Encore Wire Corp (WIRE) 2017 Q1 法說會逐字稿

Welcome to the Encore Wire first quarter earnings conference call. My name is Adrienne, and I'll be your operator for today's call. (Operator Instructions) Please note, this conference is being recorded. I'll now turn the call over to Daniel Jones, Chairman, President and CEO. Mr. Jones, you may begin.

Yes, ma'am. Thank you. Good morning, ladies and gentlemen, and welcome to the Encore Wire Corporation quarterly conference call. As mentioned, I'm Daniel Jones, the President, CEO and Chairman of the Board of Encore Wire, and with me this morning is Frank Bilban, our CFO.

We're pleased with our improved results in the first quarter. There are some key items to note. Net sales dollars increased significantly comparing to the first quarter of 2017 to both the first and fourth quarters of 2016. The increased top line was driven primarily due to both higher copper raw material prices as well as increased unit sales volumes. Unit volumes were up 8.1% in copper pounds shipped and 7.8% in aluminum pounds shipped versus the first quarter of last year. Unit volumes were up 10.4% in copper pounds shipped and 0.4% aluminum pounds shipped versus the fourth quarter of last year.

Margins increased in copper wire sales but declined in aluminum wire sales. 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 increased 7% in the first quarter of 2017 versus the first quarter of 2016, while remaining almost flat on a sequential quarter comparison. The copper spread expanded 7% as the average price of copper purchased increased 22.6% in the first quarter of 2017 versus the first quarter of 2016 and the average selling price of wire sold increased 16.9%. The percentage change on sales is on a higher nominal dollar amount than on purchases and therefore spreads changed on a nominal dollar basis.

Aluminum spreads were down 15.9% in the first quarter of 2017 versus the first quarter of 2016 and 7.6% sequentially. The margin changes were due primarily to the competitive pricing environment in the industry.

Copper spreads improved in the fourth quarter of 2016 and held through the first quarter of 2017. It appears that the industry consolidation of a copper competitor, took place last year and damaged margins in the second and third quarters of 2016, may be resolving itself.

On the aluminum side, however, there were a couple of small competitors importing aluminum wire and selling it at below-market prices. We understand the government's looking into this import activity, and we also have a financially stressed competitor who appears to readily follow these low-priced competitors. We believe both of these factors have contributed to the unsettled pricing environment and impacted our spreads negatively.

We continue to strive to lead and support industry price increases in an effort to maintain and increase margins. We also believe our superior order fill rates continue to enhance our position as our electrical distributor and customers are holding lean inventories.

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 believe our performance is impressive, and we thank our employees and associates for their tremendous efforts. And we also thank our stockholders for their continued support.

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

Thank you, Daniel. In a minute, we'll review Encore's financial results for the quarter. After the review, we'll take any questions you might have. Each of you should have already received a copy of our press release covering Encore's financial results. This release is available on the Internet, or you can call Denis McCarthy, at (800) 962-9473, and we'll 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 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, is posted on www.encorewire.com.

Net sales for the first quarter ended March 31, 2017, were $279.4 million compared to $225.5 million during the first quarter of 2016. Copper unit volume measured in pounds of wire -- of copper contained in the wire sold increased 8.1% in the first quarter of 2017 versus the first quarter of 2016. Aluminum unit volume was up 7.8% in the first quarter of 2017 versus the first quarter of 2016. Aluminum building wire sales constituted 8.7% of net sales for the first quarter of '17 versus 10.5% in the first quarter of 2016. The average selling price of wire per copper pound sold increased 16.9% in the first quarter of 2017 versus the first quarter of 2016, driving the 26.5% increase in net sales dollars.

Copper wire sales increased primarily due to the higher price of copper purchased, which increased 22.6% versus the first quarter of 2016. Net income for the first quarter of 2017 was $13.6 million versus $8.6 million in the first quarter of 2016. Fully diluted net earnings per common share were $0.65 in the first quarter of 2017 versus $0.41 in the first quarter of 2016.

On a sequential quarter comparison, net sales for the first quarter of 2017 were $279.4 million versus $239.2 million during the fourth quarter of 2016. Sales dollars increased due to a 10.4% unit volume increase of copper building wires sold combined with a 7.6% increase in the average selling price per pound of copper wires sold on a sequential quarter comparison.

Copper wire sales increased, primarily due to an increase of 12.4% in the price of copper purchased. Net income for the first quarter of 2017 increased to $13.6 million versus $11.4 million in the fourth quarter of 2016. Fully diluted net income per common share was $0.65 in the first quarter of 2017 versus $0.55 in the fourth quarter of 2016.

Our balance sheet remains strong. We have no long-term debt, and our revolving line of credit is paid down to 0. In addition, we have $86.5 million in cash on the balance sheet at the end of the quarter. We also declared another 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 (888) 843-7419 and enter the conference reference number 6825014 and the pound sign, or you can visit our website where we will have a link.

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

Thank you, Frank. As Frank highlighted, Encore performed well in the past quarter, and we believe we're well positioned going forward. Adrienne, we'll now open it up to questions, please.

(Operator Instructions) And the first question is from Roresa Mojo from D.A. Davidson.

So it seems that competitor pressures in coppers is starting or seeming to ease. Can you talk about that a little bit more, and see what's going to happen in the future with that?

Well, I need to stick to first quarter results, but what occurred in the quarter was we had a pretty consistent COMEX price. We had some sorting out of the posturing that went on in the last couple of quarters with a competitor or 2, and things have seemed to kind of stabilize a little bit. We had good construction numbers, a lot of positive things to report in the first quarter that led to more discipline on the copper building wire side.

Is there any way that you would recommend that we look at the drag of the aluminum margins?

Well, the aluminum scenario, there's a lot of information behind what's going on in aluminum right now. But as we stated in the press release, the easiest way to describe it is there's a couple of competitors that have been importing aluminum building wire products and disturbing the market without any type of business reason to do so. I mean, for example, if you look at Midwest aluminum benchmarking, aluminum consistently rose through the first quarter, and the benchmarking that we do on prices in the marketplace declined over the same time period from those 2 competitors. And it was substantiated by a third competitor that has a little bit more clout in the marketplace. And when that occurs, typically, everyone catches the disease somewhat. But there's some good news in the press this week about industry associations are digging into the issue, accumulating data and presenting it to the appropriate folks. And I just saw, I think it was yesterday or maybe the day before, where the President signed an order for Secretary Ross to dig a little deeper. So there's a lot going on with aluminum right now. On the flip side, the aluminum plant, for us, is running fantastically well. It's never ran better operationally. Things are going super well. As the aluminum tightness comes back, going forward from a raw material standpoint, we think we're in a great position to take advantage of that. So hopefully the worst on the aluminum is behind us.

And is there any color that you could give on what distributors and contractors are saying?

As far as business going forward in general or overall?

Yes, overall.

Yes, I mean, the quote process that we go through is pretty rigorous on the data that we collect. And the customers that we're with and both contractors come in with distribution. Everybody is very busy. Their books are full. Again, data centers, all of the schools around the country, in some -- one fashion or another, whether it be public, private, higher education, there's hospitals, pretty much every segment is staying pretty busy on the construction front. And our contractors and distributor friends are telling us that they're very busy.

(Operator Instructions) And we do have a question from Bill Baldwin from Baldwin Anthony.

Okay. Dan and Frank. Dan, I wanted to see what insider color you can provide from the standpoint that you've created a capability on the aluminum building wire side similar to what you had on the copper building wire side in terms of deliverability, timing, orders delivered complete, 100% accurate. It sounds like these competitors are in no way able to meet that kind of a standard. I just wondered if you're able to have those conversation with clients to let -- to get some recognition for the tremendous investment you've done here to really enhance their ability to operate with lean inventories. I mean, these guys, there's no way they could operate with lean inventories the way they do if they had to depend on these other folks for their aluminum building wire. They'd be out in the cold.

Right. And Bill, as you know, we've gone through this in the past on the copper side and armored cable side. And it's really not a new challenge on the aluminum side. It kind of comes and goes. But our consistency on the delivery and fill rate is rewarded in the field. But again, when you have competitors that will irrationally quote something below material costs, there's guys out there who will take advantage of that. And then, you'll get a substantial competitor in that market segment that will honor or meet or emotionally react or whatever it might be, it certainly could not be playing with their own money or they wouldn't do it, but in that scenario, it pulls the entire market down. The good thing about what's occurred is it's so visible and so irrational, you provide data to industry associations that are set up and they're in place to help with these types of situations, specifically the imports that are coming in from China on aluminum, it's a short-lived scenario. It's very disruptive. We don't like it. We had a phenomenal quarter in spite of it. But having said that, to your point, we do and are able to hang on to customers and a little bit of a premium in the market, specifically related to our lead times and deliveries. And as you indicated, we make a pretty strong pitch to the folks that we're selling and try to hang on to a 1% or 2% type premium.

Well, I know you do. I mean, you guys have done a heck of a job in your operation there. And I guess, I was just a little bit surprised that there's -- I mean, I understand business and how business works, I think, but when you look at long-term sustainability of their business, there's no way -- there's just no way that, that sustainability is going to be sustained by dealing with folks that are operating the way these guys are. It's only going to be sustained by having a strong relationship with Encore Wire. And I would think that, that realization would at least allow them to understand, "Hey, we got irrational pricing here, and it's not going to be sustained long term, so let's work with Encore as we go through this thing." It just seems to me the right thing to do and the -- business-wise, the best thing to do, long term, for them. But I guess not. I guess they just go with the flow here and take advantage of any disruptions they can to get the best price they can get for the time being.

Well, occasionally, and you're right. And it sounds like you're -- you've been on one of our sales calls with us. But that is what our pitch is, and the disruption will be temporary. A couple of the competitors that are doing some of the things that clearly don't make any sense, it's a short-term opportunistic scenario and it'll pass. Again, they're not even significant manufacturers (inaudible).

I didn't think they were. No. Let me ask you this, Dan. I don't have the answer to this. I should, I guess. But how many domestic competitors do you have in the aluminum building wire business? I've got a pretty good handle on the copper side, but are there as many competitors on the aluminum building wire side as there are on the copper? My sense is there's not, but...

No, there's not. I would say we have 3 or 4 aluminum competitors domestically, and then we have 5 to 6, maybe 7 competitors on the copper side. It'll pass. Listen, we had a great quarter in spite of it.

It was. It's heck of a quarter. I'm not complaining about the quarter. I'm just a little -- I guess, just voicing some frustration about the short-term, myopic view of some of your customers towards the aluminum building wire relationship they have with Encore. Certainly not a long-term view, it's short term, and I think that's unfortunate.

No, you're right. You're right. Starting in 2014 with this thing, and rolling like luck we have been, we expected pricing pressure at some point from somebody. We just didn't think it would be a China imported dumping scenario-type thing or whatever it ends up being, and that's -- but I really believe, though, we're situated to take advantage of it, coming out the other side...

Oh, no question about that.

Yes. The factory, the plant, everything is set up. And more importantly, we have the right people in the right spots to take advantage of it. So I think it's going to be a good thing.

No. You guys have done a heck of a job. No question about it, and that's not the nature of my commentary here.

No, no. I got you. I hear you.

And our next question comes from Eric Marshall from Hodges Capital.

I was wondering if you could give us a little bit of an idea when you talk about some of the recent consolidation that has occurred on the copper building wire side. If you could give us an idea of what percentage of the top 3 players out there now control what percentage of the market, and if some of the less rational behavior out there was more -- had to do with inventory liquidations from these distressed players out there, or if it was from the lack of higher cost capacity coming off-line as we anticipated.

Yes, great question, Eric, and good points. What we're seeing in the market from the last quarter, the consolidation piece, it was very chaotic, very disrupting. There was different reps in one market with competing lines and with the same owner. And one rep in the same market with both lines, and they're going to change brands on this drop-dead date, and then they didn't -- all of this back and forth, whatever. But in the quarter, while all of that was being sorted out for whatever reasons, business was good. So with business being good, and copper basically flat in the quarter at about $2.64, whatever it ended up, COMEX-wise is maybe $2.65, in that range. It's relatively flat. Price increases went through okay. And the business was good enough to force some discipline in the market from a service standpoint. The price-cutting thing and no delivery is not -- it's not substantiated. You have to have both. You can't have one-or-the-other type deals. So as you know, our story, we pushed the delivery piece and worked very hard on the higher price as opposed to -- I think, this month is 28 years for us here, and we've never had a down year in market share. Which leads to your other part of the question. I think the top 2 or 3 guys in the copper building wire market are somewhere between 60% and 70% of the overall market.

Okay. So the conditions are now in place to have a much more rational market, we just haven't seen that fully materialize yet. Would you say that -- the first month of the second quarter, has it been more rational than the first quarter or would you say it's been about the same? Or less rational?

As opposed to the first 3 months of the year...

Yes, but I mean, just directionally, does it think -- does it feel like it's more rational or less or about the same?

It feels about the same on the copper piece, and it feels better on the aluminum piece. We're seeing some signs that are good. But again, in the first quarter, on the copper piece, COMEX itself was relatively flat, which is good. Now we had some ups and downs during the months of where COMEX closed and where it didn't. There were a lot of jobs that finished up and tremendous amount of quotes to go forward with in the first quarter. There's some forced discipline on the delivery piece, as I mentioned. There's actually some jobs that were wrapping up that had deadlines to meet and what have you that maybe a competitor or 2 cut the price to get and couldn't make the delivery. We were able to step in at somewhat of a premium and kind of snatch some of that stuff up. But that's all normal routine stuff when business is good. When things slow down is when you have an issue. We didn't have that in the first quarter. It was a pretty brisk pace for the copper market. Aluminum started to kind of rally toward the end. I think it was a really solid quarter in all aspects. And most of the distributor customers that we see, and we have them in here or we're in the field with the customers frequently, they're busy. Their books are full. They're hiring people. They're focusing on delivery, which is helpful. We have to be competitive, but it just -- it's just hard to fathom for somebody that we compete with to cut the price to get an order and then deliver -- not deliver all the material. That's foreign to us, but that's what we deal with. It -- listen, it's been this way though for a lot of years, and we think we've got it down. We think we're good at this.

On the aluminum side, you guys mentioned imports from China. I don't think I've ever heard that much about imported aluminum wire from China before. Is that something that's relatively new? Or is that -- have we seen that in previous cycles?

We've had it before. It could be aluminum of any shape or form. It ends up being building wire or what have you, which is what we're concerned with is just the building wire piece. But we actually have had some imported finished goods hit the market from China and a couple other places, and it's very disruptive and chaotic. And while there is a surplus of aluminum in other countries, obviously, this is the first market that they will try to capitalize on. And that's not uncommon with steel or any other product categories, we'd guess. But in that scenario, when things tighten up, those issues kind of take care of themselves. And that's kind of where we were at toward the end of the quarter. And that's the feel. Nothing factual yet, but that's the feel coming out of the first quarter.

Congratulations on the quarter and the last 28 years of doing the business.

Thank you. Appreciate it, Eric.

Thanks, Eric.

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

Just following on, if I could one more time, with the aluminum situation you described. Is it fair to say then that the problems that you faced in the first quarter, they've started to abate in the second quarter? Is that a fair statement?

I can't give you anything factual because I'm sticking to the first quarter, but the feel is things are better. Yes. The feel is things are better. Look, the -- it was bad enough that it's getting attention from industry associations. What can they do to help? Whatever. And it was a -- again, I think we've covered most of the topics, Greg. But specifically to -- it's a price-cutting scenario. When you pay $0.95 a pound for aluminum and process it into building wire, if you just take the cost of the materials, not -- whether or not you're a good operator or whatever, just cost of materials, you're challenged in the market when imports are being brought in and sold in the market below normal cost. And it typically flushes itself through. Something will occur outside the industry typically to correct it, and those things are starting to line up. And missed deliveries have consequences and all the things you could imagine, but in all of that chaos, it was -- March was better on aluminum than January. And I think it's -- I feel like it's getting better. It feels better.

Okay. And if I could ask, volumes themselves, overall, for you were pretty strong. Copper volumes, I think, is -- was that 8%?

Yes.

And I was modeling something below that. Kind of is it reasonable to think it's -- high single-digit volume growth is sustainable over the course of the year? Or should I be looking -- think -- assuming that maybe that's just a one-off and something more to a mid-single-digit sized growth is more reasonable for the industry and for you?

Well, that's a great question. We don't give guidance. And so as it pertains to the first quarter, you're exactly correct. As it's going to be going forward, it currently feels like, from talking to our customers in the field and what we're seeing and the indicators that we watch, things are going to be good. If that's single digit or whatever it ends up being, it's going to be tough to end up on an exact number. But the range will be similar to what you saw in the first quarter is how we see it today -- factually as we see it today.

And our last question comes from Brian Gibson from Raymond James.

Dan and Frank, it's nice to see a couple quarters ago, you made 40-some cents; in the last quarter -- or 2 quarters ago, you made 50-some cents; now it's $0.65. And the last couple callers -- I'm just really drilling down, I mean, you answered my questions in the last couple of callers. But a year ago on your press release, you said something like, "That our people out on the field -- talking to our people out in the field, we believe there's a fairly good outlook." Now you're saying there's a good outlook. So how -- I've heard that there's -- the housing market's tight. There hasn't been a lot of building going on since the Great Recession in '08 for residential housing. Is that -- how much of an impact is that going to have? And -- but basically, you guys already answered the questions when you said you feel good about things, and it appears to me that you're more bullish on the future going ahead at this point.

Brian, that's correct. The only thing that I would just talk through with you is, from the housing start comments, I don't think that I've been inconsistent when I tell you that I think 1.2 million starts is a fair number. We were down to 300,000 or 400,000 starts in '08, '09 range, so it's back up over 1 million now. And I think, if it goes to 1.5 million or 2 million starts, I think that's too many. So that's the only way I can answer the housing question other than, cyclically, as the housing number moves one way or the other, there's other construction numbers to look at. It could be multi-family, it could be the commercial industrial picking up in one or the other. Because as you know, when a neighborhood goes up, all the support construction happens right after and follows. It could be amusement parks, it could be gas stations, movie theaters, stores, restaurants, whatever it might be. And in that scenario, over the years, what we see today that's been consistent is still the growth of the school buildings and expansions on college campuses, public and private schools, adding hospital expansion. The retail piece in certain markets is expanding. So the things that are attracting people to an area are also the things that occur after the original surges hit. And a lot of people, specifically with kids and what have you, what their values are and what they're not. And you have whatever data you collect on different movements around the country from one state to the other. Texas is still hammering away, and there's pockets around the U.S. that are having pretty strong residential numbers and growth. And the balance comes from some of the other states. They're not doing as well residentially, but they may be doing well commercially or industrially. So the numbers just -- you can kind of get bogged down with those occasionally. There's a few indicators that we watch in-house, and those are the things today that contribute to me being very bullish.

We have no further questions at this time. I'll turn the call back over for final comments.

All right, Adrienne. Well, thank you for handling the call. And I appreciate the questions and the interaction and you guys calling. Look forward to talking to you guys results of the second quarter. Thank you.

Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for participating, and you may now disconnect.