Encore Wire Corporation's CEO Discusses Q3 2011 Results - Earnings Call Transcript

Oct.28.11 | About: Encore Wire (WIRE)

Encore Wire Corporation (NASDAQ:WIRE)

Q3 2011 Earnings Call

October 27, 2011 11:00 AM ET

Executives

Daniel Jones – President and CEO

Frank Bilban – CFO, Secretary, Treasurer, and VP

Analysts

Robert Kelly – Sidoti & Company

Kerry Rigdon – Mayberry Partners

Keith Johnson – Morgan Keegan

Operator

Hello and welcome to the Encore Wire Third Quarter Earnings Call. As a reminder, all phone lines will be on listen-only mode. And we will conduct a Q&A session at the end of the call. (Operator Instructions).

At this time, I’d like to welcome and turn the call over to Mr. Daniel Jones, President, Encore Wire. Please go ahead.

Daniel Jones

Thank you Amanda and good morning ladies and gentlemen and welcome to the Encore Wire Corporation’s 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. He also just won the Dallas Business Journal CFO of the Year.

We’re pleased to announce strong quarterly earnings in this turbulent economy and severe recession currently taken place in the construction industry. As we have repeatedly noted, the key metric to earnings is the spread between the cost of wire sold and cost of raw copper purchased in any given period.

The spread increased 41.2% in the third quarter of 2011 versus the third quarter of 2010 while our unit volume shipped in the third quarter of 2011 increased 2.3% versus third quarter of 2010. The nine months ended September 30, 2011, the spread increased 34.2% versus the nine months ended September 30, 2010 driving our increased earnings, while unit volumes increased 9.4%. Industry processing discipline improved significantly in the second half of the third quarter as copper prices dropped precipitously. The Comex average copper price in July was $4.40 per pound with a high of $4.47 on July 29.

In August, the price of copper started trending down, the big decline came in September, with a Comex close price of $4.14 on September 1st and a Comex close of $3.14 on September 30. We were able to reduce wire prices more slowly than copper was falling, especially in September, significantly improving our margins. Over the last several decades falling copper prices have been detrimental to industry margins, but that dynamic appears to have changed recently as was also the case during the last two quarters of 2008, when copper prices dropped at a historic pace and margins improved.

We continue to support industry price increases in an effort to maintain and increase margins. And 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 are historically lean inventories for us.

We believe our performance is impressive in this economy. 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 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 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, 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 out posted on www.encorewire.com.

Now for the financial results. Net sales for the third quarter ended September 30, 2011 were $319.4 million compared to $242.8 million during the third quarter of 2010. Higher prices for building wire sold in the quarter ended September 30, 2011 accounted for most of the increase in net sales dollars, increasing 28.7% per copper pound sold versus the same period in 2010. Sales prices rose primarily due to higher copper prices, which rose 24.7%.

Unit volume in the third quarter of ‘11 increased 2.3% versus the third quarter of ‘10. Net income for the third quarter of 2011 increased 169.4% to $13.7 million versus $5.1 million in the third quarter of 2010. Fully diluted net earnings per common share increased 168.7% to $0.59 in the third quarter of 2011 versus $0.22 in the third quarter of 2010.

Net sales for the nine months ended September 30, 2011 were $932.2 million, compared to $654.1 million during the same period in 2010. Higher prices for building wire sold in the nine months ended September 30, again accounted for most of the increase in net sales dollars, increasing 30.4% per copper pound versus the same period in 2010. Unit volume in the nine months ended September 30, 2011 also helped to increase the net sales dollars, increasing 9.4% versus the same period in 2010.

Net income for the nine months ended September 30, 2011 increased 214.4% to $33.8 million versus $10.8 million in the same period in 2010. Fully diluted net earnings per common share increased 212.9% to $1.45 per share for the nine months ended September 30, 2011 versus $0.46 per share in the same period in 2010.

On a sequential quarter comparison, net sales for the third quarter of 2011 were $319.4 million versus $309.5 million during the second quarter of 2011. Unit volume increased 3/10ths of 1% on a sequential quarter comparison. Net income for the third quarter of 2011 was $13.7 million versus $9.5 million in the second quarter of 2011. Fully diluted net income for common share was $0.59 in the third quarter of 2011 versus $0.40 in the second quarter of 2011.

Our trailing 12 months results are also dramatically improved with net sales up 43% to $1.188 billion and net earnings per common diluted share of 333.2% to a $1.64 per share versus $831.2 million in sales and $0.38 per share in the previous 12 month period respectively.

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 $15.2 million in cash as of September 30, 2011. We also declared another quarterly cash dividend during the third quarter.

We also want everyone to know that this conference call will be available for replay after the conclusion of this session. If you wish to hear this tape replay, please call 866-206-0173 and enter the conference reference 267097 and the pound sign.

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

Daniel Jones

Thank you. As Frank highlighted all things considered Encore performed well in the past quarters. We believe we are well positioned for the future. Amanda we’d like to take questions now from our listeners.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question is from Robert Kelly with Sidoti & Company. Please go ahead.

Robert Kelly – Sidoti & Company

Daniel, Frank good morning.

Daniel Jones

Good morning.

Frank Bilban

Yes.

Robert Kelly – Sidoti & Company

Congratulations, Frank.

Frank Bilban

Thank you.

Robert Kelly – Sidoti & Company

Just a question two quick one on the third quarter. First the shipment growth you saw is that better than what the industry is seeing it sound what you are seeing and hearing? And then as far as is there a ballpark impact you can give us from that, that steep drop in copper prices in September on the profit line?

Daniel Jones

Off work.

Frank Bilban

I’ll take the first part of the question first. Based on – no one else is public Bob so we’ve a hard time knowing for certain. But our speculation would be is kind of a blunt we probably took some market share in some areas geographically and also I would think that there was a little bit of industry growth.

And as far as the extra kick in September is basically holding the line on prices sacrificing a little bit of volume for discipline trying to get back to a reasonable profit margin and we’re able to do that in September for couple of reasons. Again demand was decent wasn’t great but it was decent and we’re able to hold the line on pricing and still like some orders.

We believe on our service level with the right distributor partners known as copper, it was very volatile. It would be up one day $0.10 or $0.15 and be down $0.20 or so the next day so it was – I won’t say it was easy, but with the volatility there was also uncertainty, but some of the jobs couldn’t wait on the commercial side. So, several things in play there wouldn’t just our brilliance. There was a lot of through our market demand there it was I think pent up and needed to shake out and things come lined up we’re sure.

Robert Kelly – Sidoti & Company

Great. Are you seeing more of the projects coming to the pipeline, more urgency for shipment, is that playing into a little bit of the industry growth that you saw during this quarter that just passed?

Daniel Jones

Yes, yes definitely and what’s happening also the orders themselves are a little more complicated from a service standpoint, the shorter lead times, the product mix is deeper and the luxury type services that you would offer the striping, the cutting, the paralleling really some pretty bizarre request.

Operator

Good morning. This is the conference operator. Your line has been privately intercepted maybe first and last name for record please. This is the conference operator. The companies are questioning your first and last name for record please.

Robert Kelly – Sidoti & Company

Demand was decent, not good or great, I know you just can’t see to the future, my question I think what people are trying to figure out is, how good can things peak be as the (inaudible) or even great I know it’s a couple of years away just given the economy, but – is there some sort of level of marginal spread that turning cost structure in the current number of competitors in the space, or how you guys could do when things just get good or may be even great if you can allow or so that to be that optimistic?

Daniel Jones

That’s a great question, but also I really a tough one to answer. You’re seeing the volatility of earnings over the year, but you know the lows – or low but it seems like the highest are headed certainly to be higher. We – we’re refocused here from the cost standpoint to maintain a low cost structure, again we’re the only public company in our space, but I’m somewhat familiar with as much as I can be with competition and I’ll tell you I still believe we have a low cost structure here for a lot of reasons.

But, we are doing everything we can to maximize that sale price, because as good as we think we are on the shop for, if we save a fraction of a point in a breakthrough type new activity or a project, we price it a 2.5 and 5 discount. So, you can really be shocked in manufacturing what you have to be for survival obviously, but you can also given all back plus if you’re not paying attention to the sale price.

Robert Kelly – Sidoti & Company

And then just one follow on maybe this one just for Frank. The cash balance is lowest we’ve seen in a couple of years here is that just the timing issue?

Frank Bilban

That’s really just due to the accounts receivable and the inventory value going up with copper prices and with the volumes we’ve had. If you look at the last two quarters have been at over $300 million in net sales and as we’ve took people repeatedly on the AR side. We pay for our copper with most of them there is within a week or so of getting the copper here and then we have to turn into inventory and we try to keep our inventory lean, but we try to keep it adequate to meet needs of the market and so we’ll have only two months of inventory on the floor and then we wind up giving 60 days to 75 days of terms which are standard in the industry.

So as these sales have ramped up in the past six months, we’ve invested in inventory in on a year-to-date basis on the cash flow you’ll see in the 10-Q accounts receivable have accounted for $69.1 million of the cash usage of $78 million in the nine months ended September 30th.

So, it’s a good sign we have obviously the wherewithal to support that and quite frankly in the long run although we’ve probably would like to reduce the terms of the customers it provides a barrier to companies that are less well funded than we are. So we are...

Robert Kelly – Sidoti & Company

Yeah.

Frank Bilban

We live with it.

Robert Kelly – Sidoti & Company

That’s where we are going with the next the follow up was are you going towards the longer end of the returns trying to ramp up the (inaudible) or intensify the (inaudible) some of your competitors.

Daniel Jones

Agreements does not change. All sort of standard terms we had in place forever.

Robert Kelly – Sidoti & Company

Okay. Thank you so much guys.

Daniel Jones

Thank you.

Operator

(Operator Instruction). Okay it looks like we have no further questions at this time.

Daniel Jones

We almost managed there

Operator

Okay. (Operator Instruction).

Daniel Jones

Okay.

Operator

Okay we do have a couple of questions that have come in. Our first question is from Kerry Rigdon with Mayberry Partners. Please go ahead.

Kerry Rigdon – Mayberry Partners

Good morning gentlemen.

Daniel Jones

Good morning.

Kerry Rigdon – Mayberry Partners

There is been a lot of reports here over the last few months about the increased activity in the multi-family housing, can you just comment a little bit about what you’re seeing in that segment on the commercial side?

Daniel Jones

The multi-family depending on how many floors are involved in the construction in a way could be residential product, it could be commercial product either one. But specifically to your question we really don’t see a – an uptick in one particular constructions phase inside the commercial construction we’re selling again a broad range of products almost on every order.

But having said that the commercial construction in the industrial side both of those are the two where we’re seeing the most interest. The residential side carry is still about as slow as it has been it’s certainly within that commercial segment, if you were to pick one week or the other you might have an uptick in multi-family product demand and in the next week it could be a completely different type of project it really is kind of all over the board.

Kerry Rigdon – Mayberry Partners

Okay, thank you.

Daniel Jones

Okay.

Operator

Thank you. Our next question is from Keith Johnson with Morgan Keegan. Please go ahead.

Keith Johnson – Morgan Keegan

Good morning guys.

Daniel Jones

Hi Keith.

Keith Johnson – Morgan Keegan

I apologize I came in the call little bit late, so I’d hopefully start repeating the question just let me know. I guess first question have you with the volatility in the copper market have you seen any change in kind of the way your customers are looking at their inventory position going into the year. In other words adjusting order rates are turning back with volatility we’ve seen in copper does that made any difference to you guys?

Daniel Jones

Yeah it’s a great point and actually we’ve. The order complexion itself has become a little more complicated and by that I mean they’re ordering though almost every item that’s in the catalogue they’re ordering a little bit of each item as far as them carrying – distributor customers carrying inventory from the timing standpoint going in to the tail-end of the year they normally don’t ramp up their inventories but again from the Tommy’s standpoint we’ve seen some demand increase on the job side which will increase the demand for service levels on the local inventory.

So we’re going to have to put some in it will be I’m sure that will be super cautious with it, there may be some mistakes made here and there which will fit our model on the correction side, but overall demand itself seems to be coming from real short lead-time deliverable type goods, it’s not necessarily a restocking effort in my opinion at this time.

Keith Johnson – Morgan Keegan

Okay. Its – in that improved job ordering pattern is it regional that you are seeing in one area of the country versus another, is it a broader type of a trend?

Daniel Jones

There will be usual sparks geographically do well the larger metropolitan areas and then suburbs surrounding those seem to do well, the Southeast is doing well, the Northeast which was probably one of the worst areas hit in the last few years seems to have some activity which is pretty good. Phoenix all the way over to the Pacific Coast is been decent and in Northern Cal all the way up into Seattle to come into those markets are doing well also.

Keith Johnson – Morgan Keegan

Okay.

Daniel Jones

And then you have some of the other states with the photovoltaic cable, there was some of the oil and gas companies I mean you’re seeing some pretty decent repetitive type orders but again they are super complicated orders. The stress on the factory, the stress on the service department here it’s up but at the same time we are able to maintain some discipline on processing so let’s work it.

Keith Johnson – Morgan Keegan

Okay. Its – as you can do in the quarter that the way, the third quarter is a way that the pricing environment or the ability to manage the selling price in relation with the volatility in copper, did that get better through the quarter and then as you moved into October have you seen a change in that pattern anyway?

Daniel Jones

I really can’t comment on October but the answer to the first part of the question is yes. July was July, August had decent volume, decent discipline and then September it was a lot better, September was a good month but again the pricing discipline came from the volatility in the market which was good.

It kind of forced some discipline and we shed some light on that or some insight. What happens is we have copper up one day and down the next and backup and then down the next, there is no bias, there is no trend except overall it ended up trending of biasing toward a lower level.

So, the uncertainty of what copper is going to do led people to going back to pricing orders and running their businesses and not speculating so much on what copper was going to do or not do and focusing on making money from their operations rather than trying to buy better so to speak. So, it definitely improved in the latter part of the quarter, no question.

Keith Johnson – Morgan Keegan

Okay. All right, great. Thanks.

Operator

Thank you. (Operator Instructions). Okay, we currently have no questions in queue.

Daniel Jones

Okay, Amanda, thank you very much and thank you to the listeners and we look forward to the next call at the end of the fourth quarter. Thank you.

Operator

Ladies and gentlemen thank you for your time and attention. And that concludes this conference.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!