Encore Wire Corp (WIRE) 2013 Q3 法說會逐字稿

Welcome to the Encore Wire Corporation third-quarter conference call. My name is Shannon 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 will now turn the call over to Mr. Daniel Jones, President and CEO of Encore Wire. May begin, sir.

Thank you, Shannon. 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.

Continuing in a positive trend we saw developing in the second quarter of this year, the third quarter was encouraging to us from both the volume and margin perspective. Unit volumes were up in all building wire products. We believe our expansion of product offerings over the last several years to our existing customer base has been critical to maintaining and perhaps 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 6.2% in the third quarter of 2013 versus the third quarter of 2012, while our copper unit volume shifted in the third quarter of 2013 increased 15% versus the third quarter of 2012.

The copper spread expanded as the average price of copper purchased fell 7.5% in the third quarter of 2013 versus the third quarter of 2012. But the average selling price of wire sold fell only 4% as a result of improved pricing discipline in the industry. The same positive trend was evident on a year-to-date comparison as copper unit sales increased 6.8%, coupled with the 5.5% increase in spreads.

Our aluminum plant is now online and capable of producing our full line of products. The aluminum building wire products grew to 7.2% of net sales in the quarter, driven by unit sales increase of 18% 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 the economy and we 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 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 Melissa Roby at 800-962-9473 and we will 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 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 financials. Net sales for the third quarter ended September 30, 2013 were $309.9 million compared to $269.2 million during the third quarter of 2012. Increased unit volumes of building wire sold in the third quarter of 2013 versus the third quarter of 2012 accounted for the increase in net sales dollars.

Unit volume measured in copper pounds contained in the wire sold increased 15% in the third quarter of 2013 versus the third quarter of 2012. The volume increase was offset somewhat by a 4% decrease in the average selling price per copper pound sold in the third order of 2013 versus the same period in 2012. Sales prices declined primarily due to lower copper prices, which declined 7.5% versus the third quarter of 2012.

Net income for the third quarter of 2013 was $13.8 million versus $5.5 million in the third quarter of 2012. Fully diluted net earnings per common share were $0.66 in the third quarter of 2013 versus $0.27 in the third quarter of 2012. Net sales for the nine months ended September 30, 2013 were $864.7 million compared to $814.3 million during the same period in 2012. Increased unit volumes of building wire sold in the first nine months of 2013 versus the first nine months of 2012 accounted for the increase in net sales dollars.

Unit volume, measured in copper pounds contained in the wire sold, increased 6.8% in the first nine months of 2013 versus the first nine months of 2012. The volume increase was offset somewhat by a 4% decrease in the average selling price per copper pound sold in the first three quarters of 2013 versus the same period in 2012.

Sales prices declined primarily due to lower copper prices, which declined 7.1% in the first three quarters of 2013 versus the first three quarters of 2012. Net income for the nine months ended September 30, 2013 were $35.7 million versus $14.6 million in the same period in 2012. Fully diluted net earnings per common share were $1.72 for the nine months ended September 30, 2013 versus $0.66 in the same period in 2012.

On a sequential quarter comparison, net sales for the third quarter of 2013 increased 7.1% to $309.9 million versus $289.5 million during the second quarter of 2013. Unit volume of copper building wire accounted for the majority of the increase, rising 8.1% on a sequential quarter comparison. Net income for the third quarter of 2013 was $13.8 million versus $15.5 million in the second quarter of 2013. Fully diluted net income per common share was $0.66 in the third quarter of 2013 versus $0.75 in the second quarter of 2013.

As a previously noted, 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. 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 had $16.1 million in cash at the end of the quarter. We also declared another quarterly cash dividend during the quarter.

Please note that this conference call will be available for replay after the conclusion of this session. If you wish to hear the taped replay, call eight 888-843-7419 and enter the conference reference 7928596 and the # sign. I will turn the floor back over to Daniel Jones, our President and CEO. Daniel?

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

(Operator Instructions)

Brent Feldman, DA Davidson.

Daniel or Frank, could you talk about how the average selling price changed on a sequential basis relative to Q2?

Sure. And you are talking about average selling prices?

Yes.

For copper, the average selling price in Q3 -- let me get it right here -- was down 1.6%. Copper during that same period was down 0.9%. So it was very close.

Okay. And then I guess on this industry price discipline that you guys pointed out, is it widespread? Or are you still seeing maybe some irrational decisions here and there, maybe by some of the smaller participants in the industry?

A little bit of both. Discipline that we have seen may have been somewhat forced with the volatility in copper. And then also, it appears that on business that was taking a little bit longer to be realized from the quote phase to the purchase order phase, that time period is shortened. When you have those two things working, along with the pricing discipline that we saw, it allows for you to do some things in the market, based on your service levels and fill rates and what have you, to possibly maintain or hold the line on the pricing.

Okay. And in addition to that, is this growth in aluminum, given some of the bigger players in the industry, at least to supply those products, a bigger say in overall price maybe then you would have otherwise seen a couple of years ago?

That is hard to gauge. I'm not really sure, Brent, what the other guys are doing or not doing from that standpoint.

When we first entered the market there was a lot of talk and what have you about what was going to happen, what wasn't going to happen. But basically, the aluminum plant for us and the products that we offer are there to make certain that we don't forfeit an order of copper that may have a few items of aluminum included in the list. So as far as going out and going head-to-head on large aluminum exposure-type quotes or jobs, that is just not where we are at.

I'm really not sure exactly what the market feedback is going to be other than so far it has all been positive from the distributor point of view, not the competitive point of view.

Sure. And then just one more and I will turn it over -- SG&A increased a little more than I was looking for. Is that just the variable piece increasing with sales?

Yes. Because commissions -- the S part of our SG&A is really only two components. And that is freight -- freight out to our customers, which stayed -- if you are talking on a sequential quarter basis, it actually went down from 1.9% of sales to 1.8%, although it went up slightly in dollars. And the commissions, which we pay to our outside independent reps, stayed constant at 2.3%. But again, went up $600,000.

(Operator Instructions)

Bob Kelly, Sidoti.

A question on the volume growth. For a long time we have been trending sideways. What explains the spike that you saw, particularly in the copper wire business?

The commercial piece seems to be -- again, when there is jobs that are being quoted, from the quote phase to the actual purchase order phase, when that time frame shortens, which it has a little bit by a few days, business seems to be picking up a little bit. And then as well, we noticed a little bit of a bump in our average size of an order that we track daily. Not huge numbers; but, again, trending in the right direction, both residentially and commercially, and we've also been doing very well in the industrial market.

Good to hear.

Each piece, Bob, looks pretty good.

Good to hear.

Is the discipline that you are seeing in the industry, is it due to the fact that we are starting to see the order size increase, the jobs move or the time frame shrink for the jobs that you are bidding? Is that what is driving the discipline? Or have your competitors found religion?

That is part of it. I guess it is all of the above.

I am not sure exactly what the competitors are thinking or not thinking, but we are certainly seeing more discipline on the pricing side with -- I don't want to overplay it -- but with a little bit of pressure on delivery that fits our model a little bit better than some of the others. And then also, a pickup in business like we have had, causes, not necessarily a market shortage, but it causes tightness in pieces of the market.

You might have a situation where, in the commercial side, and also feeding the industrial product, where you have a particular line item, maybe 10 strand, that is tight in the market. And to halfway confirm that, we will receive calls from second, third tier competitors that need to buy from us that they can't get from their normal suppliers, what have you. But it all fits together, and in the meantime, the sales office does a really good job of identifying the threshold, where we still -- although maybe perceived as high in the market -- are still able to write the order.

And based on some of the services that we offer, you may not necessarily have to match that lower number in some fashion because delivery is starting to be a bigger piece than it was over the last few months. Business is a little more brisk. Things are picking up in certain areas. People feel better about placing orders. And again, that is evident in the average order size that we look at daily.

Okay. Great. And then just as far as pricing within the aluminum business -- is there heavy competitive price pressure there as well? What is the story with aluminum pricing?

There is always price pressure. But again, just starting out, that is the challenge, is making sure that you do not create a negative in the market. And we have been very successful at doing that, although salespeople rarely lose an order over anything in their mind other than price. They always write orders because they are a fantastic relationship and they only lose orders because someone else had a better price, which obviously that is not true. That is the thought process, it seems, in our industry.

As we continue to push in the aluminum market, again, our approach in aluminum has been to maintain those copper orders that typically we would lose because we weren't able to service the smaller pieces of aluminum that would be coupled with the copper to make a freight requirement or maybe make a delivery requirement -- something of that nature.

But having said that, as far as I can tell, and I think evident in our results, we have been very disciplined on the aluminum. We are very good in the sales office about not going after an order that we really do not deserve. And if we have to meet some delivery requirements or some special type of arrangement off the sheet, we have been very successful at charging for that. It is not the same pressure that you would see on copper. The market itself on metal is not as volatile, maybe, and certainly not as watched.

There's always a story on copper each day. You just don't have that on the aluminum side. And the pricing itself is less volatile, maybe 3 to 1 copper volatility to the aluminum side on pricing.

Great. And just one follow on -- you have had a pretty impressive ramp in sales in the aluminum business since bringing production internal. Do you have any idea what your share of the market is at this point?

I really don't. We're trying to focus on one piece of that market. We will probably have better numbers coming out of the fourth quarter to see where we fit. We have had great support from distributor customers.

A lot of timing. I'd like to tell you it was all brilliant management, but it wasn't. There is timing in the market with some changes. One company bought another company and that typically leads to opportunity for us. Again, a lot of that was timing. But as far as with our overall share is, I'm just not prepared to break that out for you right now. I just don't know.

Bill Baldwin, Baldwin Anthony Securities.

Can you comment on how the aluminum plants are running, based on what your expectations have been when you were getting started up? How efficient is it operating and so forth?

Right. The aluminum plant actually has exceeded expectations on the positive side. Aluminum, and handling the product and so forth is, believe it or not, quite a bit different and a little more complicated than handling the copper in the production process. I really expected to be a little bit slower and a little bit further behind and possibly even still waiting on some pieces of equipment to be worked out. But it has been fantastic.

The guys are doing a great job. Our scrap levels are in line where we want them to be. Our delivery has been fantastic. Our lead-times have been fantastic. I really can't say enough about the team and what they did to get that think going. It is going fantastic. I really don't have any negatives to share with you on the aluminum piece right now. They're doing a great job.

Well that's super --

Bill, we are having trouble hearing. Could you speak up please?

Can you hear me now?

Yes.

Is that better?

Yes.

Okay. Does that apply pretty much across all your product lines in the aluminum area, then?

Yes, sir. Aluminum in total has been really good for us. And again --

That's good.

Yes. The new plant came online. It is doing well. It feeds into the industrial market and the commercial market real well. Everything is going pretty good in the aluminum side.

Well, good job there.

Second and last question -- can you comment on what you see as a trend in the level of inquiries that has taken place here over the last several months, and how that's been going?

Yes, definitely. It seems to be more in line with the commercial piece where the conversation's surrounding projects. Again, the time from quoting something until it becomes an order has narrowed quite a bit, shortened quite a bit. The whole process is sped up. A lot of apprehension that was there, maybe in the financial side, appears to have moved away. The availability of money on projects certainly does not appear to be a problem. Outside of conversations surrounding some of the nationwide political issues -- that seems to be the only discussions that have a negative piece to them.

As far as working toward the quote in the order process and delivery and functionality of the order itself, it has been very positive. And I would tell you that from an order standpoint, as far as the volume of inquiries on a daily basis and even on a weekly basis that we track, we are up about the same percentage that we are up in volume, so it all fits together. It is not new customers for us. It is existing customers. We are getting paid on time. Things appear to be pretty solid, actually. Business is pretty good at this point.

That's good. Dan, are you seeing, on the industrial side, are you seeing the impact of investments that are taking place in the oil/gas refinery and petrochemical area? Is that business beginning to really trend up nicely for you?

Yes, sir. There is a definite credit to be given, certainly, to that market. We are running quite a bit of industrial product 6 days a week, basically, and shipping about all that we can make in that market currently. It has been very good. Again, a lot that product is time-sensitive on delivery, and I think that plays into our model real well and that market has been really good.

(Operator Instructions)

Brad Evans, Heartland.

Congrats on a great quarter.

Thank you.

Would you hazard a guess as to the -- across the aluminum and copper side of your businesses, what type of capacity utilization you ran at in the current quarter?

Something less than 100 but something over 80.

Okay. As far as the aluminum plant is concerned, are you having discussions yet about perhaps investing in an aluminum rod mill?

We haven't announced anything in the third quarter. We didn't announce anything, but we've looked and we've tried to explore every possibility that we can come up with as far as a cost reduction. We don't have anything ordered, as far as that goes, but we certainly discuss and talk, and it goes back to actually before the plant was online. We looked at and beat up the what-if's. So I guess that is a long answer to, yes, we have looked at it.

Frank what is your CapEx budget for this year? For 2013?

We are estimating right now that it will finish up right around $44 million, $45 million, including, primarily, all of this land that we bought this year, which is a [measured increment] of that number.

So do you feel like the number is more likely be higher than lower next year?

Well, when you take $29 million of land out, if we don't repeat that next year, which we probably won't, I doubt it.

Okay. Sorry about that. Good point.

How is scrap copper availability at this point?

For the right price, I think you can get what you think you need. But as the scrap market tightens and gets into an area that encroaches on the cathode [adders], we prefer the cathode. But right now it is okay. It is not great. It fluctuates. There is volatility in that market similar to what you see in the pricing on copper in the market.

And then just lastly -- Frank, can you give us the --

Hang on, Brad. Do have some that you would like to sell us? Is that was the question was for?

(Laughter] No I don't. I don't think so. I will have to check.

We will buy it if you do. If that's the question.

(Laughter) I know that.

Frank, could you just give us the split between resi and commercial in the quarter in terms of the percent of revenue? And on a year-over-year basis, what was resi and what was commercial up year over year on a volume basis, please?

I have it in terms of units, Brad. In terms of pounds of copper shipped in the quarter, in third quarter, residential was 20.7% of the copper pounds. Year over year, as we indicated, the pounds of copper shipped were up 6.8%; and for the year, similar to the quarter, we are at 21% residential, which is up over 17.7% residential for the first 9 months of 2012.

And so in the quarter, your commercial volumes were up how much year over year? And your residential volumes were up how much year over year?

Okay. You are talking 9 months to 9 months, Brad?

No. I'm sorry. Third quarter over the previous -- the prior year period. Excuse me.

Q3 to Q3, residential units are up 26.8%. Q3 over Q3, commercial and industrial is up about 12%.

So with the ABI just meandering here north of 50 for some time and it seems like it is hopefully sticking to that level. So would you argue that you're still relatively early? You are very early, obviously, in the residential recovery, but the commercial cycle as well has just turned the corner, it feels like.

Depending on who you read and who you follow, report-wise, I would say, yes. It's what it feels like. We have got straight residential customers that seem to be doing better and we have straight commercial customers that are doing better from a volume standpoint. The guys that are blended from a customer for us, distributor wise -- they do a little resi, a little commercial -- seem to be up overall a little bit more than the guys that are specific. I think the -- as first timing of a recovery, or not, or whatever, Brad -- I'll leave that to you guys -- but it does look good.

Congrats, guys. Thanks much.

At this time we have no additional audio questions.

Shannon, thank you for handling the call; and thank you, folks, for participating. And we look forward to talking to you next quarter.

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