Encore Wire Corp (WIRE) 2018 Q1 法說會逐字稿

At this time, I would like to welcome you to the Encore Wire first quarter earnings conference call. My name is Ellen, and I will be your operator for today's call. (Operator Instructions) Please note that this conference is being recorded.

I will now turn the call over to Daniel Jones, Chairman, President and CEO. Sir, you may begin.

Thank you, Ellen. I'm Daniel Jones, President, CEO and Chairman of the Board of Encore Wire. With me this morning is Frank Bilban, our Chief Financial Officer. We're pleased with our results in the first quarter with some key items to note. Net sales dollars increased in the quarter, driven primarily by the higher copper raw material prices. Copper margins increased strongly in the quarterly comparison for 2018 versus 2017.

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 10.1% in the first quarter of 2018 versus the first quarter of 2017.

The copper spread expanded as the average price of copper purchased increased 18.3% in the first quarter of 2018 versus the first quarter of 2017, while the average selling price of wire sold increased 15.6%. The percentage change on sales is on a higher nominal dollar amount than on purchases. Therefore, spreads change on a nominal dollar basis.

Unit volumes in the first 3 months of 2018 decreased 7.9% in copper pounds shipped versus the first 3 months of last year. We believe volumes were impacted primarily by rough winter weather that slowed construction projects, particularly in January.

U.S. economy appears strong, as is construction activity. We believe that some of our financially stressed competitors have struggled and acted erratically in what we consider a strong business environment.

Based on discussions with our distributor customers and our contractor customers, we believe there's good outlook for construction projects for the next year and beyond. We continue to strive to lead and support industry price increases in an effort to maintain and increase margins. We believe our fill rates continue to enhance our competitive position. As orders come in from electrical contractors, the distributors can count on our fill rates to ensure quick deliveries from coast to coast.

We believe our performance is impressive in this environment. We thank our employees and associates for their efforts. We also thank our stockholders for their support.

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

Thank you, Daniel. In a minute, we'll review the financial results for the quarter. After the review, we'll take any questions you may 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 as well, or you can call [Elizabeth Campbell] 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 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 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 first quarter ended March 31, 2018, were $291.4 million compared to $279.4 million during the first quarter of 2017. Copper unit volume measured in pounds of copper contained in the wire sold decreased 7.9% in the first quarter of 2018 versus the first quarter of 2017. The average selling price of wire per copper pound sold increased 15.6% in the first quarter of 2018 versus the first quarter of 2017.

Copper wire sales prices increased primarily due to the higher price of copper purchased, which increased 18.3% versus the first quarter of 2017. Net income for the first quarter of 2018 was $11.4 million versus $13.6 million in the first quarter of 2017. Fully diluted net earnings per common share were $0.54 in the first quarter of 2018 versus $0.65 in the first quarter of 2017.

On a sequential quarterly basis, net sales for the first quarter of 2018 were $291.4 million versus $301.3 million during the fourth quarter of 2017. Sales dollars decreased due to a 3.9% unit volume decrease of copper building wire sold offset by a 1.3% increase in the average selling price per pound of copper wire sold on a sequential quarter basis.

Copper wire sales prices increased primarily due to an increase of 2.2% in the price of copper purchased. The net income for the first quarter of 2018 was $11.4 million versus $28.5 million in the fourth quarter of 2017. Fully diluted net income per common share was $0.54 in the first quarter of 2018 versus $1.36 in the fourth quarter of 2017.

Our balance sheet is very strong. We have no long-term debt and our revolving line of credit is paid down to 0. In addition, we had $107.8 million in cash at the end of the quarter. We also declared another cash dividend during the quarter.

We want to remind you this conference call will be available for replay after the conclusion of this session. If you wish to hear the tape replay, please call (888) 843-7419 and enter the conference reference 66 -- 6783418 and the pound sign. Or you can visit our website where the call is available.

I'll now turn the call back over to Daniel Jones, our Chairman, President and CEO. Daniel?

Thank you, Frank. And as Frank highlighted, Encore performed well in the past quarter. We believe we're well positioned for the future. And Ellen, we'll now take questions from our listeners.

(Operator Instructions) Our first question is from Brent Thielman from D.A. Davidson.

Daniel, it sounds like January was more of an outlier for volume. Can you just talk a little bit about kind of the trends through the quarter? And I guess, kind of the second part of the question here, this down 8% for unit volume. I mean, is that representative of the market as you see it? Or is there a little more to it maybe from a competitive [standpoint]?

January clearly was the weak point as far as volume went, and sticking to Q1, it's not representative of the way business was or is going. I think it's the best way I can answer it. There were jobs that we had. We had the product. We were ready to ship. It's all sold. It's all buttoned up. Job sites were not physically able to take the material and/or physically able to get delivery to the job sites. So it was pretty significant. It was quite a bit of volume that we -- and again, we invoice when we ship, so the way the sales ran, clearly, January was an outlier.

And Daniel, is that mostly the Northeast or other areas of the country?

Well, we even had some in the state of Texas, believe it or not. There were some job sites that were too wet. There was too much water, what have you, but there really wasn't one specific geographic area. It seemed to be different pockets around the country. It could be -- we even had some mudslides. I mean, there was quite a variety reported back as to pushing those deliveries out. Cleanup. When our product enters into the construction cycle, that cycle is completely disrupted, so some of the job sites had to go backwards a little bit, and things were pushed out into as late as March and beyond March on some of those deliveries that were scheduled early.

Okay, okay. And then any status on the antidumping duties with respect to aluminum, I guess, particularly any sense of a time line there in terms of an announcement. Frank, do you have the aluminum wire sales as a percentage for the quarter?

Sure. Aluminum for the quarter was 6.8% of dollar sales.

On the tariff piece, Brent, the 232 that came out and then was amended and followed up with the 301, the attention immediately became from other industries that are impacted, in their mind, maybe negatively in some fashion, whatever. We're on the other side of that. We're all for the tariff to include insulated aluminum building wire. We've got 2 companies that we've talked about in the past on the calls, without naming them specifically, that continue to bring in product from China at well below raw material cost. We had an increase through the quarter per pound of aluminum and saw the price erode to near breakeven levels. That's not something that we're excited about. It's not something that's new. We went through this in the past. 14, 15 years ago, we had some issues in the markets but from China. It has to be dealt with. I think the correct industry associations, or there's some activity there. It seems to be pretty good from The Aluminum Association specifically. There's other organizations that represent a broad range of industry members that are not so quick to act in that direction, but we're clearly participating in providing factual information to the right associations to get this thing addressed. It's not positive for anyone. And it's really not even necessary. Business is really good in the U.S. Once the weather cleared, and as you guys probably know, aluminum typically favors outdoor installation versus under the roof of a house or a building. So there's a lot of things going on there that I think will clear themselves up in pretty quick fashion, but I appreciate the question on the tariff. Our position is we need to clean up this Chinese product that's being imported and passed right through with 0 value added into our industry on a daily basis.

Okay. I appreciate that color, Daniel. One more, Frank. Tax rate was higher than I was thinking about for the quarter. Is 24% what we should thinking about going forward?

Well that 24% is a compilation of the 21% federal rate and a 3% add-on for all the state and local taxes we pay to all the various jurisdictions we conduct business in, which was consistent with where we were last year. We had a federal tax rate of 35%, but the Jobs Creation Act, which we were a big user of that deduction, brought us down to about 30%, 31%, and then the 2% to 3% add-on got us back to 33%, 34%. So net-net, you got to the right place. Does that make sense?

Yes. I mean, you're thinking 24% going forward? Sorry.

I think that's about right. As far as we know at this point, yes.

Our next question is from Julio Romero from Sidoti & Company.

Just to follow-up on volumes. Would it be fair to say that you guys saw positive shipment growth in February and March?

Correct.

Okay, that's helpful. And in past quarters when you've seen the type weather impacts, does that missed volume just get pushed to the right of the calendar? Should we expect you to recoup that volume in subsequent quarters this year or...

That's exactly what occurs. Yes, that's exactly what occurs. Typically, it's when the -- it's in the first 45 to 60 days pushed out. Some will leak over in the next 30 days type thing. And the thing is, the product is purchased. It's ready to go, but again, we don't invoice until we ship it. We don't ship it until they can unload it. So in that scenario, 45 to 60 days out is typically when the volume gets pushed to.

Got it. And just switching over to aluminum. Maybe give us a sense on how price volume spreads trended in the quarter, at least directionally, if you can?

Yes, similar trends, but again, the aluminum volume piece is a big part of this story. There's some posturing in the market when a quote comes out. If it gets to the point where it's below breakeven for us in some manner, we may pass on it, right. So we're taking the orders that we feel our strategic for us to not lose out on the copper business, and then the -- some of the stand-alone aluminum type orders get beat up pretty good in the marketplace. We may choose to pass. There's an art to it, and there's a science. And unfortunately, we've got a couple of importers that are doing some things in the marketplace. They're super disruptive, and then occasionally -- but for the most part, I have to say, in the first quarter, the flip side of that is we had very disciplined business in the first quarter as far as copper goes. So the 1 or 2 guys that we compete with consistently from the copper standpoint that also ship and sell aluminum, very disciplined in the first quarter. It's not a -- I think it's a temporary situation on the aluminum piece. It just can't continue as it is based on someone importing, adding 0 value and just basically cutting price.

Got it. And just lastly as a housekeeping question. I think SG&A as a percentage of sales was up, I think, 120 basis points year-over-year. Anything unusual that drove that and maybe how you see that margin going forward?

Well, there was a couple of little things. One of them was freight. As a lot of people were talking about even at your conference, Julio, in New York, freight is up nationally, and we saw a -- on an apples-to-apples basis about a $0.07 impact of increased freight rates in the quarter. We saw a couple little things with stock options and a sale of some land we did last year that we didn't repeat this year that also added to the SG&A, but Daniel might want to add some color on the freight.

Well, the freight thing in the first quarter, again, the volatility in the market and getting trucks in and holding trucks that can't ship, can't deliver, what have you, and with the increase in overall business around the country, there's several loads per available truck in the marketplace. So there was some posturing, obviously by carriers and trucking companies, and there was a -- some laws that were instituted and changed as far as electronic logs, and there was a lot of impact to the trucking industry exclusive of and including products that we ship on a -- in the 50 states. So the available equipment in the U.S. on a truck basis, which we ship -- all of our outbound freight is by truck. We do not ship outbound by rail because the delivery requirements and the lead times that are required. So there was some adjustment there. Some new companies are starting to pop up out of that demand, more so February/March than January. We put in some price increases. Some of them held; some of them didn't through the quarter. And 2 or 3 of those specifically were geared toward the increase in the freight rates. The good thing about it is, it's an industry issue. The bad thing about it is trucks are tight. It's a -- they get to name what they agree to haul the freight for type deal. So in that scenario, we've been able to establish rates going forward and build those into the pricing that we quote into the marketplace. So the freight issue -- you can read anything you want to about it in the news. It's an issue, no question. But for the service levels that we require, we're going to pay a little bit more. In the meantime, as indicated, we're going to build that into the price and keep going.

Got it. And then maybe just last one just to your point about price increases. How do you see the appetite with your customers for passing along? Obviously, there's cost inflation in the industry. I mean, how do you see the appetite from your distributor customers in terms of absorbing those increases?

Yes, Julio, it's been really positive, actually. We're in the field quite a bit with folks, job sites, negotiations, whatever, on -- [for] huge business, whatever, and so from a volume standpoint -- in that -- in those conversations, there's only 2 topics that sell building wire and 1 of them specifically is delivery, and they get that. They understand it. They see it. They're dealing with the same issues on other materials that come in. I believe that freight pretty much across the board -- flatbeds, drive-ins, refrigerated trailers, whatever the situation is, there's increases. So they get it. They see it. It's not a huge discussion topic as it was in, say, late January, mid- part of February. It was kind of a shocker to make the argument for freight increases because, typically in our industry, at least from my 29, 30 years, has been price increases that are blamed on raw material cost or copper or whatever it might be, unless there's actual pain and recognition for that cost on their side, it's -- you're not able to pass it through. Fortunately for us, they see this across the board in other products and categories, and so the freight conversation has been -- I don't want to say it's easy, but it's been relatively business like with the customers. They see it.

The next question is from Brad Evans with Heartland Funds. It looks like Mr. Evans has dropped. We'll go to the next question. It comes from Bill Baldwin with Baldwin Anthony Securities.

I wanted to just see what kind of color you could offer regarding your CapEx budgets or plans for this year and then kind of the nature of some of those programs?

Okay. I'll start with a number. Right now, our best estimates at this point of the year is that we'll spend between $28 million and $33 million.

And Bill, we haven't announced anything publicly yet. We've got some projects that we're looking at, working on. As you know, we've got a pretty aggressive attitude toward what we can do from a service and offering standpoint. And that's probably what I should leave it at till we make any announcements. I mean, we're looking at different areas, specifically in the service and offering categories. There's a couple that are pretty hot. One will probably win out over the other. I like to do one project at a time, and that's kind of where we're at.

The next question is a follow-up from Brent Thielman from D.A. Davidson.

A quick follow-up. Frank, can you remind us sort of where you're at in terms of the buyback authorization, what you've got left on there. And I guess, a -- just given what seems to be sort of short-term headwinds here in the quarter, any thoughts on the reaction of the stock today -- context to that?

Well, number one, we have a 10b5-1 plan in place where the company adjusts at almost every board meeting or discusses, at least, adjusting the [structure] in which the company will automatically buy back stock supported at certain levels that the Board deems appropriate. Number two, we can always go back into the market and buy more with a quick board phone call, and that's always an option. Number three, I think at least on my behalf, I think the market is somewhat overreacting today, but that's their call. Might be a buying opportunity for some people. The bottom line is, as Daniel emphasized, I think a key takeaway here is to have volumes on the copper side, which is 94% of our business -- 93%, let's say -- go up -- our volumes go down 8% but spreads go up 13% really tells us something positive about what we and the industry were doing with pricing on the copper side, and we were quite enthusiastic about that.

And our next question is from Brad Evans from Heartland.

Sorry about that guys. I had a little bit of technical problem there.

Well, we're fighting it on this end, too. I mean, we don't even we have a good line. We couldn't hear you guys earlier. But hey, we're getting through it. Evidently, these lines we're on must be aluminum or something. I don't know.

We'll have to wait for the algorithms to read the transcript of this call for them to find out that Frank thinks the stock's a buying opportunity. So obviously, the market's reacting to the headline miss, and obviously volumes are -- everybody's keen on the volume. So let me try to skin that cat a different direction here. Frank, do you happen to know what copper volumes were down link quarter from the fourth quarter to the first quarter? What were copper volumes on a link quarter basis, please?

Yes, on Q4 to Q1?

Yes, sir.

Copper volumes were down 3.9%.

Got it. Okay, so down 4%. So help me understand this a little bit then, and this might help people kind of put the puzzle together. So accounts receivable were up 9% from the fourth quarter to the first quarter. Revenues were down 3%, so likely -- in lockstep with the volume number on the copper side. So that obviously paints a picture of a significant ramp into the latter part of the quarter in terms of volume.

That's a great question, and you just answered it. That our AR is not only a function of the total sales for the quarter but how the sales were loaded in the 3 months. And to Daniel's earlier response, January was very bad in terms of volume. It's...

That's my point. So Frank, my point is, I mean, volumes were down double digits in January maybe upwards as much as 15% year-over-year?

Yes, yes.

And so March volumes would have been -- volumes could have been up as much as 15% year-over-year?

Yes, February and March certainly returned to a more normal basis. And so in that we give terms in this industry that easily extend 45 to 60 days or more, if you're selling in the last 45 to 60 days of the quarter, that money is still sitting on our balance sheet in receivables as opposed if we had, had a huge first month of the quarter and we would have collected some of that.

Okay. So it was -- so clearly, just to be clear then, so the linearity within the quarter, obviously, January very weak and February/March much stronger, so the optimism you have for end market conditions really reflected in the pacing of the business as kind of the quarter progressed and as you exited into the second quarter, correct.

Correct. Well said.

Okay. So the other observation I had on the quarter, which I thought was kind of both -- to say the least was highly encouraging was volumes in the quarter were pretty weak, and historically in that environment, you would see competitors bringing the knives out and really having an impact on spread, and so for volumes to be down and spread to be up, I mean, that really paints a picture of an improving competitive dynamic perhaps.

Yes, sir. As I mentioned earlier, I'm just telling you, we've got a few competitors out there that are doing great things and, to complement those guys, when the shoe fits, wear it, right. So really good from that perspective. Those guys doing a good job. Everybody's shipping like they're supposed to. Everybody's getting paid like they're supposed to. And then you got a couple of outliers in this aluminum piece on the import deal that need to be addressed. And just to back up a bit, Brad, you hit it on the quarter. I mean, look, I'd like a way to explain it somehow better, but the fact is -- and we're pretty transparent about this, January was awful from a volume standpoint. However, the spreads in the quarter held. That's to the credit of the discipline in the market on the copper side. It magnifies the issue that we have with the other guys on the aluminum piece that are doing the importing. They clearly have no direction from my perspective, and this is just an opinion, but when business is this good and things are going along like they should, I don't know what their motivation is. I don't know if they're trying to get larger and poorer or what the issue is, but that's not my style.

Okay. Thank you for that. I really appreciate the color. And then my last question really is just along the lines of clearly, at least on the copper side, it seems like metal volatility perhaps is -- amongst other things, are causing some better competitive dynamics. Where -- do you think, Daniel, I'm curious, where does aluminum have to go where -- on a pricing perspective, from a raw material perspective where it -- where copper becomes a preferred metal versus aluminum in the marketplace. I mean clearly, we've seen this huge spike with the Rusal news on aluminum price, and I gather that, that does have a positive benefit in terms of perhaps favoring copper?

Well. I favor copper anyway, but to answer your question more directly, even to point out specifically what was going on with copper in the quarter, copper trended down in the first quarter, and we still had that price discipline. So that's another phenomenal sign. When you start the quarter at $3.19 COMEX, and you end up March at $3.06, $3.07 and still have your spread, that's really indicative of the business environment, which exaggerates, again, and puts the focus on what the (expletive) -- heck are these guys doing with -- I'm sorry -- on aluminum piece? Today, we don't have the pressure, if that's the right term to use, when the jobs come out and you start the quote process, if they start off copper on the feeder, we stay with copper throughout the project. As you know, in the past, you get, I don't know, $0.85, $0.90 aluminum and you get $3.20, $3.25 copper, then the discussion starts about should we use aluminum conductor versus copper on some of the larger sizes, and so there's a lot of discussion in that valuation, if you will, to go from one to the other. That's not the case in the market today. If we start quoting copper, we stay copper throughout. That's another good sign. So even though the aluminum piece is what it is, it's not on an across-the-board scenario. It's on the product categories, they're the A, B, C items on an inventory situation, not the deeper aluminum products that you can't get type deal. So there's a lot going on there, Brad, but we're not seeing the push -- the switch or to substitute at this point.

Super. I just had one last one that occurred to me. So I mean, anybody who is surprised that freight costs were a headwind has obviously just crawled out from underneath a rock. But -- so [someone] said headwind in the quarter is -- is what it is, at the end of the day for Encore, based on your fill rates and superior customer service, I mean, at the end of the day, demand being reasonably good and freight being tight, I mean, that's a recipe for Encore to take market share, is it not.

Well, I'm supposed to only speak to the first quarter, but the best answer to what you said is, yes.

And we have no further questions at this time. I'd like to turn the call back to your host for any closing remarks.

Well, we just appreciate everyone who joined in the call, and we look forward to talking to you again next quarter. Thank you.

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