Encore Wire Corp (WIRE) 2013 Q2 法說會逐字稿

Good morning ladies and gentlemen, and welcome to the Encore Wire second quarter earnings call. My name is John, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later we will conduct a question and answer session. Please note that this conference is being recorded. I would now like to turn the call over to Mr. Daniel Jones, President and CEO. Mr. Jones, you may begin.

Thanks John. And good morning ladies and gentlemen, and welcome to the Encore Wire Corporation quarterly conference call. I am Daniel Jones, President and Chief Executive Officer of Encore Wire, and with me this morning is Frank Bilban, our Chief Financial Officer.

The second quarter of this year was encouraging to us from both the volume and margin perspective, Unit volumes were up in the building wire, in all building wire products. We believe our expansion of product offerings over the last several years to our exist existing customer base has been critical to maintaining and boosting our market share, as our capital expenditures helped to drive increased sales.

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 increased 18.1% in the second quarter of 2013 versus the second quarter of 2012. While our copper unit volume shipped in the second quarter of 2013 increased 8.1% versus the second quarter of 2012, the copper spread expanded as the average price of copper purchased fell 8.3% in the second quarter of 2013 versus the second quarter of 2012, but the average selling price of wire sold fell only 2.1% as a result of improved pricing discipline in the industry.

The same positive trend was evident on a sequential quarterly comparison, as copper unit sales increased 13.9% with a 5.7% increase in spreads. Our aluminum plant is now online and capable of producing our full line of products that we offer. The aluminum building wire products grew to 6.6% of sales in the quarter driven by unit sales increase of 33.7% on a sequential quarter basis.

We continue to strive 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 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 have 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 would like to 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 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 may I 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 will be happy 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 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 financial results. Net sales for the second quarter ended June 30, 2013 were $289.5 million compared to $264.7 million during the second quarter of 2012. Copper unit volume measured in pounds of copper contained in the wire sold increased 8.1% in the second quarter of 2013 versus the second quarter of 2012. Accounting for most of the increase in net sales dollars.

Aluminum building wire sales also contributed to the increased sales, constituting 6.6% of net sales dollars for the second quarter of 2013 versus 3.5% in the second quarter of 2012. The average selling price of wire per copper pound sold dropped 2.1% in the second quarter of 2013 versus the second quarter of 2012, slightly offsetting the increase in sales dollars.

Net income for the second quarter of 2013 was $15.5 million versus $2.4 million in the second quarter of 2012. Fully diluted net earnings per common share were $0.75 in the second quarter of 2013, versus $0.11 in the second quarter of 2012. The second quarter of 2013 included increased aluminum production activity which enabled enhanced overhead allocations that favorably impacted quarterly results by approximately $0.06 to $0.10 in net earnings per share.

Net sales for the six months ended June 30, 2013 were $554.8 million, compared to $545.2 million during the same period in 2012. Copper unit volume in the six months ended June 30, 2013 increased 2.6% versus the same period in 2012, offset by a 3.9% drop in average sales prices. Aluminum building wire sales accounted for the increased sales constituting 6.1% of net sales dollars for the six months ended June 30, 2013 versus 3.2% in the six months ended June 30, 2012.

Net income for the six months ended June 30, 2013 was $21.9 million versus $9.1 million in the same period in 2012. Fully diluted net earnings per common share were $1.06 for the six months ended June 30, 2013, versus $0.40 in the same period in 2012.

On a sequential quarter comparison net sales for the second quarter of 2013 were $289.5 million versus $265.4 million during the first quarter of 2013. Copper wire unit volume increased 13.9% on a sequential quarter comparison, offset somewhat by a 5.2% decrease in average sales prices. Aluminum building wire sales also contributed to the increased sales, constituting 6.6% of net sales dollars for the second quarter of 2013 versus 5.7% in the first quarter of 2013.

Net income for the second quarter of 2013 was $15.5 million versus $6.4 million in the first quarter of 2013. Fully diluted net income per common share was $0.75 in the second quarter of 2013 versus $0.31 in the first quarter of 2013.

Our balance sheet remains very strong. We have no long-term debt, and our revolving line of credit is paid down to zero. In addition, we had $1.2 million in cash as of June 30, 2013 which includes after we purchased 201 acres of land for $25.7 million as previously announced in a press release. We also declared another quarterly cash dividend during the quarter.

I would like to remind you that this conference call will be available tore for replay after the conclusion of this session. If you wish to hear this taped replay please call 877-764-8714, and enter the conference reference code 338967 and the pound sign. I will now to turn the floor back over to Daniel Jones, our President and Chief Executive Officer. Daniel.

Thank you. As Frank highlighted, Encore performed well in the past quarter, and we believe we are well-positioned for the future. We will now take questions from our listeners, John.

Thank you. We will now begin the question and answer session. (Operator Instructions). Our first question comes from Robert Kelly. Please go ahead.

Hi, good morning everyone.

Hey, Robert.

Question on the volume growth that you saw in Q2 compared to a year ago. Is that just weather deferred sales from 1Q falling into the second quarter, or are you starting to see a little bit more strength in the end markets?

A great question. We are actually seeing a little bit more strength. The time involved from the quote, or actually when we start the process possibly even before the quote comes in, that timeline from beginning to purchase order has shrunk a little bit, which is a good thing, and what that means the decision to go toward with the project itself is happening a little bit faster. It is not super so much quicker that you would give it a bunch of attention, but it certainly has shrunk. It is the volume is coming in a little bit quicker than last year, and certainly toward the end of last year. We could see a little bit of that in the first quarter, but it was very evident in the second quarter, that the process from start to finish to actually secure an order is happening a little bit faster.

Okay. And then as far as the spread expansion that you saw, this is one of the strongest gross margins Encore has about put up in a couple of years. Should we expect that to continue in the second half of the year, or does the fluctuations in copper kind of X that out, given a still pretty weak end market demand?

It is hard to say what is going to happen in the second half, but what we had in this quarter and somewhat in the first quarter, copper volatility is obviously not new. Settling of the market somewhat relates to that shortened time frame from beginning to end on the order process. Folks are moving forward with projects, and regardless of what copper is doing or not doing, they need the material on the job site. So when that happens and super lean inventories in the field, and I would go into detail on some of the other things that contribute to that, but most of the time when you have a little bit of an increase in demand and the inventories are as lean as they are, we are able to charge a little bit more for our service and product. If we didn't have the service level that we offer we would not be able to do that.

So even though our inventories here are somewhat lean, our reaction time is pretty incredible. So all that kind of coming together, Bob, is really what is happening folks are needing the wire on the job site. There are a few things we do to differentiate ourself in the market. Those have proven to be a value, and folks are willing to pay for that value. I see no reason sitting here today that it doesn't happen going forward, but having said that, over the last 20 to 25 years of doing this, things happen that shouldn't, or whatever. But as of right now, things are going along pretty well.

Great. Just one final one on aluminum wire. A really strong start after commissioning the plantearlier this year. Where are you as far as utilization? How much more can you ramp that product in the short run? And I know it is obviously dependent on demand, but how much production capacity do you have for aluminum wire?

The easy answer is a lot. We don't want to get too specific on that, because I can see on the screen we have got a couple of competitors that call in and change their names, and all of that stuff, but whatever. The aluminum, the ideal on the aluminum plant hasn't changed. With the complexion of the orders that come in today, and have been coming in for the last couple of years, the complexion has become a little more complicated, the market itself. Folks are buying less of an individual product, but a broader product category on each order. They want less transactions, all of the things that the distributors are looking for that we have talked about in the past. And the aluminum was a big piece.

We have always sold aluminum in a buy and resell arrangement with folks and their changes, not ours but their changes actually put us in the aluminum business. We weren't able to service the customers in the fashion that we would like to service them buying and reselling, so we built our own plant. And really the service itself and the limited product offering that we have in that market is really just a good fit with our current existing customer base, and helps us to secure those copper orders without that particular customer going somewhere else to get the aluminum piece which typically is a smaller piece of the order.

Having said that, with the copper volatility, we have seen and I don't think it is any secret, there has been some substitution on occasion. Sometimes it is published, sometimes it is not. But the aluminum itself is going well. We eased into it. We are not out there trying to be everything to everybody obviously, but the existing customer base that we currently have, we will be able to fulfill their aluminum needs going forward whatever that means.

Okay. Thanks.

You bet. Thank you.

Thanks, Bob.

Our next question comes from Tom Brashear. Please go ahead.

Congratulations gentlemen. My question, are you seeing pricing discipline in the current market, and if so is this due to lean inventories, or what are the reasons?

We are seeing some discipline. I mean there is several reasons. You always hope for the best, but a lot of things have happened. The copper volatility, business picking up a little bit. I don't want to go on a political path here, but basically what we are seeing in the market, Tom, folks are going ahead with projects. There is a little bit of optimism out there going forward. Our customers that we check with and speak with and travel with, and so forth, they are all doing a little bit better in different categories.

As an industry overall I think folks are doing a little bit better. There just seems to be a little more optimism,a positive outlook going forward. I don't think that is any surprise to anyone, and we are able with our service and quick turnaround on the orders and order fill rates, some of the things that we offer on the sell side, folks like to carry lean inventory or second guess whether or not the copper run-up is real, or the copper dip is real, or what have you. The volatility they can hold off until the last minute, and place the order with us and receive 100% fill rate, and three or four day lead times, those kinds of things. It really is a combination of just a lot of things getting a little bit better. And we are able to take advantage of that.

Very good. Certainly enjoyed the Investor Day.

Yes, thank you very much.

Analyst day. Thank you all for hosting that. Thanks again.

You are welcome.

Our next question comes from Brett Feldman. Please go ahead.

Hi, good morning. Nice quarter.

Hi, Brett.

Thank you.

Good to talk to you.

Just on the unit volume growth you mentioned kind of up across the board. Could you expand a little bit more kind of where you are seeing more strength than others? I know you have got various SKUs in various markets, but any markets you could single out that are stronger than others?

I think they are typical. The larger metropolitan areas seem to all be doing well. There was a time when most of the downtown areas across the country in the larger cities would have cranes in the air, and one tenant may move into a vacant building, or expand two or three floors or whatever might happen, and that will initiate conversations, which lead to auxiliary type jobs and services that end up needing wire. They will gut those buildings. It is not considered new construction, but when those types of things are visible, people feel a little bit better about moving forward with their projects. But geographically speaking it is really downtown in major cities, colleges and universities still are expanding across the country,stadiums,sports arenas. It really is pretty widespread. It is not any one specific geographical area, but it is and seems to be if you had to say one area, it is the heavy trafficked cities across the country.

That is helpful. And kind of from a residential versus nonresidential perspective?

Residential if you are talking Q2 over Q2, Brett, residential was up 8%. 8.2. Again, we have been cautioning people that is off a very low base, but it is encouraging to see the uptrend. And commercial wire was up year-over-year about 7%. So both of them were up pretty much in concert with each other.

Okay. Interesting. And then if you kind of look at the three months of the quarter, any month there that was abnormally stronger than others or pretty consistent throughout?

Not really.

It was pretty consistent actually. And again, it is tough to tie it to anything, any one thing. Seasonality, weather, when something goes bad it is easy to try to find something to pin it on. But when things are good as they are right now, it just seems to be a combination of things.

Okay. And you may or may not want to respond to this one, but I will ask anyway. Margins on aluminum, are those above or below kind of the consolidated gross margins this quarter?

Aluminum right now is a little better than the copper. It is not a huge number. But today it is a little bit better.

Okay. And last one probably for Frank. The increase in this SG&A is not a huge number, but is that just a variable component of that with sales, or anything thinking about going toward from a fixed perspective?

No, it is absolutely the variable components, our selling expenses are made up of really only two accounts, which is freight and commissions, which vary directly with the top line sales. And so they went up from $11.2 million to $12.1 million. The regular quote G&A cost was totally flat at $4.1 million.

Thanks guys.

You are welcome.

Thanks for the questions. Those were good ones.

Next question from [Bill Baldwin]. Please go ahead.

Hi, good morning Dan and Frank. If you have been asked this I apologize. But with the aluminum plant now up and running, is it possible to say that some of these copper mines that we have seen here is a function now of getting more of the copper orders that you otherwise might not have gotten without the aluminum?

Well, we like to think so, Bill. That is the thought process behind the aluminum to begin with. So I think the easy answer is yes. Yes.

It is kind of difficult to quantify?

It really is because you don't know what, the ones that you miss you don't know what or why you miss them. Typically the assumption from our competition when they lose something is, it is all price, so they immediately begin to cut prices in the market. We don't have that approach.

Right.

So it really is tough to quantify. We try to move on to the next one.

And I take it from your comments, Daniel, that your ability to deliver on aluminum building wire is similar to copper building wire, as far as delivery times are concerned to your customer?

That is correct, yes. We have been very fortunate, the team here has done a phenomenal job on turning those aluminum orders around. Obviously it does ship with the copper, so you can't do one without the other or you know what would happen, and the service would suffer, and it shows up in freight, and so on and so forth. We have been very fortunate. A great team. We did not try to shove this product into the market. We took our time and actually turned down quite a bit of business and eased into it, and today our is service level is fantastic.

Are some of the benefits, Daniel, that you are seeing here on overhead absorption as a result of aluminum is that a result of better freight arrangements, now that you are shipping more tonnage per shipment, or is that not a factor here?

Bill, the overhead does not include the freight.

I was going to say no.

Okay.

It the easy answer there. And just to expand on that a little bit, the freight piece of it whether the aluminum, if an order is copper only or includes aluminum, we still would ship the same pounds in a trailer.

Okay.

It is not a real complex process. We have a cutoff on what we consider to be a truck load, and we work very hard at making sure each truck that rolls out of here is full, and it is full from a weight standpoint. So the easy answer is no on the overhead.

Okay. Thank you.

Yes sir. Thanks Bill.

Our next question comes from Brett Feldman. Please go ahead.

Frank, I think I heard you say a $0.06 to $0.10 benefit from higher production at the aluminum plant versus the prior year. Should you see a similar comparable benefit into the quarters of the second half?

No, and that is why we mentioned it into the press release. That really was just an adjustment to our overhead calculations, which was pretty minor, but as you probably can deduce, any new plant is going to be a little tricky to set an overhead allocation rate when it is first ramping up, and all of the machines aren't running, and you are getting a little high scrap. And now in second quarter as we reached a little more normalized level of production, we were able to get a little more accurate with our overhead allocations, and therefore we saw maybe a $0.06 to $0.10 increment to our earnings that we mentioned, because we don't think that will repeat.

Got it. Thank you.

You are welcome.

(Operator Instructions). Our next question comes from Kerry Rigdon, please go ahead.

Good morning gentlemen. Frank, a quick follow-up, you talked about the year-over-year change in the residential and commercial mix. What was it just if you have it quarter-over-quarter?

A sequential quarter?

Yes.

Sequential quarter you are talking about the incremental changes in residential and commercial.

Correct.

Residential was up half a percentage point Q1 of 2013 to Q2 of 2013, and commercial wire was up about 18.5%.

Great. Thank you.

You are welcome.

We have no further questions at this time.

John and ladies and gentlemen, thank you guys very much for participating. The questions always help to make the call go better, and we look forward to speaking to you guys next quarter. Thanks a lot.

Thank you, ladies and gentlemen. This concludes today's conference call. Thank you for participating. You may now disconnect.