Encore Wire Corporation
Q3 2013 Earnings Call Transcript

Published: 25 Oct 2013

[Operator:]

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

[Daniel L. Jones:]

Hi, thank you Shannon. 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. Continuing the positive trend we saw developing in the second quarter of this year, the third quarter was encouraging to us from both the 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 perhaps boosting our market share, as our capital expenditures help to drive increased sales. As we’ve 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 6.2% in the third quarter of 2013 versus the third quarter of 2012, while our copper unit volume shipped in the third quarter of 2013 increased 15% versus the third quarter of 2012. The copper spread expanded as the average price of copper purchased fell 7.5% in the third quarter of 2013 versus the third quarter of 2012, but the average selling price of wire sold fell only 4%, as a result of improved pricing discipline in the industry. The same positive trend was evident on a year-to-date comparison as copper unit sales increased 6.8% coupled with a 5.5% increase in spreads. Our aluminum plant is now online and capable of producing our full line of products. The aluminum building wire products grew to 7.2% of net sales in the quarter, driven by unit sales increase of 18% 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 the economy, 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 J. 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 might 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 Melissa Robby [ph] at 800-962-9473 and we’ll 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 each of you to the Company’s SEC reports and news releases for a more detailed discussion of these risks and uncertainties. Also reconciliations of non-GAAP financial measures discussed during this conference call to the most directly comparable financial measures presented in accordance with GAAP, including EBITDA, which we believe to be useful supplemental information for investors are posted on www.encorewire.com. Now the financials; net sales for the third quarter ended September 30, 2013 were $309.9 million, compared to $269.2 million during the third quarter of 2012. Increased unit volumes of building wire sold in the third quarter of 2013 versus the third quarter of 2012 accounted for the increase in net sales dollars. Unit volume, measured in copper pounds contained in the wire sold increased 15% in the third quarter of 2013 versus the third quarter of 2012. The volume increase was offset somewhat by a 4% decrease in the average selling price per copper pound sold in the third quarter of 2013 versus the same period in 2012. Sales prices declined primarily due to lower copper prices, which declined 7.5% versus the third quarter of 2012. Net income for the third quarter of 2013 was $13.8 million versus $5.5 million in the third quarter of 2012. Fully diluted net earnings per common share were $0.66 in the third quarter of 2013 versus $0.27 in the third quarter of 2012. Net sales for the nine months ended September 30, 2013 were $864.7 million, compared to $814.3 million during the same period in 2012. Increased unit volumes of building wire sold in the first nine months of 2013 versus the first nine months of 2012 accounted for the increase in net sales dollars. Unit volume, measured in copper pounds contained in the wire sold increased 6.8% in the first nine months of 2013 versus the first nine months of 2012. The volume increase was offset somewhat by a 4% decrease in the average selling price per copper pound sold in the first three quarters of 2013 versus the same period in 2012. Sales prices declined primarily due to lower copper prices, which declined 7.1% in the first three quarters of 2013 versus the first three quarters of 2012. Net income for the nine months ended September 30, 2013 was $35.7 million versus $14.6 million in the same period in 2012. Fully diluted net earnings per common share were $1.72 for the nine months ended September 30, 2013 versus $0.66 in the same period in 2012. On a sequential quarter comparison, net sales for the third quarter of 2013 increased 7.1% to $309.9 million versus $289.5 million during the second quarter of 2013. Unit volume of copper building wire accounted for the majority of the increase, rising 8.1% on a sequential quarter comparison. Net income for the third quarter of 2013 was $13.8 million versus $15.5 million in the second quarter of 2013. Fully diluted net income per common share was $0.66 in the third quarter of 2013 versus $0.75 in the second quarter of 2013. As previously noted, 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. 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 had $16.1 million in cash at the end of the quarter. We also declared another quarterly cash dividend during the quarter. Please note that this conference call will be available for replay after the conclusion of this session. If you wish to hear the taped replay, call 888-843-7419 and enter the conference reference 7928596 and the pound sign. I’ll turn the floor back over to Daniel Jones, our President and CEO. 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. Shannon, we’ll now take questions from our listeners.

[Operator:]

Absolutely; we’ll now begin the question-and-answer session. (Operator Instructions) Our first question comes from Brent Thielman from D. A. Davidson.

[Brent E. Thielman:]

Hey, good morning guys.

[Daniel L. Jones:]

Hey, how you are doing?

[Brent E. Thielman:]

Good.

[Frank J. Bilban:]

Hi, Brent.

[Brent E. Thielman:]

Yeah, Daniel or Frank, could you talk about how the average selling price changed on a sequential basis relative to Q2?

[Daniel L. Jones:]

Sure, and you’re talking about average selling prices?

[Brent E. Thielman:]

Yeah, yeah.

[Daniel L. Jones:]

For copper, the average selling price in Q3, let me give that right here – was down 1.6%

[Brent E. Thielman:]

Okay.

[Daniel L. Jones:]

And copper during that same period was down 0.9%. So it’s very close.

[Brent E. Thielman:]

Okay. And then I guess from this industry pricing discipline that you guys pointed out. Is it widespread or you still seeing maybe some rational decisions here and there maybe right some of the smaller participants in the industry?

[Daniel L. Jones:]

A little bit of both, the discipline that we have seen may have been somewhat forced with the volatility in copper. And then also it appears that on business that was taking a little bit longer to be realized from the quote phase to the purchase order phase that time period is shortened. We have those two things working along with the pricing discipline that we saw, it allows for you to do some things in the market based on your service levels and fuel rates and what have you to possibly maintain or hold the line on the pricing.

[Brent E. Thielman:]

Okay. And I guess in addition to that, I mean that, is this growth in aluminum getting some of the bigger players in the industry, and these to supply those products a bigger say overall price maybe would have otherwise seen a couple of years ago?

[Frank J. Bilban:]

That’s hard to gauge. I’m not really sure Brent, what the other guys are doing or not doing from that standpoint. When we first entered the market, there was a lot of talk and what have you about what was going to happen, what wasn’t going to happen. But basically the aluminum plant for us in the products that we offer are there to make certain that we don’t forfeit an order of copper that may have a few items of aluminum included in the list. So as far as going out and going head-to-head on large aluminum exposure type quotes or jobs and that’s just not where we’re at. So I’m really not sure exactly what the market feedback is going to be other than so far, it’s all been positive from the distributor point of view, not the competitor point of view.

[Brent E. Thielman:]

Sure. And then just one more, I’ll turn it over to SG&A increased for more than I was looking for. Is that just a variable piece increasing the sales?

[Daniel L. Jones:]

Yes, because commissions the S part of our SG&A is really only two components and that’s freight. Freight out to our customers, which stayed if you’re talking on a sequential quarter basis, it actually went down from 1.9% of sales to 1.8%. Although, it went up slightly in dollars and the commissions, which we pay to our outside independent reps stayed constantly at 2.3%, but again went up $600,000.

[Brent E. Thielman:]

Okay. Great, thanks guys.

[Daniel L. Jones:]

Thanks, Brent.

[Operator:]

(Operator Instructions) Our next question comes from Bob Kelly from Sidoti.

[Robert J. Kelly:]

Good morning.

[Daniel L. Jones:]

Hey, Bob.

[Frank J. Bilban:]

Hi, Bob.

[Robert J. Kelly:]

How are you doing? Question on the volume growth, for a long time we’ve been kind of trending sideways, what explains despite that you saw particularly in the copper wire business?

[Daniel L. Jones:]

On the commercial piece seems to be again, when there is jobs that are being quoted from the quote phase to the actual purchase order phase when that timeframe shortens, which it has a little bit by a few days business seems to be picking up a little bit. And then as well we noticed a little bit of a bump in our average size of an order that we track daily, not huge numbers, but again trending in the right direction both residentially and commercially and we’ve also being doing very well in the industrial market.

[Robert J. Kelly:]

Good to hear.

[Daniel L. Jones:]

Each piece Bob looks pretty good.

[Robert J. Kelly:]

Good, good to hear. Is the discipline that…

[Operator:]

(Operator Instructions)

[Daniel L. Jones:]

[Technical Difficulties] thinking or not thinking but we’re certainly seeing more discipline on the pricing side and I don’t want to overplay it. But with a little bit of pressure on delivery that kind of fits our model a little bit better than some of the others and an also a pick up in business like we’ve had causes not necessarily a market shortage, but it causes tightness in pieces of the market. We might have a situation where in the commercial side and also feeding the industrial product, where you have a particular line item maybe 10 strand that’s tightened the market and just to kind of halfway confirm that we’ll receive calls from second and third tier competitors that need to buy from us that they can’t get from their normal suppliers, what have you but it all kind of fits together. And in the meantime, the sales office does a really good job of identifying the threshold where we still, although maybe perceived as high in the market are still able to wrap the order and based on some of the service that we offer some of the services that we offer, you may not necessarily have to match that lower number in some fashion, because delivery is starting to be a bigger piece than it was over the last few months. Business is a little more brisk. Things were picking up in certain areas. People feel better about placing orders and again that’s evident in the average order size that we look at daily.

[Robert J. Kelly:]

Okay, great. And then just as far as pricing within the aluminum business. Is there heavy competitive price pressure there as well, what’s the story with aluminum pricing?

[Daniel L. Jones:]

There is always price pressure but again just starting out that’s the challenge is making sure that you don’t create a negative in the market and we’ve been very successful of doing that. Although, sales people rarely lose an order of anything in their mind other than price. They always write orders, because they have fantastic relationship and they only lose orders, because someone else had a better price, which obviously that’s not true. But that’s the thought process it seems in our industry. As we continue to push in the aluminum market, again our approach in the aluminum has been to maintain those copper orders that typically we would lose because we weren’t able to service the smaller pieces of aluminium that would be coupled with the copper to make a freight requirement or maybe make a delivery requirement something of that nature. But having said that, as far as I can tell and I think evident in our results, we’ve been very disciplined on the aluminum. We’re very good in the sales office about not going after an order that we really don’t deserve and if we have to meet some delivery requirements or some special type arrangement off the sheet, we’ve been very successful at charging for that. So it’s not the same pressure that we would see on copper. The market itself on the metal is not as volatile maybe and certainly not as watched and there is always a story on copper each day. We just don’t have that on the aluminum side and the pricing itself is less volatile and maybe 3 to 1 copper volatility to the aluminum side on pricing.

[Robert J. Kelly:]

Great. And just want to follow on. You had a pretty impressive ramp in sales and the aluminum business since bringing production internal. Do you have any idea, what you are shared the market is at this point?

[Daniel L. Jones:]

I really don’t, we’re try and focus on one piece of that market. And we’ll probably have better numbers coming out of the fourth quarter to see where we fit. We’ve had great support from distributor customers, a lot to timing. I’d like to tell you it was all brilliant management, but it wasn’t. I mean there is timing in the market with some changes, one company bought another company and that typically leads to opportunity for us again lot of that was timing. But as far as with our overall share is, I’m just not prepared to break that out for you right now, I just don’t know.

[Robert J. Kelly:]

All right, thanks. Great work guys.

[Daniel L. Jones:]

Thanks a lot Bob.

[Frank J. Bilban:]

See you Bob.

[Operator:]

Our next question comes from Bill Baldwin from Baldwin Anthony Securities.

[Bill Baldwin:]

Hi good morning, Dan and Frank.

[Daniel L. Jones:]

Hey Bill

[Bill Baldwin:]

Can you comment on how the aluminum plants are running based on what’s your expectation had been when you were you know get this started up, how efficient is it operating and so forth?

[Frank J. Bilban:]

Right, aluminum plant actually has exceeded expectations on the positive side. Aluminum and handling the product and so forth is believe it or not quite a bit different and a little more complicated than handling the copper in the production process. I really expected to be a little bit slower and little further behind and possibly even still waiting on some pieces of equipment to be worked out. But it’s been fantastic and the guys are doing a great job. Our scrap levels are inline where we want them to be. Our delivery has been fantastic. Our leadtimes have been fantastic. I’m just enough about the team – I really can’t say enough about the team and what they did to that thing. It’s going fantastic, really don’t have any negative to share with on aluminum piece right now, we’re doing a great job. Bill Baldwin – Baldwin Anthony Securities Daniel L. Jones Now that’s super.

[Frank J. Bilban:]

Bill we’re having trouble of hearing? Would you speak up clear?

[Bill Baldwin:]

Can you hear me now?

[Frank J. Bilban:]

Yes.

[Frank J. Bilban:]

Is that better?

[Daniel L. Jones:]

Yes.

[Bill Baldwin:]

Okay. Does there applying pretty much across all your product line in the aluminum area Dan?

[Daniel L. Jones:]

Yes, aluminum in total has been really good for us; and again…

[Bill Baldwin:]

And that’s good. That’s good.

[Daniel L. Jones:]

Yeah, yeah. The new plant came online. It’s doing well. It feeds into the industrial market and commercial market really well. Everything is going pretty good in the aluminum side.

[Bill Baldwin:]

Well, good job there. Second and last question, can you comment on kind of what you see as a trend in the level of inquires that taken place here over the last several months and how that’s been going?

[Daniel L. Jones:]

Yeah, definitely, it’s seems to be more in line with the commercial piece, where the conversations surrounding projects. Again the time from holding something until it becomes an order has narrowed a quite a bit and shorten quite a bit. The whole process is sped up, a lot of apprehension that was there, maybe in the financial side, appears to have moved away the availability of money on projects certainly does not appear to be a problem outside of conversations surrounding some of the nationwide political issues that seems to be the only discussions that have a negative piece to them. As far as working toward the quote in the order process and delivery and functionality of the order itself has been very positive and I would tell you that from an order standpoint as far as the volume of inquiries on a daily basis and even on a weekly basis that we track, we’re up about the same percentage, that we’re up in volume. So it all fits together. It’s not new customers for us, it’s existing customers we’re getting paid on time. Things appear to be pretty solid actually business is pretty good at this point.

[Bill Baldwin:]

That’s good. Dan are you seeing the – on the industrial side are you seeing impact of investments that have taken place in the oil gas refinery and petrochemical area that beginning to really trend up nicely for you?

[Daniel L. Jones:]

Yes, sir. There is a definite credit to be given certainly to that market, we’re running quite a bit of industrial products six days a week basically and shipping about all that we can make in that market currently. It has been very good again a lot of that product is time sensitive of delivery and I think that plays into our model real well and that market has been really good.

[Bill Baldwin:]

Thank you very much and best of success going forward here.

[Daniel L. Jones:]

Thanks a lot Bill.

[Operator:]

(Operator Instructions) Our next question comes from Brad Evans from Heartland.

[Brad Evans:]

Gentlemen, good morning.

[Daniel L. Jones:]

Hi, Brad.

[Brad Evans:]

Congrats on a great quarter.

[Daniel L. Jones:]

Thank you.

[Brad Evans:]

Which you have any guesses as to across the aluminum and copper side of your businesses, what type of capacity utilization you ran at in the current quarter?

[Daniel L. Jones:]

Something less than a 100 but something over 80…

[Brad Evans:]

Okay. Just as far as the aluminum plant is concerned are you having discussions yet about perhaps investing in a aluminum rod mill?

[Frank J. Bilban:]

We haven’t announced anything in the third quarter, we didn’t announced anything but we’ve looked and then we’ve tried to explore every possibility that we can come up with as far as the cost reduction, we don’t have anything ordered as far as that goes but we certainly discuss and talk and it goes back to actually before the plant was online, we looked at in the that. So I guess that’s a long answer to yes we’ve looked at it.

[Brad Evans:]

Say, Frank what’s your CapEx budget for this year, for 2013?

[Frank J. Bilban:]

We are estimating right now that it will finish up right around $44 million, $45 million, including primarily all of this land that we bought this year, which is very good [ph] sense of that number.

[Brad Evans:]

So do you feel like the numbers more or likely to be higher than lower next year?

[Frank J. Bilban:]

When you take $29 million of land out, if we don’t repeat that next year, which we probably won’t; I doubt it.

[Brad Evans:]

Okay. Sorry about that, good point. How is the scrap copper availability at this point?

[Frank J. Bilban:]

For the right price, I think you can get what you think you need. But as the scrap market tightens, and gets into an area that encroaches on the cathode adders, we prefer the cathode. But right now, it’s okay. It’s not great, it fluctuates. There is volatility in that market similar to what you see in the processing on copper in the market.

[Brad Evans:]

And then just lastly I guess Frank, could you give us this…

[Frank J. Bilban:]

Brad, do you have something you would like to sell. This is what the question is…?

[Brad Evans:]

I don’t think so, I have to check.

[Daniel L. Jones:]

Worldwide if you do, that’s the question.

[Brad Evans:]

I know that.

[Daniel L. Jones:]

Yeah.

[Brad Evans:]

Okay. Frank, can you just give us the split between resi and commercial in the quarter in terms of the percent of revenue and on a year-over-year basis? What was resi and what was commercial up year-over-year on a volume basis please?

[Frank J. Bilban:]

Right, I have it in terms of units Brad in terms of pounds of copper shipped in the third quarter residential was 20.7% of the copper pounds. Year-over-year, as we indicated the pounds of copper shipped were up 6.8% and for the year, similar to the quarter we’re at 21% residential, which is up over 17.7% residential for the first nine months of 2012.

[Brad Evans:]

Got it. And so in the quarter, your commercial volumes were up how much year-over-year and your residential volumes were up, how much year-over-year?

[Frank J. Bilban:]

Okay. You’re talking nine months to nine months Brad?

[Brad Evans:]

No, I’m sorry, the third quarter over to the prior year period.

[Frank J. Bilban:]

Q3-to-Q3, residential units are up 26.8%. And Q3-over-Q3 commercial and industrial is up about 12%.

[Brad Evans:]

So with the ADI having kind of just meandering here, I guess north of 50% time and it’s seems to like it’s hopefully sticking to that level. So would you argue that you’re still relatively early and you are very early obviously in the residential recovery, but the commercial cycle as well is just turned the corner of feels like?

[Daniel L. Jones:]

Depending on who you read and who you follow, report wise, I would say yes. That’s what it feels like. We’ve got straight residential customers that seem to doing better and we had straight commercial customers that are doing better from a volume standpoint. The guys that are blended from a customer for us distributor wise. They do a little resi and little commercial seem to be up overall a little bit more than the guys that are specific. So I think as far as timing of a recovery or not or whatever Brad, I’ll leave that to you guys, but it does look good.

[Brad Evans:]

Congrats guys, thanks so much.

[Daniel L. Jones:]

Thanks a lot.

[Frank J. Bilban:]

See you Brad.

[Operator:]

At this time, we have no additional audio question.

[Daniel L. Jones:]

Well, Shannon, thank you for handling the call. And thank you folks for participating and we look forward to talking to you next quarter.

[Operator:]

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