Encore Wire's (WIRE) CEO Daniel Jones on Q2 2016 Results - Earnings Call Transcript

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Encore Wire Corporation (NASDAQ:WIRE) Q2 2016 Earnings Conference Call July 28, 2016 11:00 AM ET

Executives

Daniel Jones - Chairman, President and Chief Executive Officer

Frank Bilban - Chief Financial Officer

Analysts

Brent Thielman - D.A. Davidson

Michael Conti - Sidoti & Company

Greg Eisen - Singular Research

Bill Baldwin - Baldwin Anthony Securities

Operator

Hello and welcome to the Encore Wire’s Second Quarter Earnings Conference Call. My name is Jason and I will be your operator for today’s call. [Operator Instructions] And please note that this conference is being recorded. I will now turn the call over to Daniel Jones, Chairman, President and CEO. Please go ahead, sir.

Daniel Jones

Thank you, Jason and good morning ladies and gentlemen and welcome to the Encore Wire Corporation quarterly conference call. With me this morning is Frank Bilban, our Chief Financial Officer.

We are generally pleased with the second quarter results, with unit volumes up over the second quarter of last year as well as the first quarter of this year. Margins, however, declined in both copper and aluminum wire sales. As stated before, one of the key metrics to our earnings is the spread between the price of copper wire sold and the cost of raw copper purchased in any given period.

The copper spread decreased 8.5% in the second quarter of 2016 versus the second quarter of 2015 and 3.3% on a sequential quarter comparison. The copper spread contracted 8.5% as the average price of copper purchased decreased 22.1% in the second quarter of 2016 versus the second quarter of 2015 and the average selling price of wire sold decreased 17.8%.

Aluminum spreads were down 14.2% and 8.9% versus the same respective periods. The margin declines were due to the competitive pricing environment in the industry as well as the timing of at least three attempts by the industry to raise prices that were announced just ahead of a week of soft copper commodity prices. The price increase attempts had difficulty gaining any traction and margins dropped. Our aluminum plant expansion is now fully operational and progressing well towards targeted efficiency levels.

Based on discussions with our distributor customers and their contractor customers, we believe there is a fairly good outlook for construction projects as we continue through the year. As we strive 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 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 and we thank our employees and associates for their tremendous efforts. We also thank our stockholders for their continued support.

Frank Bilban, our Chief Financial Officer, will now discuss our financial results. Frank?

Frank Bilban

Thanks, 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. Everyone should have received the copy of Encore’s press release covering Encore’s financial results. This release is available on the Internet or you can call Dennis McCarthy at 800-962-9473. We will be glad 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 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 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 second quarter ended June 30, 2016 were $238.8 million compared to $253.7 million during the second quarter of 2015. Copper unit volume, measured in pounds of copper contained in the wires sold, increased 14% in the second quarter of 2016 versus the second quarter of 2015. Aluminum unit volume was up 14.3% in the second quarter of 2016 versus the second quarter of 2015. Aluminum building wire sales constituted 9.8% of net sales dollars for the second quarter of 2016 versus 9.4% in the second quarter of 2015. The average selling price of wire per copper pound sold dropped 17.8% in the second quarter of 2016 versus the second quarter of 2015 driving the decrease in net sales dollars.

Copper wire sales prices declined primarily due to the lower price of copper purchase, which declined 22.1% versus the second quarter of 2015. Net income for the second quarter of 2016 was $7.8 million versus $11.4 million in the second quarter of 2015. Fully diluted net earnings per common share were $0.38 in the second quarter of 2016 versus $0.54 a share in the second quarter of 2015.

Net sales for the six months ended June 30, 2016 were $464.4 million compared to $504 million during the same period in 2015. The average selling price of wire per copper pound sold dropped 16.6%, while copper unit volumes sold increased 9.6% in the six months ended June 30, 2016 versus the six months ended June 30, 2015. Copper wire sales followed the price of copper purchase, which declined 21.4%. Aluminum building wire sales constituted 10.1% of net sales dollars for the six months ended June 30, 2016 versus 9.4% in the six months ended June 30, 2015.

Net income for the six months ended June 30, 2016 was $16.4 million versus $22.1 million in the same period in 2015. Fully diluted net earnings per common share were $0.79 versus for the six months ended June 30, 2016 versus $1.06 in the same period in 2015. On a sequential quarter comparison, net sales for the second quarter of 2016 were $238.8 million versus $225.5 million during the first quarter of 2016. Sales dollars increased due to a 7.3% unit volume increase of copper building wires sold offset slightly by 0.5% decrease in the average selling price per pound of copper wires sold on a sequential quarter comparison. Copper wire sales prices declined slightly despite an increase of 1.1% in the price of copper purchased. Net income for the second quarter of 2016 decreased to $7.8 million versus $8.6 million in the first quarter of 2016.

Fully diluted net income per common share was $0.38 in the second quarter of 2016 versus $0.41 in the first quarter of 2016. Our balance sheet remained strong. We have no long-term debt and our revolving line of credit is paid down to zero. In addition, we have $81.1 million in cash at the end of the quarter. We also declared another cash dividend during the quarter.

I would like to remind you 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 conference reference 7023532 and the pound sign. I will now turn the floor back over to Daniel Jones, our Chairman, President and CEO. Daniel?

Daniel Jones

Thank you, Frank. As Frank highlighted, we performed well in the past quarter and believe we are well positioned for the future. Jason will now take questions from our listeners.

Question-and-Answer Session

Operator

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

Brent Thielman

Good morning, guys.

Daniel Jones

Hi, Brent. How are you doing?

Brent Thielman

Good morning. Doing well. Daniel, on the spreads in the quarter, when we look at your average selling price and then the average cost of copper purchased that you guys provide, you still have a pretty wide gap between the two. And when I look at that, can we infer that kind of exclusive of these instances where the price increases failed, you are kind of similar still in the range of spread expansion seen last year kind of that 3% to 11%?

Daniel Jones

Yes, I think that’s fair. We had probably five or six different occasions. We started May about $2.26 on copper and ended up going as low as $2.02, $2.03, somewhere in there, maybe $2.04 in the month of June. With that kind of volatility, obviously the price increases that we are trying to hang on to that spread, we are kind of the kicked in the teeth the next day with the COMEX close being down or the bias starting to go down, but there are points within the month where things were obviously what we consider to be more normalized pricing relative to where the copper pricing was.

Brent Thielman

And where those increases failed, I mean does that have a significant impact on your volume, because your – obviously your volumes are still very good?

Daniel Jones

Well, it does, which is very positive to see that the volume is up in the teeth of the intra-month volatility with COMEX, that’s a really good sign. And I think the pricing piece of that – what I have seen over the years, it’s typically a timing issue and it will catch up and correct itself, it has to. And more than anything, I think there were probably eight or nine price swings changing direction just within the month of June on COMEX. So clearly, the timing on a price increase the day before a drop in COMEX, it will catch up, it always does. So it will correct itself and typically overcorrect for a while.

Brent Thielman

Sure, okay. And then on the aluminum side, I mean it doesn’t seem like, I guess aluminum prices were quite as volatile as copper during the quarter, is the primary challenge there still more on the competitive front?

Daniel Jones

It is. Without going into too much detail, there is clearly a couple of things in the market that competitor wise that don’t necessarily make a lot of sense on the aluminum piece. But that also, I think is a timing issue and will also clear itself up going forward. We have seen specifically sticking with the second quarter information. I am pleased with where the aluminum situation is and going forward what will happen as you lose some traction occasionally on copper, it’s clearly not as volatile, but sometimes aluminum may catch the disease a little bit, so to speak. And you have some of that. But overall, the aluminum piece clearly is less volatile and is very solid for us currently.

Brent Thielman

Okay. Now, you ran full board at the new plant at this stage?

Daniel Jones

Full board today, the answer would be yes. But as a capacity number, no, we are ramping up as we need to. The plant is fully operational, all the equipment’s has been shaking down, everything is where it needs to be. It’s clean, it meets our standards on where we wanted to be and we are going to run it as efficiently, obviously as it makes sense from a cost standpoint and it’s ready to go. Looks great, morale is good, people are good, fully staffed, everything looks great in the aluminum plant.

Brent Thielman

Okay. Thank you. I will pass it on.

Frank Bilban

Thanks Brent.

Operator

Thank you. And our next question comes from Michael Conti from Sidoti & Company.

Michael Conti

Hey good morning.

Daniel Jones

Hi Michael.

Frank Bilban

Hi Mike.

Michael Conti

Yes. So just a nice increase on the volume side, we heard some of the wet weather in Texas, anything to note there, any idea on how much volume was delayed or anything you see in your future periods?

Daniel Jones

No, there were a few jobs that’s clearly that were affected, potentially some sentiment towards that in areas that needed inventory or stock on the shelves. But nothing super specific that sticks out in my mind in either April, May or June, that would have been significant. If it’s too wet to get the trucks in, we will push it back out. That seems to clear itself up pretty quickly in Texas, when the sun comes out it’s hot and dries things out. But there is no real super delays and anything. The volume in the quarter was good. The activity on the phone lines in the sales office were good, it was good. The quotes to purchase order timeframe has narrowed some, which is a bullish sign. There is a lot of – we are getting paid on time, our customers are getting paid on time. The typical signs are there, things are good. Not great, but good. Solid recurring business from solid, pay their bills on time, customers thinks in the quarter, they look good.

Michael Conti

Okay. And then just on the competitive pricing comments, you mentioned it was more or less on the aluminum side, there are ideas that apply to a specific geographic area and if that’s something that ease as we exited the quarter, just trying to get an idea if you guys continue to plan on walking away from low-margin work on the aluminum side?

Daniel Jones

There were a few orders that didn’t make sense that we shook our head and passed, more towards the front end of the second quarter. It was basically one particular competitor that got little wacky for some reason. We can speculate as to the reasoning for that, but it started to clear itself up towards the end of the quarter, which was a good sign and kind of confirmed our thoughts and speculation on what their purpose was or wasn’t going into the quarter, but it’s hard to go on these public calls and just not call it out like I see it. But keeping the names out of it, I think it’s cleared itself up.

Michael Conti

Got it, perfect. And then Frank, can you give us the year-over-year growth of volume shipments to your commercial and residential end markets?

Frank Bilban

Are you talking Q2 to Q2 or six months to six months?

Michael Conti

If you have both, that would be great?

Frank Bilban

Okay. Q2 over Q2, residential was up 7.1% and commercial was up 16.2%. In the six months period, residential was flat and commercial was up about 12%.

Michael Conti

Got it. Thank you.

Daniel Jones

Thanks Michael.

Operator

And our next question comes from Greg Eisen from Singular Research.

Greg Eisen

Thanks. Good morning.

Daniel Jones

Hi Greg.

Greg Eisen

Hi. Going back to the margin, could you talk about the linearity of the margin change, it sounds like the margin decrease was most pronounced in June, based upon what you were saying about the volatility, is that correct compared to the earlier months, just compared to April and May?

Frank Bilban

Yes, it is correct. Just to give you some idea, within April starting the month out around to $2.16 on COMEX, we bottomed about $2.08 but came on strong towards the end of April, which is what we like to see from a $2.14 number about mid-month, we ended up the month around $2.27 on COMEX. So that trend or bias if you will, of two weeks is super helpful, but early May, around the end of the first week of May, we were back down to around $2.10 level. And we had $2.09, $2.07, $2.06, those kind of numbers and then June starting out at $2.07. We were as high, I think somewhere around $2.17 or $2.18 in the month, but we were as low as $2.04, $2.05. And again, in the month of May, there were probably seven or eight changes one day to the next. If it’s $0.005 or $0.01, $0.02, it’s – you can normally defend that or are you against it, what have you. But we had swings of $0.05, $0.06, from one day to the next. And again you go up $0.05 or $0.06 and the industry prints the price sheet and post and you start to process of notifying your customers and you wake up the next day and it goes down $0.05, you can throw the price increase away, unfortunately. And what happens Greg, we actually have competitors and sales folks I guess that’s what it would be called, that will actually post what COMEX close on their website, which is ridiculous. But it’s happened for years, 27 years for me and I have been seeing it for 27 years where the attention given to a particular COMEX close one day or the other gets a little goofy, gets a little wacky. COMEX is just part of the equation, obviously on the cost part of it, but it is a romantic piece to building wire, so there is some pressure when COMEX goes down. Particularly when it’s as volatile as it was in June and you nailed it, there was more volatility in June than the other two months.

Greg Eisen

Got it. Going back to the last – the prior caller’s final question, the year-to-year growth in markets, I didn’t get the last number, you said the six-month year-over-year change for residential that was flat and commercial was up, what was your number, 12%?

Frank Bilban

Yes. It was, yes, 12%.

Greg Eisen

Okay. I heard that right. Okay. Moving on, can you comment or are you willing to comment on trends and prices and what’s happened in the market both of cost price and the selling price since the end of the quarter? It’s been just about a whole month now. What’s July been like?

Daniel Jones

I would love to, Greg, but I really need to stick to just the second quarter on this call.

Greg Eisen

Understood, understood. And then again following up on the prior question about the utilization of the aluminum plant since you completed your expansion, you said you are running full bore, but it sounds like you are not at what we’d call full capacity, which I guess that would be 85%, maybe 90% of theoretical capacity? Am I correct in understanding you are not at full capacity yet in terms of utilization?

Daniel Jones

That’s correct. We have some built-in flexibility by design. One of the things we take significant pride in is our fill rate. So, to actually calculate what the capacity would be, we are running about 4.5 to 5 days depending on the complexion of an order, if something comes in that we may or may not have completed on the floor that moment, we will go ahead and run part of the weekend, if necessary, but there is quite a bit of built-in flexibility from production standpoint capacity wise, but we are running basically 5, 5.5 days in that plant, which is really good.

Greg Eisen

On just one shift though?

Daniel Jones

No, sir, we run around the clock.

Greg Eisen

You run around that?

Daniel Jones

Yes.

Greg Eisen

Got it. Okay, I will let someone else go. Thank you.

Daniel Jones

Thanks a lot, Greg.

Operator

[Operator Instructions] Our next question comes from Bill Baldwin from Baldwin Anthony Securities.

Bill Baldwin

Yes, good morning Daniel and Frank.

Daniel Jones

Hey, Bill. How are you, sir?

Frank Bilban

Hi, Bill.

Bill Baldwin

I am doing fine. Thank you. Daniel, have you seen a period in your many years with Encore Wire where the industry conditions have been such that volatility does not affect pricing discipline as much as it has here in recent times?

Daniel Jones

In the past, Bill, I mean, copper was much different, it was below $1. If it moved $0.05 in a day, it closed the market down on COMEX. And then after it ran out to about $4 a pound that changed to $0.20 on the upside or to the downside, so a $0.40 swing. Now that it’s back down to $2 and $0.20 that hasn’t been adjusted, so the oddity that occurred in June was there were four or five days that we are a swing of $0.05 in COMEX changed from the prior day. That gets too much attention, because everybody in the industry that I am aware of, from a manufacturing standpoint, buys on a month-to-date average.

So, the attention given – I think the part that I would give credit to that I think is temporary that was in June, there is just too much sensitivity to that $0.04, $0.05 swing from one day to the next. Building wire process should not swing like that. We have seen in the past and as we saw little bit in June, we have got a couple of competitors that will operate their sales desk similar to a trading desk looking at possibly or potentially looking at speculation obviously, but looking at volume, As the volume moves one way or the other, it’s not a panic, but it’s an instant change back to an old price. Justification in their mind evidently would be COMEX closed for that day. I have seen in the past – the good thing about the June volatility was that only lasted a day or two. And then it would come back up and you start to process all over again. So from that perspective, yes, I have seen it, but the instantaneous idea of cutting prices back to a level below where they left prior to an increase, that’s a little immature. And from a business standpoint, which you just would prove it’s not their money or they wouldn’t be as anxious to cut prices, but again, right in the teeth of the cutting, the next day when you would get a close of $0.05 or $0.06 on the upside, it would force a little bit of discipline. So, I have seen it off and on over the years, just not that quick. The trading in the copper in June of again repeating myself, the 6 or 7 swings of $0.05 or more that was a little bit odd.

Bill Baldwin

Well, it just been – at this stage, I know we are not in great times in the construction cycle, but we have seen a recovery off the lows. It would be nice to see some discipline started showing up among some of these folks that hopefully we would be trying to maximize profits over...

Daniel Jones

Yes, it will happen. Listen, last week, we heard the politicians tell us they are going to fix it and then all of this week’s platform we have heard the same thing.

Bill Baldwin

That’s right. Go take that to the bank, Dan.

Daniel Jones

Whomever gets in, it’s going to be fixed is what I heard.

Bill Baldwin

On the aluminum side, I just wanted to get your feel percent of sales in the aluminum side were a little bit lower here in the second than the first. Is there any – and then the volatility or the spread was much more volatile to the downside, the second quarter than the first. Is there anything going on there that – other than just temporary you think for the second quarter versus what we have seen previous? We just haven’t seen that kind of volatility, I don’t think in aluminum spreads that I can recall?

Daniel Jones

Right. You don’t typically see, as you mentioned, the spread on the aluminum part is typically not as volatile. And concerning the volume, we are happy with the aluminum expansion and where we are at in that process. I think more than anything the jump of copper volume is what led to the overall percentage of aluminum not being as great. But the actual aluminum piece standalone is going very well and we are happy. We had a little challenge from not really a contender but a pretender in that market in April, but that was a very short-lived attack. And that I think has ran its course and hopefully they are sold out for a while and it’s what we think and it’s back to business as usual in aluminum, which for us has been very positive. May and June were very solid for aluminum.

Bill Baldwin

So you are happy with your fill rates at aluminum and your ramp up on the operating efficiencies and so forth in that plant?

Daniel Jones

Yes, sir. We – sitting here today, we have not been in a better position ever as far as aluminum goes. It’s….

Bill Baldwin

Okay. Now don’t you have fewer competitors in the aluminum building wire business domestically than you do in the copper building wire?

Daniel Jones

That’s correct, yes, but there is – yes, the answer will be yes.

Bill Baldwin

Now, I don’t think I have ever explored this, but on the aluminum building wire, our imports – any kind of a factor in the aluminum building wire business?

Daniel Jones

Yes, a little bit.

Bill Baldwin

More so than in copper?

Daniel Jones

Correct. More so in April also than May and June.

Bill Baldwin

Is that something that’s been around for a long time, Daniel or is that kind of relatively new over the last year or two?

Daniel Jones

It’s been around. It’s been around off and on. That’s a hot and cold, very unreliable source for aluminum, but it can’t be in there in one particular month or another as we saw in April. But for the most part, it’s not a huge influence from the market one way or the other, lot of unfulfilled promises there. Prices, it’s price and delivery.

Bill Baldwin

That’s all in they can compete on is price, they can’t compete on service I wouldn’t think at all.

Daniel Jones

Yes, that’s where we are at, yes.

Bill Baldwin

Okay. Well, thank you for your time. Take care.

Daniel Jones

You bet. Well, thank you. Appreciate the questions.

Frank Bilban

Thanks, Bill.

Operator

Thank you. And we have no further questions in the queue.

Daniel Jones

Well, Jason, we appreciate you handling the call and I appreciate our folks that called in and listened and the questions that came up in support. We look forward to talking to guys again in October.

Operator

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

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