Encore Wire Corp (WIRE) 2012 Q1 法說會逐字稿

As stated, I'm Daniel Jones, the President and Chief Executive Officer of Encore Wire and with me this morning is Frank Bilban, our Chief Financial Officer.

The results in the first quarter of 2012 were affected by somewhat weak pricing in our market compared to the first and fourth quarters of 2011.

Building wire prices and margins were impacted negatively by the volatility of copper prices during the quarter. Copper traded erratically which made it difficult for us to maintain any type of industry announced price increases. For example, Comex prices ranged from a low of $3.41 a pound to a high of $3.97 a pound. It kept bouncing between those two points throughout the quarter with large swings occurring within a span of several days. This disrupted our customers' buying patterns and enticed our competitors to cut or hold prices, lowering margins.

The performance of our stock and the prolonged industry recession has been exceptional. Encore Wire is one of only 120 companies of the 12,920 public companies that trade on the United States Exchange that has enjoyed positive share appreciation in 2008, 2009, and 2010. Furthermore, Encore Wire is one of only 67 public companies that has enjoyed positive share appreciation in 2008, 2009, 2010 and 2011.

We continue to support industry price increases in an effort to maintain and increase margins. 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. We'd like to thank our employees and associates for the tremendous efforts. We'd also like to thank our stockholders 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 will take any questions you might have.

Everyone should have received a copy of Encore's press release covering Encore's financial results. This release is available on the internet or you can call Natalie Seelbach at 800-962-9473 and we'll 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 would refer all 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 in this call to the most directly comparable financial measures presented in conformance with GAAP including EBITDA which we believe to be useful supplemental information for investors are posted on our website, www.EncoreWire.com.

Now the financials -- net sales for the quarter ended March 31, 2012 were $280.5 million compared to $303.4 million during the first quarter of 2011. The average selling price of wire per copper pound sold dropped 9.7% in the first quarter of 2012 versus the first quarter of 2011, accounting for the decline in sales dollars.

Net income for the first quarter of 2012 was $6.7 million versus $10.7 million in the first quarter of 2011. Fully diluted net income per common share was $0.29 in the first quarter of 2012 versus $0.46 in the first quarter of 2011.

Unit volumes measured in pounds of copper contained in the wire sold during the period were virtually unchanged in the first quarter of '12 versus the first quarter of '11.

On a sequential quarter comparison, net sales for the first quarter of 2012 were $280.5 million versus $248.3 million during the fourth quarter of 2011.

Net income for the first quarter of 2012 was $6.7 million versus $16.3 million in the fourth quarter of 2011. Fully diluted net income per common share was $0.29 in the first quarter of 2012 versus $0.69 in the fourth quarter of 2011. Copper pound unit volumes increased 8.7% in the first quarter of 2012 versus the fourth quarter of 2011. The spread between the cost of a pound of copper purchased and the sales price of wire containing a pound of copper decreased by 13% sequentially, accounting for the majority of the gross profit declines.

We continue to maintain our strong balance sheet. We have no long term debt and our revolving line of credit is paid down to zero. In addition, we have $83.9 million in cash as of March 31, 2012. We also declared another quarterly cash dividend during the past quarter.

The conference call will be available for replay after the conclusion of this session. If you wish to hear the taped replay, please dial 866-206-0173 and enter the conference reference 271907 and the # sign.

I'll 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 and we believe we're well positioned for the future. Towanna will now take questions from our listeners.

(Operator Instructions) And our first question is from Kerry Rigden from Mayberry Partners. Go ahead, please.

Frank, with the price volatility of copper in the quarter could you comment on whether or not there were any LIFO adjustments that might have occurred?

Sure, Kerry. For the first quarter of 2012 we took expense or an increase to cost of sales of $17.2 million. That compares to the fourth quarter of 2011 when copper was declining and it went the other way and we took a decrease to cost of sales of $19.8 million.

What you saw in effect from the fourth quarter to the first quarter is copper dropping in the fourth and going back up in the first with a lot of volatility in between and the long and the short of it is the two quarters almost cancel each other out.

Terrific, thank you.

(Operator Instructions)

And the next question is from Tony Kure from KeyBanc. Go ahead.

Just a couple questions, Frank, you mentioned the spread was down 13% sequentially first quarter to fourth. Do you have that number year over year?

Year over year the spread was virtually unchanged.

Gotcha, and then is there a way to parse out -- obviously, you enumerated the LIFO adjustment, $17 million, but do you guys have any visibility or can you quantify or maybe make an estimate about how much the pricing environment may have also impacted your COGS?

We know, Tony, that pricing was down on an ASP basis fourth quarter to first quarter 10%. We know that our spread was down 13% and that was the real story there on a sequential basis.

Okay so now with copper down here in the second quarter on average versus the first quarter, do you think the pricing environment gets more rational? Is that a rational conclusion to make, is that maybe pricing gets more rational?

It's -- again, it's early to say what is going to happen in the second quarter. We're trying to stick the call basically to first quarter results but I think it is fair to assume that there should be some rationalization and some discipline going forward.

Gotcha, okay and just a couple more. From a competitive standpoint during the quarter the pricing volatility in the competitive environment, is there any way to tell if that was more biased towards the maybe smaller competitors versus some of the larger market participants, where the smaller guy is maybe a little bit more irrational?

Yes, I think that's very perceptive, Tony. The smaller guys for whatever reason, I certainly don't know what their motivation would be but they did seem to be a lot quicker to react on the downside. Looking at averages, looking at demand, looking at things in the market, there is no way to rationalize the price cutting from our standpoint.

When copper would trade down for a day or two and actually it wasn't even a trend, it was more of a bias from one day to the next, there seemed to be maybe some price cutting to get ahead of the decline in some fashion and I can't really get too specific but I will tell you that when you have that type of disparity between one competitor and another from a pricing standpoint it certainly does not generate a purchase point. The uncertainty itself contributes to and will exaggerate whether or not someone will hold off and wait and see because they obviously want to purchase in their mind, any way at the bottom. So it definitely stagnates demand to some extent when you get the price cutting.

Great, that's very helpful. Just one more quick one on end markets, any differentiation that you could tell between the residential or non-residential markets during the quarter?

The feel in the quarter on the residential side was is that there is some improvement. It's not a huge jump or any means but there certainly is a feel of some improvement residential-side and then again, the commercial/industrial side as well. Both sides, the activity seems to be picking up. Some of the larger more visible jobs that come out, the threat or the feel for which direction copper is going to go was muddied a bit so some of the jobs that could be pushed out, sure seems like a lot of the guys that were ready to go held off which at some point they're going to have to step back into the market and place an order.

Okay, great. Thanks so much. That's helpful.

(Operator Instructions) And we do have a question from Brad Evans from Heartland Advisors. Go ahead, please.

I joined on a little bit late. Did you break out the mix of sales between commercial, industrial, and residential in the quarter?

I did not. In Q1 of '12 the residential was 14.5% of our unit volume. The rest was commercial.

Okay, and the volume trends within those respective markets on a year over year basis in the first quarter?

Remarkably similar I believe. Last year the residential was 15.5% and this year on Q1 it was 14.4%.

I'm sorry, I was asking for volume trends within the quarter on a year over year basis. I think in the aggregate you said volumes were flat and on a consolidated basis I'm curious what, based on the two end markets --

Oh, I see. Year over year, residential and again, residential tends to exacerbate the amount of the percentage increases or decreases because it's down at such a low level but residential year over year was down 7% and commercial and industrial were up a little over 1% for a net flat.

So to Daniel's point then, if I have numbers correct I think in the back half of '11, the third quarter your commercial/industrial volumes were down 2% and then they were I guess down 5.5% in the fourth quarter so now you swung to a positive year over year growth so to Daniel's point then so the improvement you're seeing there, I realize you're a later cycle beneficiary of any improvement in commercial and industrial construction but it sounds like perhaps you might be starting to see early signs of that. Is that fair?

That's fair. That's the feel, Brad. There is a lot more activity on the phones. The sales office is working a little bit harder, a little bit sooner it seems like and the bid award process has stretched back out just a little bit with the volatility we had in copper but again, the activity level, the feel is there is more activity and we do see some traction on the residential side. Again, it's not huge but the overall feel is a little bit better.

Okay, and then just last question for me -- on the pricing dynamics within the quarter, the smaller players that perhaps might have been acting a little irrationally in the quarter, were they U.S. based or were they international?

Both. Depending on what day it was and what week it was everybody kind of had their turn and then eventually I think pretty much everybody kind of caught the disease, so to speak, but the hard part is again, you can't really get in specifics on the pricing but the way that it works, when you start to have the prices being offered or faxed or whatever they're doing, it really does not stimulate demand. It may be counterintuitive to some folks to hear it that way but it really, the guys that are consistent buyers in the market weekly and biweekly and even some of them daily, everyone has a close eye on what they feel like copper is going to do or not do and then if some trend or bias is substantiated in the market with a wire manufacturer making some type of offer, if the guy is not ready to buy or whatnot, it really does not stimulate demand and I think it really does not operate like a trading desk.

But I think there is, I don't want to get too frustrated on the call and going down that path is nothing but frustration right now. Anyway, that's probably enough on the pricing side.

Just one follow up then, what do you think has happened recently that has catalyzed maybe a bit more rationality in the marketplace? Has any of that occurred?

Yes, what happens quite frankly is copper turns and it forces a little bit of discipline. It's almost like some of the lower prices that were offered or price cutting that is offered is for that moment but unfortunately, you just don't have the ability or you should, and we feel like we do but you just don't have the ability to pull that price back as quickly as you would like.

With the volatility, one day, two days down doesn't really get us all that jazzed up. You've got copper turns in the next two or three days and the bias is back on the upside so without that pricing volatility up and down you can kind of smooth out the pricing but unfortunately, for whatever reason we had some difficulty in the market in the first quarter with some folks being able to rationalize that.

Okay, thanks very much.

(Operator Instructions)

Our next question is from Brian Gibson from Edward Jones. Go ahead, your line is open.

On this undisciplined type of deal, I'm trying to get my mind around how this business works. So, if you give a quote for a project and then a competitor comes in and underbids you, do you follow that down or do you just walk away from it?

That's a real specific question and the answer is going to be more general. It just depends. Again, each individual quote somewhat stands alone but the general idea is, and I'm not sure I can explain to you well enough on one conference call how this works but basically what happens, the way you described it, we would walk. If we give a price and somebody comes in and cuts it, we would walk. Hopefully, and I believe for the most part, before we give a price we are in position to write the order so we're not into that auction, back and forth, who has got the better price-type of activities. That's just not what we do.

Then what you're saying is then on a more complex or bigger type deal, to get a deal done it could be several days or maybe weeks to put a deal together and then there might be some negotiating on that type of a situation then?

Yes Brian, I think that's fair. There is a lot of work today a lot sooner before a deal is ready to go but you know, if you put all that work in and then someone comes in last minute that has done no work and wants to cut the price for no value whatsoever, we would walk and that's very common for us to do.

Okay, my other question is how is everything going with the new aluminum wire building or business?

The building itself looks fantastic. I can see it right now out the window in the office here where we're sitting. Walls are up, roof is on. Machinery is going in and out one of the side doors here as we speak. It looks pretty good, actually. It's great. No delays that I know of at this point.

Okay, thank you.

And our last question is from Brad Evans from Heartland Advisors. Please go ahead, your line is open.

Just a follow up on the residential side, the volume, the decline that Frank highlighted, 7% in the quarter, does that feel more like seasonality than cyclicality at this point? I know that there has been some hope that housing starts are on the mend and I'm just curious what you might be seeing there. I realize DIY might be at play there as well.

Brad, sequentially -- you were asking year over year -- sequentially, residential was up about half a point, just to note that as well.

The numbers are not huge, again Brad, but on a small basis I would tell you the bias on the residential is on the positive side. I'm not really sure what to give the credit to. It depends on what report you read and the timing that comes out on permits and what-have-you but overall, from a residential manufacturing standpoint for us it is a little bit better. It's not great but it is better.

Okay and I'm sorry, $30 million to $40 million for CapEx this year, is that still a good range?

Yes, we're currently estimating about $28 million to $33 million.

Okay, and your sense is that working capital will be a use of cash this year as hopefully you return to some growth here in the upcoming quarters?

Yes but obviously highly contingent upon what the base metals do. If copper stays at this level and volumes pick up we'll need a little more into inventory and AR. If volumes pick up and copper goes down $0.50 it could go the other way. It's difficult to predict but our current projection which we're not in the projection business but I guess our current feeling as Daniel has indicated is we think the summer will be pretty good.

Thank you and our next question is from Robert Kelly from Sidoti and Company. Go ahead, please.

A question on the aluminum plant, as you ramp up production there -- and I don't think you've even started that just yet -- is that expected to be a material operating drag in the second half of the year?

No, I don't think so. We sell, we've always sold a bit of aluminum on a buy/sell type of arrangement and the aluminum plant itself will give us a little more flexibility and a little more control over what we're doing. I just don't want to say too much because I can see on the screen we've got several competitors on the line and I don't want to draw a roadmap for them. I recognize their phone number not necessarily their name but I would tell you that on the aluminum side, we plan, Robert, to hit the ground running with the aluminum product.

It's not something that is new. It's not something that we're introducing. It's really just going to be about more of the same with an expansion in control over the service level, very similar to what we've done in the past with other product categories where we were buying and selling it and the folks we were buying it from really couldn't keep up with what we needed to buy and to maintain the type of service level that we'll operate at we kind of had to take it in-house and that's really what's going to happen. It won't be, I don't see it as a drain at all. In fact, I think again to repeat what I said, I think we'll hit the ground running with the aluminum.

Excellent, thank you and then just one final one if you could -- volumes, are shipments flat roughly with a year ago, still in the absolute sense fairly low relative to where we've been historically? Could you give us an idea of where company-wide utilization is right now?

We're running five days which I think most everyone is. I'd love to be running 6.5 days. That would be perfect for me. We're running about five days in all categories basically other than the residential. Residential is running about four days and we use a half a day, maybe the fifth day, for the residential plant when necessary.

(Operator Instructions)

And we do have another question. This one is from Eric Marshall from Hodges Capital Management. Go ahead, please.

Hey guys, I got on the call a little late. Did you guys mention the LIFO impact for the quarter?

Yes we did, Eric. We said and I'll reiterate, in Q1 of '12 we increased cost of sales or took expense by $17.2 million which compares to the previous quarter, Q4 of '11, where we decreased cost of sales and expense by $19.8 million. That's indicative of the fact that in Q4, copper prices were dropping and in Q1 in general they were trending up and I also pointed out that between the two quarters obviously the two adjustments almost cancel each other out and our current reserve balance is $80 million.

Okay, very good. Thanks guys.

(Operator Instructions)

And we currently have no additional questions.

Towanna, I want to thank you for handling the call and thank you for the questions. As Frank indicated earlier, it is available for replay and if any of you folks have questions offline you can call us here at the office and we do appreciate your participation, look forward to talking to you next quarter. Thanks a lot.

Thank you ladies and gentlemen for joining today's presentation. That will conclude the call. Have a good day.