Encore Wire Corp (WIRE) 2012 Q3 法說會逐字稿

Hello and welcome to today's third quarter earnings call. As a reminder, all lines will be on listen-only mode. There will be time for question and answer at the end of the call. (Operator Instructions)

I will now turn the call over to Daniel Jones, President and CEO. Please go ahead, Daniel.

Thank you, Brendan. Good morning ladies and gentlemen and 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.

The third quarter of this year was another fairly steady volume quarter in the midst of the construction industry recession. There are signs of bright spots around the country and talk of projects. Major projects are discussed but then get delayed due to uncertainties surrounding the global economy, the U.S. economy, and even 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 perhaps boosting our market share.

As we have repeatedly noted, one of the key metrics to our earnings is the spread between the price of wire sold and cost of raw copper purchased in any given period. The spread increased 7.8% in the third quarter of 2012 versus the second quarter of 2012 while our copper unit volume shipped in the third quarter of 2012 increased 1.6% versus the second quarter of 2012.

Comex prices for raw copper were somewhat less volatile in the first two months of the quarter than the previous quarter and then rose in September, allowing us to marginally enhance spreads. As illustrated, relatively small movements in the spread can affect our earnings per share and were a positive influence on a sequential quarterly comparison.

Conversely, spreads were down 17.3% in the third quarter of 2012 versus the third quarter of 2011 and down 8.8% on a year to date basis in 2012 versus 2011.

We continue to lead and 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 distributor customers are holding lean inventories in the field. As orders come in from 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 very lean inventories.

We believe our performance is impressive in the 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 will take any questions you might have. Each of you should have already received a copy of Encore's press release covering Encore's financial results. This release is also 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 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 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 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, 2012 were $269.2 million compared to $319.4 million during the third quarter of 2011. Lower prices for building wire sold in the quarter ended September 30, 2012 accounted for most of the decrease in net sales dollars, decreasing 15% per copper pound sold versus the same period in 2011.

Sales prices declined primarily due to lower copper prices which declined 14.2% versus the third quarter of '11. Unit volume measured in copper pounds contained in the wire sold decreased 2.7% in the third quarter of '12 versus the third quarter of '11.

Net income for the third quarter of '12 was $5.5 million versus $13.7 million in the third quarter of 2011. Fully diluted net earnings per common share were $0.27 in the third quarter of 2012 versus $0.59 in the third quarter of 2011. Net sales for the nine months ended September 30, 2012 were $814.3 million compared to $932.2 million during the same period in 2011.

Lower prices for building wire sold in the nine months ended September 30, 2012 accounted for most of the decrease in net sales dollars, decreasing 12.7% per copper pound versus the same period in 2011.

Unit volume in the nine months ended September 30, 2012 decreased 2.4% versus the same period in 2011. Net income for the nine months ended September 30, 2012 was $14.6 million versus $33.8 million in the same period of 2011. Fully diluted net earnings per common share were $0.66 for the nine months ended September 30, 2012 versus $1.45 in the same period in 2011.

On a sequential quarter comparison, net sales for the third quarter of 2012 increased 1.7% to $269.2 million versus $264.7 million during the second quarter of 2012. Unit volume accounted for this increase, rising 1.6% on a sequential quarter comparison.

Net income for the third quarter of 2012 increased 133.2% to $5.5 million versus $2.4 million in the second quarter of 2012. Fully diluted net income per common share increased 148.1% to $0.27 in the third quarter of 2012 versus $0.11 in the second 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 as of September 30. In addition, we have $18 million in cash at the end of the quarter. We also declared another quarterly cash dividend during the quarter.

This conference call will be available for replay at the conclusion of this session. If you wish to hear the taped replay, please dial 855-410-0556 and enter the conference reference 336232 and the # sign.

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

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

Brendan, we'd now like to open up the lines for questions from our listeners.

(Operator Instructions)

Our first question is from Tony with KeyBanc. Please go ahead, Tony.

A couple questions, could you just -- let's just start off with the mix of non-residential versus residential volumes for this quarter and then could you maybe follow up with how do you feel that those trends play out in a recovery mode meaning if residential is in fact recovering, does non-resi typically, in your view, lag that somewhat or is it maybe different this time that it could play out with a recovery going on in parallel?

The residential percentage of our total pounds shipped in Q3 of '12 were 18.8% and that's up a little over the year to date numbers which are 17.7%.

Tony, the other part of your question, if I could try to make sure that I'm clear on what you're asking, we are seeing some areas where residential demand is a little bit better. I wouldn't say that it's fantastic or anything but certainly better. I don't know that it's really a trend as much as it may be a bias right now but it certainly is there and what we've seen historically in the past, at least for me, the non-resi would typically follow the residential as the rooftops or as numbers start to support or show that they're trending in the right direction. That's when you'll see the support type non-residential construction follow convenience stores, gas stations, movie theatres, what have you, restaurants, whatever but right now, the residential seems to be increasing slightly. It's been pretty steady. There really was not one month where it was super heavy for any particular reason. It just seems to be a little bit better going forward.

Okay, thank you. That's helpful and then a couple more questions. What were the LIFO adjustments on the cost of goods sold line and then did you liquidate any LIFO layers during the third quarter?

As will be detailed out in our Q which will come out probably late next week, Tony, our LIFO charge or expense for the quarter was $2 million which brings the total for the nine months up to $11.6 million and it brings the total reserve up to about $74 million.

And the second part of your question was?

Did you liquidate any LIFO layers during the quarter?

No, we did not. We added a slight amount of inventory in the quarter.

Okay and then if I could just sneak a couple more in, the progress on the new aluminum facility, I know that this is a long time coming, I'm wondering is that going to contribute at all to the fourth quarter or is sort of the material contribution going to start early next year?

Just as you outlined, I believe that there will be some contribution in the fourth but most of it will be coming in the first quarter but it's going well. I don't know of anything to tell you that is delayed or would be delayed. It seems to be progressing pretty much on schedule as we thought it would. It looks great. It's running great. We built a little bit of inventory and just repeat. Not a whole lot in Q4 but should start to see a little bit of that contribution in the first quarter.

Okay great, and then I'll just -- one more. How do quarters typically play out if there is any linearities that a trend, meaning are your quarters backend loaded typically or are they generally month by month pretty linear or is there no trend? Just curious how the quarters typically play out.

I think you've got a good handle on it. The answer really is all of the above. We've had quarters that have been linear. We've had some that have been backend. We've had some that were front end. This particular one seemed to be going along, and it would depend too if you're looking at purely in volume or what have you but they're kind of hard to predict because the volatility in copper seems to have a huge effect. September seemed to be the slowest month of the three but it also had the most copper volatilities so it just depends really on several different factors but I don't know that there is a consistent way to look at which direction that quarter might go or might not go but we've actually had all of the above.

(Operator Instructions)

And at this time we do not have any other questions.

We have a couple questions that have come in. Our first question is from Brian with Edward Jones Investments. Please go ahead, Brian.

On the aluminum facility, is aluminum wire becoming more popular because it's cheaper? If aluminum stays cheap, I assume that trend will continue but if it gets expensive, will people go back to copper? How do you see this aluminum deal playing out?

I think the easy answer is aluminum has been around for awhile and becomes considered obviously as an alternative the more expensive copper becomes in certain situations but overall, most of the copper orders have some aluminum mixed in with them. There are different uses but for the most part, the category that we're shipping into currently is where we are and that's what we're going to continue to do. We've sold and shipped aluminum for several years and we'll continue to do that. There were some things going on in the market which were demand driven obviously as you pointed out and then there was some posturing by competitors that we feel like pushed us into having control of our own production. I think you may or may not have read but General Cable bought Alcan assets that were aluminum suppliers and so forth so there are a lot of factors involved in the plant but certainly we don't see it as a straight up substitute. It's more of something that is in the trailer that is already being delivered to our customers where the peculiarities have already been identified.

Okay, we have another question from Tony with KeyBanc. Please go ahead, Tony.

Could you just talk about, you mentioned the distribution channel's inventories are pretty lean. Could you talk about their sales out versus your sales in to them at all and then any chance that these guys do some window dressing to close the year, maybe liquidate inventories and make them super lean as we close out the calendar year?

I don't know -- I'll start and go backwards -- I don't know, Tony, for sure how much room they have to go from where they are to super lean. I know end of year taxes in certain geographic regions on inventory would be an issue for the most part but what we see on that or what we've seen in the past, they'll push deliveries out until after yearend inventory, first week of January, something of that nature. I don't know though how much room, I don't know that it could go leaner.

For the most part, everyone that we know and sell to and ship to and have the relationships with and travel with and all those things, they're about as lean as they can get and still support and service their customers and that's kind of where we're at. We're about as lean as we want to be to maintain service levels and 100% fill rate and so on. You start to forfeit service, you're going to spend it in freight and headaches so for us, the idea in the model is to carry enough inventory to service the demand and as the demand continues to creep up and trend up and have a bias in the upward position, we'll add a little inventory appropriately in those areas and I think that's kind of the way the distributors do it as well. From order entry to delivery we've been able to take a little bit of time out of that which also is one of our sales keys and success strategies. We try to help our distributor customers continue to maintain about as lean as they can get by with and that may not be as specific as you'd like it but that's kind of the answer.

I just don't know that there is room to be more lean if you will but there certainly will be some type of posturing at yearend to avoid some kind of inventory tax by somebody, I'm sure.

Do you have access to what their sales out are or no?

Do you mean in like an increase over year over year or something of that nature, or how they're running? I'm not sure that I get --

What I mean is, well obviously you know what you're selling into the distribution channel. What I'm wondering is how that differs at all relative to their sales out, if you know.

We just had a -- it's a great question -- and in the quarter we actually had several annual-type meetings with folks and whatever and from those meetings for the most part, with the folks that we're selling, we're up and if we're up that means that they're up on the sell side on our product category.

As far as overall in the industry and what's happening with other product categories and so forth, I really can't speak to but for the most part, most distributors that we talked to in our meetings in the last 60, 90 days, they've been up -- not substantially but again, up is better than down.

I think last quarter you talked about sort of walking away from low margin deals because you didn't want to take on that. Can you contrast that with maybe how things played out in the third quarter? Did you have to walk away less this quarter? Is that fair to assume?

Yes, for the most part on the front end but again, the volatility in September, we did walk away from some orders in September that just made absolutely no sense whatsoever. Price, and I'm not supposed to get too deep into that specifically but there were products that were being pushed, not just sold but being pushed at the end of the quarter by competitors at prices that were just ridiculous. They were below the cost of the raw materials in the products so we definitely let the competitors have those but again, the volatility kind of breeds that issue. If we get a bias or a trend on the upside, it forces discipline and I think you've seen in the past what can happen with earnings when there is forced discipline in the market.

At this time we do not have any other questions.

Brendan, thank you and thank you to the listeners, specifically Tony for the questions, makes the call go a lot better and look forward to talking to you guys next quarter. Thanks very much.

Thank you for joining today's conference. This conference call has now been concluded.