Encore's (WIRE) CEO Daniel Jones on Q1 2016 Results - Earnings Call Transcript

| About: Encore Wire (WIRE)

Encore Wire Corporation (NASDAQ:WIRE)

Q1 2016 Earnings Conference Call

April 28, 2016 11:00 A.M. ET

Executives

Daniel L. Jones - Chairman, President, and CEO

Frank J. Bilban - CFO, VP of Finance, Treasurer, and Secretary

Analysts

Brent Thielman - D.A. Davidson

Unidentified Analyst - Sidoti and Company

Operator

Welcome to the Encore Wire First Quarter Earnings Conference Call. My name is Sylvia, 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, Chairman President and CEO. Mr. Jones, you may begin.

Daniel L. Jones

Thank you, Sylvia and good morning, ladies and gentlemen. And welcome to the Encore Wire Corporation quarterly conference call. As stated I am Daniel Jones, the President, Chief Executive Officer and Chairman of the Board of Encore Wire. And with me this morning is Frank Bilban, our Chief Financial Officer.

We’re generally pleased with the first quarter results. The unit volumes were up over the first quarter of last year. Margins however declined slightly in both copper and aluminum wire sales. One of the key metrics to our earnings is this spread between the price of copper wire sold and the cost of raw copper purchased in any given period.

The copper spread decreased 4.2% in the first quarter of 2016 versus the first quarter of 2015 and 1.2% on a sequential quarter comparison. The copper spread contracted 4.2% as the average price of copper purchased decreased 20.7% in the first quarter of 2016 versus the first quarter of 2015 and the average selling price of wire sold decreased 15.4%. Aluminum spreads were down 0.3% and 4.0% versus the same respective periods. The margins were off somewhat due to the timing of at least two attempts by the industry to raise prices that were announced just ahead of the week of soft copper commodity prices. This price increase attempts difficult to gaining traction and margins drop slightly.

Do not necessarily view this as a poor industry discipline but more a case of unfortunate timing which happens from time to time. Our discussions with our distributor, customers, and their contractor customer indicate there is a fairly good outlook for construction projects this year. Although, we were starting through headwinds generated by concern about the national political landscape and other factors.

We continue to strive to lead and support industry price increases in an effort to maintain an increased margin. We believe our superior order fill rates continue to enhance our 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 fill rates to ensure quick deliveries from coast to coast. We’ve been able to accomplish this despite holding historically lean inventories for us.

We believe our performance is impressive in this environment and we thank our employees and associates for the tremendous efforts. We also thank our stockholders for their continued support. Frank Bilban, our CFO will now discuss our financial results. Frank?

Frank J. 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 of our press release covering Encore’s financial results. This release is available on the Internet or you can call Karen Wagner, at 800-962-9473, and we will be happy 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 first quarter ended March 31, 2016 were $225.5 million compared to $250.3 million during the first quarter of 2015. Copper unit volume measured in pounds of copper contained in the wires sold increased 5.2% in the first quarter of 2016 versus the first quarter of 2015. Aluminum unit volume was up 11.6% in the first quarter of 2016 versus the first quarter of 2015. Aluminum building wire sales constituted 10.5% of net sales dollars for the first quarter of 2016 versus 9.4% in the first quarter of 2015.

The average selling price of wire per copper pound sold dropped 15.4% in the first quarter of 2016 versus the first quarter of 2015 driving the decrease in net sales dollars. Copper wire sales prices declined primarily due to the lower price of copper purchased which declined 20.7% versus the first quarter of 2015. Net income for the first quarter of 2016 was $8.6 million versus $10.8 million in the first quarter of 2015. Fully diluted net earnings per common share were $0.41 in the first quarter of 2016 versus $0.52 in the first quarter of 2015.

On a sequential quarter comparison, net sales for the first quarter of 2016 were $225.5 million versus $250.9 million during the fourth quarter of 2015. Sales dollars decreased due to a 6.8% unit volume decrease of copper building wire sold coupled with a 3.9% decrease in the average selling price per pound of copper wire sold on a sequential quarter comparison. Copper wire sales followed the price of copper purchased which declined 5.3%

Net income for the first quarter of 2016 decreased to $8.6 million versus $10.9 million in the fourth quarter of 2015. Fully diluted net income per common share was $0.41 in the first quarter of 2016 versus $0.53 in the fourth quarter of 2015. Our balance sheet is strong, we have no long-term debt and our revolving line of credit is paid down to zero. In addition we have $78.6 million in cash at the end of the quarter. We also declared another cash dividend during the quarter.

I’ll now 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 dial 888-843-7419 and enter the reference number 6908494 and the # sign.

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

Daniel L. Jones

Thank you, as Frank highlighted Encore performed well on the past quarter and we believe we’re well positioned for the future. And Sylvia we will now take questions from listeners.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions]. And our first question comes from Brent Thielman from D.A. Davidson.

Brent Thielman

Hi, good morning.

Daniel L. Jones

Hey Brent.

Brent Thielman

Daniel I was interested to hear your comments on kind of a customer feedback about project activity, anymore color on what they seem to be seeing out there and kind of where it is happening?

Daniel L. Jones

Yes, within the quarter it was quite a bit of activity starting off the New Year. February slowed a little bit with some weather issues and some volatility in the commodity market that we pointed out and then March seemed to be back to business as usual. And usual for us currently there is a pretty heavy -- the activity on the quote desk is pretty heavy. Its geographic regions that are doing a little bit better than others but for the most part most of the states that you would expect to heavily populated areas you are doing several projects. Each area there would be colleges expanding, medical building, strip malls, more commercial and then we also have seen a little uptick in the residential demand. And both areas seem to be busier looking back over 2015 in the first quarter for us and 2016. I don’t want to get too far ahead in 2016 yet.

Brent Thielman

Sure and looking at that kind of 5% growth in unit volume, I mean is it fair to say that was kind of negatively skewed by February, but January and March might have been stronger than that?

Daniel L. Jones

Correct, great read, yes.

Brent Thielman

Okay and then on the margins this quarter, obviously the spread is key but wondering kind of what affects the mix products you are selling might be influencing profitability here, kind of higher end lowering cables, why or any thoughts on that?

Daniel L. Jones

Yes, it’s a great question also. I mean the specialty stuff as typically is with jobs there is always fringe items that would be a non-catalog type color combination of something of that nature that comes out. But which is typically better margin. But for the most part margins were good. The volume is decent. You know we had a month in a quarter that was a little difficult that were three or four reversals of the bias within the month on the cost. And three or four attempts at leading, initiating price increase. We have three or four in one month its clearly once a week and there is some structure out in the market that we compete with that prevents that type of movement on a price increase from sustaining itself unless the bias turns and be somewhat of a trend. That made February very difficult.

We had one, two, three, we had four reversals in the month of February alone on Calmax [ph] and it might be difficult. I mean the real issue with the first quarter was trying to write their pricing model in February and it just it wasn’t there. It wasn’t going to happen. There is a competitive situation that we deal with. They just don’t move their prices that quickly and I don’t want to get too deep into that but they are committed in some way contractually or whatever to allow longer buying at the old cost level so to speak. And it causes problems when you have a volatile month on a cost standpoint.

Brent Thielman

Appreciate that and then Frank on SG&A little higher than I guess I had expected, anything unusual I guess with respect to the 8% increase year-on-year?

Frank J. Bilban

We did have an accelerated depreciation on a particular asset in the quarter. So that did bump it up by about 900,000.

Brent Thielman

Okay, that covers it, thanks guys.

Daniel L. Jones

Thanks Brent.

Operator

And your next question comes from [indiscernible] from Sidoti & Company.

Unidentified Analyst

Hi, good morning.

Daniel L. Jones

Hey Michael.

Unidentified Analyst

With the aluminum facility can you just give us an update on its utilization and if there is any room for efficiency improvement on the expanding aluminum facility that can maybe move in the year and debt margins I guess higher than they are now?

Daniel L. Jones

Yes, the utilization number right now depending on what the denominator would be but we’re looking at running at about 60% to 65% currently. Depending on product mix and ourselves department drives that, what orders we want to take or not take in that sense. And from the 65% number, the thing on the product mix it could be plus or minus 5% on that number. And there are clear opportunities for us to improve on the cost side, we’ve made some pretty aggressive changes in that implant 6 in the last 30 to 45 days and starting to see the numbers show up that we would like to see. And it has actually been a good expansion for us.

Unidentified Analyst

Sure okay and then with capital spending, I mean I know is that something we should I guess model in that you guys would be more inclined to increase the efficiency on your plants on the capital spending side, maybe targeting no bottlenecking areas, etc?

Daniel L. Jones

That’s fair to say. We are wrapping up a small billing. We are doing a little add on right now that should wrap up late this summer. And after that occurs, the current intent is to go into a little deeper in some of the equipment that we have and make changes where we think we need to. And something that we are constantly doing so I think it makes sense for you to at least have the number in their mind.

Unidentified Analyst

Great, okay and then just last one, do you think year-over-year growth for volume shift to the residential and commercial end market?

Frank J. Bilban

Yes, you are talking to Q1 to Q1 Mike?

Unidentified Analyst

Yes.

Frank J. Bilban

Q1 to Q1 the residential units were up 4% and the commercial and industrial on their copper side were up about 26% and obviously on the aluminum which is also a commercial and industrial product that was up 11.6%.

Unidentified Analyst

Great, thank you.

Frank J. Bilban

You’re welcome.

Operator

And we have no further questions at this time.

Daniel L. Jones

Give it a minute maybe. Well, if there is no more questions again we thank you folks for calling in and always appreciate the questions and look forward to catching up after the next quarter. Sylvia and thank you very much.

Operator

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

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