Encore Wire's CEO Discusses Q3 2012 Results - Earnings Call Transcript

Oct.25.12 | About: Encore Wire (WIRE)

Encore Wire Corporation (NASDAQ:WIRE)

Q3 2012 Earnings Conference Call

October 25, 2012 11:00 a.m. ET

Executives

Daniel Jones – President & CEO

Frank Bilban – VP, CFO, Secretary & Treasurer

Analysts

Anthony Kure – KeyBanc Capital Markets

Brian Gibson – Edward Jones Investments

Operator

Hello, and welcome to today’s Third Quarter Earnings Call. As a reminder, all lines will be on listen-only mode. There’ll be time for question-and-answer at the end of the call. (Operator Instructions) I will now turn the call over to Daniel Jones, President and CEO. Please go ahead Daniel.

Daniel Jones

Thank you, Brandon. 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.

The third quarter of this year was another fairly steady volume quarter in the midst of the construction industry recession, but there are signs of bright spots around the country and talk of projects. Major projects are discussed but then get delayed due to uncertainties surrounding the global economy and the U.S. economy and even the political environment. The good news is that our volumes are not trending downward. We believe our expansion of product offerings over the last six years to our existing customer base has been critical to maintaining and perhaps boosting our market share.

As we have repeatedly noted, one of the key metrics 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 7.8% in the third quarter of 2012 versus the second quarter of 2012. Our copper unit volume shipped in the third quarter of 2012 increased 1.6% versus the second quarter of 2012. COMEX prices for raw copper were somewhat less volatile in the first two months of the quarter than the previous quarter and then rose in September, allowing us to marginally enhance spreads.

As illustrated, relatively small movements in the spread can affect our earnings per share and were a positive influence on a sequential quarterly comparison. Conversely, spreads were down 17.3% in the third quarter of 2012 versus the third quarter of 2011 and down 8.8% on a year-to-date basis in 2012 versus 2011.

We continue to lead and support industry price increases in an effort to maintain and increase margins. We believe our superior order fill rates continue to enhance our competitive position as our distributor customers are holding lean inventories in the field. As orders come in from 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 very lean inventories. We believe our performance is impressive in the economy and 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 might have. Each of you should have already received a copy of Encore’s press release covering Encore’s financial results. This release is also available on the Internet or you call Natalie Seelbach at 800-962-9473 and we’ll be glad to get you a 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 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 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 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 third quarter ended September 30, 2012 were $269.2 million compared to $319.4 million during the third quarter of 2011. Lower prices for building wire sold in the quarter ended September30, 2012 accounted for most of the decrease in net sales dollars, decreasing 15% per copper pound sold versus the same period in 2011. Sales prices declined primarily due to lower copper prices, which declined 14.2% versus the third quarter of 2011.

Unit volume, measured in copper pounds contained in the wire sold, decreased 2.7% in the third quarter of 2012 versus the third quarter of 2011. Net income for the third quarter of 2012 was $5.5 million versus $13.7 million in the third quarter of 2011. Fully diluted net earnings per common share were $0.27 in the third quarter of 2012 versus $0.59 in the third quarter of 2011.

Net sales for the nine months ended September 30, 2012 were $814.3 million compared to $932.2 million during the same period in 2011. Lower prices for building wire sold in the nine months ended September 30, 2012 accounted for most of the decreases in net sales dollars, decreasing 12.7% per copper pound versus the same period in 2011. Unit volume in the nine months ended September 30, 2012 decreased 2.4% versus the same period in 2011. Net income for the nine months ended September 30, 2012 was $14.6 million versus $33.8 million in the same period of 2011. Fully diluted net earnings per common share were $0.66 for the nine months ended September 30, 2012 versus $1.45 in the same period in 2011.

On a sequential quarter comparison, net sales for the third quarter of 2012 increased 1.7% to $269.2 million versus $264.7 million during the second quarter of 2012. Unit volume accounted for this increase, rising 1.6% on a sequential quarter comparison. Net income for the third quarter of 2012 increased 133.2% to $5.5 million versus $2.4 million in the second quarter of 2012. Fully diluted net income per common share increased 148.1% to $0.27 in the third quarter of 2012 versus $0.11 in the second quarter of 2012.

Our balance sheet is very strong. We have no long-term debt and our revolving line of credit is paid down to zero as of September 30th. In addition, we have $18 million in cash at the end of the quarter. We also declared another quarterly cash dividend during the quarter.

This conference call will be available for replay after the conclusion of the session. If you wish to hear the taped replay, please dial 855-410-0556 and enter the conference reference 336232 and the pound sign. I’ll now turn the call back over to Daniel, our President and CEO. Daniel?

Daniel Jones

Thank you. As Frank highlighted, all things considered, Encore performed well in the past quarter. We also believe we’re well positioned for the future.

Brandon, we’d now like to open up the lines for questions from our listeners.

Question-and-Answer Session

Operator

(Operator Instructions) Okay, our first question is from Tony with KeyBanc. Please go ahead Tony.

Tony Kure – KeyBanc

Hey, good morning, gentlemen. Thanks for taking my questions.

Daniel Jones

You bet. Thank you.

Tony Kure – KeyBanc

Couple questions. Could you just start off with a mix of non-residential versus residential volumes for this quarter and then could you maybe follow-up with how do you feel that that those trends play out in a recovery mode, meaning if residential is in fact recovering, does non-resi typically in your view lag that somewhat or is it maybe different this time that could play out with the recovery going on in parallel?

Daniel Jones

The residential percentage of our total pounds shipped in Q3 of 2012 were 18.8%. And that’s up a little over the year-to-date numbers, which are 17.7%.

Tony, the other part of your question, if I could try to make sure that I’m clear on what you’re asking, we are seeing some areas where residential demand is a little bit better. I wouldn’t say that it’s fantastic or anything, but certainly better. I don’t know that’s really a trend as much as it may be a bias right now, but it certainly is there. And what we’ve seen historically in the past, at least for me, that the non-resi would typically follow the residential – as the rooftops or as numbers start to support or show that they’re trending in the right direction.

That’s when you’ll see the support, that nonresidential construction follow, convenience stores, gas stations, movie theaters, what have you – restaurants, whatever. But right now the residential seems to be increasing slightly. It’s been pretty steady. It really was not one month where it was super heavy for any particular reason, it just seems to be a little bit better going forward.

Tony Kure – KeyBanc

Okay, thank you, that’s helpful. And then couple more questions. On the – were there any – what were the LIFO adjustments on the cost of goods sold line, and then did you liquidate any LIFO layers during the third quarter?

Daniel Jones

As will be detailed out in our Q, which will come out probably late next week, Tony, our LIFO charge or expense for the quarter was $2 million, which brings the total for the nine months up to $11.6 million and it brings the total reserve up to about $74 million. And the second part of your question was...

Tony Kure – KeyBanc

Did you liquidate any LIFO layers during the quarter?

Daniel Jones

No. We did not. We added a slight amount of inventory in the quarter.

Tony Kure – KeyBanc

Okay. And then if I could just sneak a couple more in. The progress on the new aluminum facility, I know that this is a long time coming. I’m wondering, is that going to contribute at all to the fourth quarter or is the sort of the material contribution going to start early next year?

Daniel Jones

Just as you outlined, I believe there will be some contribution in the fourth, but most though will be coming in the first quarter. But it’s going well. I don’t know of anything to tell you that there’s – that’s delayed or would be delayed, seems to be progressing pretty much on schedule as we thought it would. Looks great, it’s running great, building a little bit of inventory, and just repeat – not a whole lot in Q4, but should start to see a little bit of that contribution in the first quarter.

Tony Kure – KeyBanc

Okay, great. And then I’ll just – one more, just – how your quarters typically play out, if there is any linearity, that a trend, meaning, are your quarters backend loaded typically or they are generally month by month, pretty linear, or is there no trend? I am just curious how that – quarters typically play out?

Frank Bilban

I think you’ve got a good handle on it. The answer really is all the above. We’ve had quarters that have been linear; we’ve had some that have been backend; we have some that are frontend. This particular one seemed to be going along, and it would depend too if you’re looking purely at volume or what have you. But they’re kind of hard to predict because the volatility in copper seems to have a huge effect. September seemed to be the slowest month of the three, but it also had the most copper volatility, so it just depends really on several different factors, but – I don’t know if there is a consistent way to look at which direction that quarter might go or might not go, but we’ve actually had all the above.

Tony Kure – KeyBanc

Okay. Great. I appreciate you taking my questions.

Frank Bilban

Thanks Tony.

Daniel Jones

See you Tony

Operator

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

Daniel Jones

Oh, super.

Frank Bilban

Give it one minute maybe.

Daniel Jones

There is a couple (inaudible).

Operator

Somebody has already – hold on for a moment, we have a couple of questions that have come in.

Daniel Jones

Good.

Operator

OK, our first question is from Brian with Edward Jones Investments. Please go ahead Brain.

Brian Gibson – Edward Jones Investments

Hi guys.

Daniel Jones

Good morning, Brian.

Brian Gibson – Edward Jones Investments

Hey, on the aluminum facility, is the aluminum wire becoming more popular because it’s cheaper? I mean, what – and is that, if aluminum stays cheap, that will – I assume that trend will continue – but if it gets expensive, will people go back to copper? I mean how do you see this aluminum deal playing out?

Daniel Jones

Well, I think the easy answer is aluminum has been around for a while. It becomes – considered obviously as an alternative the more expensive copper becomes in certain situations, but overall most of the copper orders have some aluminum mixed in with them, there’s different uses. But for the most part, the category that we’re shipping into currently is where we are and that’s what we’re going to continue to do. We’ve sold and shipped aluminum for several years and we’ll continue to do that.

There were some things going on in the market which were demand-driven, obviously, as you pointed out, and then there were some posturing by competitors that we feel like pushed us into having control of our own production. I think you may or may not have read, but General Cable bought Alcan assets that were aluminum suppliers and so forth, so there’re a lot of factors involved in the plant, but certainly we don’t see it as a straight up substitute, it’s more of something that’s in the trailer that’s already being delivered to our customers where the peculiarities have already been identified.

Brian Gibson – Edward Jones Investments

Okay. Okay, well I appreciate that.

Daniel Jones

Yes, sir.

Operator

Okay, we have another question from Tony with KeyBanc. Please go ahead Tony.

Tony Kure – KeyBanc

Hey guys, I just wanted to get a couple more in if time allots here. Could you talk about – you mentioned the distribution channels’ inventories are pretty lean. Could you talk about their sales out versus your sales into them at all, and then any chance of these guys do some window dressing to close the year, maybe liquidate inventories and make them super lean as you – as we close out the calendar year?

Daniel Jones

I don’t know – and I’ll start and go backwards – I don’t know, Tony, for sure how much room they have to go from where they are to super lean. I know end of year taxes in certain geographic regions on inventory would be an issue for the most part, but what we see on that, or what we’ve seen in the past, will push deliveries out till after year-end inventory, first week of January, something of that nature. I don’t know though how much room – I don’t know that it could go leaner.

For the most part, everyone that we know and sell to and ship to and have the relationships with and travel with and all those things, they’re about as lean as they can get and still support and service their customers. And that’s kind of where we’re at. We’re about as lean as we want to be to maintain service levels and a 100% fill rate and so on. If you start to forfeit service, you’re going to spend it in freight and headaches. So for us, the idea and the model is to carry enough inventory to service the demand.

And as demand continues to creep up and trend up and have a bias in the upward position, we’ll add a little inventory appropriately in those areas – and I think that’s kind of the way distributors do it as well. From order entry to delivery, we’ve been able to take a little bit of time out of that, which also is one of our sales keys and success strategies. So we try to help our distributor customers continue to maintain about as lean as they get by with, and that may not be as specific as you’d like it, but that’s kind of the answer. I just don’t know that there’s room to be more lean, if you will, but there certainly will be some type of posturing at year end to avoid some kind of inventory attacks by somebody, I’m sure.

Tony Kure – KeyBanc

Okay, and then do you have access to what their sales out are or no?

Daniel Jones

Do you mean in like an increase year-over-year or something of that nature, or how they’re running, or I’m not sure that I get...?

Tony Kure – KeyBanc

Yeah, what I mean is – well, obviously you know what you’re selling into the distribution channel; what I am wondering is how that differs at all relative to their sales out, if you know?

Daniel Jones

We just had a – it’s a great question, and in the quarter we actually had several annual top meetings with folks and whatever, and from those meetings for the most part with the folks that we’re selling, we’re up. And if we’re up, that means that they’re up on the sell side on our product category. As far as overall, in the industry and what’s happening with other product categories and so forth, I really can’t speak to. But for the most part, most distributors that we talked to in our meetings in the last 60, 90 days, they’ve been up – not substantially, but again up is better than down.

Tony Kure – KeyBanc

Okay. And then I think last quarter you talked about sort of walking away from low margin deals – did you know you didn’t want to take on that? Can you contrast that with maybe how things played out in the third quarter? Did you have to walk away less this quarter, is that fair to assume?

Frank Bilban

Yes for the most past on the front end, but again the volatility in September, we did walk away from some orders in September that just made absolutely no sense whatsoever. Priced – and I am not supposed to get too deep into that specifically – but there were products that were being pushed – not just sold, but being pushed – at the end of the quarter by competitors at prices that were just ridiculous, they were below the cost of the raw materials in the products. So, we definitely let the competitors have those. But again, the volatility kind of bridged that issue – if we get a bias or a trend on the upside, it forces discipline and I think you’ve seen in the past what can happen with our earnings when there is forced discipline in the market.

Tony Kure – KeyBanc

Okay, great. Thanks for the time. That’s all I have.

Daniel Jones

Thank you, Tony. I appreciate it.

Operator

Okay. At this time, we do not have any other questions.

Daniel Jones

Well. Brandon, thank you. And thank you to the listeners and specifically Tony for the questions, makes the call go a lot better and look forward to talking to you guys next quarter. Thanks very much.

Operator

Thank you for joining today’s conference. This conference call has now been concluded.

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