Encore Wire Corporation
Q2 2013 Earnings Call Transcript

Published: 26 Jul 2013

[Operator:]

Good morning ladies and gentlemen, and welcome to the Encore Wire Second Quarter Earnings Call. My name is John, 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 this conference is being recorded. I will now like to turn the call over to Mr. Daniel Jones, President and CEO. Mr. Jones you may begin.

[Daniel L. Jones:]

Hi, thanks John and good morning ladies and gentlemen, and welcome to the Encore Wire Corporation quarterly conference call. I’m Daniel Jones, the President and Chief Executive Officer of Encore Wire, and with me this morning is Frank Bilban, our Chief Financial Officer. The second quarter of this year was encouraging to us from both a volume and margin perspective. Unit volumes were up in all building wire products. We believe our expansion of product offerings over the last several years to our existing customer base has been critical to maintaining and boosting our market share, as our capital expenditures help to drive increased sales. As we have repeatedly noted, 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 spread increased 18.1% in the second quarter of 2013 versus the second quarter of 2012, while our copper unit volume shipped in the second quarter of 2013 increased 8.1% versus the second quarter of 2012. The copper spread expanded as the average price of copper purchased fell 8.3% in the second quarter of 2013 versus the second quarter of 2012, but the average selling price of wire sold fell only 2.1%, as a result of improved pricing discipline in the industry. The same positive trend was evident on a sequential quarterly comparison, as copper unit sales increased 13.9% with a 5.7% increase in spreads. Our aluminum plant is now on line and capable of producing our full line of products that we offer. The aluminum building wire products grew to 6.6% of sales in the quarter, driven by unit sales increase of 33.7% on a sequential quarter basis. 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’ve been able to accomplish this despite holding what are historically lean inventories for us. We believe our performance is impressive in this economy, and we’d like to 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 J. Bilban:]

Thank you Daniel. In a minute we’ll review Encore’s financial results for the quarter. After the financial review, we will take any questions you may have. Each of you should have received a copy of Encore’s press release covering Encore’s financial results. This release is available on the Internet or you can call Natalie Seelbach at 800-962-9473 and we’ll be happy 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 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 financial results. Net sales for the second quarter ended June 30, 2013 were $289.5 million compared to $264.7 million during the second quarter of 2012. Copper unit volume, measured in pounds of copper contained in the wire sold, increased 8.1% in the second quarter of 2013 versus the second quarter of 2012, accounting for most of the increase in net sales dollars. Aluminum building wire sales also contributed to the increased sales, constituting 6.6% of net sales dollars for the second quarter of 2013 versus 3.5% in the second quarter of 2012. The average selling price of wire per copper pound sold dropped 2.1% in the second quarter of 2013 versus the second quarter of 2012, slightly offsetting the increase in sales dollars. Net income for the second quarter of 2013 was $15.5 million versus $2.4 million in the second quarter of 2012. Fully diluted net earnings per common share were $0.75 in the second quarter of 2013 versus $0.11 in the second quarter of 2012. The second quarter of 2013 included increased aluminum production activity, which enabled enhanced overhead allocations that favorably impacted quarterly results by approximately $0.06 to $0.10 in net earnings per share. Net sales for the six months ended June 30, 2013 were $554.8 million compared to $545.2 million during the same period in 2012. Copper unit volume in the six months ended June 30, 2013 increased 2.6% versus the same period in 2012, offset by a 3.9% drop in average sales prices. Aluminum building wire sales accounted for the increased sales, constituting 6.1% of net sales dollars for the six months ended June 30, 2013 versus 3.2% in the six months ended June 30, 2012. Net income for the six months ended June 30, 2013 was $21.9 million versus $9.1 million in the same period in 2012. Fully diluted net earnings per common share were $1.06 for the six months ended June 30, 2013 versus $0.40 in the same period in 2012. On a sequential quarter comparison, net sales for the second quarter of 2013 were $289.5 million versus $265.4 million during the first quarter of 2013. Copper wire unit volume increased 13.9% on a sequential quarter comparison, offset somewhat by a 5.2% decrease in average sales prices. Aluminum building wire sales also contributed to the increased sales, constituting 6.6% of net sales dollars for the second quarter of 2013 versus 5.7% in the first quarter of 2013. Net income for the second quarter of 2013 was $15.5 million versus $6.4 million in the first quarter of 2013. Fully diluted net income per common share was $0.75 in the second quarter of 2013 versus $0.31 in the first quarter of 2013. 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 had $1.2 million in cash as of June 30, 2013, which includes after we purchased 201 acres of land for $25.7 million as previously announced in a press release. We also declared another quarterly cash dividend during the quarter. I’d like to remind you that this conference call will be available for replay after the conclusion of this section. If you wish to hear this taped replay, please call 877-764-8714 and enter the conference reference code 338967 and the pound sign. I’ll now turn the floor back over to Daniel Jones, our President and Chief Executive Officer. Daniel?

[Daniel L. Jones:]

Thank you. As Frank highlighted, Encore performed well in the past quarter. We believe we are well-positioned for the future. Now, take questions from our listeners, John. Thank you. We’ll now begin the question-and-answer session. (Operator Instructions) Our first question comes from Robert Kelly. Please go ahead.

[Robert J. Kelly:]

Hi, good morning every one.

[Daniel L. Jones:]

Hey, Robert.

[Frank J. Bilban:]

Hi, Bob.

[Robert J. Kelly:]

A question on the volume growth that you saw in 2Q compared to a year ago, is that just whether the deferred sales from 1Q falling into the second quarter, or are you starting to see a little bit more strength from the end markets?

[Daniel L. Jones:]

It’s a great question. We are actually seeing a little bit more strength, the time involved from the quote or actually when we start the process possibly even before the quote comes in. That timeline from beginning to purchase order has shrunk a little bit, which is a good thing, and what that means, the decision to go forward with the project itself is happening a little bit faster. It's not super, so much quicker that you would give it a bunch of attention, but it certainly has shrunk. The volume is coming in a little bit quicker than last year and certainly toward the end of last year. We could see a little bit of that in the first quarter, but it was very evident in the second quarter that the process from start to finish to actually secure an order, is happening a little bit faster.

[Robert J. Kelly:]

Okay. And then, as far as the spread expansion that you saw this is one of the strongest gross margins Encore has put up in a couple of years. Should we expect that to continue in the second half of the year or does the fluctuations in copper, just kind of ex that out given a still pretty weak end market demand?

[Frank J. Bilban:]

It's hard to say what's going to happen in the second half, but what we had in this quarter, and somewhat in the first quarter copper volatility is obviously not new. Settling of the market somewhat relates to that shortens timeframe from beginning to end on the order process. Folks are moving forward with projects and regardless of what copper is doing or not doing they need the material on the job site. So when that happens and super lean inventories in the field and I could go on to some detail on some of the other things you contribute to that, but most of the time when you have a little bit of an increase in demand and the inventories are as lean as they are, we’re able to charge a little bit more for our service and product. If we didn’t have the service level that we offer we would not be able to do that. So even though our inventories here are somewhat lean, our reaction time is pretty incredible. So all that kind of come in together, Bob, is really what’s happening. I mean, folks are needing the wire on the job site. There is a few things we do to differentiate ourselves in the market. Those have proven to be of value, and folks are willing to pay for that value. So I see no reason sitting here today that it doesn’t happen going forward, but having said that, over the last 20, 25 years of doing this, these things happen that shouldn’t, whatever, but as of right now things are going on pretty well.

[Robert J. Kelly:]

Great. Just one final one on aluminum wire. A really strong start after commissioning the plant earlier this year. Where are you as far as utilization? I mean, how much more can you ramp that product in the short run? And I know it’s obviously dependent on demand, but how much production capacity do you have for aluminum wire?

[Daniel L. Jones:]

The easy answer is a lot. We don’t want to get too specific on that, because I can see on the screen we've got a couple of competitors that call in and change their names and all stuff, but whatever. The idea on the aluminum plant hasn't changed. With the complexion of the orders that come in today, and have been coming in for the last couple of years, the complexion has become a little more complicated. The market itself, folks are buying less of an individual product, but a broader product category on each order. They want less transactions all the things that the distributors are looking for that we've talked about in the past. And the aluminum was a big piece. We have always sold aluminum in a buy and resell arrangement with folks and their changes, not ours, but their changes actually put us in the aluminum business. We weren't able to service the customers in the fashion that we would like to service them buying and reselling. So we built our own plant. And really the service itself, and the limited product offering that we have in that market is really just a good fit with our current existing customer base, and helps us to secure those copper orders without that particular customer going somewhere else to get the aluminum piece, which typically is a smaller piece of the order. Having said that, with the copper volatility we've seen, and I don't think it's any secret, there has been some substitution on occasion. Sometimes it's published, sometimes it's not, but the aluminum itself is going well. We eased into it. We're not out there trying to be everything to everybody obviously, but the existing customer base that we currently have we will be able to fulfill their aluminum needs going forward, whatever that means.

[Robert J. Kelly:]

Okay, thanks.

[Daniel L. Jones:]

You bet. Thank you.

[Frank J. Bilban:]

Thanks Bob.

[Operator:]

Our next question comes from [Tom Brashear]. Please go ahead.

[Unidentified Analyst:]

Congratulations gentlemen. My question, are you seeing pricing discipline in the current market, and if so is this due to lean inventories, or what are the reasons?

[Daniel L. Jones:]

We are seeing some discipline, I mean, there are several reasons. You always hope for the best, but a lot of things have happened. The copper volatility, business picking up a little bit. I don’t want to go in a political path here, but basically what we’re seeing in the market, Tom folks are going ahead with projects. There is a little bit of optimism out there going forward. Our customers that we check with and speak with and travel with, and so forth, they are all doing a little better in different categories. As an industry, overall, I think folks are doing a little bit better. It just seems to be a little more optimism, a positive outlook going forward. I don’t think that that’s any surprise to anyone, and we’re able with our service and quick turnaround on the orders and order fill rates, some of the things that we offer on the sell side, folks like to carry lean inventory or second guess whether or not the copper run up is real or the copper dip is real or what have you. The volatility they can hold off till last minute, place the order with us, and receive a 100% fill rate, and three or four day lead times, those kinds of things. So it really is a combination of just a lot of things getting a little bit better, and we’re able to take advantage of that.

[Unidentified Analyst:]

Very good. Certainly enjoyed the Analyst Day.

[Frank J. Bilban:]

Yeah, thanks very much, Tom.

[Unidentified Analyst:]

Thank you all for hosting that. Thanks again.

[Daniel L. Jones:]

You're welcome.

[Operator:]

Our next question comes from [Brett Feldman]. Please go ahead.

[Unidentified Analyst:]

Hi, good morning. Nice quarter.

[Frank J. Bilban:]

Hi, Brett. Thank you.

[Daniel L. Jones:]

Brett, good to talk to you.

[Unidentified Analyst:]

Yeah. Just on the unit volume growth, you mentioned kind of up across-the-board. Could you expand a little bit more kind of where you're seeing more strength in others and I know you've got various SKUs in the various markets, but any market you could think about that are stronger than others?

[Frank J. Bilban:]

I think they're typical. The larger metropolitan areas seem to all be doing well. There was a time when most of the downtown areas across the country in the larger cities would have cranes in the air, and one tenant may move into a vacant building or expand two or three floors or whatever might happen, and that will initiate conversations, which lead to auxiliary type jobs and services that end up needing wire. They'll gut those buildings. It's not considered new construction, but when those types of things are visible people feel a little bit better about moving forward their projects, but geographically speaking it's really downtown in major cities. Colleges and universities still are expanding across the country. Stadiums, sports arenas, it really is, it's pretty widespread. It's not any one specific geographical area, but it is and seems to be if you had to say one area, it’s the heavy trafficked cities across the country.

[Unidentified Analyst:]

That’s helpful. And kind of from a residential versus non-residential perspective?

[Frank J. Bilban:]

Residential, if you’re talking Q2 over Q2 rent, residential was up 8%, 8.2%. Again, we’ve been cautioning people that’s off a very low base, but it’s encouraging to see the uptrend, and commercial wire was up year-over-year about 7%. So, both of them were up pretty much in concert with each other.

[Unidentified Analyst:]

Okay. Interesting. And then, if you kind of look at the three months of the quarter, any month there that was abnormally stronger than others or pretty consistent throughout?

[Frank J. Bilban:]

Not really.

[Daniel L. Jones:]

Yes, pretty consistent actually, and again, it’s tough to tie to anything, any one thing. Seasonality, weather, when something goes bad, it’s easy to try to find something to pin it on, but when things are good as we are right now, there seems to be a combination of things.

[Unidentified Analyst:]

Okay. And you may or may not want to respond to this one, but I’ll ask anyway. Margins on aluminum, are those above or below kind of the consolidated gross margins this quarter?

[Daniel L. Jones:]

Aluminum right now is a little bit better than the copper. It’s not a huge number, but today it’s a little bit better.

[Unidentified Analyst:]

Okay. And last one, probably for Frank. The increase in this SG&A, it’s not a huge number, but is that just a variable component of that with sales, or anything thinking about going toward from a fixed perspective?

[Frank J. Bilban:]

No, it is absolutely the variable components are selling. Expenses are made up of really only two counts, which is freight and commissions which vary directly with the top line sales. And so they went up from $11.2 million to $12.1 million. The regular quote G&A costs was totally flat at $4.1 million.

[Unidentified Analyst:]

Okay, great. Thanks, guys.

[Daniel L. Jones:]

You're welcome.

[Frank J. Bilban:]

So the question, it was a good one.

[Operator:]

Next question comes from [Bill Baldwin]. Please go ahead.

[Unidentified Analyst:]

Hi, good morning, Dan and Frank. If you've been asked this I apologize. With the aluminum plant now up and running, is it possible to say that some of these copper mines that we have seen here is a function now of getting moving the copper orders that you otherwise might not have gotten without the aluminum??

[Daniel L. Jones:]

Well, we'd like to think so. Bill, that's the thought process behind the aluminum to begin with. So I think the easy answer is yes. Yeah.

[Unidentified Analyst:]

So it's kind of difficult to quantify?

[Daniel L. Jones:]

It really is because you don't know what, the ones that you miss, you don't know what or why you missed them. Typically the assumption from a competition when they lose something is that it's all price. So they immediately begin to cut prices in the market. We don't have that approach.

[Unidentified Analyst:]

Right.

[Daniel L. Jones:]

So it really is tough to quantify. We'll try to move on to the next one.

[Unidentified Analyst:]

And I take it from your comments, Daniel, that your ability to deliver on aluminum building wire is similar to copper building wire, as far as delivery times are concerned to your customer?

[Daniel L. Jones:]

That is correct, yes. We have been very fortunate. The team here has done a phenomenal job on turning those aluminium orders around. Obviously, it does ship with the copper. So you can't do one without the other or what would happen and service would suffer and it shows up freight so and so forth but we’ve been very fortunate, great team. We did not try to shove this product into the market. We took our time and actually turn down quite a bit of business and eased into it, and today our service level is fantastic.

[Unidentified Analyst:]

Are some of the benefits, Daniel, that you’re seeing here on overhead absorption as a result of aluminum, is that a result of better freight arrangements now that you are shipping more tonnage per shipment, or is that not a factor here?

[Frank J. Bilban:]

Bill, the overhead is not in the – the overhead does not include the freight.

[Daniel L. Jones:]

Yeah, I was going to say no.

[Unidentified Analyst:]

Okay.

[Daniel L. Jones:]

It’s the easy answer there. And just to expand on that a little bit, the freight piece of it whether the aluminum – if an order is copper only includes aluminum, we still would ship the same pounds in a trailer.

[Unidentified Analyst:]

Okay.

[Daniel L. Jones:]

It’s not a real complex process. We have a cut off on what we consider to be a truckload and we work very hard at making sure each truck that rolls out of here is full, and it’s full from a weight standpoint. So the easy answer is no on the overhead.

[Unidentified Analyst:]

Okay. Thank you.

[Daniel L. Jones:]

Yes, sir. Thanks, Bill.

[Operator:]

Our next question comes from [Brett Feldman]. Please go ahead.

[Unidentified Analyst:]

Hey, guys, just a follow-up. Frank, I think I heard you say a $0.06 to $0.10 benefit from higher production at the aluminum plant versus the prior year. Should you see a similar comparable benefit into the quarters the second half?

[Frank J. Bilban:]

No, and that’s why we mentioned it in the press release. That really was just a adjustment to our overhead calculations, which was pretty minor, but as you probably can deduce any new plant is going to be a little tricky to set an overhead allocation rate when it's first ramping up, and all the machines are running, and you get a little high scrap and now in second quarter as we reached a little more normalized level of production, we were able to get a little more accurate with our overhead allocations, and therefore we saw maybe a 6% to 10% increment to our earnings that we mentioned because we don't think that will repeat.

[Unidentified Analyst:]

Got it. Thank you.

[Daniel L. Jones:]

You're welcome.

[Operator:]

(Operator Instructions) Our next question comes from [Kerry Rigdon]. Please go ahead.

[Unidentified Analyst:]

Good morning, gentlemen. Frank, just a quick follow-up. You’ve talked about the year-over-year change in the residential and commercial mix. What was it just if you have a quarter-over-quarter?

[Frank J. Bilban:]

A sequential quarter?

[Unidentified Analyst:]

Yeah.

[Frank J. Bilban:]

Sequential quarter, you're talking about the incremental changes in residential and commercial?

[Unidentified Analyst:]

Correct.

[Frank J. Bilban:]

Residential was up 0.5 percentage point Q1 of 2013 to Q2 of 2013 and commercial wire was up about 18.5%.

[Unidentified Analyst:]

Great. Thank you.

[Frank J. Bilban:]

You're welcome.

[Operator:]

We have no further questions at this time.

[Daniel L. Jones:]

Well, John and ladies and gentlemen, thank you guys very much for participating. The questions always help to make the call go better and we look forward to speaking to you guys next quarter. Thanks a lot.

[Operator:]

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