Encore Wire's (WIRE) CEO Daniel Jones on Q2 2014 Results - Earnings Call Transcript

Jul.25.14 | About: Encore Wire (WIRE)

Encore Wire Corporation (NASDAQ:WIRE)

Q2 2014 Earnings Conference Call

July 25, 2014 11:00 AM ET

Executives

Daniel L. Jones – President and Chief Executive Officer

Frank J. Bilban – Vice President-Finance, Treasurer, Secretary and Chief Financial Officer

Analysts

Brent Thielman – D.A. Davidson & Co.

Bill Baldwin – Baldwin Anthony Securities, Inc.

Brad A. Evans – Heartland Funds

Robert Johnson – Satuit Capital Management, LLC

Tom Brashear – Preston Capital Management

Operator

Welcome to the Encore Wire’s Second Quarter Conference Call. My name is Bakiba, 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, the President and CEO of Encore Wire. Daniel Jones, you may begin.

Daniel L. Jones

Yes, ma’am, thank you. Good morning, ladies and gentlemen and welcome to the Encore Wire Corporation quarterly conference call. I am Daniel Jones, the President and Chief Executive Officer of Encore Wire. With me this morning is Frank Bilban, our Chief Financial Officer.

Continuing to positive trend we saw developing throughout last year, the second quarter was encouraging. Unit volumes were up in all building wire products. We believe our expansion of product offerings to our existing customer base over the last several years has been critical to maintaining and perhaps boosting our market share as our capital expenditures help to drive increased sales.

As we have 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 decreased 9.9% in the second quarter of 2014 versus the second quarter of 2013. While our copper unit volume shipped in the second quarter of 2014 increased 10% versus the second quarter of 2013. The copper spread contracted as the average price of copper purchased fell 4.4% in the second quarter of 2014 versus the second quarter of 2013. But, the average selling price of wire sold fell 6% as a result of slightly unfavorable pricing discipline in the industry.

The same trend was evident from a sequential quarterly comparison as copper unit sales increased 14.9% with the 6.1% decrease in spreads. We believe the certain competitors cut prices in the second quarter of 2014 to try to remain competitive with our superior service levels. Although, the continued success of our aluminum building wire launch, the increase in copper unit volumes drove earnings per share in the quarter.

Aluminum building wire products grew to 8.9% of net sales in the quarter, driven by unit sales increase of 28.9% on a sequential quarter basis. We continue to try to lead or follow industry price increases to achieve profit growth. We produced these results due to our low cost business model and aggressive cost control in all facets of our operations.

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. We believe our performance is impressive in this economy 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 review we will take any questions you may 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 Tracy West at 800-962-9473, and will be happy to get your 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 SEC 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 second quarter ended June 30, 2014 were $307.1 million, compared to $289.5 million during the second quarter of 2013. Copper unit volume measured in pounds of copper contained in the wire sold increased 10% in the second quarter of 2014 versus the second quarter of 2013 accounting for most of the increase in net sales dollars.

Aluminum building wire sales also contributed to the increase sales constituting 8.9% of net sales dollars for the second quarter of 2014 versus 6.6% in the second quarter of 2013. The average selling price of wire per copper pound sold dropped 6% in the second quarter of 2014 versus the second quarter of 2013, offsetting the increase in sales dollars to some extent.

Net income for the second quarter of 2014 was $10.2 million versus $15.5 million in the second quarter of 2013. Fully-diluted net earnings per common share were $0.49 in the second quarter of 2014 versus $0.75 in the second quarter of 2013.

Net sales for the six months ended June 30, 2014 were $584.3 million, compared to $554.8 million during the same period in 2013. Copper unit volume in the six months ended June 30, 2014, increased 9.6% versus the same period in 2013 offset by a 6.2% drop in average sales prices. Aluminum building wire sales contributed to the increase sales constituting 8.4% of net sales dollars for the six months ended June 30, 2014, versus 6.1% in the six months ended June 30, 2013.

Net income for the six months ended June 30, 2014, was $21 million versus $21.9 million in the same period in 2013. Fully diluted net earnings per common share were $1.01 for the six months ended June 30, 2014 versus $1.06 in the same period in 2013.

On a sequential quarter comparison net sales for the second quarter of 2014 were $307.1 million versus $277.2 million during the first quarter of 2014. Copper wire unit volume increased 14.9% on a sequential quarter comparison, offset somewhat by a 4.6% decrease in average sales prices.

Aluminum building wire sales also contributed to the increase sales, constituting 8.9% of net sales dollars for the second quarter of 2014. In addition, we had $19.1 million in cash as of the end of the quarter. We also declared another quarterly cash dividend during the past quarter.

You should note 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 888-843-7419, and enter the conference reference number 6194224 and the pound sign. I’ll now turn the floor back over to Daniel Jones, our President and Chief Executive Officer. 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. Now, Bakiba we’d like to open it up for questions.

Question-and-Answer Session

Operator

Perfect. Thank you. We will now begin the question-and-answer session. (Operator Instructions) Okay, and our first question is going to come from Brent Thielman from D.A. Davidson. Please go ahead. Your line is open.

Brent Thielman – D.A. Davidson & Co.

Hi, Good morning.

Frank J. Bilban

Hey, Brent.

Daniel L. Jones

Hi, Brent.

Brent Thielman – D.A. Davidson & Co.

Yes, (indiscernible) competitive pressure on price a little more this quarter. Obviously the specific participant, but was the pressure coming from any potential new entrance or just sort of existing competitors that you sort of gave your fund before?

Frank J. Bilban

We’ve seen the behavior before out of the one or two of the particular competitors that come to mind. There is still discipline in the market from one or two of the guys that we compete with and it clearly was some top of motivation that we are not familiar with from couple of the others that really – without going to too much detail, but products literally being coated at or below the price of raw material and labor.

So we’ve seen it before, typically it’s not something that last, what we’ve seen in the past is that type of behavior precede some type of structural change in the industry either by sale, merger or something of that nature or shutdown a plant, what have you, but you really was not something that we thought would happen in the second quarter, again business was good, the coat pace was good, the lead time and court order was positive, all the typical signs were very positive other than one or two really bad actors. I’d love to go into detail, but I’m not suppose to.

Brent Thielman – D.A. Davidson & Co.

Now, that’s fine. And at this time the growth rate in the quarter Daniel, and is that continuing in Q3 or is that pressure sort of – excited at this point.

Daniel L. Jones

Well, we saw it, mainly Brent first part of May into the end of May there was quiet a bit of copper volatility within the three months of the quarter, difference between start to finish didn’t end up and how much pricing to be a huge gap, but within the three months from low-to-high that was cumulative that was about $0.46 per pounds for changing our volatility in COMEX. So I don’t think you could tie to that, specifically, but the actions were not consistent with the way costs were moving. I don’t know how to rationalize the price cutting piece. The good thing is in June, it was pretty consistent from the start of the month to the end. Although in 12 months, there was a low of about $3 I believe a pound of copper.

But overall, June was a little more consistent, if you will. and with that going into detail again, too much into the third quarter, it seems to have leveled back out somewhat. there has been a couple of price increases posted, announced, published; I mean typical fashion with the industry. So I think it’s going to be good going forward, I mean it’s – it looks better than the month of May for sure.

Brent Thielman – D.A. Davidson & Co.

Okay, great. And then I know that the spread kind of the primary driver here, but were there any other factors that may have had an impact on margin this quarter, was that transferred yet?

Frank J. Bilban

Not really, I mean the spread really is the story, a pinion spread is equal to about $0.02 in EPS at the run rate of copper volume that we had in Q2. So the spreads are big numbers. obviously, and it’s driven from both directions, cost and sell price. We feel like, and I’m very confident that we have a handle on the control, well, piece of that, which is the cost side, look at better processing environment and again, it doesn’t take a whole lot to pop that spread again. So it clearly for us is the spread, it wasn’t a cost issue.

Brent Thielman – D.A. Davidson & Co.

Okay. and then just one last one on the volume side, nice to see your stuff in your solid growth here, it looks to be broad based. What else kind of volume trend is pretty consistent across the quarter?

Frank J. Bilban

Yes. That was very satisfying to see that April, May and June all three, we had again, good clothe volume, the lead time from clothe to order was short, which we like. and again, the pace of business in Q2 was up a little bit, customers’ face-to-face meetings, we were in the road quite a bit, seeing customers pretty much all quarter and most of the folks that we’ve met with were a little more positive than the past, and most of the end users that we’ve met is not all have a pretty good backlog of business going forward. There’s some pretty large job is going on around the country, cranes in the air in most of the major cities, which is always a good sign. and the other piece of that is paid on time in the second quarter, which is also a good indicator. So overall, April, May and June were very consistent and business was good.

Brent Thielman – D.A. Davidson & Co.

That’s encouraging, that’s so much fair in Q3.

Frank J. Bilban

Yes, sure.

Operator

Great, thank you. Okay. And our next question is going to come from Bill Baldwin of Baldwin Anthony Securities. Please go ahead. Your line is open.

Bill Baldwin – Baldwin Anthony Securities, Inc.

Okay, thank you good morning Daniel and Frank. I don’t want to kill a dead horse here. But I thought I just throw out and ask you if you think perhaps higher than comfortable inventory levels with some of these folks maybe could have attributed to some of their action. Since we had – did have and fairly long winter and perhaps the inventory levels just they don’t have the financial (indiscernible) that you do, I am sure to the large degree. Do you think that is playing role in this Dan or is it just your speculation?

Daniel L. Jones

It’s hard to say I mean deliveries from our competitors have been decent not great. But decent relatively speaking. So that certainly could be the piece of it. I really don’t know for sure. Again we did the best we could to get information to maybe rationalize what we are seeing or not seeing and confirm what we are seeing and hearing. And again they are just really was not a strong overwriting business topic if you will for the price cutting that we saw. It wasn’t a consistent order level, it wasn’t a consistent geographical situation it was very random is very sporadic and again involved couple of the competitors that we’ve seen that from – first.

The only again, business piece that we could maybe tie to is some type of management turnover, expectations, change I don’t know maybe board decisions, parent company decisions it was – is really kind of all over the board it’s tough to put our hand, but I think the speculation of the inventory certainly could be a piece of it.

Bill Baldwin – Baldwin Anthony Securities, Inc.

We decided that the second quarter, let me put it this way. Do you think there is seasonality to the spreads that kind of show up in the second quarter on the low side I know we’ve seen that in the few years past 2012 particularly. And then you see a real strong snapback in the third and fourth quarter.

Daniel L. Jones

Yes, we have I mean that’s a good point, we’ve seen that in the past, July is typically a big vacation month domestically and then August is vacation month in Europe. And so maybe there is some seasonality to those two factors, but again business has been good we are getting paid on time, which is obviously something that we focus on and I’ve really don’t without it being a clear and evident business decision to do something the nature we saw in the second quarter, we’ve been doing this quite a while. I don’t see what the reason would be going into the third quarter, (indiscernible) we’re ready for it, if it happens but again we think going forward it looks good.

Bill Baldwin – Baldwin Anthony Securities, Inc.

Let me change a (indiscernible) just briefly, you are obviously having very good execution, good volume and so forth. I know in previous conference calls you’ve indicated that perhaps you had an issue with one or two product lines and the aluminum plant that worked exactly, run in the way, you wanted to run, any update on the status of how that’s evolved here in the last quarter.

Daniel L. Jones

We currently don’t have any major equipment issues whatsoever. the plans are running great. it’s high in the plans. the workforce is doing a great job. Management is doing a great job of controlling the cost side, so really nothing negative to report there at all, it looks good.

Bill Baldwin – Baldwin Anthony Securities, Inc.

Very good, well. Good job. Thank you.

Daniel L. Jones

Thank you very much.

Operator

Thank you. And then our next question is going to come from Brad Evans at Heartland Funds. Please go ahead. Your line is open.

Brad A. Evans – Heartland Funds

Hey, good morning, guys.

Daniel L. Jones

Hey, Brad. How you doing? Good morning.

Frank J. Bilban

Good morning.

Brad A. Evans – Heartland Funds

Good, okay. Thanks. How about yourselves?

Daniel L. Jones

Good, yes.

Brad A. Evans – Heartland Funds

Quite good to hear you guys are making wire for practice.

Daniel L. Jones

Here we go.

Brad A. Evans – Heartland Funds

I have a few questions, just on the discounting of the low rationality, you saw early in the quarter was it from your competitor that’s owned by a large insurance company, or is it from your competitor that recently get a large acquisition into kind of a lot of debt?

Daniel L. Jones

I don’t know. I mean I do, but I don’t know into too much detail. It’s kind of sketchy area to begin with. but for the most part, it’s a couple of guys that for whatever reason. I don’t know if they turn their sales reps, lose on the fax machine, or the phone or whatever, but it’s consistent with some of their behavior in the past. And again, I just don’t want to get too specific, Brad, but…

Brad A. Evans – Heartland Funds

I understand, I understand. I appreciate that just, hey, Frank, just in terms of, as the quarter progressed, are you – can you give us any data as to whether the spread in June of 2014, was the spread positive comparison versus the spread in June of 2013?

Daniel L. Jones

We’re looking at that right now, Brad. Give me a moment; I’m looking back to 2013. Good question, Brad. It was actually down consistent with what we’ve reported for the quarter.

Brad A. Evans – Heartland Funds

Okay. but it sounds as you said; July is kind of taking the step in the right direction?

Daniel L. Jones

Well, we hope so. I mean, again, there’s a couple of price increases that have been posted. And really, that’s kind of where we’re at; we kind of got to stay ahead. In a number of years, if you get – need to get trends in copper, I think more so lately, we get a bias in copper, one way the other in the past. as you guys know, copper on the way up, and the bias is a trend whatever it might be, we do very well. and for whatever reason this time, they were intra-month moves on COMEX that there was a reaction to a cross reaction and I’m not sure if a couple of the competitors were looking at one particular report, and felt like they were going to get ahead of the decrease in the value of a pound of copper, or what it might be. but just for example, in May, we started the month at 302 COMEX and ended up at around 313, 315 COMEX. but with that $0.17 of volatility, within those months, we had quite a bit of processing movement.

So, if the price increase is put out the debt before, or a couple of days before, COMEX drops $0.08 or $0.10 during the month, it basically kills that price sheet for whatever reason. And in the month of May and June, specifically, we saw a couple of competitors consistent. basically, with the theme of this call that when copper did drop, post price increase announcement, they didn’t go back to existing levels, they went back and went a little bit deeper for whatever reason, moving inventory, getting ahead of their speculation on copper going down, maybe they were looking at last month’s copper average, instead of current month’s copper average, which is in this industry, because of debt. but again, we’re out when we thought we had a handle on why they would be doing it, conditions would change a little bit. So we had a week or two, where things were fantastic. In a week or two, we were setting this scratching our head, what are these guys trying to do.

So because again, the typical signs are there for good business, we’re again, paid on time, the volume of clothes for the product that we offer and the markets that we serve is still good. So I want to go too deep into July, really, but we haven’t seen that so far we’ll see.

Brad A. Evans – Heartland Funds

Good to hear. Just one last question for Frank, in terms of just for the quarter, what percentage of sales were commercial versus residential, and then could you give us the year-over-year change in volume for those respective categories for the second quarter please?

Frank J. Bilban

Sure. The second quarter of 2014, the residential pounds constituted 22.6% of our total pounds, and that is up from 20% last year. and if you’re asking what the growth is year-to-year, it’s 24%. and I’ve been cautioning you over the last couple of quarters, be careful with that growth percentage number, because it’s coming off as we all know, a real low drop. Our commercial pounds grew over 5% for the year-over-year quarter comparison.

Brad A. Evans – Heartland Funds

And then I’m sorry, just last one we speak on more and in terms of, just for Daniel, just – hey, I just want to know your – what are you seeing in the copper scrap market, to the availability. And then in terms of, on the commercial side, do you think you’re feeling any other demand at this point on the Gulf Coast that the large investments are being made on the Gulf Coast in terms of petchem; are you filling any of that yet? That’s it. Thanks.

Daniel L. Jones

Yes. Thanks for the question, Brad. We’ve seen and visited with customers until some of job sites that are started. we’re participating in some of the preorder type steps that we’d like to take on some of the larger jobs that are out there, and quite a few medium and small jobs. The copper scrap question, again, during the quarter, we saw a little volatility in the scrap, there were weeks where scraps look decent, we’re getting about what we wanted. And then there were weeks, during the same month, where we didn’t necessarily get as much as we wanted. But overall, for the quarter itself, I wouldn’t say that scrap is super type like it’s been in the past. But it wasn’t like it was super-plentiful either, but it definitely was more available in the second quarter than we saw in the first quarter. no question.

Brad A. Evans – Heartland Funds

Okay. good luck in the third quarter, guys. Thanks.

Daniel L. Jones

Thank you, Brad. Appreciate it.

Operator

Thank you. And then our next question is going to come from Bob Johnson, Satuit Capital. Please go ahead. Your line is open.

Robert Johnson – Satuit Capital Management, LLC

Dan, just another shot at perhaps (indiscernible) is variable that could have add an influence and what’s in that many weeks back that there were articles in the financial paper about Chinese banks in the financing of inventories. Specifically, it related in the couple of articles I read copper. I’m curious whether that conceivably could have been interpreted by some as representing something disruptive that could have implied price weakness in copper. We did see some weakness, but and trying to figure out what’s going on in China is difficult. But I’m just curious whether that may have add any influences as you look at that equation and given the rise and copper today and the fact if you ship on very short notice. You have finger on the pulse is still pretty good and it may well be that those things have received it into the past. So at the interest in any reaction you might have along those lines.

Daniel L. Jones

Well, you must have been sitting in on some of our meetings or listening in, we certainly watch that closely. We gave most of the volatility a swing of $0.17 within the month of COMEX, we’re certainly not justified by the published inventories. So, clearly the swing and COMEX pricing could be attributed in some part or whole to the Chinese stories. Because if you look at April, May or June anyone of those three months again there was $0.12, $0.17 and $0.17 in order volatility within the month from high to low so.

That’s a lot of volatility within a 30-day period so we gave the Chinese inventory questions and articles credit for the COMEX volatility from one day to the next or from one week to the next because we didn’t see the swing and the available or published inventories to justify swing either way. I think certainly there has to be some credit given to those stories as possibly input for the decision making process on whomever has pricing authority at the couple of competitors that we are little on their own. So, speak but its tough to rationalize from a business standpoint because again if it’s COMEX prices went down $0.07 in a day because the Chinese inventory issues it would comeback up in the next two or three days $0.07 or $0.08 because of the Chinese stories on inventory.

So we gave it credit on the COMEX volatility we just had our hard time relating that to business decision on the price of building wire when business was good. There was no real reason to be cutting prices and our own customers are asking for service and cost solutions other than selling price. So I think you’re on to something Bob I really do and that’s we kind of justified it in our own minds and gave that credit to the COMEX volatility.

Robert Johnson – Satuit Capital Management, LLC

Well, thanks for that extra color…

Daniel L. Jones

Yes, sir.

Operator

Thank you. And then our next question is going to come from Tom Brashear, Preston Capital Management. Please go ahead.

Tom Brashear – Preston Capital Management

Good morning, gentlemen. Are you giving any read on any basic economic trends in construction from your order flow in your conversations with your customers?

Daniel L. Jones

As it relates to some of the articles that we read and some of the data going backwards, it’s not always a match in the field with some of the contractors, and end users with distributors, onside business is good, they’ve got a backlog, they are finding ample labor to get the job done, and again, they are paying the distributor on time, the distributor is paying us on time for the most part. So business seems to be and feels like and we’ve witnessed the commercial industrial market was good.

Again, I think you can find an article, probably several articles if you want to support either conclusion. But I mean if you think it’s going down I think you can find an article says it’s going down and the same for if you feel like it’s going up. So we stick basically to the fundamentals here and travel quite a bit and spend time in the field with customers and users and try to help supply solutions to immediate issues they have in the field and for the most part business is good.

Tom Brashear – Preston Capital Management

Excellent. Well, appreciate you guys and respect what you are doing?

Daniel L. Jones

Thanks, Tom.

Operator

Thank you. And we have no additional questions at this time, Daniel.

Daniel L. Jones

Well, we appreciate the question that we’ve had and we certainly appreciate the support. Bakiba, you’ve done a fine job and look forward to speaking with you guys after the Q3 announcement. 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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