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Encore Wire Corporation (NASDAQ:WIRE)

Q4 2012 Earnings Call

February 21, 2013 11:00 AM ET

Executives

Daniel Jones – President and CEO

Frank Bilban – CFO

Analysts

Ben Karbowski – KeyBanc

Bob Kelly – Sidoti & Co.

Kerry Rigdon – Pierson and Mayberry

Tom Brashear – Preston Capital Management

Bob Kelly – Sidoti & Company

Operator

Welcome to the Encore Wire, Fourth Quarter Earnings Conference Call. Starting your presentation, we have Mr. Daniel Jones, President and Chief Executive Officer. Please go ahead.

Daniel Jones

Okay, thank you, John. 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.

With me this morning is Frank Bilban, our Chief Financial Officer. The fourth quarter of this year was another fairly steady volume quarter, considering the time of the year and the current economic and construction industry environment.

We believe our expansion of product offerings over the last few years to our existing customer base has been critical to maintaining and boosting our market share.

As we have previously noted, one of the key metrics to our earnings is the spread between the price of wire sold, and cost of raw copper purchased in any given period.

The spread increased 6.4% in the fourth quarter of 2012 versus the third quarter of 2012. Our copper unit volume shipped in the fourth quarter of 2012 decreased 9.4% versus the third quarter of 2012.

The spread increase helped us to produce similar earnings in both of the last two quarters despite the volume decrease. Volumes in the fourth quarter, are generally at their winter and holiday load point. Relatively small movements in the spread can affect our earnings per share, and were a positive influence on a sequential quarterly comparison.

Conversely, spreads were down 17% in the fourth quarter of 2012 versus the fourth quarter of 2011, and down 9.4% on an annual basis in 2012 versus 2011.

A new aluminum building Wire plant began to produce wire in the fourth quarter. The last of the equipment is being delivered and installed in the first quarter of 2013.

We’re expanding our distribution of aluminum wire to all of our sales reps and customers in the first quarter, and expect to see sales of these products to gradually increase over the course of 2013.

We continue to 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.

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 lean inventories ourselves.

We believe our performance is impressive in this economy, and we thank our employees and associates for their tremendous efforts. We also thank our shareholders 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 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 in advance.

This release is available on the Internet, or you can call Natalie Seelbach 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 indentify each particular statement as forward-looking, we advice 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 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 fourth quarter ended December 31, 2012, were $258 million compared to $248.3 million during the fourth quarter of 2011. Prices for copper building wires sold in the quarter, declined 1.8% versus the fourth quarter of 2011.

However, the average price of copper purchased during the quarter rose 4.9% in the fourth quarter of ‘12 versus the fourth quarter of ‘11.

Copper unit volume measured in pounds in copper contained in the wires sold, increased 2.2% in the fourth quarter of ‘12 versus the fourth quarter of 2011.

Aluminum building wire sales constituted 5.1% of net sales dollars on the fourth quarter of 2012.

Net income for the fourth quarter of 2012 was $5.2 million versus $16.3 million in the fourth quarter of 2011. Fully diluted net earnings per common share was $0.25 in the fourth quarter of 2012 versus $0.69 in the fourth quarter of 2011.

Net sales for the year ended December 31, 2012 were $1.072 [ph] billion compared to $1.180 [ph] billion, excuse me, during the same period in 2011. Lower building prices for building wire sold in the year ended December 31, 2012 accounted for most of the decrease in net sales dollars, decreasing 10.4% per copper pound versus the same period in 2011. Copper unit volume in the year ended December 31, 2012 decreased 1.3% versus the same period in 2011.

The average price of copper purchased during the year fell 10.7% in 2012 versus 2011, albeit on a lower absolute value than building wire prices.

Aluminum building wire sales constituted 3.6% of net sales dollars for the year.

Net income for the year ended December 31, 2012 was $19.8 million versus $50.1 million in the same period in 2011. Fully diluted net earnings per common share were $0.91 for the full year ended December 31, 2012 versus $2.14 in 2011.

On a sequential quarter comparison, net sales for the fourth quarter of 2012 were $258 million versus $269.2 million during the third quarter of 2012. Copper unit volume decreased 9.4% on a sequential quarter comparison. Net income for the fourth quarter of 2012 was $5.2 million versus $5.5 million in the third quarter of 2012. Fully diluted net income per common share was $0.25 in the fourth quarter of 2012 versus $0.27 in the third quarter of 2012.

Our balance sheet continues to remain strong. We have no long-term debt and our revolving line of credit is paid down to zero. In addition, we have $33.9 million in cash at the end of the quarter. 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 session. If you wish to hear the taped replay, please call 877-764-8714 and enter the conference reference 336661 and the pound sign.

I’ll now turn the call back over to Daniel Jones, our President and Chief Executive Officer. Daniel?

Daniel Jones

Thanks Frank. All things considered, Encore performed well in the past quarter, and we believe we’re well positioned for the future. And John, we’ll now take questions from our listeners.

Question-and-Answer Session

Operator

(Operator instructions) And we have a question from Anthony Kure from KeyBanc. Please go ahead.

Ben Karbowski – KeyBanc

Good morning, gentlemen, this is Ben Karbowski on for Tony Kure. How are you?

Daniel Jones

Okay. Good, Ben.

Ben Karbowski – KeyBanc

Good. So I’ll just jump right in the questions, I guess. Could you give me your mix of commercial versus residential in the fourth quarter?

Daniel Jones

Certainly. In the fourth quarter, our residential pounds constituted 19.2% of our total volume.

Ben Karbowski – KeyBanc

Okay. And given that residential mix continues to get a little bit higher and that the residential numbers have been picking up recently, do you feel that the non-residential construction market is lagging the residential trends by any specific time frame?

Daniel Jones

We don’t see that in the market place. What we’re seeing, Ben, is a very slow and gradual uptick in the residential side, but not so much the others lagging, it’s actually more positive numbers.

Ben Karbowski – KeyBanc

Okay. That makes sense. And then what do you think about the non-residential numbers coming out with the ABI being up consecutively in the past couple of months? Do you think it’ll start to recover to more normalized levels maybe in the second quarter or maybe pushed out towards the third or fourth?

Daniel Jones

The only caveat I would add before I answer is, what is normal, but a more specific answer would be, is, yes. We’re seeing some positive feedback in the market on maybe pin up jobs that are coming out, again with the volatility in copper, you’ll get one started, and it stops, or what have you, but for the most part, the feeling is in the market, that it is positive, yes.

Ben Karbowski – KeyBanc

All right. And then one last question for you, could you tell me what the LIFO adjustments are to the COGS line?

Daniel Jones

In the fourth quarter, the LIFO was almost nothing. It was just under $1 million of credit, or decrement to cost of goods sold. And that meant for the year, we took a hit or expense to cost of goods sold of $10.7 million.

Ben Karbowski – KeyBanc

All right, thank you, gentlemen, appreciate it.

Daniel Jones

You’re welcome.

Frank Bilban

Thank you.

Operator

Our next question comes from Bob Kelly from Sidoti & Co. Please go ahead.

Bob Kelly – Sidoti & Co.

Good morning, guys.

Daniel Jones

Hey, Bob. How are you doing?

Bob Kelly – Sidoti & Co.

I had a question on – doing well, thank you. I had a question on the orders. You had referenced over the past couple of quarters walking away from some low margin bids. Was that still the case in four Q? Did that continue into 2013? Any comments on that?

Daniel Jones

Yes, we still continue to see some – I just have to be careful because it all has to do with price, but I guess the best answer I can give you, Bob, is yes, we still continue to see attempts for whatever reason, for folks to try to buy their way in on an order or what have you.

It’s better. The quarter was better than what we had seen, but it still does continue to some extent, yes.

Bob Kelly – Sidoti & Co.

Okay. As far as the conversations with your customers go for bids and maybe the quarter just ended and what’s going on today, some bullish commentary out of some of the miners about demand for copper. Are the price expectations moving up into the right as far as your customers? Did they expect copper increases? I mean what’s the [inaudible] as far as their expectations for ‘13?

Daniel Jones

Well, we try to do as much as we can to separate the demand for building wire and the demand for copper, but obviously, copper gets all of the attention. I guess that’s the romantic [ph] piece to our business. But the feel currently is on the jobs that they’re going ahead.

Folks are active, they’re in the market to buy, they’re still a little bit cautious, but then you know, if someone is right on the cusp of placing a purchase order for a significant job, and copper drops $0.07 or $0.08, there’s times when they hold back, and there’s times when they go ahead and move forward. It’s almost – it’s better, the feel is better, but there’s still some of that apprehension because of the volatility in copper.

And I don’t want to get too deep in the ‘13 because the call is about Q4, and I apologize for that.

Bob Kelly – Sidoti & Co.

Right. Very positive development. Thanks for that. As far as the mix, Encore is 80-20 give or take, but your competitors are not necessarily weighted that much towards commercial, I mean is that a fair statement? And is there some sense with reds [ph] getting better, that more and more of your competitors are doing less of the price drops to win business and getting more disciplined?

Daniel Jones

It’s hard to say. I mean we got a decent feel for our competitors, how the commercial residential piece breaks down, but with none of the guys that we compete with being public, it’s hard to say with any certainty, but based on what we think internally, and what we see in the market place, I think it’s got to be close, or at least similar to the breakdown in the market, but again, I don’t know enough about their approach to the market, other than, I’m sure they have their reasons or what have you, I’d love to hear them sometime, but I don’t understand why you would cut the price to get an order with all the cost, and as you mentioned earlier, the copper miners as bullish as they are and the volatility that’s in the market, it’s confusing, maybe a little, but more so than anything, it’s frustrating. The best answer I can give you on that.

Bob Kelly – Sidoti & Co.

Thanks. And just one final one. Aluminum, 5% of sales in 4Q. Is that sort of mix, a good metric for modeling 2013, ‘14 to saying aluminum is going to be 5% of your sales?

I know you don’t want to give forward guidance, but any help into how we should think about the contribution from aluminum in the next couple of years.

Daniel Jones

Yes. I would say more specifically, Bob, that aluminum going forward will be a little bit bigger piece than 5%.

Bob Kelly – Sidoti & Co.

Okay. Thanks very much.

Daniel Jones

You bet. Thank you for the support.

Operator

(Operator instructions) And we have a follow up from Anthony Kure from KeyBanc. Please go ahead.

Ben Karbowski – KeyBanc

Yes, gentlemen, I just had two more questions for you. I guess, when looking at the residential market for the build out of your wire, when does that typically go into a home? It’s that’s going to be earlier, in the process so that means a little bit later?

Daniel Jones

Once the concrete is poured, if it’s a slab, a house, walls go up, roof goes on, wires pulled in. So depending on which part of the country in that’s affected by weather or what have you, it might be a little faster or a little slower. But typically, this time of the year, the walls are up, the roof is on and our product needs to be protected from weather, moisture and what have you.

So it’s early in the coming of a construction project residentially but depending on if you’re the builder or the seller I guess you could change that timing. But basically, it’s pretty early. To finish out on a house would take a little bit longer than getting the rough end.

Ben Karbowski – KeyBanc

Okay. And then could you provide a little bit of insight around the impact from the new JP Morgan copper ETF. I know you guys had kind of been out against that. And just kind of tell me what you think that impact might be on the copper market.

Daniel Jones

You know what, I’d love to talk to you about that but some things we have going on in the market right now with the attorneys and what have you, I probably should not comment. I’ll just give you a little piece. I’ll just give you a little piece.

As volatile is copper is today in the market, it’s our opinion basically that that will increase the volatility if it’s even possible. But we feel that will increase the volatility.

Ben Karbowski – KeyBanc

So basically, the concept is – if I can ask this, that they’re going to be holding large reserves of copper so that will take even more of the supply out of what’s available?

Daniel Jones

Correct.

Ben Karbowski – KeyBanc

Okay. All right. I appreciate you making the comments that you can. Thank you for answering all my questions.

Daniel Jones

You bet. Thank you.

Operator

Our next question comes Kerry Rigdon from Pierson [ph] and Mayberry. Please go ahead.

Kerry Rigdon – Pierson and Mayberry

Good morning, gentlemen.

Daniel Jones

Hey, how are you doing?

Kerry Rigdon – Pierson and Mayberry

I’m doing well. Thanks. Quick question on the residential. Are you seeing any kind of trends in specific geographic regions? Is it across the board or are there any pockets that are showing a little better metrics than others?

Daniel Jones

Let me answer like this. The only area that comes to mind that is not at least participating in the residential piece is basically the mid-Atlantic. We’re just not seeing a whole lot of that area yet. But again, it could be timing for one month or one quarter to the next but specifically in Q4, we just didn’t see much participation from that area.

Kerry Rigdon – Pierson and Mayberry

Do you anticipate any increase in activity due to Hurricane Sandy? I say that going back to what happened in the Gulf Coast with Katrina and so forth. There seem to be a lag effect and eventually, when that did kick in you could really kind of see increases based on that. Do you expect or is that something that you’re seeing any hints of currently?

Daniel Jones

We did. Immediately, there are some emergency type shipments that take place and temporary power. And there’s a lot of things that happened but the business itself as far as measurable shipments and orders really is more spread out over time than it would be in any one quarter. But the answer is yes, as the rebuilding piece picks up and the timing of that again is spread out a little longer term than in any one quarter if it continues as it is and what we’ve seen in the past.

Kerry Rigdon – Pierson and Mayberry

Great. Thanks.

Daniel Jones

Thank you.

Operator

(Operator Instructions) Standing by for questions. And we have a question from Tom Brashear from Preston Capital Management. Please, go ahead.

Tom Brashear – Preston Capital Management

Morning, Daniel.

Daniel Jones

Hey, how are you doing?

Tom Brashear – Preston Capital Management

Doing great. Share with us what indicators you’re seeing on the commercial side of the building improving there. Are you seeing it stable or slowing?

Daniel Jones

What we saw in Q4, again, was a little bit of copper volatility. If we were in some type of bias one way or the other, it certainly had an effect on the jobs that we were discussing commercially. So if the bias was on the upside and we had a couple of three days, folks that were ready to go would pull the trigger and place a purchase order.

On the other side, when the bias would be down for two or three days on a copper price situation, if they had the luxury of time, they would hold off. But again, in a bigger picture, what we’re seeing is that timing and time frame at some point, the product needs to be shipped and there has to be a decision made, a business decision made. So Q4 was really a little bit better in that sense. That was the feel. The discussions were less lengthy and purchase orders were placed and product was shipped and delivered and obviously installed.

So just to keep it in the Q4 context, the Q4 feeling was again, it was related to volatility quite a bit but overall, the feel of business was pretty good. We had a few weather events that may have slowed some things down over time but they’ll come back out and the overall feel was it was pretty good.

Tom Brashear – Preston Capital Management

Very good. Thank you.

Daniel Jones

You bet.

Operator

Our next question comes from Bob Kelly from Sidoti & Company. Please, go ahead.

Bob Kelly – Sidoti & Company

Hi, just one follow-up. You referenced a couple of times – it sounds like there’s quite a bit of projects that are just about to move off the sidelines. Could you give us a sense of how big or how strong quoting-bidding activity is? How active is your market in the stages just before we get to the projects being released?

Daniel Jones

Well, in Q4, we were very active in the sales office. We’re very active with some of the things that we’re doing to get in front of the timing of the order itself. And there’s a lot of things that we’re doing, again, before the order happen. So there is a lot of work, Bob, that’s going into the decision-making process on these orders and it kind of fits in to the earlier comments about, you put this, you invest your time and effort into getting the job quote ready to go and you might have a competitor swoop in with some ridiculously discounted price level without the knowledge of the investment that was put in prior to.

But again, in the fourth quarter, that was improving. We were working harder and seen orders come through, shipping them on time. Again, there was a couple of weather type events that no one can control that may have pushed off a job because the job side itself just could not physically take the material. But overall, the feeling was really good in the fourth quarter about the investment of time and effort in getting an order or getting a quote really to become an order.

And that process definitely, in the last few years has changed but I think it has changed for the better. There’s a lot more value discussion up front in convincing folks to go ahead and pull the trigger on these jobs that are pinned up. You know, Bob, there is a lot of activity out there. You travel around, the airports are full, movie theater, parking lots are full of people, restaurants are pretty full. We’re getting paid on time. There’s a lot of really positive signs out there and you can see it come across the desk as far as business goes. And there is a lot of activity out there, a lot of discussion about jobs. And it’s not so much what if anymore, again, it is more discussions about timing than anything.

Bob Kelly – Sidoti & Company

Great. Thank you very much.

Daniel Jones

You bet. Thank you.

Operator

(Operator Instructions) At the moment, I show no questions.

Daniel Jones

Okay. Well, John, thank you very much for handling the call and the questions and we appreciate the support on the call and the questions are always helpful. I look forward to seeing you guys next quarter. Thank you.

Operator

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

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