Encore Wire Corporation
Q3 2015 Earnings Call Transcript

Published: 23 Oct 2015

[Operator:]

Welcome to the Encore Wire Third Quarter Earnings Conference Call. My name is Cynthia, 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, Chief Executive Officer and Chairman. You may begin.

[Daniel Jones:]

Thank you, Cynthia, and 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. With me this morning is Frank Bilban, our Chief Financial Officer. We are pleased with the third quarter results. Unit volumes bounced back in the third quarter after the rough spring weather we endured in the second quarter. On a sequential quarterly comparison, copper units were up 10.1%, aluminum units were up 20.2%. Margins also improved in both copper and aluminum wire sales. We continue to execute our strategy of attempting to be an industry pricing leader and believe this contributed to our improved margins during the quarter. One of the key metrics to our earnings is the spread between the price of copper wire sold and cost of raw copper purchased in any given period. The spread increased to 4.5% in third quarter of 2015 versus the third quarter of 2014, and 3.3% on a sequential quarter comparison. The copper spread expanded 4.5% as the average price of copper purchased decreased 23.1% in the third quarter of 2015 versus the third quarter of 2014. But the average selling price of wire sold decreased only 15.2%, as a result of somewhat improved pricing discipline in the industry. The aluminum building wire products grew to 10.5% of net sales in the quarter versus 9.4% in the third quarter of 2014. We continued 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 from coast to coast. We have been able to accomplish this despite holding what our historically lean inventories for us. We believe our performance is impressive in this economy. We think our employees and associates for the 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 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 Karen Wagner, at [phone], and we will 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 all of you that 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. Excuse me, 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 financial results. Net sales for the third quarter ended September 30, 2015, were $262.8 million, compared to $297.4 million during the third quarter of 2014. Copper unit volume measured in pounds of copper contained in the wire sold increased 3% in the third quarter of 2015 versus the third quarter of 2014. Aluminum building wire sales constituted 10.5% of net sales dollars for the third quarter of 2015 versus 9.4% in the third quarter of 2014. Aluminum unit volume was up 2.2% in the third quarter of 2015 versus the third quarter of 2014. The average selling price of wire per copper pound sold dropped 15.2% in the third quarter of 2015 versus the third quarter of 2014, driving the decrease in net sales dollars. Copper wire sales prices declined primarily due to lower copper prices, which declined 23.1% versus the third quarter of 2014. Net income for the third quarter of 2015 was $14.5 million versus $11.1 million in the third quarter of 2014. Fully diluted net earnings per common share were $0.70 in the third quarter of 2015 versus $0.53 in the third quarter of 2014. Net sales for the nine months ended September 30, 2015 were $766.8 million compared to $881.6 million during the same period in 2014. The average selling price of wire per copper pound sold dropped 10.7% while copper unit volume sold declined 3.7% in the nine months ended September 30, 2015 versus the nine months ended September 30, 2014. Copper wire sales prices followed the price of copper purchase, which declined 17.3%. Aluminum building wire sales constituted 9.8% of net sales dollars for the nine months ended September 30, 2015 versus 8.8% in the nine months ended September 30, 2014. Net income for the nine months ended September 30, 2015 was $36.7 million versus $32.1 million in the same period of 2014. Fully diluted net earnings per common share were $1.76 for the nine months ended September 30, 2015 versus $1.54 in the same period of 2014. On a sequential quarterly comparison, net sales for the third quarter of 2015 were $262.8 million versus $253.7 million during the second quarter of 2015. Sales dollars increased due to a 10.1% unit volume increase of copper building wire sold, offset by a 7.1% decrease in the average selling price per pound of copper wire sold on a sequential quarter comparison. Copper wire sales prices followed the price of copper purchased, which declined 11.9%. Net income for the third quarter of 2015 increased to $14.5 million versus $11.4 million in the second quarter of 2015. Fully diluted net income per common share was $0.70 in the third quarter of 2015 versus $0.54 in the second quarter of 2015. 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 $58.8 million in cash at the end of the quarter. We also repurchased 92,804 shares of our common stock on the open market for approximately $2.9 million during the quarter. We also declared another cash dividend during the quarter. 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 5651067 and the pound sign. I’ll now the turn floor back over to Daniel Jones, our Chairman, President and CEO. Daniel?

[Daniel Jones:]

Thank you, Frank. Encore performed well on the past quarter. We believe we’re well positioned for the future. Cynthia will now take questions from our listeners.

[Operator:]

Thank you. [Operator Instructions] And our first question comes from Brent Thielman. You may begin.

[Brent Thielman:]

Good morning. Congratulations. Great quarter.

[Daniel Jones:]

Thanks Brent.

[Brent Thielman:]

Dan, nice to see that the volumes, obviously, back here in the territory and appreciate the sequential improvement but when you look at it from a year-over-year perspective this quarter, at least relative to some prior periods over the last couple of years, what do you kind of hear from the channel that you think might be still weighing on the industry, getting a little more momentum than what you are currently seeing?

[Daniel Jones:]

It’s not money, Brett. We are hearing really good things on a lot of the larger jobs, larger projects are moving forward. Some of the medium-sized projects in the field are little slower to get started than what we would have liked. And then the small projects are certainly happening following with the larger projects. But for some reason in particular markets, geographically even, some of the jobs are being pushed out a little bit. It’s not necessarily. We don’t see that it’s a money issue. Certainly, not an interest rate issue. The money is there. It’s more of timing, maybe some of the hangover from second quarter weather, first quarter weather. I’m not really sure exactly what it might be but they all tell us confidently that they are going to move forward. So it’s not the larger marquee jobs that everybody knows about. It’s not some of the smaller ones that follow, seems to be more of the middle-sized jobs. And then certainly as inventory is drawn down and with cooper coming off of the high end May of, I think it was around 289 in May, down to around 230, mid 230s in Q3. When you have that bias of that trend downward with the metal, folks are certainly less anxious to load up on inventories. So it’s kind of combination of both.

[Brent Thielman:]

Okay. That’s helpful. Last point, do you think you saw destocking more so than what you would have expected to see this quarter?

[Daniel Jones:]

Yeah, a little bit. Some of the guys -- I guess the best way to put is our average order size was a little bit less than what we would have liked it to be based on historical. But it seems to be coming back a little bit. I don’t want to get too specific with what we are seeing right now. But the destocking part of it, not that sure that’s it that technical but it certainly is a feel in the market relative to the metal when it is biased or there might be a trend one way or the other. Folks really watch the cooper price daily. We even have competitors that put out the price of copper open and the price of cooper close each day which is ridiculous. But it’s certainly got a lot of attention that’s for sure in the third quarter.

[Brent Thielman:]

Sure. That’s helpful. And then what do you think is kind of behind the better industry pricing discipline? Is it that there is just a little more business out there for everyone now or something else because it seems like it’s generally sustained here for a few quarters now?

[Daniel Jones:]

Yeah. I think so. I have some thoughts on it for sure. I don’t want to -- not really want to go in too much of that but we’ve been -- I guess the best way to answer would be is yes. There is better discipline. We’ve got some competitors where there is a little bit of turnover. Sometimes that’s good. Sometimes that’s bad. For the most part, we -- in-house opinion here is it’s going to be good. There just seems to be more discipline. I mean, the tightness on different raw material areas forces it on occasion. It may not last through 60 or 75 days but in any particular month, if one or two of the basic raw materials become tight or is suspected tightness in the market, it forces discipline. So it’s a combination of things, it’s not really anyone big event. There is a lot of smaller events to kind of add up to pretty good discipline. And actually most recently even we’ve seen some really decent leadership of the competition. So it’s been good.

[Brent Thielman:]

Great. I will get back in queue. Thank you.

[Operator:]

And our next question comes from Michael Conti. You may begin.

[Michael Conti:]

Hey, good morning.

[Daniel Jones:]

Good morning, Mike.

[Frank Bilban:]

Hey, Mike.

[Michael Conti:]

Frank, what was the breakdown between commercial and residential spending for this quarter and what was the year-over-year growth?

[Frank Bilban:]

Are you talking units, Mike?

[Michael Conti:]

Yes.

[Frank Bilban:]

In Q3?

[Michael Conti:]

Yes.

[Frank Bilban:]

The residential constituted exactly 20% of the copper pounds versus obviously 80% for the commercial and industrial. And residential growth year-over-year in units was 3.5%, while the commercial grew at about a 3% pace. So they were very close.

[Michael Conti:]

Okay. And then with the sequential increase, did that have any push impact on work that should have been completed in the third quarter, that’s now can be pushed to the fourth quarter?

[Frank Bilban:]

Can you repeat that question, Mike? I think that’s a first part of it.

[Michael Conti:]

With the sequential increase in your orders, did that have any push impact on work that should have been completed in the third quarter that now is getting push back to the fourth quarter from your customers?

[Daniel Jones:]

There will be some of that, yes. There were some jobs that were held up for different reasons and they continue on and we’re making shipments and whatever, but there is some of that for sure.

[Michael Conti:]

Okay. That’s helpful. And then, I mean, obviously you guys had nice growth in the spread for the past couple of quarters here. I am just curious as to what’s going to take for the spreads to may be narrow at this point. Is that more of a function of industry pricing discipline or maybe a spike in copper prices, which participants can fully digest that price increase quick enough? I mean, just any color on that would be great.

[Daniel Jones:]

I think both of those are obviously to us important. If you get a bias or trend on the upside from copper, it might take -- it’s a possibility sure. You could have folks that don’t react as quick as necessary or dragging their feet for whatever reason. But again from the pricing discipline standpoint, competitors have been very disciplined in their approach, the jobs are moving along like they are supposed to move along and what could make the spread narrow, it’s really a function of the prices going down and the metal going up in some fashion, either one of those are possibilities. That’s not what we’re seeing though. We’ve seen some really good discipline on the pricing side and had very good success with price increases during the quarter that were timely necessarily and I don’t see that that’s going to change. It looks as if for various different reasons in the industry things are looking good and great, but they look good.

[Michael Conti:]

That’s helpful. And then I have been hearing from other companies just regarding labor. I mean, is that -- has that impacted your volume shipments in any way shorts in construction labor or lack of drivers or has that maybe impacted capacity on the end user to accept some of your shipments?

[Daniel Jones:]

Lot of the folks that we’ve met with and specifically through the third quarter with end users and customers labor clearly is an issue. There’s a meetings to be had on things going forward with labor savings ideas and as you're familiar with our story pretty well, we’ve been pretty successful in that area. And it clearly is a topic that comes up routinely in the meetings with end users and with our customers as well not just the installers, but as you mentioned also the delivery drivers and just basic labor seems to be pretty tight. And even with us here with some of the growth in different areas that we've had, we might enjoy getting 30 or 40 people to choose from, you’re getting 15 or 20, and train them little more and work little harder on employee retention. So, it definitely is -- labor definitely is an issue mark. It’s good point.

[Michael Conti:]

Sure. And one last one before I defer to others, construction is growing, but have you seen any increase in capital spending from competitors to increase capacity or increase their product offerings to benefit greater in the cycle?

[Daniel Jones:]

Yes and no, I mean some of the guys that we compete with haven't really done a whole lot. And then there's a couple that seem to be pretty active. Net effect if it's an actual increase in capacity I really couldn't tell you specifically. But rationalization of existing production facilities and locations and shipping points and inventories and all of those things are super, super hot topics in meetings. And I think it’s indicative of the constant battle in our industry to find ways to lower your costs and be competitive. Again though, I don’t want to confuse timing with genius but when you have copper go from a peak in May of about 289, we lost about $0.50 a pound through September on that inventory cost. So there are some things there that that could happen from an increasing capacity standpoint but nothing major. The things that we are hearing are more about taking care of the bottlenecks and maybe swapping out some older equipment, or an announcement of adding 50,000 or 60,000 square feet. If you covered the entire floor with equipment, that's not a significant announcement in our eyes.

[Michael Conti:]

Okay. Now that’s helpful. Appreciate it.

[Daniel Jones:]

Thanks Mike.

[Operator:]

And we have no further questions at this time.

[Daniel Jones:]

Okay. Well, Cynthia, thank you for handling the call. And thank you for the two guys that spoke up and look forward to seeing you again next call. Thank you.

[Operator:]

Thank you, ladies and gentlemen. This concludes today's call. Thank you for your participation. You may now disconnect.