Encore Wire Corporation
Q4 2015 Earnings Call Transcript

Published: 19 Feb 2016

[Operator:]

Welcome to the Encore Wire Fourth Quarter Earnings Conference Call. My name is Silvia, 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. Daniel, you may begin.

[Daniel Jones:]

Thank you, Silvia 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're pleased to report that 2015 produced the second highest earnings per share in the history of the company. The fourth quarter was good from both a volume and margin perspective. Although our unit sales volumes were down slightly for the year, it should be noted that through the first five months of this year our sales were adversely affected by rough winter and spring weather as we noted in previous quarterly press releases. It is also noteworthy that after the first five months of 2015, copper unit sales were down 9.4% and aluminum units were down 2.7% compared to the first five months of 2014; however, in the last seven months of 2015, copper units were up 4.4% and aluminums units were up 1% versus last seven months of 2014 as we recaptured sales that were delayed earlier in the year. The overall construction and building wire markets did not show any significant improvement over last year. Anecdotal information confirms our belief that there are still large commercial and industrial projects in the pipeline. 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 increased 5.2% in 2015 versus 2014. The total year copper spread expanded 5.2% as the average price of copper purchased decreased 19.3% in 2015 versus 2014 while the average selling price of wires sold decreased 12.5%. Aluminum spreads rose 4.0% in 2015 versus 2014. We're encouraged by the fact spreads widened during the year while copper and other commodity prices fell in 2015. Spreads did tighten on a sequential quarterly comparison declining 7.2% and 2.7% 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 costs to costs. We have been able to accomplish this despite holding what are historically lean inventories for us. We believe our performance is impressive in the 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’ll review the financial results for the quarter. After the review we'll take any questions you might have. Each of you should have received a copy on Encore’s press release covering our financial results. This release is available on the Internet or you if you prefer 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 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 fourth quarter of 2015 decreased to $250.9 million compared to $285.3 million during the fourth quarter of 2014. Unit volume measured in copper pounds contained in the wires sold increased 5.1% and were offset by a 17.3% decrease in the average selling price per copper pound sold in the fourth quarter of 2015 versus the same period in 2014. Sales prices declined primarily due to lower copper prices, which declined 25.3% versus the fourth quarter of 2014. Aluminum building wire sales continued their growth pattern, constituting 10.2% of net sales dollars for the fourth quarter of 2015 versus 9.2% in the fourth quarter of 2014. Net income for the fourth quarter of 2015 was $10.9 million versus $5.1 million in the fourth quarter of 2014. Fully diluted net earnings per common share were $0.53 in the fourth quarter of 2015 versus $0.24 in the fourth quarter of 2014. Net sales for the year ended December 31, 2015, decreased to $1.018 billion from $1.167 billion during the same period in 2014. Copper unit volume decreased to 1.5% in 2015 versus '14. The volume decrease was amplified by a 12.5% decrease in the average selling price per copper pound sold in 2015 versus 2014. Once again sales prices declined primarily due to lower copper prices, which declined 19.3% in 2015 versus 2014. Aluminum building wire sales continued to grow constituting 9.9% of net sales dollars during 2015 versus 8.9% in 2014. Net income for the year ended December 31, 2015, was $47.6 million versus $37.1 million in 2014. Fully diluted net earnings per common share were $2.29 for the year ended December 31, 2015, versus $1.78 in 2014. On a sequential quarter comparison, net sales for the fourth quarter of 2015 were $250.9 million versus $262.8 million during the third quarter of 2015. Copper unit volume increased 3.4% on a sequential quarterly 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 2015 was $10.9 million versus $14.5 million in the third quarter of 2015. Fully diluted net income per common share was $0.53 in the fourth quarter of 2015 versus $0.70 in the third 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 have $79.2 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 year. We also declared another cash dividend during the quarter. We want you to note that the 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 9369796 and the pound sign. I’ll turn the floor back over to Daniel Jones, our Chairman, President and Chief Executive Officer. Daniel?

[Daniel Jones:]

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

[Operator:]

Thank you. [Operator Instructions] And our first question comes from Michael from Sidoti.

[Unidentified Analyst:]

Hey, good morning.

[Daniel Jones:]

Hey, how are you doing?

[Unidentified Analyst:]

Good, good. Daniel, can you just talk a bit about the competitive landscape in terms of pricing? We’ve seen improvements in the spread on a year-over-year basis in the past couple of quarters here. What is driving some of that pricing discipline?

[Daniel Jones:]

Well, the easy answer is the volatility, right. The metals are being jerked around on a pretty consistent basis, right, when we think we have a bias in one direction or the other it turns, but the easy answer is the volatility in the metal. The other contributing factor is business is pretty good. It's not great but it's pretty good. There is jobs that are pending. There is jobs that we're delivering to that start out at one size and end up expanding in one area or the other and also giving credit to some of the guys out there that we compete with. I think it’s industry wide, there really is not a particular one rogue bad actor on a consistent basis that seems to be like a tag team type effort. There is two or three that contribute in that fashion, but it’s predictable in some fashion or another, but for the most part businesses is good. We got some copper volatility that forces a little bit of discipline and as you know in those times we tend to do well.

[Unidentified Analyst:]

Right, right, okay thanks. And then my next question, can you just talk a bit more about aluminum demand and I guess the potential shift in product mix just given the way that copper prices have trended say over the past two years or so? Are more customers transitioning towards copper again and if it’s so, what does that mean for your margins?

[Daniel Jones:]

Well, speaking specifically to the past year, there are certainly times when the value engineering topic comes up specifically on the larger jobs. It’s not a new phenomenon by any means. It didn’t just occur in 2015, it’s been going on for a while. And what will happen is after the job is awarded somebody comes in and tries to swap out the aluminum for the copper to make it appear cheaper on the surface on the material purchase part. In the recent months and most of last year as copper declined in one fashion on another, it's not as important or as apparent on the sticker or the purchase price of the job. So, I think conventional wisdom will tell you that it's probably not happening as often as you would think if the metal was or if copper, the red metal is a little bit more expensive, but there certainly is some of that to predict, which way that’s going to go or not go I think is probably not as easy as you would think. I don’t know specifically which way Copper is going to go in 2016 for sure and we were pretty close in our guess on 2015 on copper prices, but we still missed it by a little bit. It’s tough to predict which way the metal is going to go at this point, but having said that, we're equipped and running very well in the aluminum expansion and ready to take on whichever way the order decides to go. We, without question, 100%, prefer to ship copper. I think there is other people that would argue that point, but that’s clearly my stance. I prefer to ship the copper.

[Unidentified Analyst:]

And is that a function because you receive more gross margin dollars, gross profit dollars if you ship copper over aluminum?

[Daniel Jones:]

It’s not any one specific item, it’s several. The fixed cost part of that equation becomes a little bit different. The variable cost piece of that is a little bit different. The labor piece is a little bit different, but in the end I still prefer to ship the copper.

[Unidentified Analyst:]

Sure, sure okay. And then I guess can you just maybe share with us your outlook for construction? What are some of your customer saying in terms of where we are in the cycle and are any of them saying maybe seeing any reason of strengths or pockets of weakness?

[Daniel Jones:]

Great question. A lot of the national guys that we deal with, there is areas of the U.S. that have been hit with weather recently. There has been areas that were hit obviously with $29 a barrel and we're not seeing it in other areas. Texas you would think would be one of the hardest hit areas with the dependence on energy and what have you, but Texas and specifically the Dallas market is extremely [hot] [ph] at this point. There are areas that are better than other geographically. It would depend on which product category if you break it down and in that manner residential versus industrial or commercial, but in general the feeling is somewhat positive and almost every conversation specifically in the last 60, 90 days as far as an outlook goes there seems to be a lot of discussion and concern probably rightfully so surrounding what happens in November depending on which news channel you watch and who you listen to and what you consider to be important. The business implications for us come up typically in a conversation it started out being somewhat kind of funny and maybe an aside joke or whatever and it’s starting to become serious. So in that sense it's tough to predict, but overall the feeling is good, not great, but good. We have a lot of folks that are pretty heavily invested in construction sites and job sites and permit numbers depending on how you look at the residential market, the commercial market to follow, the general feeling is good, not great, but good.

[Unidentified Analyst:]

Sure, okay and then last one for me, the pipeline that you mentioned, are those projects that are expected to come online and aren’t currently built, are those projects up and running expect to ship products to over the next year or so?

[Daniel Jones:]

Well, it's actually both. It depends on which stage and which size and actually there is -- there is some activity that’s even geographically based, on either coast the quote to delivery is typically faster. They want immediate delivery. It’s a specific piece or a phase of a job and they break it down individually in that manner. We move toward the middle of the country and it’s a little bit slower paced from the quote to delivery standpoint. It's not as fast paced, but you get paid quicker. So it’s a little bit of both. The pipeline is moderately full and the business that we're doing on the jobs in most areas where we are shipping into the larger job sites before we're finished shipping the original order, there is a work order change and they are expanding a little bit. They're adding a different piece of a building. Datacenters are still high. Universities are still expanding. Hospitals are still expanding. There is a lot of areas in the new construction piece that tend to add before the job is finished. Hasn’t seen that in quite a while, but it’s welcome.

[Unidentified Analyst:]

Great, no that's very helpful. Those are all my questions. Thanks.

[Daniel Jones:]

You bet, thank you.

[Frank Bilban:]

Thanks Mike.

[Operator:]

And our next question comes from Brent Thielman from D.A. Davidson.

[Brent Thielman:]

Hi good morning.

[Frank Bilban:]

Hey buddy.

[Brent Thielman:]

Yes Daniel maybe following up on couple of last questions, are you seeing any pressure on the harsh and hazardous and industrial oriented cables are those still holding up pretty good?

[Daniel Jones:]

They're still holding about the same. They don’t get the attention as some of the other categories and so I think they're not necessarily ignored. It takes quite a bit of work to get that product to market, but overall they seem to be holding about the same.

[Brent Thielman:]

Okay. That's good to hear. And then any additional thoughts or color on the tightening spreads from Q3 to Q4? Is that -- is that typical from a seasonal perspective?

[Daniel Jones:]

We’ve seen that in the past. Historically Q4 from a lot of different standpoints we've had record Decembers and we've had pretty dismal Decembers, but overall in general from an inventory positioning standpoint for the New Year, budget numbers for distributed customers, budget numbers for contractors whether on job sites there is all kinds of factors that contribute to that. But it might be too long of an answer, the short answer is yes.

[Brent Thielman:]

Okay, perfect. That's all I had. Thank you.

[Daniel Jones:]

You bet. Thank you.

[Frank Bilban:]

See you Brent.

[Operator:]

And the following question comes from Bill Baldwin from Baldwin, Anthony.

[Bill Baldwin:]

Good morning, Dan and Frank.

[Daniel Jones:]

Hey Bill, good morning.

[Frank Bilban:]

Good morning.

[Bill Baldwin:]

Couple of items here, Frank can you indicate what the trends are in terms of percent of your business now going into the residential market, how that progress through 2015 by quarter in early part of the year versus the end of the year?

[Frank Bilban:]

It actually held pretty steady in the 20% to 21% range and for the year in 2015 we were at just under 21%, 20.7% residential and in '14 we were at 21.6%, so not a big change there.

[Bill Baldwin:]

Okay. And do you have the unit volumes for aluminum for the fourth quarter year-over-year and full year 2015 year-over-year?

[Frank Bilban:]

I do, aluminum volume Q4 over Q4 was up 5% and for the year it was down 0.5%. So basically flat as the case.

[Bill Baldwin:]

Okay. And my last question in the fourth quarter of this year versus the fourth quarter a year ago it looks like your spreads on copper were pretty much were pretty similar if my numbers are right? The gross margin percentages this year were much higher than a year ago. What accounted for that gross margin to be a lot higher this year than last year once spreads were fairly equal?

[Frank Bilban:]

Well you really had a confluence of factors but spread and we’re talking Q4 over Q4 right Bill?

[Bill Baldwin:]

Correct.

[Frank Bilban:]

Yes in Q4 of '15 versus '14 our copper spread was up 2.9% and the aluminum spread was up 7.1%. In addition bear in mind that copper volume was up 5.1% and aluminum volume was up 5%. So all the arrows were trending up and positive. In addition I would tell you that we did a pretty good job on overhead costs and held them and we got a little bit of push in the back not much, but a little bit for example like freight where you picked up about $700,000 primarily I would attribute to us doing a better job of shipping full trucks and number two us benefiting from the fact that diesel came down in cost. So you had once again all the arrows pointing in the same direction.

[Bill Baldwin:]

Okay. So, I guess much better productivity in the plans with the higher volumes and then you benefited like you say on the freight side.

[Daniel Jones:]

Those are part of the equation.

[Bill Baldwin:]

Okay. Very good. Thank you.

[Daniel Jones:]

Yes sir. Thank you.

[Operator:]

And next question comes from Sam Ensslin from Midwood Capital.

[Sam Ensslin:]

Yes, hi guys. A quick question on spread I just wanted to understand you’ve done a very nice job obviously in an declining copper price environment of maintaining spread and keeping your ASP declining slower than the copper price. And if my understanding is right, historically you would rather have a raising copper price. You’ve done a nice job in an adverse market. I just wanted to understand when and if copper I know are speculating, when if copper prices eventually turn and start coming back up, will there be a period of timer where the spread gets compressed there at the bottom before it widens again or just can you help me understand how spread will transition when prices eventually turn?

[Daniel Jones:]

That’s a great question Sam and thank you for the kind words in the beginning of the question. We do as you mention prefer a trend for copper on the upside. The volatility is a little bit more difficult to manage. We haven’t been able to see trends in quite a while we see biases during the week or during the month and then overall for the year obviously we had a downward trend. In that sense if we were able to maintain prices for other reasons, other than the metal decline and again there is volatility in that market to look at, there is volatility in our market to look. We’ve had a lot of turnover with our competitor's management teams. There is all kinds of things that figure into the equation of how you arrive at maintaining of spread or losing the spread, most of the time it has to do specifically with just price. When you have the volatility in the metal that we've had it forces some discipline on the pricing side. If you try to react to a copper close of being down a nickel, it could be up $0.05 or $0.06 the next day. So I think in that piece of the equation without sounding arrogant or anything of that nature, we at the mercy of the market most of the time, but we have a very good model and we have very good discipline and very solid price handling methods in our sales office. If you lead with price and try to sell only on price there is times when that doesn’t necessarily work out for you. We try as we've mentioned for 25 years, we're trying to sell other things other than low price and I don’t want to be too specific or more specific than that, but that's a long answer to your question and I normally like to keep it little more brief, but that's really the answer. It’s a pricing discipline thing. It's not something where you're trying to chase volume by cutting the price that does not fit our culture that's just not what we do. We’re not trying to get larger and pourer. That's not in it. So it really has to do with basically a pricing discipline.

[Sam Ensslin:]

Okay. Thank you.

[Operator:]

And we have no further questions at this time.

[Daniel Jones:]

Well, Silvia, thank you. You've done a great job of handling the call. And we appreciate the participation and always welcome the questions and look forward to talking to you guys next quarter.

[Operator:]

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