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Encore Wire Corporation (NASDAQ:WIRE)

Q2 2011 Earnings Call

July 28, 2011 11:00 am ET

Executives

Daniel Jones – President and CEO

Frank Bilban – CFO

Analysts

Robert Kelly – Sidoti

Eric Marshall [ph]

Kerry Rigdon – Mayberry Partners

Tom Brashear – Preston Capital Management

Operator

Hello, ladies and gentlemen, and welcome to the Encore Wire, second quarter earnings conference. As a reminder, all of your lines will be on a listen-only mode. However, we will have a Q&A session at the end of the call. (Operator instructions) At this time, I would like to introduce and turn the call over to Mr. Daniel Jones, President and CEO of Encore Wire. Go ahead, Mr. Jones.

Daniel Jones

Thank you, Angie, and 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.

We’re pleased to announce strong quarterly earnings in the midst of the severe recession currently taking place in the construction industry. As we’ve repeatedly noted, the key metric 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 22.2% in the second quarter of 2011, versus the second quarter of 2010, while our unit volume shipped in the second quarter of 2011 increased 1.9% versus the second quarter of 2010. For the six months ended June 30, 2011, the spread increased 30.4% versus the six months ended June 30 2010, driving our increased earnings. On a unit volume for the same time period of six months 2010 versus six months 2011, increased 13.4%,

We believe the exit of a former competitor in the first quarter of 2010 has contributed to the positive trend and industry pricing levels and margins. In the past five quarters, since their exit, we’ve earned a cumulative $1.62 and fully diluted net earnings per share versus a cumulative $0.05 and fully diluted net earnings per share in the previous five quarters ended March 31, 2010.

Despite producing strong earnings in the second quarter of 2011, we’re down slightly on a sequential quarter comparison with a volatility of copper prices during the quarter, industry attempts to introduce price increases were occasionally stormy by the volatility. We attempted to lead the formal price increases during the quarters some of which we’re unsuccessful. We continue to support industry price increases in an effort to maintain an increased 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 into ensure quick deliveries from coast-to-coast and we’ve been able to accomplish this despite holding what are historically lean inventories levels for us.

We believe our performance is impressive in this economy and thank our employees and associates for the 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 review, we will take any questions you may have. Each of you should have received the copies of Encore’s press release covering Encore’s financial results. The release is available on the Internet or you can call Tracy West at 800-962-9473 and we will 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 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.

(Audio Gap)

During the second quarter of 2010. Higher prices for building wires sold in the quarter ended June 30, 2011 accounted for most of the increase in net sales dollars increasing twenty eight point six cents per copper pound sold, versus the same period in 2010. Sales prices rose primarily due to higher copper prices which rose 30.7%. Unit volume in the second quarter of 2011, increased 1.9% versus the second quarter of 2010.

Net income for the second quarter of 2011 increased 16.3% to $9.5 million versus $8.1 million in the second quarter of 2010. Fully diluted net earnings per common share increased 16% to $0.40 in the second quarter of 2011, versus $0.35 in the second quarter of 2010.

Net sales for the six months ended June 30, 2011 were $612.8 million, compared to $411.3 million during the same period in 2010. Higher prices for building wire sold in the six months ended June 30, 2011 accounted for most of the increase in net sales dollars, increasing 31.5% per copper pound versus the same period in 2010.

Unit volume in the six months ended June 30, 2011 also helped to increase the top-line sales dollars, increasing 13.4% versus the same period in 2010. Net income for the six months ended June 30, 2011 was $20.1 million versus $5.7 million in the same period in 2010. Fully diluted net income per common share increased 252.6%, to $0.86 for the six months ended June 30, 2011 versus $0.24 in 2010.

On a sequential quarter comparison, net sales for the second quarter of 2011 were $309.5 million versus $303.4 million during the first quarter of 2011. Unit volume increased 6% on a sequential quarter comparison. Net income for the second quarter of 2011 was $9.5 million, versus $10.7 million in the first quarter of 2011. Fully diluted net income per common share was $0.40 in the second quarter of 2011, versus $0.46 in the first quarter of 2011.

Our balance sheet remains strong. We have no long term debt. Our revolving line of credit is paid down to zero. In addition, we have $46.8 million in cash as of June 30, 2011. We also declared another quarterly cash dividend in the second quarter of 2011.

We want everyone to know that this conference will be available for replay after the conclusion of this session. If you wish to hear the replay, please call 866-551-4520 and enter the conference reference number 274645 and the pound sign.

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

Daniel Jones

Thank you. As Frank highlighted, all things considered, Encore performed well in the past quarter and we believe we’re well positioned for the future. Angie we’ll now like to take questions from our listeners.

Question-and-Answer-Session

Operator

(Operator Instructions) And our first question is from Robert Kelly go ahead, Robert.

Robert Kelly – Sidoti

Daniel, Frank, good morning.

Daniel Jones

Yes sir.

Frank Bilban

Good morning.

Robert Kelly – Sidoti

Just a question on one of the lines in the prepared remarks, the copper volatility is timing some of your efforts to increase prices. Would you just talk about the trend, whether it would be pricing or spreads, people managing how that kind of played out throughout the quarter, if you could?

Daniel Jones

Right, April ended up around the 430 mark on the COMEX average for the month. May ended up about 405 and June I think was around 410. Going from a higher copper average to a lower copper average, each month within the quarter. If you (Audio Gap) the industry either follows or it doesn’t but, if you lose for example $0.25 from April to May in COMEX average, you had a little chance with that process increase sticking. The other good thing was, in June, it recovered about $0.05 and we were able to put some, if price increases threw the help.

Robert Kelly – Sidoti

Okay, great. And then as far as July, it seems some strength in the copper market again, has there been any change to discipline in the market, it seems over the past five or six quarters, you’ve seen the market get religion following a liquidation of AIW any change with the competitive dynamics with copper back on the rise?

Frank Bilban

I can’t really speak to Q3, but there certainly is in my opinion improvement of discipline in the market, we were at 1% in additional price or very close to having a block quarter. So, I do believe the discipline in the market has been good. One thing in the industry that happens when you have an upward trend or an upward bias, I guess today rather than a trend, but if we have an upward bias in copper, you are able to substantiate those price increases with very little effort. If you have copper going against you on a price increase, not only we lose that opportunity of the increase but we do have a few competitors that will maybe run ahead of the game and discount a little deeper, when the actual event or the actual daily trading of copper. But, overall, at the most part, the competitors I believe have been very disciplined.

Robert Kelly – Sidoti

Okay, good to hear. One final one. Was there what was the working capital used in Q2 Frank if you will?

Frank Bilban

Cash flow from operations in Q2 was a negative $25.25 million and that’s because accounts receivable went up by $12 million again and due to timing, our accounts payable went down by $13 million and inventory went up by $7 million. So net-net, with the few other items including net income of almost $10 million, it netted out to a use of cash going into the working capital booked $25 million.

Robert Kelly – Sidoti

Thanks, so much. Thank you, guys.

Frank Bilban

Thank you.

Operator

(Operator Instructions) Our next question is from Eric Marshall [ph]. Go ahead Eric.

Eric Marshall

Yes, guys. One quick question I have is, just that and forgive me if you’ve already talked about this but could you go over what the LIFO reserve was in the quarter?

Frank Bilban

LIFO in the quarter was a $6.8 million of credits or decrements to cost of sales and for the six months ended June, it almost washed itself out it’s down to $1.4 million hit. So as Daniel indicated, copper trended up in the first quarter during which you normally take a bit of a hit and as copper trended down a little in the second quarter we get it back. So, net we are almost at zero for the six months.

Eric Marshall

Okay, thanks.

Frank Bilban

You are welcome.

Operator

And there are no other questions at this time.

Daniel Jones

Okay, get on just a second. I’m sure there will be one or two Angie.

Operator

Okay. (Operator Instructions) And our next question is from Kerry Rigdon. Go ahead Kerry.

Kerry Rigdon – Mayberry Partners

Good morning, gentlemen.

Daniel Jones

Hey, how are you doing?

Kerry Rigdon – Mayberry Partners

Doing great. A quick question, could you give a quick breakdown in terms of the residential versus commercial for the quarter?

Frank Bilban

For the second quarter, our residential wire in copper pounds constituted about 17.5% of the pounds shipped leaving about 82.5% to be our commercial and industrial.

Kerry Rigdon – Mayberry Partners

Terrific, thanks. Okays no, go ahead

Daniel Jones

No, I was just going to say or the six months if you wanted it, it’s about the same, Residential was 16.4 for r the six months.

Kerry Rigdon – Mayberry Partners

Okay, great thank you.

Daniel Jones

You are welcome.

Operator

And our next question comes from Tom Brashear, go ahead Tom.

Tom Brashear – Preston Capital Management

Hey good morning, gentlemen; great quarter.

Daniel Jones

Thanks, Tom.

Tom Brashear – Preston Capital Management

Are you saying any new proper mining capacity come online in any time soon the next two to four years that could amend or change the dynamic of copper supply and prices?

Frank Bilban

Nothing of any real significance, Tom there are few properties that have been operational for last couple of years and whatever that might be considered new but, for the most parts, nothing huge nothing significance.

Tom Brashear – Preston Capital Management

Very good. Thank you so much. Look forward to seeing you guys soon and really enjoyed the Analyst Day.

Daniel Jones

Thanks, Tom.

Operator

(Operator Instructions) And we do not have any questions at this time.

Daniel Jones

Okay, Angie, thank you very much for handling the call for us and thank you ladies and gentlemen for the participation and questions. We look forward to speaking to you next quarter.

Operator

Thank you, ladies and gentlemen. This conference call has been concluded.

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