Encore Wire Corporation
Q4 2014 Earnings Call Transcript

Published: 20 Feb 2015

[Operator:]

Welcome to the Encore Wire Fourth Quarter Conference Call. My name is Christine 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 Daniel Jones, President, CEO and Chairman. You may begin.

[Daniel Jones:]

Thank you, Christine and good morning ladies and gentlemen and welcome to the Encore Wire Corporation quarterly conference call. I am Daniel Jones and with me this morning is Frank Bilban, our Chief Financial Officer. The fourth quarter was good from a volume perspective. Aluminum unit volumes were up strongly in the fourth quarter and the full year as we continue to grow that portion of our business. Copper wire units were also up in 2014 versus 2013. The overall construction and building wire markets did not show any significant improvement over last year. Anecdotal information confirms our belief that we are outperforming the industry in volume growth. Our fourth quarter copper wire unit volume is near the average of the first three quarters. And as we have previously 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 copper wire spread decreased 2.5% in 2014 versus 2013, while our copper unit volume shipped in 2014 increased 3.6% versus 2013. Copper spreads decreased 5.7% on a sequential quarter comparison. The total year copper spread contracted 2.5%, as the average price of copper purchased decreased 5.7% in 2014 versus 2013, driving the average selling price of wire sold down 4.8%. Aluminum spreads were down 8.1% in 2014 versus 2013 as a competitor appears to be cutting prices to make up for poor delivery performance. The aluminum building wire products grew to 8.9% of net sales in 2014, driven by a unit sales increase of 34.4% in 2014 versus 2013. The decreased spreads accounted for 92% of the drop in pre-tax income in 2014 versus 2013. Our new aluminum plant expansion is proceeding on schedule and will begin producing wire in the second quarter and will ramp up through the end of the year. Copper and other commodity prices trended down in 2014 contributing to the margin deterioration we endured in 2014 versus 2013. However, margins can reverse of course quickly in this industry and bear in mind that the copper spread was down only 2.5% year-over-year. We have seen price cycles before in the National Construction forecast appear upbeat about 2015 with the Dodge report forecasting double-digit growth in commercial construction. 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 have 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 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. For our listeners today if I sound a little froggy, I apologize I am fighting all for a bit of something that I can’t identify, but I feel good. In a minute we will review Encore’s financial results for the quarter. After the financial review we will take any questions you might have. Each of you should have received the copy of our press release covering Encore’s financial results. This release is available on the Internet or you can call Karen Wagner, at 800-962-9473 and we will get your 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 call to the most directly comparable financial measures presented in accordance with GAAP including for example EBITDA, which we believe to be useful supplemental information for investors are posted on www.encorewire.com. Net sales for the fourth quarter of 2014 decreased to $285.3 million compared to $293.5 million during the fourth quarter of 2013. Unit volume measured in copper pounds contained in the wire sold, increased 2.4% and was offset by a 6.3% decrease in the average selling price per copper pound sold in the fourth quarter of ‘14 versus the same period in ‘13. Sales prices declined primarily due to lower copper prices, which declined 7.9% versus the fourth quarter of 2013. Aluminum building wire sales continued their growth pattern, constituting 9.2% of net sales dollars for the fourth quarter of ‘14 versus 8% in the fourth quarter of 2013. Net income for the fourth quarter of 2014 was $5.1 million versus $11.2 million in the fourth quarter of 2013.

[Operator:]

I am sorry for the interruption. [Operator Instructions]

[Frank Bilban:]

31, 2014 increased to $1.167 billion compared to $1.158 billion during the same period in 2013. Copper unit volume increased 3.6% in 2014 versus 2013. The volume increase was offset by a 4.8% decrease in the average selling price per copper pound sold in 2014 versus 2013. Sales prices declined primarily due to lower copper prices, which declined 5.7% in 2014 versus 2013. Aluminum building wire sales continued to grow, constituting 8.9% of net sales dollars during 2014 versus 6.9% in 2013. Net income for the year ended December 31, 2014 was $37.1 million versus $46.9 million in 2013. Fully diluted net earnings per common share were $1.78 for the year ended December 31, 2014 versus $2.26 in 2013. On a sequential quarter comparison, net sales for the fourth quarter of 2014 were $285.3 million versus $297.4 million during the third quarter of 2014. Copper unit volume increased 1.4% on a sequential quarter comparison, despite the fact that the fourth quarter is generally a slower quarter in the construction and building wire industries. Net income for the fourth quarter of 2014 was $5.1 million versus $11.1 million in the third quarter of 2014. Fully diluted net income per a common share was $0.24 in the fourth quarter of ‘14 versus $0.53 in the third quarter of ‘14. Our balance sheet continues to be very strong. We have no long-term debt, and our revolving line of credit is paid down to zero. In addition, we had $54.7 million in cash at the end of the year. We also declared another cash dividend during the quarter. We also want to point out that this conference call will be available for replay after the conclusion of this session. If you wish to hear to the taped replay, please dial 888-843-7419 and enter the conference reference number 7201305 and the pound sign. I will now turn the floor back over to Daniel Jones, our President, CEO, and Chairman. Daniel?

[Daniel Jones:]

Thank you. As Frank highlighted Encore performed well in the past quarter. We believe we are well positioned for the future. And Christine we will now take questions.

[Operator:]

Thank you. [Operator Instructions] And our first question is from Brent Thielman of D.A. Davidson. Please go ahead.

[Brent Thielman:]

Hey, good morning Daniel and Frank.

[Daniel Jones:]

Good morning Brent, how are you.

[Brent Thielman:]

Doing well. Daniel or Frank in prior quarter you guys talked about some challenges in terms of kind of industry price discipline on the copper side, have you seen things level off there or are you still encountering some pressure there?

[Daniel Jones:]

We are trying to stick to the fourth quarter and what have you, but just in general we ran into some aluminum pricing pressure in the fourth quarter and also some on the copper side was a lot of discipline or business credit that you could give to that. But based on folks that we were talking to and common distributors and what have you. It seemed to be there was one particular competitor maybe more than one I guess, but pushing product and so forth trying to hang on to customers maybe, trying to hang on to something. I am not real sure exactly what it might have been, but it seemed to have kind of halfway cleaned itself up.

[Brent Thielman:]

Okay. Do you see things resolve themselves here more recently or?

[Daniel Jones:]

Yes, in general it’s better. Again, I don’t want to say too much about Q1 on this call, but yes, I mean things are better.

[Brent Thielman:]

Understood. And did you guys see any major changes in terms of customer buying patterns this last quarter that you typically don’t see in fourth quarter, as I know there is some seasonality to it?

[Daniel Jones:]

That’s a great question. We actually did. The volume and intensity if that’s even the right word, but the volume and intensity picked up from a quote standpoint. The quotes themselves, there was a shorter amount of time from quote to purchase order which was good. I think business for us in the fourth quarter was again there was no way to justify that price cutting situation, because business was decent. There were several distributors that were active pretty much across the board geographically. There were some weather issues in some areas that prevented maybe some of the orders to be placed timing wise, but overall the feeling was good. It was an intense sense of urgency if you will in the sales office as far as quotes and purchase orders. The transportation piece was good. Again from the normal operational standpoint, things were good in Q4. It was just no way to justify. We are always cautious in why and how and whatever we say when it comes to competitors, but it was pretty obvious in the fourth quarter for some reason.

[Brent Thielman:]

Sure. And respecting you don’t want to say too much about the current quarter, but just anything you can say in that regard given we have seen some kind of bigger moves in commodity prices since January 1?

[Daniel Jones:]

Yes. I mean, obviously we don’t have the trend in copper anymore that we used to many, many years ago. We have more of a bias now from 1 or 2 days at a time top deal, but less emphasis on the commodity prices so far. It’s really more about service levels and value-added type stuff and what things are unique on each particular job and how we can help going forward with someone’s stocking patterns to help maybe alleviate some of the anxiety if you will about the commodity pricing, so very positive.

[Brent Thielman:]

Interesting, okay. And then how much incremental spend do you have left on the new aluminum facility?

[Frank Bilban:]

For the year, we are still thinking we will spend easily $30 million in CapEx and the bulk of that will be in plant six, which is the new aluminum expansion for those of you who don’t know our nomenclature.

[Brent Thielman:]

Okay. Thanks so much and good luck guys.

[Daniel Jones:]

You bet. Thank you.

[Operator:]

Thank you. Our next question is from Bill Baldwin of Baldwin Anthony. Please go ahead.

[Bill Baldwin:]

This is Bill Baldwin.

[Daniel Jones:]

Hey, Bill.

[Bill Baldwin:]

Good morning, gentlemen. The last question got the CapEx for 2015, can you tell what the CapEx was for 2014, Frank?

[Frank Bilban:]

Yes. We spent just over $44 million. And again, the bulk of that was on the aluminum expansion. All the other stuff was about $14 million of that. So, $30 million of it was in plant six.

[Bill Baldwin:]

Okay.

[Frank Bilban:]

In the aluminum expansion, we are doing.

[Bill Baldwin:]

Looking out beyond a little bit of expansion program, are you all in a position to offer any color on what type of CapEx projects that you are considering or looking at?

[Daniel Jones:]

We have got some ideas, Bill, nothing though that we are prepared to announce going forward.

[Bill Baldwin:]

Frank, can you tell us what if any impact LIFO had on 2014?

[Frank Bilban:]

For the quarter or the year?

[Bill Baldwin:]

Both, if you had please.

[Frank Bilban:]

Sure. In Q4 of ‘14, LIFO was fairly minimal. It was a $2.2 million credit or decrement to cost of sales. And for the year, it was on $9.2 million the same way credit or decrement to cost of sales, which would be consistent with what you would expect in a falling copper commodity price market.

[Bill Baldwin:]

Right.

[Frank Bilban:]

The two things that drive LIFO is price and units on hand. And our units on hand in the copper side did not change a whole lot.

[Bill Baldwin:]

Okay, thank you very much.

[Daniel Jones:]

Sure, Bill. Thank you.

[Operator:]

Thank you. Our next question is from Kerry Rigdon of Mcpherson & Mayberry. Please go ahead.

[Kerry Rigdon:]

Good morning.

[Frank Bilban:]

Hi, Kerry.

[Daniel Jones:]

Hi, Kerry.

[Kerry Rigdon:]

First of all, Daniel, congratulations on the Chairman announcement.

[Daniel Jones:]

Thank you.

[Kerry Rigdon:]

Do you have a particular target for aluminum sales, as it relates to total sales volume? Is that something that you guys are looking at or is that just as that ramps up you are going to see how it fits in?

[Daniel Jones:]

Right. We do have an in-house number that we look at, but again maybe restating this at some point, but what we are currently trying to do with the aluminum, the approach for us has not changed. There is significant orders in the marketplace and significant distributors that need the aluminum to go with the copper. Our intent is to not overtake anyone in the aluminum market at all, that’s not the intent. The intent is to not lose the copper business. As we got into the aluminum, maybe timing, our performance, a lot of things I am sure feed into that, but we clearly underestimated the demand on the aluminum side to be coming from us, because we do serve a very narrow and specific market category with the aluminum that – hence the expansion to the new building. So, the actual percentage of sales number, again it’s going to depend really on the copper piece overall, but it’s not driven solely by just the aluminum as a standalone product.

[Kerry Rigdon:]

Terrific. Thank you.

[Daniel Jones:]

Yes, sir.

[Operator:]

Thank you. And I am showing no more questions at this time.

[Daniel Jones:]

Well, Christine, thank you very much and thank you for the callers that called in and we look forward to speaking to you at the end of the first quarter. Thank you.

[Operator:]

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