Encore Wire Corp (WIRE) 2018 Q3 法說會逐字稿

Welcome to the Encore Wire Third Quarter Earnings Conference Call. My name is James. I'll be your operator for today's call. (Operator Instructions) And also note, this conference is being recorded.

I'd now like to turn the call over to Daniel Jones, Chairman, President and CEO. Mr. Jones, you may begin.

All right. Thank you, James, and good morning, ladies and gentlemen, and welcome to the Encore Wire Corporation quarterly conference call. As stated, I'm Daniel Jones, the President, CEO and Chairman of the Board of Encore Wire. With me this morning is Frank Bilban, our Chief Financial Officer.

We're very pleased with our improved results in the third quarter and on a year-to-date comparison. There are same key items to note. Net sales dollars increased significantly in both the quarterly and 9-month comparisons of 2018 to 2017. The increased top line was driven primarily by higher unit volumes. Unit volumes increased 16.1% in the third quarter of 2018 versus third quarter of 2017. Margins increased in both the quarterly and 9-month comparisons of 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 7.3% in the third quarter of 2018 versus the third quarter of 2017 and increased 10.7% on the 9-month comparison while increasing 6.2% on a sequential quarter comparison.

The copper spread expanded 7.3% as the average price of copper purchased decreased 2.3% in the third quarter of 2018 versus the third quarter of 2017, while the average selling price of wire sold increased 0.9%. The improved copper spreads drove our earnings per share to the third-best core operating quarterly results in the history of our company.

In aluminum wire, which represented 7.7% of our net sales in the third quarter of 2018, we continued to experience pressure on margins due to the import competition from China. As announced previously, we've taken action to enforce our rights under the U.S. trade remedy laws. The results of that action are pending.

U.S. economy appears to be strong as is construction activity. Based on discussions with our distributor customers and their contractor customers, we believe there is a good outlook for construction projects for the next year. We believe our superior order fill rates continue to enhance our competitive position. 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. We also thank our stockholders for their continued support.

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

Thank you, Daniel. In a minute, we'll review Encore's financial results for the quarter. After the financial review, we'll take any questions you might have.

All of you should have received a copy of Encore's press release covering our financial results. This release is available on the Internet, on our website at www.encorewire.com, or you can call Elizabeth Campbell 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 the 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, are posted on www.encorewire.com.

Now the financials. Net sales for the third quarter ended September 30, 2018, were $340.7 million compared to $292 million during the third quarter of 2017. Copper unit volume, measured in pounds of copper contained in the wire sold, increased 16.1% in the third quarter of 2018 versus the third quarter of 2017, driving the $48.7 million increase in net sales dollars. The average selling price of wire per copper pound sold increased 0.9% in the third quarter of 2018 versus the third quarter of 2017. Net income for the third quarter of 2018 was $23.7 million versus $14 million in the third quarter of 2017.

Fully diluted net earnings per common share increased 68.7% to $1.13 in the third quarter of 2018 from $0.67 in the third quarter of 2017. Net sales for the 9 months ended September 30, 2018, were $969 million compared to $863 million during the same period in 2017. Copper unit volume, measured in pounds of copper contained in the wire sold, increased 2.6% in the 9-months ended September 30, 2018, versus the 9-months ended September of 2017. The average selling price of wire per copper pound sold increased 10.9% in the 9-months ended September 30, 2018, versus the 9-months ended September 30 of 2017, driving the 12.3% increase in net sales dollars.

Copper wire sales prices increased primarily due to the higher price of copper purchased, which increased 10.9% in the 9 months ended September 2018 versus the same period in 2017. Net income for the 9 months ended September 30, 2018, increased 37.9% to $53.1 million from $38.5 million in the same period of 2017. Fully diluted net earnings per common share were $2.54 in the 9 months ended September 30, 2018, versus $1.85 in the same period of 2017.

On a sequential quarterly comparison, net sales for the third quarter of 2018 were $340.7 million versus $336.8 million during the second quarter of 2018. Sales dollars increased due to a 5.5% unit volume increase of copper building wire sold, offset by a 4.6% decrease in the average selling price per pound of copper wire sold on a sequential quarterly comparison. Copper wire sales prices decreased, primarily due to a decrease of 9.6% in the price of copper purchased. Net income for the third quarter of 2018 was $23.7 million versus $18.1 million in the second quarter of 2018. Fully diluted net income per common share was $1.13 in the third quarter of 2018 versus $0.86 in the second quarter of 2018.

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 $134 million in cash at the end of the quarter. We also declared another cash dividend during the quarter.

I want 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 call (888) 843-7419 and enter the conference reference 8588249 and the pound sign. Or you can visit our website where we will have the replay.

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

Thank you, Frank. As we highlighted, Encore performed well in the past quarter. We believe we are well positioned for the future.

And James, we'll now take questions from our listeners.

(Operator Instructions) And our first question is from Brent Thielman of D.A. Davidson.

Daniel and Frank, the 16% volume growth, really impressive. Can you talk about what product line you're seeing strength? Is it broad-based? And I know it's tough to answer. But do you think this sort of growth is relatively consistent with some of the other larger industry participants you compete with?

It's hard to say without a lot of insight to what they have going or not going. But I'll tell you, Brent, for us, there are quite a few projects, some of them pretty large in stature. And then there's also seem to be a very vibrant business through stock for our customers, the wholesale electrical distributor. It really wasn't one particular category. It really -- and there is more -- and really, there's a lot of movement between categories. It was pretty consistent across the board for the copper products as well as some of the aluminum.

Okay. And Daniel, any additional color you can offer on what's allowed you to generate the spread you did this quarter. Is it more a function of your sales than the industry being more responsive to copper and just better overall discipline? Is there any element of kind of cost deflation that might have helped you generate the margins you did this quarter?

Well, as you know, we're very aggressive in controlling our cost. And that certainly was a contributor. We've a phenomenal operations team here, that continues to do great things. And then we also have the timing within the quarter. I was looking earlier. I think we started the year about $3.14 or $3.15 on COMEX. It's down to $2.70-ish or what have you, which normally is not a good thing. But overall, you look at what occurred during the quarter, specifically Q3, we had a little bit of strength toward the end of September that was helpful. It's always a discipline that comes from that copper volatility on the upside, as you know. And so that was very helpful. We've got a couple of competitors out there that are doing a great job and have been disciplined in the things that are more businesslike, obviously. And for the most part, when you have the demand that we've had, the service and delivery comes through. And as long as we're doing the things that we're supposed to be doing here, we're able to maximize that spread.

Okay, great. One more if I could. Just Daniel, I know you're routinely talking and meeting with customers. Seasonally or sequentially, your business tends to ramp down a bit from the third quarter into the fourth quarter. Any feel for whether you think customers are going to try to unload or lean out inventory more than you'd typically see? Or they're just lean enough already?

I think they're running pretty lean, Brent, for the most part. There are quite a few projects and jobs that are ongoing. We had a pretty wet month in some areas recently. And then for the most part, everybody is busy. And that's probably the best way to put it without being too specific. But the projects are there across the country. There's cranes in most of the larger cities, and then the suburbs and what have you are following suit with strip malls and movie theaters and restaurants and what have you. So it looks pretty busy.

Next question, Bill Baldwin from Baldwin Anthony Securities.

Based on the current product mix that you have. Do you have additional room for capacity, additional capacity to increase production as we look out through 2019?

We are constantly, Bill, looking at where we may have a bottleneck that we can address, where we may have equipment. It's at the end of a depreciation cycle or something that might give us a cost advantage from a production standpoint. That's an ongoing, never-ending approach to how we address the operation side. And we definitely do have some upgrades that we're in the middle of and some that are coming in the future. But for the most part, we've got some room. And we constantly have to adjust our flexibility to maintain our fill rates. And so we're looking at that currently. But as far as specifically to the capacity utilization part of that, we got a little space, a little room.

And how is your labor availability situation, Dan, as far as plant labor, people in the plant?

Yes, great question. It's been supertight. We're -- again, we're in the same situation that we're typically in. But we could use a few folks. And you hire or try to hire 10, you may go through 30 or 40 folks to get those 10. But for the most part, we're getting the folks that we need, Bill. It just takes a little bit more work.

Well, looks like, just looking at the income statement, with your significant increase in shipments, you apparently were able to have the freight part of that, the transportation part of that in good shape and with cost that were in line with your expectations.

Yes, sir. The freight part of that increased. It cost us a little bit in the quarter, without being too specific. But we were able to maintain the service level, which is what we were after.

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

So similar to last quarter, you've seen, kind of the backdrop, where after the quarter ended, copper prices have kind of dropped since the end of September. But given the record demand you're seeing, I mean, how should we think about spreads going forward? Do you see a similar backdrop of price kind of holding relatively at current levels, even with lower copper?

Well, I'm really supposed to stick to the third quarter, Julio. But I can tell you things are good. As I usually answer that question with, things are good, it's not great, but things are good. Demand is good. Weather, as I mentioned, has an effect on timing. But the projects continue. The business is good. We're getting paid on time. And our customers are getting paid on time for the most part. They're upbeat. I was able to meet with quite a few of them yesterday in Dallas face-to-face, that are in town for one of their conferences. And so for the most part, it's upbeat, very upbeat. Things are good.

Got it. And I'm sorry if I missed it. Did you guys call out what CapEx was in the quarter?

We did not, Julio. But I have that number available for you. In the quarter, our capital expenditures were $6.4 million, which is $21.25 million for the year-to-date.

Okay. Cash building nicely here. I think you mentioned in the past, you've had your eye on some projects. Any color there on thoughts, on maybe some of the projects being thrown around? And maybe when the Street can maybe expect an announcement on that?

Yes. As you know, we haven't announced anything yet. We are aggressively pursuing an opportunity and should have something on that coming soon. I don't like dancing around the answers at all, Julio, but we hadn't said anything publicly. But we've got something on the front burner. And as soon as we have that detailed and laid out like we want, we'll let you guys know.

I appreciate that. And maybe a last one here. Towards the end of the quarter, I saw you filed an antidumping petition regarding aluminum. Just any additional color you could provide there. And typically, these things take a pretty long time to play out. So maybe some color on what inning you are in regards to the working with the Department of Commerce?

Yes. As we've pointed out, we did file the petition. We've taken the steps that we're supposed to take. And at this point, we expect the government will announce, probably some CVD deposit rates early next year, and maybe some of the antidumping rates to follow. I think the government has published the key dates in their investigations and whatever, and it's just playing out. We've done our part and just kind of waiting to hear back at this point.

Our next question, from Tim Curro of Value Holdings.

It's just asked. Thank you.

And we have Bill Baldwin again, Baldwin Anthony Securities.

Well just to follow up, Frank, and kind of in relation to earlier question. But what do you see CapEx for the total here in 2018? So $21 million through the third -- through 9 months.

Yes. $21 million through 9 months. And right now, our guys are still projecting that we're going to come in a little above $35 million, more like $36 million, $37 million. That is always, at this time of the quarter, is contingent upon our manufacturing people being satisfied with the progress of some of the machinery that's out at the vendors and is being constructed. If that goes according to the schedule we were originally given, we should spend about $36 million, $37 million this year. Between you and me, sometimes that number comes down a little lower. Just because in December, as our manufacturing people look at some of the equipment, it's a little behind schedule. And we don't make the progress payment on the schedule we originally anticipated, and some of that slides into next year.

And another question, Brent Thielman, D.A. Davidson.

Quick question. Frank, can you remind us what's remaining under the share repurchase authorization? And then also, this cash continues to build. How much do you want to keep on the balance sheet just for working capital purposes?

Well, first of all, as regards to the share repurchase, I don't have the exact number right in front of me. It's well over 1 million shares. But in regards to that, if we were to deplete that allocation, Daniel always has the ability to either, a, go to the board and get approval for more under the program and/or do some outside the program with the board's approval. As regards the cash allocation, again, we sleep well with the cash in the bank. I'd much rather be in this position than being a company where you're overloaded with debt. And the only thing we know about expansions is they eventually end. And so as Daniel has said in the past, if copper were to go up to $3.50 or $4, we may need the money in working capital for inventory and receivables. If copper goes down and we harvest some of that money, you never know if a recession is coming and you need the money anyhow. The third leg of that stool is, we have the money to do whatever we like in terms of expanding product lines, in terms of replacing old equipment, in good times and bad. And in the last recession from 2007 to 2012, we were able to build new buildings and put new machinery and be ready to hit the ground running when this current expansion is here. And that's what's driving some of our earnings today. So to say that we don't look at acquisitions would be a lie. We look at them all the time. However, what we see doesn't fit our business model. And that's the key. I mean, I think one of our core focuses is, don't throw the baby out with the bathwater. We're not going to make an acquisition just to make an acquisition. Is that fair, Daniel?

Correct.

Don't want to be larger and poor. And I have the number here. As I indicated, the balance right now on the authorization is a little over 1.1 million shares.

(Operator Instructions) Question from Craig Kempler, Perkins.

So I totally appreciate and commend you for not doing deals that would be -- could look accretive, but could otherwise be value destructing. But going back to, I guess, the cash on the balance sheet. I mean, if I go back to really to the '09 period, you had cash there. You were free cash flow positive in that period as well. So can you just give a little bit more insight into -- it would seem as though with your stock trading at 1.3x book value that -- and with the cash that you have on the balance sheet, you could have a dual-prong approach of investing in your current business, plant expansion and actually implementing and buying back some shares. So could you just elaborate a little bit more at what point would you actually feel comfortable executing on the share repurchase that is authorized, if ever?

Yes. Definitely. We discussed that internally quite a bit. The board's involved most of the time on that entry-level number. And it's hard to answer that without being too specific. But we are constantly looking at it. We've got some projects that we're looking at going forward. As Frank mentioned, when you get the volatility in copper, there's a couple of things that occur obviously. If copper goes up, the strain on the working capital eats up the cash. And when copper goes down, your revenues drop accordingly. So both of those have an effect on the availability of cash. And one thing for certain is, we're going to have copper volatility, right. Depending on what percentage that happens to end up being on the cost of goods sold scale, it amplifies that bias one way or the other on volatility. So in that scenario, a snapshot of where the cash might be at one point or the other, we need some cash. And there's some projects that we've got in front of us. The working capital situation is what it is. And when it is right opportunity for us, we will definitely step in and buy back. Again, there's not a public number that I'm wanting to put out there. I'm just letting you know that we've got our eye on it, Craig, and we'll step in, if that's the best place for us to go with that cash. And obviously, we -- with our history -- I think you can check the buyback history as well along with that cash that you looked at back to '08, '09. And I think our history has been that we buy stock back. So it's definitely in the top 2 or 3 things that we look at as uses of cash, is to buy the stock back.

(Operator Instructions) And gentlemen, it looks like we have no questions.

Okay. Well, thank you, James, you did a nice job. And we appreciate the participation on the call. And we look forward to talking to you guys at the -- on the next call.

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