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Encore Wire Corporation (NASDAQ:WIRE)

Q1 2012 Earnings Call

April 25, 2012 11:00 am ET

Executives

Daniel L. Jones – President and Chief Executive Officer

Frank J. Bilban – Vice President and Chief Financial Officer

Analysts

Kerry Rigdon – Mayberry Partners

Anthony C. Kure – KeyBanc Capital Markets Inc.

Brad Evans – Heartland Advisors

Brian Gibson – Edward Jones

Robert Kelly – Sidoti & Company

Eric Marshall – Hodges Capital Management

Operator

Ladies and gentlemen hello and welcome to today’s Encore Wire First Quarter Earnings Call. Please note that all lines are on listen-only mode and there will be a question-and-answer session at the end of the presentation. (Operator Instructions)

And now to start of our conference, I would like to welcome and turn the call over to Mr. Daniel Jones, President and Chief Executive Officer. Go ahead, please.

Daniel L. Jones

Thank you, [Tuwana] and good morning, ladies and gentlemen and welcome to the Encore Wire Corporation quarterly conference call. As stated, I’m Daniel Jones, the President and Chief Executive Officer of Encore Wire and with me this morning is Frank Bilban, our Chief Financial Officer. The results in the first quarter of 2012 were effective by somewhat weal processing in our market, compared to the first and the fourth quarters of 2011.

Building on our prices and margins were impacted negatively by the volatility of copper prices during the quarter. Copper traded erratically which made it difficult for us to maintain any top of industry announced price increases. For example, Comex prices ranged from a low of $3.41 a pound to a high of $3.97 a pound and kept balancing between those two points throughout the quarter with large swings occurring within the span of several days. This disrupted our customers buying patterns and enticed our competitors to cut or hold prices, lowering margins. The performance of our stock and the prolonged industry recession has been exceptional.

Encore Wire is one of only 120 companies of the 12,920 public companies that trade on the United States Exchange that has enjoyed positive share appreciation in 2008, 2009 and 2010. Furthermore, Encore Wire is one of only 67 public companies that has enjoyed positive share appreciation in 2008, 2009, 2010 and 2011.

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 to ensure quick deliveries from coast-to-coast. We’ve been able to accomplish this despite holding what or historically lean inventories for us.

We believe our performance is impressive in this economy. We’d like to thank our employees and associates for their tremendous efforts. We’d also like to 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 financial review, we will take any questions you might have. Everyone should have received a copy of Encore’s press release covering Encore’s financial results. This release is available on the Internet or you can call Natalie Seelbach 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 here today. I would refer all 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 conformance with GAAP including EBITDA, which we believe to be useful supplemental information for investors are posted on our website www.encorewire.com.

Now the financials. Net sales for the quarter ended March 31, 2012 were $280.5 million compared to $303.4 million during the first quarter of 2011. The average selling price of wire per copper pound sold dropped 9.7% in the first quarter of 2012 versus the first quarter of 2011 accounting further decline in sales dollars.

Net income for the first quarter of 2012 was $6.7 million versus $10.7 million in the first quarter of 2011. Fully diluted net income per common share was $0.29 in the first quarter of 2012 versus $0.46 in the first quarter of 2011. Unit volumes, measured in pounds of copper contained in the wire sold during the period were virtually unchanged in the first quarter of ‘12 versus the first quarter of ‘11.

On a sequential quarter comparison, net sales for the first quarter of 2012 were $280.5 million versus $248.3 million during the fourth quarter of 2011. Net income for the first quarter of 2012 was $6.7 million versus $16.3 million in the fourth quarter of 2011. Fully diluted net income per common share was $0.29 in the first quarter of 2012 versus $0.69 in the fourth quarter of 2011.

Copper pound unit volumes increased 8.7% in the first quarter of 2012 versus the fourth quarter of 2011. The spread between the cost of a pound of copper purchased and the sales price of wire containing a pound of copper decreased by 13% sequentially, accounting for the majority of the gross profit declines.

We continue to maintain our strong balance sheet. We have no long-term debt, and our revolving line of credit is paid down to zero. In addition, we have $83.9 million in cash as of March 31, 2012. We also declared another quarterly cash dividend during the past quarter.

The conference call will be available for replay after the conclusion of this session. If you wish to hear the taped replay, please dial 866-206-0173 and enter the conference reference 271907 and the pound sign.

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

Daniel L. 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.

[Tuwana,] we’ll now take questions from our listeners.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And our first question is from Kerry Rigdon from Mayberry Partners. Go ahead please.

Kerry Rigdon – Mayberry Partners

Good morning gentlemen.

Daniel L. Jones

Hi, Kerry.

Kerry Rigdon – Mayberry Partners

Frank, with the price volatility of copper in the quarter, could you comment on whether or not there are any LIFO adjustments that might have occurred?

Frank J. Bilban

Sure, Kerry. For the first quarter of 2012 we took expense or an increase to cost of sales of $17.2 million that compares to the fourth quarter of 2011, when copper was declining and it went the other way and we took a decrease to cost of sales of $19.8 million. What you saw in effect from the fourth quarter to the first quarter is copper dropping in the fourth and going back up in the first with a lot of volatility in between and the long and short of it is the two quarters almost canceled each other out.

Kerry Rigdon – Mayberry Partners

Terrific. Thank you.

Daniel L. Jones

Thanks, Kerry.

Operator

(Operator Instructions) And the next question is from Tony Kure from KeyBanc. Go ahead.

Anthony C. Kure – KeyBanc Capital Markets Inc.

Hey, good morning gentlemen. How are you?

Daniel L. Jones

Good morning.

Anthony C. Kure – KeyBanc Capital Markets Inc.

Just a couple of questions. Frank, you mentioned the spread was down 13% sequentially first quarter to fourth. Do you have that number year-over-year?

Frank J. Bilban

Year-over-year the spread was virtually unchanged.

Anthony C. Kure – KeyBanc Capital Markets Inc.

Got you. And then is there a way to parse out obviously, you enumerated the LIFO adjustment $17 million, but do you guys have any visibility or do you, can you quantify or may be make an estimate about, how much the pricing environment may have also impacted your COGS.

Daniel L. Jones

Well, we know Tony that pricing was down on an ASP basis fourth quarter to first quarter, 10% we know that our spread was down 13%.

Anthony C. Kure – KeyBanc Capital Markets Inc.

Gotcha.

Daniel L. Jones

And that was the real story there on a sequential basis

Anthony C. Kure – KeyBanc Capital Markets Inc.

Okay, so now with the copper down during the second quarter on average versus the first quarter. Do you think, the pricing environment gets more rational, is that a rational conclusion to make, is that may be pricing gets more rational?

Daniel L. Jones

Well it’s, again it’s early to say what’s going to happen in the second quarter. We’ll try onto stick the call basically to first quarter results, but I think it is fair to assume there should be some rationalization and some discipline going forward.

Anthony C. Kure – KeyBanc Capital Markets Inc.

Gotcha. Okay and just couple more from a competitive standpoint during the quarter the pricing volatility and the comparative environment, is there anyway to tell that was more bias towards the may be smaller competitors versus some of the larger market participants where the smaller guys may be a little bit more irrational?

Daniel L. Jones

Yeah I think that’s very perspective Tony, I mean the sour guys for whatever reason, I certainly don’t know what their motivation would be, but they did seem to be a lot quicker to react on the down side. Looking at averages, looking at demand, looking at things in the market. There is no way to rationalize the cost cutting from our standpoint, when copper would trade down for a day or two and actually wasn’t even a trend, it was more of a bias from one day to the next, there seem to be maybe some cost cutting to get ahead of the decline in some fashion, but and I can’t really get too specific, but I will tell you that, when you have that type of disparity between one competitor and another from a processing standpoint, it certainly does not generate a purchase point, uncertainty itself contributes to and will exaggerate whether or not someone will hold off and wait and see, because you obviously want to purchase in their mind anyway at the bottom. So it definitely stagnates demand to some extend, when you get the cost cutting.

Anthony C. Kure – KeyBanc Capital Markets Inc.

Great, that’s very helpful. Just I go one more quick one on just end markets any differentiation that you could tell between the residential or non-residential markets during the quarter.

Daniel L. Jones

The feel in the quarter on residential side was is that, there is some improvement, it’s not a huge jump [remains], but there is certainly is the feel of some improvement in residential side and in again, the commercial industrial side as well. Both sides, the activity seems to be picking up, some of the larger more visible jobs it come out, that the threat or the feel for which direction copper is going to go was muddied a bit, so some of the jobs that could be pushed out, sure seems like part of the gas ready to go held off, which at some point they’re going to have to step back end of the market and place an order.

Anthony C. Kure – KeyBanc Capital Markets Inc.

Okay, great. Thanks so much it’s helpful.

Daniel L. Jones

Thanks Tony.

Operator

(Operator Instructions) And we do have a question from Brad Evans from Heartland Advisors. Go ahead please.

Brad Evans – Heartland Advisors

Good morning guys.

Daniel L. Jones

Good morning, Brad.

Frank J. Bilban

Good morning, Brad.

Brad Evans – Heartland Advisors

Hope you guys doing well? I tuned on a little bit late, did you break out their mixes of sales between commercial, industrial and residential in the quarter.

Frank J. Bilban

I did not, in Q1 of ‘12 the residential was 14.5% of our unit volume. The rest was commercial.

Brad Evans – Heartland Advisors

Okay, and the volume trends within those respective markets on a year-over-year basis in the first quarter.

Daniel L. Jones

Remarkably similar I believe last year the residential was 15.5% and this year on Q1 it was 14.4%.

Brad Evans – Heartland Advisors

I’m sorry, I was asking for volume trends within the quarter on a year-over-year basis. I think you said volumes reflect on a consolidated basis, I’m curious what the – based on the two end markets.

Daniel L. Jones

I see, year-over-year residential and again, residential tends to exacerbate to the amount of the percentage increases or decreases because it’s down at such a low level, our residential year-over-year was down 7% and commercial and industrial were up a little over 1% or a net flat.

Brad Evans – Heartland Advisors

So, today I’ll point that, so if I have my numbers correct, I think in the back half of '11. Third quarter your commercial and industrial volumes are down 2% and they were I guess were down 5.5 in the fourth quarter so now you swung to a positive year-over-year growth. So today, (inaudible) so the improvement you are seeing there is, I realize your later cycle beneficiary of any improvement in commercial and industrial construction, but it sounds like perhaps you might be starting to see early signs of that, is that fair?

Frank J. Bilban

That’s fair. That’s (inaudible) Brad. There is a lot more activity on the phones. The sales office is working a little bit harder, a little bit sooner, it seems like and the bit of word process is stretched back out just a little bit with the volatility we had in copper. But again, the activity level, the feel is there is more activity and we do see, you know some traction on the residential side it's – again it's not huge, but the overall feel is a little bit better

Brad Evans – Heartland Advisors

Okay. And then just last question for you on the price and dynamics within the quarter, the smaller players that perhaps might have been acting a little rationally in the quarter were they U.S. based or were they international?

Frank J. Bilban

Both depending on what day it was and what week it was, you know everybody kind of had their turn and then eventually I think pretty much everybody kind of caught the disease so to speak, but the hard part is this again, I can’t really get in specifics on the processing but the way that it works when you start to have the prices being offered or faxed or whatever they are doing, it really does not stimulate demand. It’s may be countering intuitive to some folks to hear it that way, but it really the guys that are consistent buyers in the market weekly and biweekly and even some of them daily. There everyone has a close eye on what they feel like copper is going to do or not do and in some trend or bias is substantiated in the market with the wire manufacturer making some type of offer. If the guy is not ready to buy or what not, it really does not stimulate demand, and I think it really does not operate like a trading desk, but I think there is, I don’t want to get too frustrated on the call and that going down that path is nothing, but frustration right now but, any way that’s probably enough on the processing side.

Brad Evans – Heartland Advisors

Just one follow up and is, what do you think has happened recently that’s catalyzed may be a bit more rationality within the market place, is there anything that was occurred.

Daniel L. Jones

Yeah, what happens quite frankly is copper turns and it forces a little bit of discipline. It’s almost like some of the lower prices that we offer to cross cutting that’s offered is for that moment, but unfortunately you just don’t have the ability, you should and we feel like we do, but you just don’t have the ability to pull that price back as quickly as you’d like. With the volatility one day, two days down, doesn’t really get us all that jazzed up, you’ve got copper terms in the next two or three days and the bias is back on the upside, so without that pricing volatility up and down you can kind of smooth out the processing, but unfortunately whatever reason we had some difficulty in the market in the first quarter with some folks being able to rationalize that.

Brad Evans – Heartland Advisors

Okay, Thanks very much.

Operator

(Operator Instructions) Our next question is from Brian Gibson from Edward Jones. Go ahead, your line is open.

Brian Gibson – Edward Jones

Hi guys. Hey, I’ve got a couple of questions here.

Frank J. Bilban

Hey, Brian.

Brian Gibson – Edward Jones

Hi, hey on the undisciplined type of deal I’m trying to get my mind how this business works. So, if you give a quote for a project, and then like a competitor comes in and under bids you, do you follow that down or do you just walk away from it?

Frank J. Bilban

Well. That’s a real specific question and the answer is going to be more general. It just depends again, each individual quote somewhat stands alone, but the general idea is, and I’m not sure I can explain to you well enough on one conference call how this works, but basically what happens if that – the way you described it, we would walk.

Brian Gibson – Edward Jones

Okay.

Frank J. Bilban

If we give a price when somebody comes in and cuts it, we would walk, hopefully and I believe for the most part before we give a price, we are in position to write the order. So, we’re not into that option back and forth who’s got the better price type of activity is that’s just not what we do.

Brian Gibson – Edward Jones

What you’re saying is then on a more complex or bigger type deal it could – to get a deal done, it could be several days or maybe weeks to put a deal together, and then there might be some negotiating on that type of a situation then or...?

Frank J. Bilban

Yes, Brian. I think that’s fair. There’s a lot of work today, a lot sooner before a deal is ready to go. But if you put all that work in, and then someone comes in last minute that’s done no work and wants to cut the price for no value whatsoever, we would walk.

Brian Gibson – Edward Jones

Okay.

Frank J. Bilban

And that’s very common for us to do.

Brian Gibson – Edward Jones

Okay. My other question is how is everything going with the new aluminum wire building or business?

Frank J. Bilban

The building itself looks fantastic. I can see it right now out the window in the office here where we’re sitting. Walls are up, roof is on, machineries going in and out one of the side doors here as we speak. Looks pretty good actually, looks great. No delays that I know ever at this point.

Brian Gibson – Edward Jones

Okay. Thank you.

Frank J. Bilban

Yes, sir. Thanks, Brian.

Operator

Thank you. And our last question is from Brad Evans from Heartland Advisors. Go ahead, your line is open.

Brad Evans – Heartland Advisors

Just a follow-up on the residential side that the volume – the decline that Frank highlighted 7% in the quarter, does that feel like more or like seasonality than cyclicality at this point? I know that there’s been some hope that housing starts are on demand and just curious what you might be seeing there, I realize DIY might be a player there as well?

Frank J. Bilban

Well, Brad sequentially for you were asking year-over-year. Sequentially, residential was up about half a point just to note that as well.

Daniel L. Jones

Yeah, so the numbers are not huge again Brad, but on a small basis, I would tell you the bias on the residential is on the positive side. Not really sure what to give the credit too, depends on what report you read and the timing that comes out on permits and what have you. But overall, from a residential manufacturing standpoint for us, it is a little bit better. It’s not great, but it is better.

Brad Evans – Heartland Advisors

Okay. I’m sorry $30 million to $40 million for CapEx this year, is that so with the range?

Frank J. Bilban

Yeah, we’re currently estimating about $28 million to $33 million.

Brad Evans – Heartland Advisors

Okay. And your sense is that working capital would be a use of cash this year that’s hopefully you returned to some growth here in the coming quarters?

Frank J. Bilban

Well, yes, but obviously highly contingent upon what the base metals do. If copper stays at this level and volumes pick up we’ll need a little more into inventory in AR. If volumes pick-up and copper goes down $0.50, it could go the other way. So, it’s difficult to predict. But our current projection, which we don’t – we’re not in the projection business, but I guess, our current feeling as Daniel has indicated is, we think the summer will be pretty good.

Brad Evans – Heartland Advisors

Okay, (inaudible). I appreciate it.

Daniel L. Jones

You bet. thanks, Brad.

Operator

Thank you. And our next question is from Robert Kelly from Sidoti & Company. Go ahead please.

Robert Kelly – Sidoti & Company

Good morning guys.

Daniel L. Jones

Hey.

Robert Kelly – Sidoti & Company

A question on the aluminum plants, as you ramp up production there and I don’t think you’ve even started that just yet. Is that expected to be a material operating drag in the second half of the year?

Daniel L. Jones

No, I don’t think so. We sell – we’ve always sold a bit of aluminum on a buy/sell top arrangement, and the aluminum plant itself will give us a little more flexibility and a little more control over what we’re doing. But I would – I just don’t want to say too much, because I can see on the screen, we’ve got several competitors on the line and won’t draw roadmap from, I recognize their phone number, not necessarily their name. But I would tell you that on the aluminum side, we plan Robert, to hit the ground running with the aluminum product, it’s not something that is new, it’s not something that we’re introducing, it’s really just going to be about more of the same and with an expansion and control over the service level, very similar to what we’ve done in the past with other product categories where we were buying and selling it and the folks we were buying it from really couldn’t keep up with what we needed to buy and to maintain the type of service level that we’ll operate at. We kind of had to take it in-house and that’s really what’s going to happen, but it won’t be, I don’t see it as a drain at all. In fact I think again, to repeat what I said, I think we’ll hit the ground running with the aluminum.

Robert Kelly – Sidoti & Company

Excellent. Thank you, and then just one final one if you could. Volumes our shipment is flat roughly with the year-ago still in the absolute sense fairly low relative to where we’ve been historically. Could you give us an idea where company wide utilization is right now?

Frank J. Bilban

We’re running five days, which I think most everyone is, I’d love to be running 6.5 days that would be perfect for me. So we’re running about, we’re running about five days in all categories basically other than the residential. Residential is running about four days and we use half a day, maybe the fifth day for the residential plan when necessary.

Robert Kelly – Sidoti & Company

Okay, great. Thank you.

Frank J. Bilban

You bet. Thanks, Robert.

Operator

(Operator Instructions) And we do have another question. This one is from Eric Marshall from Hodges Capital Management. Go ahead please.

Eric Marshall – Hodges Capital Management

Hi, guys. I got in the call a little late. Did you guys mention the LIFO impact for the quarters?

Frank J. Bilban

Yes, we did. Yes, we did Eric. We said and I’ll reiterate. In Q1 of ‘12 we increased cost of sales or took expense by $17.2 million, which compares to the previous quarter Q4 of ‘11 where we decreased cost of sales and expense by $19.8 million. That’s indicative of the fact that in Q4, copper prices were dropping, and in Q1 in general, they were trending up. And I also pointed out that between the two quarters obviously the two adjustments almost cancel each other out.

Eric Marshall – Hodges Capital Management

Right, okay.

Frank J. Bilban

And our current reserve balances is $80 million.

Eric Marshall – Hodges Capital Management

Okay, very good. Thanks guys.

Frank J. Bilban

You’re welcome.

Daniel L. Jones

Sure. Thanks, Eric.

Operator

(Operator Instructions) And we currently have no additional questions.

Daniel L. Jones

(Inaudible) I want to thank you for handling the call. And thank you for the questions. As Frank indicated earlier, it is available for replay and if any of you folks have questions off line you can call to at the office, and we do appreciate your participation. Look forward to talking to you next quarter. Thanks a lot.

Operator

Thank you, ladies and gentlemen for joining today’s presentation. That will conclude the call. Have a good day.

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