Encore Wire Corp (WIRE) 2011 Q3 法說會逐字稿

Hello, and welcome to the Encore Wire third-quarter earnings call. As a reminder, all phone lines will be on listen-only mode and we will conduct a Q&A session at the end of the call. (Operator Instructions).

At this time, I'd like to welcome and turn the call over to Mr. Daniel Jones, President, Encore Wire. Please go ahead.

Thank you, Amanda. Good morning, ladies and gentlemen. Welcome to the Encore Wire Corporation quarterly conference call. I'm Daniel Jones, the President and Chief Executive Officer of Encore Wire. With me this morning is Frank Bilban, our Chief Financial Officer, who also just won the Dallas Business Journal CFO of the Year.

We're pleased to announce strong quarterly earnings in this turbulent economy and severe recession currently taking place in the construction industry. As we have repeatedly noted, the key metric to our earnings is the spread between the price of wire sold and cost of raw copper purchased in any given period. This spread increased 41.2% in the third quarter of 2011 versus the third quarter of 2010, while our unit volume shipped in the third quarter of 2011 increased 2.3% versus third-quarter of 2010. For the nine months ended September 30, 2011, the spread increased 34.2% versus the nine months ended September 30, 2010, driving our increased earnings, while unit volume increased 9.4%.

Industry pricing discipline improved significantly in the second half of the third quarter, as copper prices dropped precipitously. The COMEX average copper price in July was $4.40 per pound with a high of $4.47 on July 29. In August, the price of copper started trending down, but the big decline came in September with a COMEX close price of $4.14 on September 1, and a COMEX close of $3.14 on September 30.

We were able to reduce wire prices more slowly when copper was falling, especially in September, significantly improving our margins. Over the last several decades, falling copper prices have been detrimental to industry margins, but that dynamic appears to have changed recently, as was also the case during the last two quarters of 2008, when copper prices dropped at a historic pace and margins improved.

We continue to support industry price increases in an effort to maintain and increase margins, and we believe our superior order fill rates continue to enhance our competitive position, as our electrical distributor customers are holding lean inventories in the field. As orders come in from electrical contractors, the distributors can count on our order fill rates to ensure quick deliveries from coast to coast. We've been able to accomplish this despite holding what are historically lean inventories for us.

We believe our performance is impressive in this economy, and we thank our employees and associates for their tremendous efforts. We also thank our shareholders for their continued support.

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

Thank you, Daniel. In a minute, we will review Encore's financial results for the quarter. After the financial review, we'll take any questions you may have. Each of you should have received a copy of our press release covering Encore's financial results. This release is available on the Internet, or you can call Tracey West at 800-962-9473, and we will get you a copy.

Before we review financials, let me indicate that throughout this conference call we will 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 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 for 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 financial results.

Net sales for the third quarter ended September 30, 2011 were $319.4 million compared to $242.8 million during the third quarter of 2010. Higher prices for building wire sold in the quarter ended September 30, 2011 accounted for most of the increase in net sales dollars, increasing 28.7% per copper pound sold versus the same period in 2010. Sales prices rose primarily due to higher copper prices, which rose 24.7%. Unit volume in the third quarter of '11 increased 2.3% versus the third quarter of '10.

Net income for the third quarter of 2011 increased 169.4% to $13.7 million versus $5.1 million in the third quarter of 2010. Fully diluted net earnings per common share increased 168.7% to $0.59 in the third quarter of 2011 versus $0.22 in the third quarter of 2010. Net sales for the nine months ended September 30, 2011 were $932.2 million compared to $654.1 million during the same period in 2010. Higher prices for building wire sold in the nine months ended September 30, again, accounted for most of the increase in net sales dollars, increasing 30.4% per copper pound versus the same period in 2010.

Unit volume in the nine months ended September 30, 2011 also help to increase net sales dollars, increasing 9.4% versus the same period in 2010. Net income for the nine months ended September 30, 2011 increased 214.4% to $33.8 million versus $10.8 million in the same period in 2010. Fully diluted net earnings per common share increased 212.9% to $1.45 per share for the nine months ended September 30, 2011 versus $0.46 per share in the same period in 2010.

On a sequential quarter comparison, net sales for the third quarter of 2011 were $319.4 million versus $309.5 million during the second quarter of 2011. Unit volume increased 0.3% on a sequential quarter comparison. Net income for the third quarter of 2011 was $13.7 million versus $9.5 million in the second quarter of 2011. Fully diluted net income per common share was $0.59 in the third quarter of 2011 versus $0.40 in the second quarter of 2011.

Our trailing 12-month results are also dramatically improved, with net sales up 43% to $1.188 billion and net earnings per common diluted share up 333.2% to $1.64 per share versus $831.2 million in sales and $0.38 per share in the previous 12-month period, respectively. 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 have $15.2 million in cash as of September 30, 2011. We also declared another quarterly cash dividend during the third quarter.

We also want everyone to know that this conference call will be available for replay after the conclusion of this session. If you wish to hear this tape replay, please call 866-206-0173 and enter the conference reference 267097 and the pound-sign.

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

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

Amanda, we would like to take questions now from our listeners.

Robert Kelly, Sidoti and Company.

Congratulations, Frank. Just a question -- two quick ones on the third quarter. First, the shipment growth you saw, is that better than what the industry is doing based on what you're seeing and hearing?

And then as far as, is there a ballpark impact you can give us from that steep drop in copper prices in September on the profit line?

I'll take the first part of the question first. Based on -- no one else is public, Bob, so we have a hard time knowing for certain, but our speculation would be it's kind of a blend. We probably took some market share in some areas geographically. And also I would think that there was a little bit of industry growth.

And as far as the extra kick in September, it's basically holding the line on prices, sacrificing a little bit of volume for discipline, trying to get back to a reasonable profit margin. We were able to do that in September for a couple of reasons. Again, demand was decent -- it wasn't great, but it was decent. And we were able to hold the line on pricing and still write some orders, we believe, on our service level, with the right distributor partners.

And as copper was very volatile, you know it would be up to one day $0.10 or $0.15 and be down $0.20 or so the next day. So it was -- I don't want to say it was easy but with the volatility, there was also uncertainty. But some of the jobs couldn't wait on the commercial side. So several things in play there. It wasn't just our brilliance. There was a lot of market demand there that was, I think, pent-up and needed to shake out. And things kind of lined up for us here.

Great. Are you seeing more of the projects coming through the pipeline -- more urgency for shipment, is that playing into the little bit of the industry growth that you saw during this quarter that just passed?

Yes. Yes, definitely. And what's happening also, the orders themselves are a little more complicated from a service standpoint with shorter lead-times. The product mix is deeper. And the ancillary tide services that you would offer, the striping, the cutting, the paralleling -- really some pretty bizarre requests from a service standpoint, but those seem to fit right in with our model. So it was kind of a blend of things. The market was moving in the right direction. We were able to step up and deliver with existing distribution. So it was kind of a mix of things.

Okay. You made what I thought was an interesting comment. You said demand was decent, not good or great. I know you guys can't see into the future. My question, or I think what people are trying to figure out is, how good can things be if demand gets good or even great? I know it's a couple of years away, just given the economy, but is there some sort of level of margin or spread in the current cost structure, the current number of competitors in the space, will allow you guys to do when things just get good or maybe even great, if we can allow ourselves to be that optimistic?

That's a great question but also really a tough one to answer. You've seen the volatility of earnings over the year. The lows are low but it seems like the highs are headed certainly to be higher. We're really focused here from the cost standpoint to maintain a low cost structure. Again, we're the only public company in our space, but I'm somewhat familiar with as much as I can be with competition. And I'll tell you I still believe that we have a low-cost structure here for a lot of reasons.

But we're doing everything we can to maximize that sell price, because as good as we think we are on the shop floor, if we save a fraction of a point in a breakthrough-type activity or project, we price it at 2.5 and 5.0 discount. So you can really be sharp in manufacturing, which you have to be for survival, obviously, but you can also give it all back plus some if you're not paying attention to the sell price.

And then just one final one, maybe this one is for Frank. The cash balance is as low as we've seen it in a couple of years here. Is that just a timing issue?

That's really just due to the Accounts Receivable and the inventory value going up with copper prices and with the volumes we've had. If you look at the last two quarters have been up over $300 million in net sales. And as we've told people repeatedly on the AR side, we pay for our copper with most vendors within a week or so of getting the copper here. And then we have to turn it into inventory, and we try to keep our inventory lean, but we try to keep it adequate to meet the needs of the market. So we'll have one to two months of inventory on the floor. And then we wind up giving 60 to 75 days of terms, which are standard in the industry.

So as these sales have ramped up in the past six months, we've invested in inventory. And on a year-to-date basis on the cash flow, you'll see in the 10-Q, Accounts Receivable have accounted for $69.1 million of the cash usage of $78 million in the nine months ended September 30. So it's a good sign. We have, obviously, the wherewithal to support that. And quite frankly, in the long run, although we probably would like to reduce the terms to the customers, it provides a barrier to companies that are less well-funded than we are. So we live with it.

Yes. That's where I was going with the next -- the follow-up was, are you going towards the longer end of the payment terms to try to ramp up the pain, or intensify the pressure on some of your competitors?

The payment terms have not changed, Bob. Those are the standard terms we've had in place forever. We're not (multiple speakers) --

(multiple speakers) Okay, great. Thanks so much, guys.

Thank you.

(Operator Instructions). Okay, it looks like we have no further questions at this time.

Give them a minute, here.

Okay. (Operator Instructions). Okay, we do have a couple questions that have come in. Our first question is from Terry Rigdon with Mayberry Partners. Please go ahead.

There's been a lot of reports here over the last few months about the increased activity in the multifamily housing. Can you just comment a little bit about what you're seeing in that segment on the commercial side?

The multi-family, depending on how many floors are involved in the construction, it could be residential product, it could be commercial product, either one. But specifically to your question, we really don't see an uptick in one particular construction phase inside the commercial construction. We're selling, again, a broad range of products almost on every order. But having said that, the commercial construction and the industrial side, both of those are the two where we're seeing the most interest.

The residential side, Terry, is still about as slow as it has been. But certainly, within that commercial segment, if you were to pick one week or the other, you might have an uptick in multifamily product demand, and then in the next week, it could be a completely different type of project. It really is kind of all over the board.

Okay. Thank you.

Keith Johnson, Morgan Keegan.

I apologize, I came on the call a little bit late, so hopefully, if I'm repeating the question, just let me know, I guess. First question, have you, with the volatility in the copper markets, have you seen any change in the way your customers are looking at their inventory position going into the year? In other words, adjusting order rates or trimming back just with the volatility we've seen in copper? Has that made any difference to you guys?

Yes, it's a great point. And actually, we have. The order complexion itself has become a little more complicated. And by that, I mean they're ordering -- almost every item that's in the catalog, they're ordering a little bit of each item.

As far as them carrying -- the distributor customers carrying inventory from a timing standpoint, going into the tail end of the year, they normally don't ramp up their inventories. But, again, from a timing standpoint, we've seen some demand increase on the job side, which will increase the demand for service levels on the local inventory. So they're going to have to put some in.

It will be -- I'm sure they'll be super cautious with it. There may be some mistakes made here and there, which will fit our model on the correction side. But overall, the demand itself seems to be coming from a real short lead-time of deliverable-type goods. It's not necessarily a restocking effort, in my opinion, at this time.

Okay. In that improved job ordering pattern, is it regional that you're seeing that one area of the country versus another? Or is it a broader type of trend?

No, the usual spots geographically do well, the larger metropolitan areas. And then the suburbs surrounding those seem to do well. The Southeast is doing well. The Northeast, which was probably one of the worst areas hit in the last few years, seems to have some activity, which is pretty good. Phoenix all the way over to the Pacific Coast has been decent. And then Northern Cal, all the way up into Seattle, Tacoma, those markets are doing well.

And then you have some of the other states with the photovoltaic cable with some of the oil and gas companies. I mean, you're seeing some pretty decent repetitive-type orders. But again, they're super-complicated orders. The stress on the factory, the stress on the service department here, it's up. But at the same time, we're able to maintain some discipline on pricing, so it's worth it.

Okay. As you came through the quarter, did the -- the way -- through the third quarter, did the way that the pricing environment or the ability to manage the selling price in relation to the volatility of copper, did that get better through the quarter? And then as you moved into October, have you seen a change in that pattern in any way?

I really can't comment on October, but the answer to the first part of the question is yes. July was July. August had decent volume and decent discipline. And then September, it was a lot better. September was a good month, but again, the pricing discipline came from the volatility in the market, which was good. It kind of forced some discipline. And to shed some light on that or some insight, what happens is, if you have copper up one day and down the next, and back up and then down the next, there's no bias, there's a trend; except overall, it ended up trending or biasing toward a lower level.

So the uncertainty of what copper is going to do led people to going back to placing orders and running their businesses, and not speculating so much on what copper was going to do or not do, and focusing on making money from their operations rather than trying to buy better, so to speak. So it definitely improved in the latter part of the quarter. No question.

Okay. All right, great. Thanks.

(Operator Instructions). Okay. We currently have no questions in queue.

Okay, Amanda. Thank you very much and thank you to the listeners. And we look forward to the next call at the end of the fourth quarter. Thank you.

Ladies and gentlemen, thank you for your time and attention. That concludes this conference.