Encore Wire Corp (WIRE) 2012 Q2 法說會逐字稿

-- and gentlemen, and welcome to the Encore Wire Corporation quarterly conference call. As mentioned, 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, and a few other members of our management team.

The second quarter of this year was another fairly steady volume quarter in the midst of the industry recession. There are signs of bright spots around the country and talk of some major projects. The projects are discussed, but then get delayed due to all the uncertainty surrounding the global economy and political environment.

The good news is that our volumes are not trending downward. We believe our expansion of product offerings over the last six years to our existing customer base has been critical to maintaining and boosting our market share.

As we have repeatedly noted, 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 spread decreased 10% in the second quarter of 2012 versus the second quarter of 2011, while our unit volumes shipped in the second quarter of 2012 decreased 4% versus the second quarter of 2011. We believe the slight volume drop was due more to our attempts to lead or maintain pricing levels in the industry, while not taking some lower margin orders, than anything else.

There were several building wire industry price increase attempts that did not materialize or stick in the quarter, but led to reduced margins. On several of those occasions, the industry would announce a price increase in the face of a bias of upward movement in copper prices, only to have copper drop just after the effective date of the increase and effectively negate the increase. The volatility creates or leads to buyer uncertainty.

In summary, we attempted to lead or follow price increases during the quarter, most of which were unsuccessful, although we continue to support industry price increases in an effort to maintain and increase margins. We believe our performance is impressive in the economy, and we thank our employees and associates for their tremendous efforts. We also thank our vendors and 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. Each of you 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 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 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 financial results. Net sales for the second quarter ended June 30, 2012 were $264.7 million compared to $309.5 million during the second quarter of 2011. Lower prices for building wire sold in the quarter ended June 30, 2012 accounted for most of the decrease in net sales dollars, decreasing 13.2% per copper pound sold versus the same period in 2011. Sales prices declined primarily due to lower copper prices, which dropped 14.1%.

Unit volume in the second quarter of 2012 decreased 4% versus the second quarter of 2011. Unit volume is measured in pounds of copper contained in the wire shipped during the period. Net income for the second quarter of 2012 was $2.4 million versus $9.5 million in the second quarter of 2011. Fully diluted net earnings per common share were $0.11 in the second quarter of 2012 versus $0.40 in the second quarter of 2011.

Net sales for the six months ended June 30, 2012 were $545.2 million compared to $612.8 million during the same period in 2011. Lower prices for building wire sold in the six months ended June 30 accounted for most of the decreases in net sales dollars, decreasing 11.3% per copper pound versus the same period in 2011.

Unit volume in the six months ended June 30, 2012 declined 2.2% versus the same period in 2011. Net income for the six months ended June 30, 2012 was $9.1 million versus $20.1 million in the same period in 2011. Fully diluted net earnings per common share were $0.40 for the six months ended June 30, 2012 versus $0.86 in the same period in 2011.

On a sequential quarter comparison, net sales for the second quarter of 2012 were $264.7 million versus $280.5 million during the first quarter of 2012. Unit volume increased 2.1% on a sequential quarter comparison. Net income for the second quarter of 2012 was $2.4 million versus $6.7 million in the first quarter of 2012. Fully diluted net income per common share was $0.11 in the second quarter of 2012 versus $0.29 in the first quarter of 2012.

Our balance sheet is very strong. We have no long-term debt and our revolving line of credit is paid down to zero. In addition, we have $47.7 million in cash as of June 30, 2012. As previously announced, during the quarter, we purchased back 2,774,250 of our shares, representing approximately 11.8% of the outstanding shares of our stock from one of our major shareholders for over $66.6 million. We also declared another quarterly 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 call 855-410-0556, and enter the conference reference number 335562 and the pound sign.

I will now turn the call back over to Daniel Jones, our President and Chief Executive Officer. 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.

Chris, we'll now take questions from our listeners, please.

(Operator Instructions)

Thank you.

You're welcome. We do have a call. Our first call is from Tony Kure with KeyBanc. Go ahead, please.

(multiple speakers) Just a couple of quick updates. Could you talk about the mix of commercial versus residential during the second quarter?

Yes, sir. In the second quarter, the residential pounds constituted 19.9% of the pounds of copper sold, which is up a little from 17.4% in the second quarter of last year.

Okay. And then could you give (multiple speakers) --

(multiple speakers) That would leave the rest -- I'm sorry -- that would leave 80% to the commercial side.

Right, okay. And then could you just talk about how the quarter trended, maybe month-to-month, sort of the linearity of the quarter as you progressed? And then, I guess to add on to that, do you think there was -- I mean, volumes up 2% sequentially. Maybe would that be considered a little less than the seasonal bump you'd get into the second quarter? And if I'm right on that, do you think that maybe better weather may have helped the first quarter disproportionately?

You know, I think weather, Tony, certainly is a factor usually. As far as how the quarter trended, it seemed that it was pretty even for the most part. The challenge being in the second and third week of June, as far as the pricing volatility in the market, only because we started out -- I believe we started out the quarter with Comex around $3.72 -- $3.72 a pound, and ended up around $3.35 a pound.

So, when you have the price of copper trending or trending a bias on the downside, it's tough to stay ahead of the price discounting or the volatility, if you will. But, overall, as far as the -- and that has to do with the pricing side -- but as far as the volume side, it was pretty even through the quarter each month, with June actually being the strongest of the three months in volume. But it was not a significant increase.

Okay, so -- but was that less than a sequential -- less than a normal sequential increase into the second quarter?

I guess it would be hard to identify what's normal.

Okay. (laughter)

I mean, the volatility, again -- and I hate to make the question specifically, but with the volatility that we have in all the raw materials, and diesel, for example, any of the (technical difficulty) four or five indices that we watch, they're all over the place.

So, to give you an idea of what would be a normal quarter is kind of hard to do. But in spite of the volatility and lack of discipline that we saw in the market in the second quarter attributable probably to that volatility, you know, we chose not to participate in some of the lower margin quotes that came across. And when I say low, they were significantly low.

I think the volume was good for the quarter. Now as far as if it's normal or not, I don't have a good answer for you other than to tell you, as mentioned earlier in the prepared statement, that there appear to be -- appears to be several projects that are working and waiting. But again, when you have a bias or a trend in copper on the downside, from the first of the quarter to the end, if there's any time available for those jobs or projects or quotes, those buyers just hold off.

They want to try to pinpoint the bottom, which normally means the bias or the trend has to turn. And once it turns and starts to go on the upside for a few days or even a week, you flush out most of the urgent jobs. And I know we're specifically talking of the second quarter, but I think you could see Comex for the month of July and form your own conclusions.

Okay. Just two more quick questions. I think in your press release, it mentioned distributors sort of contributing to that caution and trying to time the copper market. Can you speak to what their -- if you know what their point-of-sale or their sales-out were, relative to your sales into the distribution channel, the rate?

And then my last question is just if you could comment -- I don't know if you can disclose this or you just leave this for the queue -- what the LIFO adjustment to the COGS line was during the quarter?

Yes. The distributor feel -- and I travel quite a bit and talk to customers every day for very -- you know, different reasons, but most of the feedback that I'm getting, Tony, from the distributor customer is their inventories, obviously, are super lean when it comes to copper on the timing side of when they purchase and when they don't.

A lot of times they'll run completely out of something, because they read an article or read something on the Internet that predicts copper is going to be cheaper next week or go down for whatever reason, whether it be the eurozone reports on Spain and Greece and what have you, or uncertainty in Europe. All the above -- all the reasons that you could give as to why copper would go down one day to the next, those are exactly the same reasons, usually in print, as to why copper went up the next day.

So, that's the risk that the distributors have been willing to take, unless they're forced by their contractor customers to step in and make a buy on their behalf. But as far as speculating on inventories or purchasing or timing of a buy, I believe it's gotten to the point where distributors are buying what they feel like they need when they need it, rather than trying to beat or get ahead of a bias or a trend.

So, the most part, inventories are super lean; distributors are doing a very good job of managing that from a cost standpoint and operationally. And I do think that that fits into the model that we go to market with. We're not afraid to carry the inventory, but we certainly keep a close watch on our fill rate and our leadtimes into the market. And we have actually been able to narrow those leadtimes a little bit into the markets that we serve.

So, all in all, the distributor feedback and feel is more positive than negative. But again, it's still -- they're buying basically what they think they need when they need it.

And Frank, do you have that LIFO number he was looking for?

Yes, I do. For the quarter, Tony, LIFO was a decrement to cost of sales of $7.6 million, and that's almost exactly what it was in Q2 of '11, which was $6.9 million. So, it's only a change net-net of $700,000. For the six months ended in '12, LIFO was a increase to cost of sales of $9.6 million.

Great. Thanks so much, guys.

Thanks for the questions, Tony. Appreciate it.

Tom Brashear, Preston Capital Management.

Good morning, Daniel; good morning, Frank. (multiple speakers) The housing construction numbers have been led by multifamily. Are you all seeing or experiencing any percentage increase in single-family usage of your residential product? Do your distributors share that with you, do you know?

Yes. I mean, there's distributors that have a reputation for being in that market specifically. You know, again, it's more positive than negative. I think that was reflected in our residential uptick over the first quarter. I guess that's the best way to describe it.

There's more positive than negative. There's still quite a few areas that have not maybe picked back up the way that some folks would like it. You know, again, Tom, depending on what you read in print, either Internet or what have you, a lot of the reports on single-family from one month to the next, and sometimes even during the month, the numbers actually contradict themselves. They'll be up early and down late or vice versa, based on what is expected.

I'd love to speak to the folks that put out the number as to what is expected, because I don't know where they draw their information from. But overall, the feeling on the residential side, again, is more positive than negative.

Very good. Thank you so much.

You bet. Thanks, Tom.

Joe Giamichael, Global Hunter.

Just a quick clarification because we couldn't hear you particularly well here. When you're discussing the LIFO adjustments, I couldn't tell if you said decrement or detriment. So were your cost of goods increased or decreased by the $7.6 million in Q2?

They were decreased in Q2 of '12, which was almost exactly the same effect and amount in Q2 of '11.

Got it. Got it. And could you just give us an update on the aluminum facility expansion?

Yes, Joe, I will. The building was wrapped up and complete, and the certificate of occupancy was issued May 30. We're in the process of shaking down the equipment now and we still have equipment being delivered. Everything that we know through this morning seems to be good. No issues that I could tell you as far as delays. It all seems to be progressing pretty much as we planned, and it looks great.

Again, I mentioned earlier in the prepared statement, thanking our vendors. They've done a fantastic job of getting us the types of adjustments and changes that we required, and feel good about it going forward. Sales is very excited to have a little more control in-house of that product, as far as inventory and distribution and manufacturing. And it's going along very well.

Great. And just last question, more of a bookkeeping issue because the 10-Q is not out yet. What was the total CapEx for Q2?

CapEx for the six months is $24 million. For the 10-Q, I don't have that right in front of me, Joe.

That's fine. We'll -- that's fine. That's good enough. Okay, great. Well, thank you very much, guys.

Thanks, Joe.

Brian Gibson, Edward Jones.

I'm not a financial wizard here, but I'm trying to figure out how you basically start the quarter with 80-plus-million in cash, spend 60-some-plus-million on stock, make a net $2 million, but it looks like, to me, you added about $30 million to your coffers. And I don't see where Accounts Receivables were way down. How can we come up with all this cash?

I'll tell you. Very easy. Cash flow -- and again, I'm looking at it on a year-to-date basis -- cash flow on a year-to-date basis has been positive by $27 million. $9 million of that is earnings; $7 million of that is depreciation. We did pick up $11 million on the inventory line, and we did pick up another $10 million on the AP and other liabilities, which is just due to timing. At year-end, generally, we're low. And at the end of this quarter, we're a little up. So, we have picked up $27 million.

Okay. And then just real quickly here. This $0.11 a share, is that based on the reduced number of shares that we have now?

It is on a rolling average. And so for the quarter, for example, the fully diluted share amount is still at $22 million, just a hair over that, when you weighted average in the fact that we bought them back in May. And that number will be trending down. The actual number physically outstanding today is $20.3 million.

Okay. Okay, very good. Thanks.

You're welcome.

(Operator Instructions) Robert Kelly, Sidoti & Co.

I had a question on the competitive landscape. There's less competition than there was five, 10 years ago. But you're still dealing with a pretty intense competition. Is it tied to certain regions? Or is it pretty hard and fast nationally, that you're running into the inconsistent pricing that you detailed in the release?

Robert, it actually is a little bit of both. There's guys -- there's competitors that go to market a little bit differently, that try to do some things in different geographical regions that cause those problems. And there's also some regional players that -- the best way to put it, say they're an irritant in the market, for the most part, you know.

And to put a little color to that, what ends up happening, you know, they get in at a point in the quote process leading with price. They tend to muddy the waters somewhat. And I'm trying to speak somewhat carefully here because it is price-related usually. And then all's it takes is for one of the national-type competitors to match that price, which gives verification or authentication to that price, and you either catch the disease or you don't participate.

And usually it has to do with timing on the copper situation. If you have a bias or a trend on the upside during the quarter, it tends to clean some of that up, and maybe force a little bit of discipline that we've talked about in the past. And then on the bias or the trend on the downside, for whatever reason, it appears that they try to discount beyond the decrease in the price of copper per pound proportionately.

So, it really is a handful of both. There's a couple of marketing areas that are known to be littered with predatory pricing on the downside. And there's a couple of regional-type manufacturers that are known to go to market and lead with price. And so, any type of excuse, if you will, in the market itself for those end-users or contractors or distributor buyers to use as leverage on the downside, it certainly contributes to the pricing to go in the wrong direction.

Thanks. Thanks very much. Helpful answer.

You bet.

There do not appear to be any further questions at this time. Gentlemen, I'll return the conference to you.

We certainly appreciate all the folks that have called in today. If there's any more questions that you would have, you can reach us at the office any time. And, again, we do appreciate your support and your participation in the call. And Chris, we appreciate the job you've done for us today. And we'll speak to you next quarter. Thanks a lot.

Thank you. This now concludes our conference call. Thank you all for attending. You may disconnect.