Encore Wire Corp (WIRE) 2022 Q1 法說會逐字稿

Welcome to the Encore Wire reports First Quarter 2020 Results Conference Call. My name is Cheryl, and I will be your operator for today's call. (Operator Instructions) Please note that this conference is being recorded. I will now turn the call over to Bret Eckert. Sir, you may begin.

Thanks, Cheryl. Good morning, and welcome to the Encore Wire Corporation's quarterly conference call. I'm Bret Eckert, Chief Financial Officer of Encore Wire. With me this morning is Daniel Jones, President, CEO and Chairman of the Board.

In a minute, we will review Encore's financial results for the quarter ended March 31, 2022. After the financial review, we will take any questions you may have.

Before we review the financials, let me indicate that throughout this conference call, we may be making certain statements that might be considered to be forward-looking. In order to comply with certain securities legislations 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 our website.

I'll now turn the call over to Daniel for some opening remarks. Daniel?

Good morning, everyone, and thank you for joining us on the call and your interest in Encore Wire. We appreciate your continued investment, confidence and support.

The continued strong results in the first quarter ended March 31, 2022, marked the fourth consecutive quarter of elevated margins and spreads. Stable demand, coupled with developing global uncertainties and persistent tightness in the availability of certain raw materials, drove copper, aluminum and other key raw material prices higher in the quarter. Because of this trend, we were able to increase average sales price for our products, keeping spreads strong throughout the first quarter of 2022. We still believe our 1 campus model is a strategic competitive advantage in the market today, giving us unmatched flexibility to quickly pivot and adapt to dynamic external market forces.

Our continuing to execute upon our core values of providing unbeatable customer service and high order fill rates, we were able to increase both copper and aluminum volumes shipped on a comparative quarter basis over 2021 levels. Volumes shipped were also up sequentially over fourth quarter 2021 levels. We believe existing market conditions and the current outlook should support gross margin abatement continuing at a gradual pace.

Copper unit volumes increased 8.6% on a comparative quarter basis. COMEX copper prices increased steadily throughout the first quarter, along with increases in other key raw material costs. The upward volatility positively impacted in supportive market spreads. Copper spreads increased 86.1% on a comparative quarter basis.

With the new capacity coming online this year, we believe Encore Wire remains well positioned to capture incremental market share and volume growth in the current economic environment. As we address the near-term challenges, we remain focused on the long-term opportunities for our business, including improving our position as a sustainable environmentally responsible leader in our industry.

We believe that our superior order fill rates and deep vertical integration will continue to enhance our competitive position. As orders come in from electrical contractors, our distributors can continue to pin on us for quick deliveries coast to coast.

I'll now turn the call over to Bret to cover our financial results. Bret?

Thank you, Daniel.

Net sales for the first quarter ended March 31, 2022, were $723.1 million compared to $444.1 million for the first quarter of 2021. Copper unit volume, measured in pounds of copper contained in the wires sold, increased 8.6% in the first quarter of 2022 versus the first quarter of 2021. Gross profit percentage for the first quarter of 2022 was 33.7% compared to 19% in the first quarter of 2021. The average selling price of wire per copper pound sold increased 43.3% in the first quarter of 2022 versus the first quarter of 2021, while the average cost of copper per pound purchased increased 19.3%.

Net income for the first quarter of 2022 was $161.5 million versus $41.2 million in the first quarter of 2021. Fully diluted net earnings per common share were $7.96 in the first quarter of 2022 versus $1.99 in the first quarter of 2021. Aluminum wire represented 11.5% of our net sales in the quarter ended March 31, '22. Aluminum wire volumes increased for the quarter ended March 31, 2022, compared to the comparative period in the prior year.

The favorable market conditions in the first quarter ended March 31, 2022, were driven by consistent demand for our products. Persistent tightness in the availability of certain raw materials, developing global uncertainties and suppressed availability of skilled labor, drove copper, aluminum and other key raw material prices higher in the quarter. Because of these trends, we were able to increase average sales prices to (inaudible) price, keeping spreads strong throughout the first quarter of 2022.

This marks the fourth consecutive quarter of elevated margins and spreads. We expect these conditions will abate in the future, but we are unable to predict the timing of that abatement. However, we do believe the existing market conditions and the current outlook should support gross margin abatement continuing at a gradual pace.

Our balance sheet remains very strong. We have no long-term debt, and our revolving line of credit remains untapped. We had $466.1 million in cash at the end of the quarter. During the first quarter, we repurchased 500,917 shares of our common stock at an average price of $116.55, for a total cash outlay of $58.4 million. We also declared a $0.02 cash dividend during the quarter.

The new service center opened in mid-May 2021 is fully operational today. The repurposing of our vacated distribution center into a newly formed plant 7 will expand manufacturing capacity and extend our market reach. We expect this transition will be completed in the second quarter of 2022.

The incremental investments announced in July of 2021 continue in earnest, focused on broadening our position as a low-cost, sustainable manufacturer in the sector and increasing manufacturing capacity to drive growth. Capital spending in 2022 through 2024 will expand vertical integration in our manufacturing processes to reduce costs as well as modernize select wire manufacturing facilities to increase capacity and efficiency, and improve our position as a sustainable and environmentally responsible leader in our industry.

Total capital expenditures were $32 million in the first quarter of 2022, and $118 million for the full year in 2021. We expect total capital expenditures to range from $150 million to $170 million in 2022, $150 million to $170 million in 2023, and $80 million to $100 million in 2024. We expect to continue to fund these investments with existing cash reserves and operating cash flows.

I'll now turn the floor over to Daniel for a few final remarks.

Thank you, Bret. The strong performance in the first quarter ended March 31, 2022, further attests to the strength of our one-campus vertically integrated low-cost business model, which continues to thrive into current market conditions. We wouldn't have this level of success without consistent, exceptional performance of our long-term suppliers. Our deep relationships and strong internal management team, coupled with the consistent execution, positions us favorably in the market, allowing us to maintain our overall low cost structure.

Looking ahead, we remain solely committed to execute upon the core values of the company, unbeatable customer service, nimble operations, and quick deliveries coast to coast.

I want to close by recognizing our outstanding and dedicated employees for their hard work, tenacity and commitment to safety and excellence. Our performance over the past 4 quarters could not have happened without extraordinary efforts.

Our success in the market continues to allow us the opportunity to incrementally invest in our team, as we position Encore as an employer of choice in the sector. I also want to thank our shareholders for their continued support.

Cheryl, we'll now take questions from our listeners.

(Operator Instructions) Our first question comes from Brent Thielman from D.A. Davidson.

Congrats on another great quarter. Daniel, I think historically, your unit volumes typically slow in the first quarter, but it sounds like they were up from 4Q. I guess I find that interesting and just wondering if that's a function of sort of continued tightness, the desire to get material on to a job site as fast as possible, whether you or associate demand environment lapping up in the fourth quarter. What are your thoughts around that?

Yes, I think you're right on track with it, Brent. We've seen pretty steady demand coming from all the sectors. Residential is still strong. The Commercial side is strong and the Industrial side is strong, as far as the amount of quotes that we're seeing and the execution on the delivery side. Our fill rate is significantly improved in the first quarter. There's a lot of things that occurred kind of came together. But from a demand perspective, we're continuing to see each of the sectors to be pretty strong, including the aluminum piece.

Okay. And Daniel, are you -- I look at the continued strong spread increase. Are you seeing larger spreads or premiums for certain of your products relative to the whole portfolio, just based on industry demand for those products or just a lack of availability? I'm just wondering if there's a few sort of select products that are really moving the needle here, or is this just really across the entire portfolio?

It's really across the entire portfolio of products. The sales team has done a real fantastic job of managing that intake, so they were able to execute reform and the production team and operations teams really back them up. So there's not 1 particular category over the others. If you had to pick 1 for whatever reason, it could be the aluminum push has been good. The Residential push has been good. The Commercial side has been really good. And Industrial's strong as well. So it's really not 1 that's just outpacing or outperforming the other. The overall market itself has been really good for us.

Okay. And then, Daniel, beyond copper, which we can all see is still pretty tight in the market, what other things still kind of contributing to this sort of supply-constrained environment for the industry that there might be prohibiting others from meeting the kind of lead times that you're able to meet?

We've got -- as we mentioned in the prepared statements, we've got fantastic support and partners with our vendor situation. So all those things are tight and they have to be managed incredibly well. The execution of our team has been fantastic. But I really think that 1 location model has allowed us the opportunity to perform maybe a little better than some of the competitors in the market from that perspective.

There's still tightness in the market pretty much across the board. Aluminum is tight, copper is tight, some of the PVC raw materials are tight, pretty much across the board, freight is tight. There's still that pressure, if you will, to really pay attention to what's happening. And we were really aggressive and able to perform really well in the first quarter on cost controls, material usage controls, maximizing the trucks that do show up on time. It's really not -- there's not 1 particular item that stands out as being a problem as far as the supply chain piece goes. It's all still relatively tight, Brent.

It's just a real focused push. A lot of pressure on the people side here, and everybody is responding the way that they should respond. So it's actually going along pretty well. You do feel the pressure when you come in, you ride through the plant. It's incredibly clean, but people are showing up on time and doing a great job.

Our next question comes from Julio Romero from Sidoti & Company.

So you guys talked about stable demand and persistent tightness of -- on the supply side. How has the operating environment changed if at all over the last 2 months?

I mean it's evolving, right? It's probably a lot what you see in your personal lives. There's -- it just ebbs and flows. Something will get a little bit better in 1 month, and then it tightens up the next month. I still think throughout the supply chain, you're seeing the impact of underinvestment during the pandemic and reactionary terminations or layoffs that you're trying to build back your force and get that investment dollars flowing again. And that still kind of trickles through what we see today. So when 1 thing gets a little better, it's backed up for the month and 3 others go the other direction, but it's still a lot of effort.

Team's executing exceptionally well. Our suppliers are executing exceptionally well, but they're doing it in a continued tough environment. So it seems like when we fix 1 link in the supply chain, puts strain on 3 others, and that was consistent last year and that same pattern held through the first quarter.

Okay. Very good. If you could speak to the end market mix, how much of your sale of these days are coming from nonresidential versus residential? And then secondly, on the nonresidential side, if you could talk about, are the same subsectors that have given growth in the past, data centers, hospitals, warehouses, still the key drivers of growth today?

Okay, I'll take the first one, if Daniel wants to get into the detail in a second. But from a residential standpoint for the quarter, it was about 31%. That compares to 32% for the first quarter of last year. So it is pretty consistent. (inaudible) the first quarter compared to the fourth quarter. We were 31% residential in the first quarter, we were at like 29.5% residential in the fourth quarter. So it stays fairly steady and consistent between those 2.

How do you want me to phrase the answer, Julio. What was your question?

Yes. I was just asking like on the nonresidential side, are -- which subsectors are driving growth today?

Okay. Well, on the Commercial piece, overall, it's good categorically. Without getting too deep into the details, there's some changes on the demand side that are good. Some of the differences on the approach on the quote side, it's changed a little bit. It seems to be more driven toward the service side, which we thrive with. The timing of the deliveries, which is 1 of our strengths, that has really paid off for us in the last quarter. The approach to the Commercial quote side, the timing of -- from the quote to delivery has shrunk dramatically. The volatility in raw materials, the volatility in finished good deliveries in the industry have helped to drive that.

But when the -- once the quote is given, purchase order's placed and the delivery, that whole time frame is really compressed and causing a little bit of chaos. It's a good chaos for us, because we're able to step in and make those deliveries. The Industrial side is not too far from that. We've also seen solar projects really were a nice pickup in volume in the first quarter. Again, a lot of those are not custom products, but custom delivery concerns potentially. And so we're able to charge for that service, and it was good volume in the quarter.

So those 2 would stand out from a volume perspective over maybe some of the others. So the discussions and prep around the upgrade to the grid has been really good discussions. There's actual orders in the pipeline, but I'd say, solar and data and then the grid upgrade has been something that kind of stands out as being, from a volume perspective, Q1 specifically.

Okay. That's very helpful. And then just last 1 for me is, you talked about the expanded stock repurchase plan. You've gotten much more aggressive with buybacks, which to me looks like you have big confidence in the underlying business and how you're thinking about capital allocation going forward?

Great question, Julio. We now have expanded buyback, increasing the authorization to 2 million shares through March -- end of March 2023. As you know, we've now repurchased 500,000 of those in the first quarter. If you go back to repurchases, even going back to when we started this buyback in March, April of 2020, we've purchased over 1.4 million shares over that period. And so we continue to see after CapEx and the growth, and the CapEx focused on deepening our vertical integration to take costs out to help us with our order fill and speed of shipment, and then environmental and things that's associated with that.

But the next (inaudible) continues to be the share buyback. And I think the Board's authorization and the execution on that in the first quarter would be a good indication as to what we think of the stock.

(Operator Instructions) Our next question comes from Ron Patel, Private Investor.

I'm going to follow up on the question that was just asked regarding share buybacks. So as you mentioned, you bought back a ton of shares in the last quarter at an average price of $115. The stock, from what I can tell currently, is trading below that price. What do you think gives you the confidence to deploy capital in that manner, that potential investors and Wall Street may not be understanding or appreciating? And what are your plans in terms of delivering that message in terms of increasing investor awareness and potentially increasing analyst coverage?

Good question, Ron. The analyst coverage side, I mean, Julio at Sidoti, and Brent at D.A. Davidson, have long covered us. They're both very, very solid analysts, and I think do a great job. As you navigate through our repurchases, you can go back in history, we've typically bought back the stock close to the gross value, and that's really what you'd evidence when you look at the buybacks in March of 2020 and April of 2020, when we got about 441,000 shares. And subsequent to that point in time as we started to experience the growth we had last year and started to look at the triggers we utilize as far as the best and the highest and best use of cash.

The opportunity when you're buying back at these levels is almost more of a return of capital to shareholders, right? It shows the confidence we have in the stock. If you look at our PE, we're sitting below 4 right now. So with the trailing 12-month earnings of a little over $32. And so we all (inaudible) the Board's confidence in the value of the stock and think that the buybacks at these levels are very much still warranted.

You see the Board's intentions in the directions we've got with the authorization of up to 2 million shares through the end of March next year. And with the 500,000 we repurchased this quarter, again, I think that was a very good use of cash. Even with the $58 million that we spent in the first quarter on buybacks, the $32 million that we spent on CapEx, we still grew cash $27 million. So from a cash perspective, the balance sheet remains very, very strong. We have sufficient resources to fund all of our CapEx growth, without leveraging the company, and still have the opportunity to look to other uses.

So that's what the alignment and the announcement that came out in February is related to.

Awesome. Awesome. And then you mentioned as far as gross margin in the future could potentially drop off. And when I look at forward estimates, they consistently show earnings potentially going through a drop-off with -- and I apologize that my questions are probably not as polished as Brent and Julio's. But essentially, I'm just wondering, do you see that drop-off in gross margin anytime in the near future? And if not, what kind of gives you that visibility?

It's a good question, Ron. It's a tough one. I've always said, you tell me exactly what copper and all other raw material costs, access to skilled labor, distribution and freight costs, right, I could give you a better indication. And it's a difficult -- this is a different world we're in today. A lot of constraints across the board on the raw materials. You need them all to be able to make residential and commercial building wire and make -- the pandemic and the shortages and the tightness of supply chain has really highlighted the significant component that each 1 plays in producing a finished good and final product.

We had, I think, gross margin of around 15% in 2020, and then you look at gross margin on a year-to-date rate for last year of 43.5%. Obviously, as we look towards this, we really had said all last year that we thought that from a copper perspective, it probably peaked in June, and we expected it to abate. And most of last year, we always said we just didn't know when it would abate. We didn't know if it would be abrupt or gradual. 4 quarters in now, we feel more comfortable with that gradual abatement.

And I think if you look at the margins as to what they did for last year for the fourth quarter and then where we came out in the first quarter, it has shown it's abating at that sort of pace. But there's still -- as you look at this, you look at the outlook, you look at the tightness that still exists and you look at the demand, and those are the factors that we are considering as we kind of look out. We don't give guidance, Ron. And -- but it's based on what we're seeing right now, we see it continuing to trend at a more gradual pace.

Okay. Okay. That's fair. And my last question is related to the -- so you mentioned that you've seen some pickup in orders related to the upgrading of the grid, and solar installations. With the passing of the Bipartisan Infrastructure Bill and the upgrading of rural broadband, and the -- I guess, with the operating of the grid, I imagine there's some upgrading to the wiring of people's residential houses as well. Does that put some sort of -- where there might be concerns of new home sales falling off, does that put in some sort of floor with the talking of this infrastructure bill going forward into the future? Just love to get your perspective on that.

Yes. Good question. As far as the residential piece, each house, based on the square footage measurement, would show that there's more copper going into a house, definitely with the upgrades that we're having. The broadband piece, we strictly manufacture 600-volt building wire. As the grid is upgraded, there's service entrants cable to all kinds of products that will contribute to that. And with the increasing demand and increasing volume, categorically, we'll see demand coming from even -- as you'll see, you might see some number of houses, the building permits, whatever it might be, and I'm trying to kind of not get too deep into it, it's hard to answer that.

But there should be demand coming from these quotes that we're already seeing. We will be able to participate at a higher volume. And maybe too vague, but it's not a bad thing for our 600-volt cable category for this to go forward.

At this time, I show no further questions in queue.

Well, thank you, everybody. Appreciate your time this morning. I appreciate your investment in Encore and enjoy your day.

Thank you.

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