Q4 or for the year?

[Roresa Mojo:]

Q4?

[Frank Bilban:]

Q4 residential constituted 22% of copper volume.

[Roresa Mojo:]

Okay.

[Frank Bilban:]

And aluminum is all non-residential.

[Roresa Mojo:]

All right. Thanks.

[Frank Bilban:]

You’re welcome.

[Daniel Jones:]

Thanks.

[Operator:]

Our next question comes from [Larry Robbins], Private Investor.

[Unidentified Analyst:]

Hi, Frank and Daniel. Thank you for taking my call. We appreciate your efforts in Wire Company. I have one question, the guidance results of WIRE seems to be -- most of sales come in the fourth quarter and falloff in the first, second, and third, could you describe why that occurs and do you have vision the sales and earnings will change in 2017? Are the sales consistent throughout the year? In other words, how did the earnings fall from 55 or 53 in fourth quarter and down during the year, or are the sales consistent?

[Daniel Jones:]

Earnings fell off last year not so much in a pattern that's typical of the industry Mr. Robbins, but more due to the price competition and some of the things that have been going on in the market that we’ve been talking about for the last three quarters. As far as our volume goes, it generally and it doesn't always happen, but generally the second and the third quarter which is the warmer weather months would be slightly higher in volume than the first and the fourth quarters in terms of volume. If the margins are consistent throughout the four quarters, which rarely is the case, then you would expect earnings to be slightly higher in second and third quarters. But again as we’ve pointed out in this press release and conference call, the bigger issue with our earnings or the biggest driver of those earnings is the spread. That's where the games is won and lost.

[Unidentified Analyst:]

So, you're looking for the spread during the year this year 2017, and of course, your stock price spiked today because of the 55% -- 55% earnings or $0.55 earnings. But in the second -- first, second, third quarters of last year, it dropped way down, so do you anticipate that same thing happening this year?

[Daniel Jones:]

Speaking specifically to the fourth quarter in 2016, covering as Frank did, there’s things that move within our control and things move outside of our control, but as far as 2017, we have a pretty positive -- I am sorry?

[Unidentified Analyst:]

Okay, pretty positive okay. So is that accounting or is it -- are your sales consistent?

[Daniel Jones:]

I am sorry could you repeat that you drifted off on your question.

[Unidentified Analyst:]

I'm sorry. I have a color, I am sorry. I was looking at the earnings of Wire and they seem to be drop off in the first, second, third quarter as to the fourth quarter results, so I'm asking are your sales consistent throughout the year, that’s the basic question?

[Daniel Jones:]

Right. As we pointed out in the press release in 2016, I think you maybe referring back to 2015, but in 2016 if you track the earnings and track the sales, there's year-over-year growth from 2015 to 2016. As far as 2017 being a positive outlook, I really can't give you a lot of detail on what we've done in 2017 up to this point because we're supposed to stick to the Q4 and the full year for 2016.

[Operator:]

Thank you. And our next question comes from Bill Baldwin from Baldwin Anthony Securities.

[Bill Baldwin:]

Good morning.

[Daniel Jones:]

Bill.

[Frank Bilban:]

Bill.

[Bill Baldwin:]

Could you give us whatever color you can Dan on what your important CapEx projects are for the coming couple years -- as far out as you're looking right now with your CapEx program?

[Daniel Jones:]

I will. I mean we have some spend in front of us. Again I'm supposed to stick 2016 and Q4 -- specifically with 2016.

[Bill Baldwin:]

That makes kind of difficult then.

[Daniel Jones:]

It does. We spent some money in 2016 and it was pretty well documented. 2017, we currently have the idea all more of the same in the areas that we are making significant improvements in and more so than anything, it's going to be similar to what we've done in past Bill.

[Bill Baldwin:]

I know that's difficult for you Dan. So, don't worry about that. Could we pretty much assume that CapEx levels will be similar in 2017 to 2016 as far as [Indiscernible]?

[Frank Bilban:]

We think 2017 at the moment, Bill and it's early in year, it's going to come down a little. But that remains to be seen because of Dan sees and the Board see a project that really merits jumping on, they'll do it. But we came off of some pretty good spending last year. It may be down.

[Bill Baldwin:]

Well, good job fellows for navigating in some difficult waters here in the fourth quarter with your discipline. You obviously had good pricing discipline in the quarter.

[Daniel Jones:]

Yes sir. Thanks for the chat. Thank you very much Bill.

[Bill Baldwin:]

Absolutely. I mean when you look at your spreads as a percentage of your copper costs, they are at the highest level in the history of the company as far back as I can see going back to 2005. So, I think it’s a testimony or two to the discipline you brought to the table here.

[Daniel Jones:]

We're trying.

[Operator:]

Thank you. [Operator Instructions] Okay gentlemen. It doesn’t appear we have any more questions today. Do you have any final remarks?

[Daniel Jones:]

Jason, thank you for handling the call for us. We appreciate the stockholders' support. Thank you for the question. And look forward to the next conference call. Thank you.

[Operator:]

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