Encore Wire Corporation (NASDAQ:WIRE) Q3 2021 Earnings Conference Call October 27, 2021 11:00 AM ET
Bret Eckert - Chief Financial Officer
Daniel Jones - Chairman, President and Chief Executive Officer
Conference Call Participants
Julio Romero - Sidoti & Company
Brent Thielman - D.A. Davidson
Bill Baldwin - Baldwin Anthony Securities
Good morning and welcome to the Encore Wire Reports Third Quarter Results Conference. My name is Brandon and I'll be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] Please note, this conference is being recorded.
I will now turn it over to Bret Eckert. And you may begin, sir.
Thanks, Brandon. Good morning and welcome to the Encore Wire Corporation quarterly conference call. My name is Bret Eckert, Chief Financial Officer of Encore Wire. With - me this morning is Daniel Jones, President, CEO and Chairman of the Board. In a minute, we will review Encore's financial results for the three months and nine months ended September 30th, 2021. After the financial review, we will take any questions you may have.
Before we review the financials, let me indicate that throughout this conference call, we may be making 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 the actual results to differ materially from those discussed 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 our website.
I'll now turn the call over to Daniel for some opening remarks. Daniel?
Good morning, everyone. Thank you for joining us on the call. If you're interested in Encore Wire, we appreciate your continued investment and confidence to support. The health and safety of our employees and their families remains our top priority. And we're following CDC guidelines and maintaining safe working conditions, while we continue to serve our customers.
The strong earnings in the third quarter ended September 30th, 2021 are a testament to the grit and determination of our employees to serve our customers coupled with exceptional performance of our suppliers and vendors. We remain laser-focused on fulfilling the core values of our company.
Unbeatable customer service, nimble operations and quick deliveries coast-to-coast. Encore is one location vertically integrated business model, strong management team and deep raw material supplier relationships have allowed us to remain fully operational, while maintaining our high standard, fulfill rates to meet customer demand.
By continuing to adapt to the evolving needs of our customers, we were able to increase copper volumes, so both over the third quarter of 2020 as well as on a year-to-date basis over 2020 comparative levels. We believe we can sustain this volume growth compared to prior period levels for the remainder of 2021.
Copper unit volumes increased 7.9% and 13.3% for the three month and nine-month periods ended September 30th, 2021, compared to the commensurate periods in the prior year. Comex copper prices remained fairly stable throughout the quarter before pulling back slightly to end the quarter. However, all other raw material cost continue to rise during the quarter.
The upward volatility positively impacted and supported current market spreads. Copper spreads increased 181.1% on a comparative quarter basis and a 155.1% on a year-to-date basis. We believe Encore Wire remains well positioned to capture market share and incremental growth in the current economic environment.
As we address the near-term challenges, we remain focused on the long-term opportunities for our business. We believe that our superior order fill rates and deep vertical integration continue to enhance our competitive position. As customers - as orders come in from electrical contractors, our distributors can continue to depend on us for quick deliveries.
I'll now turn the call over to Bret to cover our financial results. Bret?
Thank you, Daniel. Net sales for the third quarter ended September 30th, 2021 were $716.3 million, compared to $339.7 million for the third quarter of 2020. Copper unit volume measured in pounds of copper contained in the wire sold increased 7.9% in the third quarter of '21 versus the third quarter of 2020.
Gross profit percentage for the third quarter of 2021 was 37.8%, compared to 15.7% in the third quarter of 2020. The average selling price of wire for copper pound sold increased 95.5% in the third quarter of '21 versus the third quarter of '20. While the average cost of copper per pound purchased increased 48%.
Net income for the third quarter of 2021 was $175.5 million versus $21 million in the third quarter of 2020. Fully diluted net earnings per common share were $8.51 in the third quarter of 2021 versus $1.02 in the third quarter of 2020. Net sales for the nine months ended September 30th, 2021 were $1.905 billion compared to $896.1 million for the nine months ended September 30th, 2020.
Copper unit volume measured in pounds of copper contained in the wire sold increased 13.3% in the nine months ended September 30th, 2021 versus the nine months ended September 30th, 2020. Gross profit percentage for the nine months ended September 30th, 2021 was 33.2%, compared to 15.1% for the nine months ended September 30th, 2020.
The average selling price of wire per copper pound sold increased 91% in the nine months ended 2021 versus the nine months ended September 30th, 2020. While the average cost of copper per pound purchased increased 55.6% for the same period comparison.
Net income for the nine months ended September 30th, 2021 was $399.8 million versus $52 million in the nine months ended September 30th, 2020. Fully diluted net earnings per common share were $19.31 in the nine months ended September 30th, 2021 versus $2.51 in the nine months ended September 30th, 2020.
Aluminum wire represented 9.1% and 7.5%, respectively of our net sales in the quarter and nine months ended September 30th, 2021. Aluminum wire volumes have increased for both the quarter and nine months ended September 30th, 2021, compared to the comparative periods in the prior year. The favorable market conditions in the third quarter and nine months ended September 30th were driven by rising raw material prices and continued demand for our products.
In addition, production challenges across the sector, including - inconsistent access to raw materials, disruptions in the distribution network and access to skilled labor created unique market conditions in the second and third quarter of 2021. We expect these conditions will abate in the future, but we are unable to predict the timing of that abatement or whether such abatement will be gradual or abrupt.
Our balance sheet remains very strong. We have no long-term debt and our revolving line of credit remains untapped. In addition, we repurchased 393,379 shares in the open market during the quarter and declared a $0.02 cash dividend. Our two-phased expansion plans announced last year remain on schedule.
The new service center opened in mid May and is fully operational today. Phase two, which is focused on repurposing our now vacated distribution center to expand manufacturing capacity and extend our market reach is on schedule for an early 2022 opening. As announced in July 2021, current market conditions have afforded us the opportunity to accelerate our capital expenditure plans and incrementally invest across our campus.
We believe these investments will broaden our position as a low-cost manufacturer in the sector and further increase manufacturing capacity to accelerate growth. The incremental spending in 2021 through 2023 will expand vertical integration in our manufacturing processes to reduce costs as well as modernize select wire manufacturing facilities to increase capacity and efficiency.
Capital expenditures are now expected to range from $115 million to $125 million in 2021, a $150 million to $170 million in 2022, and a $120 million to $140 million in 2023. We expect to fund these investments with existing cash reserves and operating cash flows.
I will now turn the floor over to Daniel for a few final remarks.
Thank you, Bret. The results in the third quarter ended September 30th, 2021 further attest to the strength of our one-campus, vertically integrated, low-cost business model, which has proven successful since inception and is thriving under the current market conditions. We remain focused and nimble, adapting to changing customer needs and fluid market dynamics.
Throughout the third quarter of 2021, sales prices and margins remained strong as we - successfully navigated raw material price volatility and availability challenges. Our steady, enduring relationships with suppliers and vendors positioned us favorably in the market, allowing us to maintain our overall low-cost structure.
Let me take a brief moment to recognize our employees and associates for their hard work. Perseverance and hustle during these unprecedented times. Our performance this year could not have happened without their extraordinary efforts and contributions. These results have allowed us the opportunity to incrementally invest in our team as we continue to position Encore as an employer of choice in the sector. I'll also want to thank our stockholders for their continued support.
Brandon, we'll now take questions from the listeners.
Thank you, sir. We'll now begin the question-and-answer session. [Operator Instructions] And from Sidoti & Company, we have Julio Romero. Please go ahead.
Thank you. Good morning, Daniel and Bret.
So my first question would be on pricing. Can you speak to the selling prices you realized as you exited the September quarter and maybe talk about if selling prices as you exited the quarter were you know higher or lower than the overall quarter average?
You want to take that one, Bret?
Yeah let me - I'll start and then I'll jump to you if that works for you. Julio, great question I think as you navigated through the quarter and we had said in the last call we felt that you know margins probably peaked in June and I stick with that statement, although. It was gradual if you looked at what copper did overall during the quarter, I think that aligned pretty consistently what sales price had done over the quarter. So it was fairly steady with the gradual change from the peak in June.
Okay. I was hoping you could speak to the competitive environment a bit. You know obviously the reliability piece is working well for you guys. I mean, is there a sense of urgency for some of your other competitors to maybe try to improve their reliability or is that just not the way that they operate?
You know, the overall market, Julio is still dealing with quite a few challenges as far as you know labor shortages throughout the industry. There's persistent supply chain issues you know, the input cost across the Board are up and then to speak just a little bit to the you know pricing in the quarter you know when you start the month off and you could pick any of the three months of the quarter and you see the volatility as much as $0.35 or $0.40 a pound on just copper.
In the past you know obviously copper is the biggest or the easiest thing for both folks to track and what have you. But the pricing piece of it is more today and continues to be focused on the delivery side. And so when you look at what the competitors are doing or not doing you know we're more focused really on what we're able to do more than what they're doing in the market.
We've built some brand preference, if you will, as much as can be built based on the service piece. And that's where we're you know making it happen. I mean the execution at the distributor level and the contractor job side level is where we're making it happen. And you know quite frankly it's just not as hard of a topic to talk about what the competitors are doing or not doing at this moment. I mean, we're just you know we're just doing our thing and the execution is really where it's at.
Got it. So I guess maybe if I could ask that another way. I mean, if it - what part of the reliability value prop would you say is the most difficult for your competitors to replicate?
You know that's a - you know it's a deep question there. I don't know. I don't know what they're you know, I don't think it's any one issue for them to address really. I think they're all doing very well. I haven't heard of any you know complete shutdowns or walkouts or you know really haven't heard anything in the market that's leading to any issues that I could speak to. I think they're all doing very well.
You know, I'm sure they're writing orders and shipping and doing the things that they do. And you know it's a pretty robust market for the residential piece as you know and you know as that starts to kind of maybe drift for toward more normal numbers. You know it's time for the commercial to take off and the industrial piece has been pretty strong with you know crude oil coming back to about $80. I don't know specifically what to tell you. I don't have anything bad to say about any or nothing, they're all probably doing real well in this market.
Okay. I guess just last one for me is you know it was very nice to see you, you know, repurchased some shares at these levels. If you could give us a quick refresher of you know how you think about your purchases and then more broadly a refresher on your overall capital allocation priorities.
You want me to take that one, Daniel?
So just kicking it off, Julio, great question. You know as we said before, you know when we look at our - highest and best use of cash you know we continue to look towards three triggers and first is CapEx you know can we take out costs from the system or from the process and/or can we expand manufacturing capacity and efficiency. And so that's continued - that's what we've done from the very start in inception and how this campus was built under Daniel's leadership and that's the continued focus today.
You know the next step would be looking at you know in no particular order, share repurchases you know and then something with the dividend. Those really are the three uses of cash that we've always focused on given the fact that we've never done an acquisition in our history. As you - was disclosed in the 10-Q, we had authorized through the Board, it's in the 10-K as well for the repurchase of up to 1 million shares I think that authorization expires in March of 2022.
Okay. Very nice quarter, gentlemen, I'll hop back in queue.
Appreciate the support.
From D.A. Davidson, we have Brent Thielman. Please go ahead.
Thank you, good morning. Hey, Daniel, maybe on the supply and raw materials side. I mean, anything whether it's purchasing copper or resins or anything else that you use manufacturing process, are you see anything ease up for you, in particular right now? Or is it - it's all pretty tight?
You know it's better than it was, but there still pockets of you know obviously challenges to get things in here. You know as we mentioned in the prepared remarks, we've got a fantastic purchasing department and they're very good at what they do. We've built relationships over many years. And you know we rely on it and push it and you know all those things and then you know one of the things that you know sticks out is on the supply chain execution piece.
You know, we're really good at matching each quote real-time, we're you know, our personality is not to put a price out there and wait and see what happens. Every quote that comes through is a real-time quote that we're matching up to the moment. You know supply chain cost increases you know a penny here or a penny there you know aluminum I think year-to-date it's up almost you know $0.60 a pound and natural gas is doubled. Plasticizers up $0.40 or $0.50 a pound and the - everything that we touch you know diesel is up $0.60, $0.70 a gallon. Everything is more expensive, Brent.
So it forces discipline in this industry which you've heard me say before. You know you can dillydally with some quotes and put a price out there and leave it for a couple of days if you want to, but in this market that's not what we do and it doesn't work for us. You know, the challenge each day of getting raw materials in here and you know down to you know shipping expensed items, stretch film, pallets, reels, you know whatever it might be, we're just super attentive to detail, we've got a fantastic team, we've got one-campus you know and you just do what you got to do to get the stuff in here and you know, it's not a roll your sleeves up and get after it you know.
Bret and I had spent you know part of our time during the day chasing things down and making certainly get here. You know spare parts for equipment, anything you can think of, propane for the forklifts, whatever it might be. So it's a team effort you know and again, you know, we go in and try to support the purchasing team and see what we can do to help. And you know quite frankly with our balance sheet and with our cash position, we're able to do some things that maybe other folks are not able to do and we take advantage of that.
Any chance that we can certainly don't mind spending money as long as it's going to lower cost or increase our service level where we can charge more. So it's a long answer to your question but the supply chain piece I think really what it comes down to you know again is that execution on matching up that supply side to that real-time quote.
Okay, I appreciate that, Daniel. When I - I guess when I look at the volume growth over the last couple of quarters, it's a little challenging I think from our side, because we had so much disruption a year ago when you tried to compare it. But then you've also got the service center investment which presumably is kind of helping you out right now too. And I guess maybe just take a step then, Dan - back, Daniel you know what - I mean what - how - what is the market feel like today? And what sectors are strong and driving the growth? How much is the service center investment sort of helping you today? I mean any you know qualitative commentary you can offer on that I think it would be really helpful.
Yeah, I mean the backlog and the quote volume remains you know remarkably high. And our success rate or hit rate on the quotes is fantastic. You know the residential market, I think will probably you know get closer and normal, but it's still a very robust market for us. You know and then again with you know crude being at $83 or so, whatever is a barrel that industrial sectors picked up pretty strong.
You know the commercial construction market even though I don't think you see it yet in some of the reports that are lagging maybe, you know as that commercial continues to gain some momentum. That's really a good use of some of our larger products and from a pounds' per foot standpoint. You know every market that we ship into seems to have some type of supply chain disruption. You know structural steel switchgear, we've even mentioned and experienced challenges for PVC raw materials. I mean everything we ship into is experiencing volatility with some forced discipline which is allowing us to you know execute and charge for it.
The - you know the solar or photovoltaic market is really hot right now. It's a good market. The utility market is you know gearing up obviously for grid upgrades. You know we're seeing you know, Brent, we're seeing good numbers come in really across the Board. If you had to pick one that was not as good as others, it'd be the commercial piece which is you know a veiled positive, because when it comes, it comes pretty quickly typically right behind that residential and industrial piece. And so really kind of across the Board we're seeing you know good things happen.
That's great. Daniel maybe a last question and I think I know what kind of answer I'm going to get here. But you've got a war chest here in terms of the balance sheet and probably going to get even bigger. I guess you know among the different things you're already doing right now in terms of putting money to work in the business. You know, are you evaluating some new sectors you spit off a few there on the utility side? Are the new areas that you're looking hard at that you're not in now that you know could present an opportunity now that you've got you know a balance sheet with so much cash on it that you could go after? Just any thought there would be great.
Yeah. It's like even sitting in the office up there with us or something, Brent. But yeah we're you know, we're pedaling as fast as we can and we've got our eyes on some stuff out in front of us. You know and you know moving as quickly as we can is the best way to put it. You know the key for any of these expansions, anytime we you know spend the money that we're spending is to lower cost or increase - maximize our service offering, all those things are very easily done. And the key is getting the right guy or girl in the right spot to make it happen. And so that's where we're at, things are going along great. We've had some fantastic additions to the team and that's probably all I should tell you.
That's great. Congrats on a tremendous quarter.
Yeah, appreciate your support.
[Operator Instructions] From Baldwin Securities, we have Bill Baldwin. Please go ahead.
Yeah. Good morning, Daniel and Bret. Fantastic execution again this quarter.
Thank you so much.
On your FX that you laid out, the 2023 was increased pretty materially. Is that kind of pulling things forward that have been originally scheduled for 2024 but due to the cash flow generation, you've decided to move that up to 2023? Is that kind of what's going on there? Just acceleration or perhaps longer-term plans coming in now to the three-year plan?
Yeah. I'll take that, Daniel. Bill, it's a great question. It really is just a little bit of balancing you know as we look out and we've got you know a list of projects. Obviously, we announced some of those in July. But as you kind of navigate that cash spend piece of it, you know, there's always those amounts that, is it going to hit you know in November and December or is it going to trickle into January, February. And so to get your estimates in and kind of clarify those based on lead times for machine orders, getting the right contractors in here for the work we need done. It was just a little bit of balancing from that standpoint. And so it's probably a little of both.
Okay, thank you.
Standing by for any further questions.
All right. Well, Brandon, you've done a great job. And I appreciate you folks calling in and supporting us and look forward to next quarter call. Thank you.
Thank you, ladies and gentlemen. This concludes today's conference. Thank you for joining. You may now disconnect.