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Encore Wire Corp (WIRE) Q1 2019 Earnings Call Transcript

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Encore Wire Corp  (NASDAQ: WIRE)
Q1 2019 Earnings Call
May. 01, 2019, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Welcome to the Encore Wire First Quarter Earnings Conference Call. My name is Jenny and I'll be your operator for today's call. At this time all participants are in a only listen-only mode. Later we will conduct a question and answer session. (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.

Daniel Jones -- Chairman, President and Chief Executive Officer

Thank you, Jenny, and good morning ladies and gentlemen and welcome to the Encore Wire Corporation quarterly conference call. As Jenny stated, I am 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 2018. Margins also improved in the first quarter comparisons of 2019 versus 2018.

One of the key metrics through 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% was due to the average price of copper purchased decreasing 9.6% in the first quarter of 2019 versus the first quarter of 2018, and 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. It 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 a sequential quarter comparison. We believe that significant internal management turnover at two 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 appears 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 and that stock compensation expense increased $800,000 in the first quarter of 2019 versus 2018 and $2.6 million dollars 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 continued to enforce our rights under the US trade remedy laws. On April 8th, 2019, the US 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 US Government's ongoing anti-dumping and countervailing duties investigations are not expected until the end of the year.

The US economy appears strong as is construction activity. Based on discussions with our distributor customers and their contractor customers, we believe there's a good outlook for construction projects for the rest of the year. We believe our superior order fill rates continued to enhance our competitive position. As orders come in from electrical contractors the distributions 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?

Frank Bilban -- CFO

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 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 31st, 2019, was $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 fourth (sic) 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 zero. 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?

Daniel Jones -- Chairman, President and Chief Executive Officer

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

Questions and Answers:

Operator

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

Brent Thielman -- D.A. Davidson -- Analyst

Thanks. Good morning.

Daniel Jones -- Chairman, President and Chief Executive Officer

Hi, Brent.

Frank Bilban -- CFO

Hi, Brent.

Brent Thielman -- D.A. Davidson -- Analyst

Daniel, the issues related to competition in the quarter, were there kind of two separate distinct periods where you saw changes in pricing behavior or did 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 things were normalizing?

Daniel Jones -- Chairman, President and Chief Executive Officer

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 were some disruptive activity at a couple of the bigger guys and I think that it's, throw a rock to a snake and it's gone through and it's behind us and looking for good things going forward.

Brent Thielman -- D.A. Davidson -- Analyst

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 is seeing it as well, I mean is that tended to correct these sort of things pretty quickly?

Daniel Jones -- Chairman, President and Chief Executive Officer

Yeah. The timing, Brent, was the odd part, but I guess I'm not super involved with the -- I'd like to be a fly on the wall occasionally, but we've got our own stuff going on here. They did what they had to do. We completely respect some of the decisions 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 on as it should, but I have respect that they got to do what they got to do and I think we'll be better -- all be better forward -- going forward.

Brent Thielman -- D.A. Davidson -- Analyst

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

Daniel Jones -- Chairman, President and Chief Executive Officer

There were some pretty significant jobs that we were involved with and shipping to. And you get on a routine and you're rolling truckloads of material couple of -- three times a week into those locations and then the bottom falls out and it rains, and 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.

Brent Thielman -- D.A. Davidson -- Analyst

Well, it's great. I'll pass it on. Thank you.

Daniel Jones -- Chairman, President and Chief Executive Officer

Yes, sir. Thanks Brent.

Operator

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

Julio Romero -- Sidoti & Company -- Analyst

Hi. Good morning. 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?

Daniel Jones -- Chairman, President and Chief Executive Officer

Man, I don't have any idea. That's a good question I would think, but to quantify it, I really don't know because again it was more of a timing scenario than anything. We had significant copper volatility in the quarter. 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's 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 was good. It was just, as stated in the press release, there were some issues going on in the marketplace competitively that had an adverse effect on maybe some pricing increase -- timing of 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.

Julio Romero -- Sidoti & Company -- Analyst

Okay. That's fair. Last year -- as you said, you had weather affect your 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?

Daniel Jones -- Chairman, President and Chief Executive Officer

That's a great topic. I mean there's clearly labor issues. 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 five or six or eight 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 test. And we're getting through it. We're doing some things on our own. We've got pretty aggressive training programs.

We're kind of growing our own in a lot of areas and we're trying to poach people where it makes sense and rob from somebody and do whatever we can to get the right people in the right spots and stay inside guardrails. But the end of the day, we're growing a little bit, we've 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.

Julio Romero -- Sidoti & Company -- Analyst

Okay. And then just one more for me. You've talked about how the end customer demand has 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?

Daniel Jones -- Chairman, President and Chief Executive Officer

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 performance is 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 one or phase two or phase three, whatever the phase might be and there's more phases to come, it comes down to two things, for billing large, 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 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 super sensitive to that. So that's where we're at.

Julio Romero -- Sidoti & Company -- Analyst

I appreciate the answer. I'll hop back into queue. Thank you.

Daniel Jones -- Chairman, President and Chief Executive Officer

You bet. Thanks, Julio.

Frank Bilban -- CFO

Thanks, Julio.

Operator

Our next question comes from Bill Baldwin from Baldwin Anthony.

Bill Baldwin -- Baldwin Anthony -- Analyst

Good morning.

Daniel Jones -- Chairman, President and Chief Executive Officer

Hi, Bill.

Bill Baldwin -- Baldwin Anthony -- Analyst

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

Frank Bilban -- CFO

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

Bill Baldwin -- Baldwin Anthony -- Analyst

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

Frank Bilban -- CFO

CapEx for the quarter was $11.8 million.

Bill Baldwin -- Baldwin Anthony -- Analyst

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

Daniel Jones -- Chairman, President and Chief Executive Officer

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

Bill Baldwin -- Baldwin Anthony -- Analyst

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?

Daniel Jones -- Chairman, President and Chief Executive Officer

Bill, short answer is, yes. I don't know that it'll be a stop and start scenario with that, but it 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.

Bill Baldwin -- Baldwin Anthony -- Analyst

When we see the price of aluminum in relation the 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?

Daniel Jones -- Chairman, President and Chief Executive Officer

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 is 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 of 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.

Bill Baldwin -- Baldwin Anthony -- Analyst

Okay. I would just look at aluminum prices kind of weaken 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 has been in the past times?

Daniel Jones -- Chairman, President and Chief Executive Officer

Right. And as I said earlier, one thing that does occur, which is, during the quarter that 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 and 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. And that's (Multiple Speakers)

Bill Baldwin -- Baldwin Anthony -- Analyst

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

Daniel Jones -- Chairman, President and Chief Executive Officer

It's not for sissies that's for sure. And build up 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 --

Bill Baldwin -- Baldwin Anthony -- Analyst

Right. That does affect your cash flow, it affects your reported earning.

Frank Bilban -- CFO

Right. Exactly.

Bill Baldwin -- Baldwin Anthony -- Analyst

That's right. Right. Yeah. That's a factory reported no. Did you see any relief at all in the PVC, resin in 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?

Daniel Jones -- Chairman, President and Chief Executive Officer

Yeah. As you know, we use flexible product not rigid, the plasticizer piece was basically flat. The PVC adjustment or CDI would 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 copper.

Bill Baldwin -- Baldwin Anthony -- Analyst

The copper. Okay.

Daniel Jones -- Chairman, President and Chief Executive Officer

Yes. So, $2.57, like I said, it's almost $3 in 90 days. Both ways by the way, up and down.

Bill Baldwin -- Baldwin Anthony -- Analyst

Daniel, is the investments you've made over the years, continue to make in improving the productivity of your equipment, does that pretty much keeping your labor and overhead as a percent of sales relatively under control? I've got to believe with the labor market your labor costs should 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 it haven't over the last few years?

Daniel Jones -- Chairman, President and Chief Executive Officer

Yes, sir. 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 you 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 an eighth of a point or a quarter of a 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 I've gone back and forth over this over the lunch, but the real answer is on the pricing 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 the low cost position, you've got to do a lot of things, but we really have, like I said next month they are -- 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 12 times. 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.

Bill Baldwin -- Baldwin Anthony -- Analyst

Absolutely. Well thank you. Good job, good performance and best of success rest of the year.

Daniel Jones -- Chairman, President and Chief Executive Officer

Yes sir. Thanks for the questions.

Operator

Well we have no further questions at this time.

Daniel Jones -- Chairman, President and Chief Executive Officer

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.

Operator

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

Duration: 30 minutes

Call participants:

Daniel Jones -- Chairman, President and Chief Executive Officer

Frank Bilban -- Chief Financial Officer

Brent Thielman -- D.A. Davidson -- Analyst

Julio Romero -- Sidoti & Company -- Analyst

Bill Baldwin -- Baldwin Anthony -- Analyst

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