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Edited Transcript of WIRE earnings conference call or presentation 1-May-19 3:00pm GMT

Q1 2019 Encore Wire Corp Earnings Call

McKinney May 8, 2019 (Thomson StreetEvents) -- Edited Transcript of Encore Wire Corp earnings conference call or presentation Wednesday, May 1, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Daniel L. Jones

Encore Wire Corporation - Chairman, President & CEO

* Frank J. Bilban

Encore Wire Corporation - VP of Finance, Treasurer, Secretary & CFO

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Conference Call Participants

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* Brent Edward Thielman

D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst

* Julio Alberto Romero

Sidoti & Company, LLC - Equity Analyst

* William Lewis Baldwin

Baldwin Anthony Securities, Inc. - Principal and Co-founder

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Presentation

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Operator [1]

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Welcome to the Encore Wire First Quarter Earnings Conference Call. My name is Jenny, 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 Daniel Jones, Chairman, President and CEO. Mr. Jones, you may begin.

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Daniel L. Jones, Encore Wire Corporation - Chairman, President & CEO [2]

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Thank you, Jenny. And good morning, ladies and gentlemen, and welcome to the Encore Wire Corporation Quarterly Conference call. As Jenny stated, I'm Daniel Jones, the President, CEO and Chairman of the Board of Encore Wire. And with me this morning is Frank Bilban, our CFO.

We're pleased with our improved results in the first quarter versus the first quarter of last year. There are some key items to note. Net sales dollars increased significantly in the first quarter comparisons of 2019 and 2018. The increased top line was driven primarily by higher unit volumes. Unit volumes increased 13.5% in the first quarter of 2019 versus the first quarter of 2018. Margins also improved in the first quarter comparisons of 2019 versus 2018.

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 copper spread increased 2.2% in the first quarter of 2019 versus 2018 while decreasing 5.3% on a sequential quarter comparison.

The copper spread expansion of 2.2% is due to the average price of copper purchased decreasing 9.6% in the first quarter of 2019 versus the first quarter of 2018, while the average selling price of wire sold decreased 5.9%.

We believe that first quarter volumes were somewhat dampened by rough winter weather, which is not unusual and happened last year also. Margins, which are highly dependent on competitive market conditions, improved slightly in the first quarter-to-first quarter comparison but decreased in the sequential quarter comparison. We believe that significant internal management turnover at 2 of our larger competitors contributed to some odd activities in pricing in the market in the first quarter of 2019. We hope this pricing pressure settles down during the rest of 2019 as the end markets for our industry appear strong.

The first quarter results were also affected by increased stock compensation expense driven primarily by our strong stock price performance driving the mark-to-market accounting on stock appreciation rights. The net stock compensation expense increased $800,000 in the first quarter of 2019 versus 2018 and $2.6 million on a sequential quarterly comparison.

Shifting gears. In the aluminum wire market, which represented 7.8% of our net sales in the first quarter of 2019, we continue to enforce our rights under the U.S. trade remedy laws. On April 8, 2019, the U.S. Commerce Department imposed preliminary remedy laws, countervailing duty on imports of aluminum wire from China at rates ranging from 11.57% to 164.16%. The final results of the U.S. government's ongoing antidumping and countervailing duties investigations are not expected until the end of the year.

The U.S. economy appears strong as is construction activity. Based on discussions with our distributor customers and their contractor customers, we believe there is a good outlook for construction projects for the rest of the year. We believe our superior order fill rates continue to enhance our competitive position. 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 believe our performance is impressive, and we thank our employees and associates for their tremendous efforts. We also thank our stockholders for their support.

Frank Bilban, our Chief Financial Officer, will now discuss our financial results. Frank?

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Frank J. Bilban, Encore Wire Corporation - VP of Finance, Treasurer, Secretary & CFO [3]

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Thank you, Daniel. In a minute, we'll review Encore's financial results for the quarter. After the financial review, we'll be glad to take any questions you may have.

Each of you should have already received a copy of our press release covering Encore's financial results. This release is available on the Internet or you can call Elizabeth Campbell at (800) 962-9473, and we'll be happy to get you a copy.

Before we review the financials, however, 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'll 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 first quarter ended March 31, 2019, were $314.7 million compared to $291.4 million for the first quarter of 2018. Copper unit volume, measured in pounds of copper contained in the wire sold, increased 13.5% in the first quarter of 2019 versus the first quarter of 2018. The average selling price of wire per copper pound sold decreased 5.9% in the first quarter of 2019 versus the first quarter of 2018.

Net income for the first quarter of 2019 increased 18.1% to $13.4 million versus $11.4 million in the first quarter of 2018. Fully diluted net earnings per common share was $0.64 in the first quarter of 2019 versus $0.54 in the first quarter of 2018.

On a sequential quarterly comparison, net sales for the first quarter of 2019 were $314.7 million versus $319.7 million during the fourth quarter of 2018. Sales dollars decreased due to a 1.3% unit volume decrease of copper building wire sold, coupled with a 0.9% decrease in the average selling price per pound of copper wire sold on a sequential quarter comparison. Copper wire sales prices decreased, while the price of copper purchased increased 1.5%.

Net income for the first quarter of 2019 was $13.4 million versus $25 million in the fourth quarter of 2018. Fully diluted net income per common share was $0.64 in the first quarter of 2019 versus $1.20 in the fourth quarter of 2018.

Our balance sheet remains strong. We have no long-term debt, and our revolving line of credit is paid down to 0. In addition, we had $178 million in cash at the end of the quarter. We also declared another cash dividend during the quarter.

This conference call will be available for replay after the conclusion of this session. If you wish to hear the taped replay, call (888) 843-7419 and enter the conference reference number 8769755 and the pound sign or you can visit our website.

I will now turn the floor over to Daniel Jones, our Chairman, President and CEO. Daniel?

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Daniel L. Jones, Encore Wire Corporation - Chairman, President & CEO [4]

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Okay. Thank you, Frank. And as highlighted, Encore performed well in the past quarter. We believe we're well positioned for the future.

And Jenny, we'll now take questions from our listeners.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we have a question from Brent Thielman from D.A. Davidson.

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Brent Edward Thielman, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [2]

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Daniel, the issues related to competition in the quarter, were there kind of 2 separate distinct periods where you saw changes in pricing behavior? Or did it all kind of happen at once? And then I guess second part of that, was there any indication by the end of the quarter that sort of things were normalizing?

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Daniel L. Jones, Encore Wire Corporation - Chairman, President & CEO [3]

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Tough to answer that on a public call. But what occurred, Brent, was things that were disruptive, we've seen them in the past over the last several years or whatever. But they're not uncommon. I mean there was some disruptive activity at a couple of the bigger guys, and I think that it's like a rock to a snake, and it's gone through, and it's behind us and looking for good things going forward.

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Brent Edward Thielman, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [4]

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Okay. And I guess that was kind of my second question, Daniel. In the past, when you had the demand the way you've seen it and presume the industry had seen it as well, I mean has that tended to correct these sort of things pretty quickly?

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Daniel L. Jones, Encore Wire Corporation - Chairman, President & CEO [5]

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Yes. The timing, Brent, was the odd part. But I guess I'm not super involved with -- I'd like to be a fly on the wall occasionally, but we've got our own stuff going on here. But they did what they had to do. We completely respect some of the decisions that they were making. But the timing and the disruption of that in the market, along with some of the volatility that we saw in the first quarter from a raw material standpoint on the cost side, I mean, just the timing of it, as you mentioned, in times when -- normal circumstances in favor of the market, everything was going as it should. But hey, I respect it. They got to do what they got to do. And I think we'll be better and I'll be better for it going forward.

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Brent Edward Thielman, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [6]

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Okay. And you mentioned weather, but your volume was, I mean, really strong this quarter. I mean I guess any sort of parcels of the country that are driving that? Or is it pretty broad-based?

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Daniel L. Jones, Encore Wire Corporation - Chairman, President & CEO [7]

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There were some pretty significant jobs that we're involved with and shipping, too. And you get on a routine, and you roll in truckloads of material a couple or 3 times a week into those locations, and then the bottom falls out. It rains, and it floods. And we had some ice situations at some job sites and whatever. I mean there were some areas in the country that were hit pretty hard with some weather events, and it did have a dampening effect. It was not a plus. But again, the sun comes out, things dry out, and here we go. Very positive.

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Operator [8]

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

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Julio Alberto Romero, Sidoti & Company, LLC - Equity Analyst [9]

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So can you try to quantify maybe the effect of your competitor-driven pricing pressure? Just how much higher do you think spreads could have gone in the quarter without that effect?

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Daniel L. Jones, Encore Wire Corporation - Chairman, President & CEO [10]

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I mean I don't have any idea. That's a good question, I would think. But to quantify, I really don't know because again, it was more of a timing scenario than anything. We had significant copper volatility in the quarter, and I think the low was about $2.50-something and the high was almost $3. So we had $0.40 worth of volatility in the quarter. So it was really timing, trying to match that up with competitive-type events.

I don't know how to quantify it, Julio. I have no idea. I mean I can tell you, demand was good, the bias or the trend for copper was good. It was just -- as stated in the press release, there were some issues going on in the marketplace competitively that kind of had an adverse effect on maybe some pricing, increased timing along with the increase of the underlying cost of copper. So it's really hard to say what it would -- I don't know what it would be.

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Julio Alberto Romero, Sidoti & Company, LLC - Equity Analyst [11]

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Okay. That's fair. Last year, as you said, you had weather affecting shipments in 1Q as well, but you had a pretty nice sequential jump in shipments in 2Q. Just understanding the labor constraints in the industry, how should we think about volume growth for the next couple of quarters?

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Daniel L. Jones, Encore Wire Corporation - Chairman, President & CEO [12]

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Yes, that's a great topic. I mean there was clearly labor issues. We're -- I can't remember, next month will be 30 years for me, and I can't remember a year that we weren't hiring people. But we're going through 30, 40, 50-type applicants and then getting 5 or 6 or 8 maybe on a good day, sometimes 10 out of those 40 or 50.

So it's pretty tight. We've gone through tightness in the past as far as trying to pick up able and qualified labor. It's not limited to just obviously Encore Wire. There is something in the Dallas paper almost every day and on national news every day about dealing with different issues as far as people being able to qualify and pass the appropriate tests.

And -- but we'll get through it. We're doing some things on our own. We've got pretty aggressive training programs. We're kind of going our own in a lot of areas, and we're trying to poach people where it makes sense and rob from somebody, doing whatever we can to get the right people in the right spots and stay inside the guardrails. But the end of the day, we're growing a little bit, we got good people that are working here, and we're stretching them pretty thin most of the time. And I think that piece of it is the new market. We're going to have to continue to find new ways to cultivate and grow and actually convince people that this is a great place to work.

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Julio Alberto Romero, Sidoti & Company, LLC - Equity Analyst [13]

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Okay. And then just one more from me. You've talked about how the end customer demand has kind of been more driven over time by data center type of work and hiring type of work. Has that mix shift of the end customer been part of the reason why delivery has become more of a differentiator for you? And does that lend itself to that spread growth being a little more sustainable over the long term?

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Daniel L. Jones, Encore Wire Corporation - Chairman, President & CEO [14]

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The easy answer is yes. But breaking down the question a little deeper, our history of growth and success and all those things, there's always been an emphasis on delivery. We went through a lot of different cycles in the economy and within the industry itself. And delivery definitely has always been something that we focus on and try to make certain that the performance is where it needs to be for a lot of different reasons. Without going into too much detail, you have to deliver.

One of the things that we see today or in Q1 as, this being a Q1 call, when you have those types of demands and the performances there, it definitely has changed the way that the next quote or the next piece of that job is handled. If you didn't service the customer appropriately on Phase 1 or Phase 2 or Phase 3, whatever the phase might be, and there's more phases to come, it comes down to 2 things for building large: it's price and delivery. Last thing that we want to talk about is price. We try to focus on the other.

So it really is more the market appreciates the service of delivery a little more than they have in the past. So going back to '18 and first quarter of this year, that's only been heightened for sure. So it really is about the delivery piece more so than trying to cut price, which you don't want to -- I've gone down that route before too with conversations and comments on pricing, and I'm supposed to be supersensitive to that. So that's where we're at.

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Operator [15]

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Our next question comes from Bill Baldwin from Baldwin Anthony.

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William Lewis Baldwin, Baldwin Anthony Securities, Inc. - Principal and Co-founder [16]

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Couple of housekeeping questions here, Frank. What was the LIFO impact in the quarter?

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Frank J. Bilban, Encore Wire Corporation - VP of Finance, Treasurer, Secretary & CFO [17]

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LIFO in the quarter was a $3.8 million charge or addition to cost of sales.

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William Lewis Baldwin, Baldwin Anthony Securities, Inc. - Principal and Co-founder [18]

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Okay. And what were your capital expenditures in the quarter?

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Frank J. Bilban, Encore Wire Corporation - VP of Finance, Treasurer, Secretary & CFO [19]

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CapEx for the quarter was $11.8 million.

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William Lewis Baldwin, Baldwin Anthony Securities, Inc. - Principal and Co-founder [20]

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Okay. And do you have a forecast for the year right now for CapEx?

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Frank J. Bilban, Encore Wire Corporation - VP of Finance, Treasurer, Secretary & CFO [21]

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The -- yes, sir. The current forecast, which we have, is targeting $38 million to $43 million, so call it $40 million. But that is -- Daniel has said this before, potentially subject to change after Board meetings in which he may, at his discussions with them, present more of the same: new plans.

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William Lewis Baldwin, Baldwin Anthony Securities, Inc. - Principal and Co-founder [22]

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Okay. Regarding the countervailing duties that were implemented here in April, should we expect that to have a positive impact on aluminum spreads going forward, Daniel?

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Daniel L. Jones, Encore Wire Corporation - Chairman, President & CEO [23]

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Bill, short answer is yes. I don't know that there'll be a stop-and-start scenario with that, but there will definitely be over time. We've already seen quite a bit of improvement in that area. There's a lot going on in that aluminum market today that you can read publicly, Venezuelan suppliers have had issues, and there's just a lot going on in that aluminum market that only stokes the bullish side of me. But I think the direct answer to your question is yes.

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William Lewis Baldwin, Baldwin Anthony Securities, Inc. - Principal and Co-founder [24]

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However, we see the price of aluminum in relation to price of copper become more favorable for aluminum. Does that show up in your demand for aluminum fairly quickly or not at all or over a period of time?

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Daniel L. Jones, Encore Wire Corporation - Chairman, President & CEO [25]

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Well, that's been debated over time. We prefer -- Encore Wire consistently and will continually prefer to ship and sell copper. That's just the way it is. The aluminum piece of that, that you're referring to as a substitution depending on the relationship between the cost of each, normally, if aluminum is more expensive, so is copper and vice versa. When copper gets to a certain dollar amount, there's no question that in the conversation, the substitution question comes up.

There are other costs involved with that most of the time. It's not a new scenario, but it doesn't necessarily increase the demand for aluminum beyond what the increase in the demand for copper would be. But it does enter into the conversation in the quote stage pretty early on when copper gets really expensive about what would it take to substitute aluminum for this piece of copper. And so in that, it's definitely in the conversation.

Today, with the tightness in the market in aluminum overall, it's not really coming up that often. But there are situations where customers prefer aluminum, and we're more than happy to sell it, ship it. But today, it really is not coming up as a substitute for copper. It's not.

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William Lewis Baldwin, Baldwin Anthony Securities, Inc. - Principal and Co-founder [26]

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Okay. While we're just looking, aluminum prices kind of weakened a little bit in the quarter, and copper, as you indicated, increased a little bit. But I guess you really wouldn't describe copper as being that expensive at this point in time in relation to where it's been in the past at times.

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Daniel L. Jones, Encore Wire Corporation - Chairman, President & CEO [27]

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Right. And I said earlier, but one thing does occur, which during the quarter, really it comes up, specifically to the aluminum piece. When you get the volatility that we had in the first quarter -- and I don't want that to be overlooked when folks are looking at our performance in Q1. If you look at a $0.40 swing in copper inside the first quarter and you see the performance that our sales department, production, whatever, put through to hit the numbers that we had, very, very good solid quarter.

All the other things that are considered, the $0.64 versus any of the other quarters, that's a fantastic quarter. That volatility of $0.40 is pretty significant in 90 days.

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Frank J. Bilban, Encore Wire Corporation - VP of Finance, Treasurer, Secretary & CFO [28]

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And that's on top...

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William Lewis Baldwin, Baldwin Anthony Securities, Inc. - Principal and Co-founder [29]

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You got to stay on your toes, right? I mean, everybody is on their toes in that kind of situation.

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Daniel L. Jones, Encore Wire Corporation - Chairman, President & CEO [30]

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It's not for sissies, that's for sure.

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William Lewis Baldwin, Baldwin Anthony Securities, Inc. - Principal and Co-founder [31]

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No, no.

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Frank J. Bilban, Encore Wire Corporation - VP of Finance, Treasurer, Secretary & CFO [32]

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And build out on top of the fact that we had a $0.094 increase in the stock appreciation rights adjustment in Q1 over Q4. And that's just due to the good performance of the stock. So we like to see that. In Q4...

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William Lewis Baldwin, Baldwin Anthony Securities, Inc. - Principal and Co-founder [33]

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Right. That effects cash flow or effects reported earnings?

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Daniel L. Jones, Encore Wire Corporation - Chairman, President & CEO [34]

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Right.

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Frank J. Bilban, Encore Wire Corporation - VP of Finance, Treasurer, Secretary & CFO [35]

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Exactly.

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Daniel L. Jones, Encore Wire Corporation - Chairman, President & CEO [36]

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That's it.

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William Lewis Baldwin, Baldwin Anthony Securities, Inc. - Principal and Co-founder [37]

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Right, right. Yes, that does effect reported number. Did you see any relief at all in the PVC raws within the quarter in your business? I know some of the chemical companies are talking about lower pricing for some of these products. I just wondered if that shows up in what you pay for those products.

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Daniel L. Jones, Encore Wire Corporation - Chairman, President & CEO [38]

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Yes. I mean yes, as you know, we use flexible product, not rigid. The plasticizer piece was basically flat. The PVC adjustment for CDI, what have you, in the first quarter was about flat. Benzene was up a little bit. The nylon piece of our equation was about flat. So it really -- from just a pure raw material and a cost standpoint, the real conversation is around the volatility of copper in the quarter.

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William Lewis Baldwin, Baldwin Anthony Securities, Inc. - Principal and Co-founder [39]

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So the copper, okay.

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Daniel L. Jones, Encore Wire Corporation - Chairman, President & CEO [40]

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Yes. So $2.50-something, like I said, to almost $3 in the 90 days, both ways, by the way, up and down.

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Frank J. Bilban, Encore Wire Corporation - VP of Finance, Treasurer, Secretary & CFO [41]

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Yes.

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William Lewis Baldwin, Baldwin Anthony Securities, Inc. - Principal and Co-founder [42]

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Daniel, is the investments you made over the years, continue to make and -- in improving the productivity of your equipment, is that pretty much keeping your labor and overhead as a percent of sales relatively under control?

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Daniel L. Jones, Encore Wire Corporation - Chairman, President & CEO [43]

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Yes. I mean...

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William Lewis Baldwin, Baldwin Anthony Securities, Inc. - Principal and Co-founder [44]

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I got to believe, with the labor market, your labor costs have got to be going up some, but it looks like your overall labor and overhead is really not increasing as a percent of sales, at least I had noted over the last few years.

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Daniel L. Jones, Encore Wire Corporation - Chairman, President & CEO [45]

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Yes, and it's a great question. And we are constantly doing things as anybody, I think, would. We're constantly improving on the plant floor. Again, though -- and I've talked in the past about this. But when you make a significant improvement in your production on the plant floor, you pick up 0.125 point or 0.25 point or whatever.

And I got to be really careful, looking at who all -- the roster that's on the call. But the real answer -- and you and I've gone back and forth over this over lunch. But the real answer is on the processing side because our industry still, to this day, prices in a manner that eats up a lot of times what you make up on the shop floor. But you just have to stay in the low cost position, you've got to do a lot of things.

But we really have, like I said, next month or actually this month in May, it's 30 years for us. And we've never been better in our productivity and production standpoint to match it up to the market. We maintain our unbelievable fill rate and service levels, and we still turn our inventory 12x. So there's just some things you do that should not be overlooked, and that's one of them. So I'm glad you brought that up.

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Operator [46]

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We have no further questions at this time.

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Daniel L. Jones, Encore Wire Corporation - Chairman, President & CEO [47]

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Well, Jenny, we appreciate how you've handled the call and appreciate the questions and the participation on the call and look forward to seeing you guys next quarter.

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Operator [48]

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