Encore Wire Corporation (WIRE) on Q1 2021 Results - Earnings Call Transcript
Operator: Welcome to the Encore Wire Reports First Quarter Results Conference Call. My name is Adrienne, and I'll be your operator for today's call. At this time, all participants are in a listen-only mode. There will be a question and answer session. Please note, this conference is being recorded. I'll now turn the call over to Daniel Jones. Daniel, you may begin.
Daniel Jones: Thank you, Adrienne, and good morning, and welcome to the Encore Wire Corporation quarterly conference call. As stated, I'm Daniel Jones, President, CEO and Chairman of the Board of Encore Wire. With me this morning is Bret Eckert, our Chief Financial Officer. Thank you for joining us on the call and for your interest in Encore Wire, and we appreciate your continued investment, confidence and support during these uncertain times. The health and safety of our employees and their families remains our top priority, and we are following CDC guidelines and maintaining safe working conditions while we continue to serve our customers during this critical time.
Bret Eckert: Thank you, Daniel. In a minute, we will review Encore's financial results for the first quarter ended March 31, 2021. After the financial review, we will take 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 legislation, and instead of attempting to identify each particular statement as forward-looking, we advise you that all such statements involve certain risks and uncertainties that could cause actual results to differ materially from those discussed today. I refer each of you to the company's SEC reports and news releases for a more detailed discussion of these risks and uncertainties. Also, reconciliations of non-GAAP financial measures discussed during this conference call to the most directly comparable financial measures presented in accordance with GAAP, including EBITDA, which we believe to be useful supplemental information for investors, are posted on our website. Net sales for the first quarter ended March 31, 2021, were $444.1 million compared to $302.8 million for the first quarter of 2020. Copper unit volume, measured in the pounds of copper contained in the wires sold, increased 1.1% in the first quarter of 2021 versus the first quarter of 2020. Gross profit percentage for the first quarter of 2021 was 19% compared to 15.1% in the first quarter of 2020. The average selling price of wire per pound -- per copper pound sold increased 46.8% in the first quarter of 2021 versus the first quarter of 2020, while the average cost of copper per pound purchased increased 47.3%. Net income for the first quarter of 2021 was $41.2 million versus $18.6 million in the first quarter of 2020. Fully diluted net earnings per common share were $1.99 in the first quarter of 2021 versus $0.89 in the first quarter of 2020. On a sequential quarter comparison, net sales for the fourth quarter of 2021 were $444.1 million versus $380.8 million during the fourth quarter of 2020. Sales dollars increased due to a 20.4% increase in the average selling price per pound of copper wire sold, offset by a 1.8% unit volume decrease of copper building wires sold on a sequential quarter comparison.
Daniel Jones: Thank you, Bret. As we highlighted, Encore performed very well in the first quarter ended March 31, 2021. Our low-cost structure, one location business model and strong balance sheet position us well to compete in the market. We believe that our vertical integration, supply chain strength and ability to quickly ship complete orders are differentiators in the current environment. I want to thank our employees and associates for their tremendous efforts and thank our stockholders for their continued support. Adrienne, we'll now take questions from our listeners.
Operator: And our first question comes from Brent Thielman from D.A. Davidson. Your line is open.
Brent Thielman: Daniel, just curious if you were able to recapture all of the business that might have been delayed because of some of the issues in Texas in the current quarter. Do you think some of that falls into the second quarter?
Daniel Jones: I think some of it's going to fall into the second quarter and continue really through the end of the year. There's quite a few large jobs that were delayed, and some of them were already delayed from COVID: lack of labor, lack of materials, whatever it might be. But I definitely think it pushes out into the second half.
Brent Thielman: Okay. And maybe you could just walk us through some of the end markets you're seeing the most strength in today, I guess, particularly after that event? And what you might be seeing around the country that's really driving the business right now?
Daniel Jones: Yes. The residential piece has been very strong, with Texas leading the way. And then also, we're seeing, or saw, some upticks in the commercial and industrial that come in and support right behind the residential growth. And then more specifically to the nonresidential, warehouses, schools, universities, started to pick back up. Some of the hospitals continue on a pretty rapid pace. But for the most part, the residential was hottest and then the commercial/industrial started to kind of fill in behind it.
Brent Thielman: Okay. And beyond, sort of, tightness in the copper market, I mean, are you seeing any other supply disruptions in other areas of the business or things that are challenging you got to work through?
Daniel Jones: Yes, Brent. I mean, everything that we bought is more expensive. And everything that we bought: raw materials, pallets, wooden reels, whatever it might be, plastic spools, everything that we're buying today is more expensive and a little harder to get. And that was true also, obviously, in the first quarter. So with that type of expense right in front of you and in current, I think our team did a fantastic job from a discipline standpoint to hold the line on the pricing, supported by the manufacturing and purchasing and shipping and maintenance. Everybody kind of had to step up and do what they had to do to get the job done. And you can't really quantify how great the team was reacting with shortages and outages and what have you, even with the labor issues that we had, trying to get enough qualified folks in here to do the work and get the product shipped. So really a fantastic quarter if you look at all those challenges that were in place.
Brent Thielman: Great. Okay. Well, congrats on a great quarter. Best of luck here in the second quarter.
Daniel Jones: Thanks, Brent. Thanks for your support.
Operator: And our next question is from Julio Romero from Sidoti & Company. Your line is open.
Julio Romero: Could you give us a little more flavor on the drivers of the copper spread quarter-over-quarter? Certainly, copper has surge demand is strong as well. Are there any other unique factors at play within the quarter? I know you mentioned lack of labor, lack of materials. Are they key drivers of the spread sequentially here?
Daniel Jones: Yes. Without getting too deep into the wids, I'll try to kind of skim across the top, Julio. What it really came down to was a pricing discipline. We had uncertainty on the supply side from a raw material standpoint and from a labor standpoint. And so protecting what we had and making certain that we could meet the customer demands, we were holding the line. We've got some really fantastic sales reps across the country that had to really work hard toward its price and delivery when it comes to building wire. And the price is no good without delivery and vice versa, so it's kind of a balancing act. So we were able to expand that spread a little bit with the discipline of holding the line and refusing to cave into the market that had pricing as much as 5%, 6%, 7% or 8% below us in any particular order on our quote. But the other folks were quoting as much as 10 or 12 weeks lead time on delivery, and that's not our style. We prefer to take an order and ship it complete immediately, specifically in this type of environment when you don't know what cost might hit you around the next quarter. So it really was about price discipline more than anything. The hard work of the sales team inside Encore and the actual sales reps out in the field. We just -- we rolled our sleeves and went to work and fought for the orders and managed, if you will, the flow on the orders that we could actually take and ship. The raw material piece was managed fantastically well. Normally, there's plenty or ample supply of raw materials, the 4 or 5 that we buy and consume. That was not the case in Q1. It's extremely tight. Copper continues to be extremely tight in all shapes before it's consumed. And so it really -- it's not as complicated as I'm making it sound. But as long as everyone here does their part and remains disciplined, you can see the results that we can throw out. And it should also be mentioned that having one location, specifically with the volatility in the supply disruptions of raw materials, certainly benefit us through the chaos.
Julio Romero: Got it. That's helpful. So I guess if it's really just price discipline, shorter lead times relative to your competitors and tight raw materials, those things sound like they're not going away, right? So I assume the spread you captured this quarter persists or even expands going forward? I mean, what are your thoughts regarding that?
Daniel Jones: Specifically to the first quarter, there's a lot of things that reset the behaviors and the disciplines and the hierarchy in the market. There was some upgrading. It also should not go unsaid that we're getting paid on time, which is a fantastic testament to the value that our customers and the quality of our customers out there are providing also. I mean, selling it and shipping it and going through what you go through and getting paid on time is clearly the recipe for us or the menu for us to be successful and push those earnings. But as far as going forward, very optimistic, very happy with the way things are going. Our team here, again, from sales, manufacturing, purchasing, shipping, maintenance, everybody, has stepped up and done the job that they should do. Our vendors have been fantastic. We've had some -- even through the weather challenges that we had in February, our construction projects continue to be moving along at a great pace. The vendors -- it's been a fantastic -- folks pulling together and seeing what they're capable of doing. We're not the only industry struggling with finding qualified labor. The construction side and the Hill & Wilkinson guys and the Potter Concretes of the world. The folks that are doing the job for us on the construction, machinery vendors, it's a team effort, and it's working out pretty well for us.
Julio Romero: Okay. And I guess, are there any product lines that are seeing increased strength above market? And did that play a role in the product expansion sequentially?
Daniel Jones: There's a lot of detail to go into with that. But in general, again, the residential piece was up the most. And as the residential goes, the commercial/industrial typically follows. That's been the pattern over the years. Once you get into the commercial, you start to look at the circuit size, the intermediate size and the feeder size. Those are never in concert or equal to each other. They always kind of hop around. We saw that in the tail end of Q1 in mid- to late March. We started to see upticks in the activity around the commercial side. We started to see upticks in the second half of Q1 in activity in the energy sector, which feeds into the industrial products that we offer. So all in all, it's very positive from the second half of Q1 rolling into the current quarter.
Julio Romero: Okay. And I guess just last one for me would just be on your current inventory levels. You have $90 million in inventory, which is about the same you had last year in the first quarter on a dollar basis. But just given where copper is, I would assume it would be less on a unit basis. So if you could speak to maybe your inventory levels and if you feel that's sufficient to carry you going forward.
Daniel Jones: It feels like it's the right amount. We are shipping -- the turnover for the finished goods is a little quicker than I like. I prefer it to be around 12. We're probably running 14 or 15 right now. So we'll -- wherever there's some holes, we'll try to fill in and continue to offer the service that we do. So I wouldn't see it moving a whole lot. We can't afford really to stick it in the warehouse and sit on it. Basically, right now, everything that we are putting on the floor as a home is being shipped out pretty quickly.
Operator: And your next question comes from Bill Baldwin from Baldwin Anthony Securities. Your line is open.
Bill Baldwin: Can you offer a little color on what it looks like as far as the status of your large capital spending programs here in this year as far as the -- are your vendors on time, you think, with what they're telling you they're going to deliver as far as getting the equipment into your shop based on the schedules that you laid out for them?
Bret Eckert: Bill, it's Bret. Yes, they really -- everything really remains right on schedule. With the service center opening up mid this quarter, final prep is being done in that process. And the general contractor, along with the equipment manufacturers, continue to largely stay on schedule. With regards to the repurposing of the existing distribution center, we accelerated a lot of those orders. As we said, we placed a good chunk of them in the fourth quarter of last year. And so that acceleration allowed for us to kind of get ahead. And as those machines come in and we get the product in the racks out of the existing distribution center, we'll start to get those installed. So they really are kind of staying on the course and staying on target. Capital expenditures in the first quarter, $26.5 million. So we're right continually -- continuing to track towards that $100 million to $120 million of CapEx estimate for the year. And so things really are -- everything takes a lot more care and feeding, Bill, a few extra phone calls. But largely, people are staying on their commitments.
Bill Baldwin: So they're giving you confidence, and they've got -- they've got it under control as far as the capital equipment for the repurposing program there. What time -- excuse me, Bret, I'm sorry, go ahead.
Bret Eckert: No, I just said we got ahead of it. And that was really partly why we accelerated a lot of these. Our team did a phenomenal job of seeing some challenges in the market and they acted upon it.
Bill Baldwin: What's the current thinking on the timing then of when you think the repurposing the facility should be able to start getting ramped up, getting the equipment in place to start producing?
Bret Eckert: Yes. So what we're seeing, Bill, is early 2022. We expect that facility be pretty close to fully up and running. As we get machines in later this year, we're not going to let them sit outside in the rain. We're going to get them installed and look to get them online as quickly as we can.
Bill Baldwin: Okay. So it'd be safe to say then, certainly by the first half of 2022?
Bret Eckert: Absolutely. Yes, sir.
Bill Baldwin: And you're probably shooting for a little bit earlier than that.
Bret Eckert: You know how we run here.
Operator: And we have no further questions. I'll turn the call back over for final remarks.
Daniel Jones: Thank you, Adrienne, and appreciate the support. Look forward to speaking to you guys next quarter.
Operator: Thank you, ladies and gentlemen. This concludes today's conference call. Thank you for participating. You may now disconnect.
