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Encore Wire Corp (NASDAQ:WIRE)
Q3 2019 Earnings Call
Oct 29, 2019, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Welcome to the Encore Wire Third Quarter Earnings Conference Call. My name is, Sheryl, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. [Operator Instructions] Please note that this conference call is being recorded. I will now turn the call over to Daniel Jones, Chairman, President and CEO. Sir, you may begin.

Daniel L. Jones -- Chairman, President and Chief Executive Officer

Thank you, Sheryl, and good morning, ladies and gentlemen, and welcome to the Encore Wire Corporation quarterly conference call. As 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 Chief Financial Officer.

Our business remains strong as evidenced by our results in the third quarter and nine months ended September 30. There are some key items to note. Unit volumes increased in the third quarter and year-to-date comparisons of 2019 to 2018. Copper unit volumes increased 0.2% in the third quarter of 2019 versus the third quarter of 2018, and increased 6% in the nine-month comparison. The unit volume increase was achieved even though we passed on orders that did not meet our margin targets. Despite the strong US construction market and demand for building wire, margins were restrained by competitive pricing in the third quarter of 2019 versus the third quarter of 2018.

Gross profit margins fell in concert with a drop in copper prices versus last year's third quarter and first nine months, along with the competitive pressure noted above. 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 decreased 9% in the third quarter of 2019 versus the third quarter of 2018, while decreasing 2.8% in the nine-month comparison. The copper spread also decreased 3% on a sequential quarter comparison. The copper spread contracted 9% as the average price of copper purchased decreased 4.2% in the third quarter of 2019 versus the third quarter of 2018, while the average selling price of wire sold decreased 5.9%.

It should be noted that the spreads in the third quarter of 2018 were the highest in over a decade. However, we believe that the currently strong end markets can support those margin levels. In aluminum wire, which represented 7.7% of our net sales in the third quarter of 2019, we continue to enforce our rights under the US trade remedy laws.

On October 18, 2019, US Commerce Department signed its final antidumping and countervailing duty determinations, resulting in combined AD/CVD duty rates ranging from 81.27% to 218.42%, for aluminum wire and cable imported from China. The final step in these investigations is a vote from the US International Trade Commission, which is not expected until approximately November 20, 2019.

US 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 next year. We believe our superior order fill rates and service solutions continue to enhance our competitive position. We thank our employees and shareholders and associates for their tremendous efforts.

Before turning the call over to Frank, I want to take a few more moments and comment. As we announced in September, Frank is retiring and stepping down as CFO effective December 31 of this year. So this will be his last earnings call in that role. His successor, Bret Eckert is on this call and the transition has been going exceptionally well.

Frank has been a vital member of our executive team. We're forever grateful for the immense contribution he has made to the growth and success of this great Company. By the time he retires, he will have been our CFO for 20 years. He deserves more time to spend with his family, playing golf, hunting and traveling. All of us in Encore Wire wish Frank a long and happy retirement.

Although we hate to see Frank go, we're delighted to have Bret,. I'm confident in Bret's abilities along with a great leadership team we have in Encore as we continue on the successful path we've enjoyed.

Frank, take us through our financial results one more time.

Frank J. Bilban -- Chief Financial Officer, Secretary, Treasurer and Vice President

Thank you, Daniel. In a minute, we'll review Encore's financial results for the quarter. After the financial review, we'll take any questions you may have. Each of you should have received a copy of this press release, covering Encore's financial results. The release is available on our website also or you can call Denis McCarthy at 800-962-9473 and we'll be glad to get you a copy.

Before we review the financials, let me indicate that throughout this conference call, we may make certain statements that might be considered to be forward looking. In order to comply with certain securities legislation and instead of attempting to identify each particular statement as forward-looking, we advise you that all such statements involve certain risks and uncertainties that could cause actual results to differ materially from those discussed here today.

I refer each of you to the Company's SEC reports and news releases for a more detailed discussion of these risks and uncertainties. Also reconciliations of non-GAAP financial measures discussed during this conference call to the most directly comparable financial measures presented in accordance with GAAP, including EBITDA, which we believe to be useful supplemental information for investors, are posted on www.encorewire.com.

Now, the financial results. Net sales for the third quarter ended September 30, 2019 were $321.2 million compared to $340.7 million for the third quarter of 2018. Copper unit volume measured in pounds of copper contained in the wire sold increased 0.2% in the third quarter of 2019 versus the third quarter of 2018. The average selling price of wire per copper pound sold decreased 5.9% in the third quarter of 2019 versus the third quarter of 2018.

Net income for the third quarter of 2019 decreased to $16.4 million versus $23.7 million in the third quarter of 2018. Fully diluted net earnings per common share were $0.78 in the third quarter of 2019 versus $1.13 in the third quarter of 2018. Net sales for the nine months ended September 30 were $972.7 million compared to $969 million during the same period in 2018.

Copper unit volume measured in pounds of copper contained in the wire sold, increased 6% in the nine months ended September 30, 2019 versus the nine months ended September 30, 2018. The average selling price of wire per copper pound sold decreased 5.8% in the nine months ended September 30, 2019 versus the nine months ended September 30, 2018, offsetting the unit volume impact on sales dollars.

Net income for the nine months ended September 30, 2019 decreased to $47.6 million versus $53.1 million in the same period of 2018. Fully diluted net earnings per common share were $2.27 in the nine months ended September 30, 2019 versus $2.54 in the same period in 2018.

On a sequential quarter comparison, net sales for the third quarter of 2019 were $321.2 million versus $336.9 million during the second quarter of 2019. Sales dollars decreased due to a 4.4% decrease in the average selling price per copper pound of wire sold, offset slightly by 0.1% unit volume increase of copper building wire sold on a sequential quarter comparison.

Copper wire sales decreased 4.4%, while the price of copper purchased decreased 5.1%. Net income for the third quarter of 2019 was $16.4 million versus $17.8 million in the second quarter of 2019. Fully diluted net income per common share was $0.78 in the third quarter of 2019 versus $0.85 in the second quarter of 2019.

Our balance sheet is very strong. We have no long-term debt and our revolving line of credit is paid down to zero. In addition, we had $203.9 million in cash at the end of the quarter. We continue to refine our plans for significant capital expenditures, but these plans remain delayed by issues arising in connection with a proposed new highway project, which may bisect our property. We also declared a cash dividend during the quarter.

A replay of this call will be available in the Investors section of our website.

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

Daniel L. Jones -- Chairman, President and Chief Executive Officer

Thank you, Frank. As we highlighted, Encore performed well in the past quarter, and we believe we're well positioned for the future.

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

Questions and Answers:

Operator

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Julio Romero. Your line is now open.

Julio Romero -- Sidoti & Company -- Analyst

Hi, good morning, everyone.

Daniel L. Jones -- Chairman, President and Chief Executive Officer

Hello, Julio.

Frank J. Bilban -- Chief Financial Officer, Secretary, Treasurer and Vice President

Hello, Julio.

Julio Romero -- Sidoti & Company -- Analyst

First off, Frank, congratulations on the retirement. Definitely [Phonetic] going to miss you.

Frank J. Bilban -- Chief Financial Officer, Secretary, Treasurer and Vice President

Thank you. I'll miss you as well.

Julio Romero -- Sidoti & Company -- Analyst

First question I have is on average selling prices on the copper side. They seem to have declined somewhat more than the price of copper purchased. Can you just maybe parse that out how much of that is due to competitive pricing, the timing of price increases versus say, maybe more of a normalization of the dollar amount of the spread?

Daniel L. Jones -- Chairman, President and Chief Executive Officer

Yeah. Julio, I'll take part of that question. This is Daniel. That's not abnormal for the industry when you have the volatility that we had intra-quarter. On the downside, typically prices or the selling prices exaggerated on the downside as you lose some traction from COMEX on copper. The same is true on the upside. We tend to do better with a bias or a trend on the upside, for sure. Because it does -- maybe over correct in both directions on the sale price.

Frank J. Bilban -- Chief Financial Officer, Secretary, Treasurer and Vice President

As far as the spreads go as we outlined on third quarter to third quarter basis, they dipped 9%. That's a big drop and had we had the same spreads in the third quarter of 2019 that we had in copper spreads in the third quarter and aluminum, although it's obviously most of the copper business.

If we had the same spreads in 2019 that we had in the third quarter of 2018, Julio, we would have made net of the commissions and cash discounts, we netted it all out, we would have made $0.34 more in earnings in the quarter or $1.12, which is remarkably close to the $1.13 that we made last quarter, which as Daniel emphasized in his comments goes to show that our manufacturing costs, our distribution costs, our G&A costs tend to be remarkably consistent and the real deal maker or deal breaker is the spread. And that is somewhat beyond our control.

Julio Romero -- Sidoti & Company -- Analyst

Okay. That's helpful. I guess my follow-up for that would be that, if maybe other quarters -- maybe 2Q of '19 maybe a little bit more reflective of a normalized dollar spread then, I mean COMEX that's kind of trended up in the third quarter -- in the fourth quarter, I should say. How likely are you to get that pricing above raw copper back going forward?

Daniel L. Jones -- Chairman, President and Chief Executive Officer

Yeah. Good question. This is Daniel again, Julio. We had one, two, three, four, five, six, seven, eight, almost nine swings of more than $0.05, one of the swings was $0.17 in eight days in Q3. And so depending on the timing of those swings of COMEX, you put a price increase through or the industry puts a price increase through to recoup that $0.17 and then four, five days -- business days into that, you get a drop of $0.12 in the following 10 days and so there is timing on those price increases, and the discounting happen to be basically one competitor in Q3 for whatever reason. They led down and I don't know what their motivation would be or wouldn't be to lead down but the minute that copper had a bias of two or three days or a trend, if you recall, seven days of trend on the downside, the discounting was exaggerated.

And they were doing it by email and whatever the usual stuff that we see, but the good thing is, when it turns, I mean over the next week and you get the upside on COMEX, it forces some discipline. So speaking specifically just Q3, the volatility and the -- I don't have a B2 critical [Phonetic] or whatever, because I don't know why they're doing, what they're doing, but it is specific to one competitor, the volume was pretty significant and we passed on several orders. It just didn't meet the test for us and made no sense whatsoever from a business perspective, but it -- I can't really speak to Q4 yet, but as you mentioned, the trend on COMEX has changed some of that. The upside normally forces discipline, which is a good thing.

Julio Romero -- Sidoti & Company -- Analyst

Okay. Got it. And just last one for me here is on that competitive landscape, I mean, just a quick refresher on how many of those players that maybe discounting can do what you guys do in terms of the order fill rates, the quick deliveries, the reliability that sort of value proposition that you guys have. Can you just talk about who in that industry can kind of do what you guys do so to speak?

Daniel L. Jones -- Chairman, President and Chief Executive Officer

Yeah. There is a couple that can somewhat do those things. We do things a little bit differently here than our competitors and there's only two things that sell building wire to price and delivery, and I've said that forever and it still remains the case. And there's things that we're doing that helps us to be able to hold the price and get repeat business, it doesn't go out to quote and those kind of things.

And so we had a good quarter. $0.78 was really good with the volatility that we had. Again, we had eight or nine swings of more than $0.05 a pound on COMEX within four, five business days. And that's just a really volatile environment to try to sustain any kind of predicted posted price increase, but overall, business was good. There is a couple of guys that can keep up with that, and there is some that cannot.

And again, though, if you get one or two of the right folks doing some crazy things from a business perspective, we all tend to catch the disease a little bit and then here we go. So we definitely had some of that and as Frank highlighted, it was reflected in the spread.

We got a very good control here of what we're doing. One of the things we fight as we thought in the past is the pricing issue in the market for whatever reason, but delivery at some point kicks in. And again, you get a bias or trend on the upside in COMEX and it forces discipline on the price side than the two [phonetic] an deliver. And so that's when we really can thrive and so.

To do what we do out of one location and service the accounts in our manner, obviously I think that we're doing the best and I think there is one or two that keeps up on a regular basis and maybe two, maybe three that lead with price only and have pretty ridiculous delivery.

Julio Romero -- Sidoti & Company -- Analyst

Got it. I appreciate the color. Thank you. And I'll hop back in the queue.

Daniel L. Jones -- Chairman, President and Chief Executive Officer

I would give you names, Julio, but I'm looking at the screen and pretty much all of them are on here. So I don't want to say names.

Julio Romero -- Sidoti & Company -- Analyst

All great. Thanks very much.

Operator

Our next question comes from Zane Karimi. Your line is now open.

Zane Karimi -- D.A. Davidson -- Analyst

Hey, good morning, gentlemen.

Daniel L. Jones -- Chairman, President and Chief Executive Officer

Good morning.

Zane Karimi -- D.A. Davidson -- Analyst

So first off, can you talk about a little bit more on what Julio was talking about with the competitive pricing pressure and how the softness in copper versus a competitive [Phonetic] bidding has impacted you this quarter? As well as a little bit more color on the percent of orders that have not meet the targets? The margin targets you guys have relative to prior quarters? How much of a jump with this and how should we be thinking about this moving forward?

Daniel L. Jones -- Chairman, President and Chief Executive Officer

Well, Zane, that's a mouthful. From the bottom up, the orders as a percentage of the ones that we passed, it's hard to gauge exactly what that percentage would be if it's on a unit or a poundage basis maybe somewhere between 8% and 12% of the overall volume of quotes that we see. We did an intentional hard pass just because of pricing and the discounting is too deep on the front end. There's a lot of posturing in the market in Q3, a lot of loyalty changeover, there's just a lot going on in the market from a positive perspective, but again, the volatility led to, for whatever reason, some odd behavior from the folks that are usually pretty disciplined.

I don't want to go too deep into the names or anything, but you have a swing of $0.17 on COMEX in six or seven business days and then right behind that, you have five days where swings $0.12 the other way. It's tough to substantiate a price increase from the copper perspective, right. So when folks -- believe it or not, we have competitors that will post where COMEX opens and closes on their website, which is one of the most ridiculous things I've seen in 30 years, but they do it. We're not selling copper. We're selling building wire and so when you have the volatility that we have, and you get a bias or trend on the upside, posting COMEX supports the argument for a price increase, but the reverse is true on the downside.

So posting COMEX on a corporate website basically feeds the frenzy, one way or the other. So it's pretty ridiculous in our opinion, but in that, orders come by, we'd love to have them on a delivery basis at our price, but when they're significantly below market levels and they're trying to outpace or beat the downside pressure on COMEX, if it's -- if the conditions are not met based on our criteria. It's a hard pass and that's not unlike what we've done in the past and so you look at Q3 and you do a little mapping on where COMEX opens and closes starting the week, mid-week and end of the week, you've got $0.07 or $0.08 swing within that week. Our folks did a fantastic job of maintaining that discipline in the marketplace.

And again, we led and or followed four or five price increases in Q3 and just, again, if you lose copper, you lose the support of that price increase. And so that's what led to go hard pass on some jobs. I want every order that comes by here if it's with the right customer. And so it's hard to watch them go by, but listen, if they're not up to our standards, it's a hard pass.

There's a good chance we'll get it back anyway when the delivery is not there. There's a good chance we'll get that order back anyway.

Zane Karimi -- D.A. Davidson -- Analyst

Okay. Thank you for that.

Daniel L. Jones -- Chairman, President and Chief Executive Officer

[Indecipherable] is good.

Zane Karimi -- D.A. Davidson -- Analyst

Thank you there. Are there any particular markets or pockets in the US right now with a stronger or more robust demand for your products, or is it just general strength in the markets?

Daniel L. Jones -- Chairman, President and Chief Executive Officer

There is some really good pockets. The Texas market is strong. The Pacific Northwest is pretty strong. The Southeast is strong and coming out of some of the weather issues that occurred in Q2, and started out Q3, the Midwest has picked up. There's really not a weak area. The Northeast is one pretty well for us right now. I mean there's really just not a dead spot. They're all doing pretty well. Most of the major metropolitan areas, all have cranes in the air, movie theaters are full, airports are full, gas stations are busy. I don't know where there's a -- I don't know there is a slow spot or dead areas, it all looks pretty good in my travels.

Zane Karimi -- D.A. Davidson -- Analyst

Thank you. And then one final one here. Can you talk a little bit more about the highway building plan, how they've been proceeding relative to your expectations and your hopes?

Daniel L. Jones -- Chairman, President and Chief Executive Officer

Yeah. It's going on pretty well. I had a very productive meeting yesterday. We have acreage to the north and we have acreage to the east and this particular project is -- involves the property to the east and so we're hashing out some details and had a really good working meeting yesterday and it's progressing like it should and I feel very confident that we'll have everything wrapped up by the end of this year and move forward.

Zane Karimi -- D.A. Davidson -- Analyst

Great. Thank you, gentlemen.

Daniel L. Jones -- Chairman, President and Chief Executive Officer

Yes, sir. Thanks, Zane.

Frank J. Bilban -- Chief Financial Officer, Secretary, Treasurer and Vice President

Thanks, Zane.

Operator

Our next question comes from Tom from Preston Capital Management. Tom, your line is now open.

Tom Brashear -- Preston Capital Management -- Analyst

Thank you. Good morning, gentlemen.

Daniel L. Jones -- Chairman, President and Chief Executive Officer

Hey, Tom.

Tom Brashear -- Preston Capital Management -- Analyst

Hey, Tom.

Frank, thank you for your service. It's been a great pleasure working with you for the past 20 years.

Frank J. Bilban -- Chief Financial Officer, Secretary, Treasurer and Vice President

[Indecipherable] to all of you certainly, nationwide and especially, locally, I am retiring, I'm not dying, so you can still come and see me.

Tom Brashear -- Preston Capital Management -- Analyst

Very good. Look forward to that. My question was on competitive pricing and has been answered already. So thank you.

Daniel L. Jones -- Chairman, President and Chief Executive Officer

Thank you, Tom.

Operator

Our next question comes from Bill Baldwin from Baldwin Anthony. Your line is now open.

Bill Baldwin -- Baldwin Anthony -- Analyst

Yeah. Good morning, everybody.

Daniel L. Jones -- Chairman, President and Chief Executive Officer

Hey, Bill.

Frank J. Bilban -- Chief Financial Officer, Secretary, Treasurer and Vice President

Hey, Bill.

Bill Baldwin -- Baldwin Anthony -- Analyst

Can you talk a little bit or offer any color to us about the aluminum business. When -- you talk on volumes and you talk spreads and things of that nature. And I don't expect to get into the exact detail what you do on copper, but can you give us a feel for where the aluminum business stands today versus a year ago in terms of volume and spreads? And what do you think when this vote [Phonetic] comes in November, is that going to affect the spreads in that business in your opinion?

Daniel L. Jones -- Chairman, President and Chief Executive Officer

Hey, Bill. This is Daniel. The aluminum business for us has always been good. There's times when it's been great. And then we ran into a situation competitively where it wasn't so good. It looked super sketchy and suspicious to us. We did some investigating and that led to the petition that we filed against the government term cheaters, and that's the China update that we gave in the prepared statement. Where it's at today, it's better. There were some post petition improvement, it's not where we'd like to see it yet. I think it's headed in the right direction. I feel, I feel good and positive about all of our meetings that we had in D.C. We've got the right team in place and I think that's moving in the right direction.

Aluminum is a good part of our business. As you know, we're primarily copper. I don't think it's any secret that we do a substantial amount of aluminum in the market and we've spent a tremendous amount of money here from the service side to be a substantial aluminum manufacturer, and we want to do great things from the service piece and we'd like to see the return on that significant investment and that's the reason for the petition that we filed. But today it's better, it's not where it needs to be, but it's headed in that direction.

Bill Baldwin -- Baldwin Anthony -- Analyst

That's good color. I appreciate it. And Frank, just a housekeeping, can you indicate what the LIFO cost was in Q3?

Frank J. Bilban -- Chief Financial Officer, Secretary, Treasurer and Vice President

LIFO in the third quarter of 2019 was a $4.4 million decrement to cost of sales.

Bill Baldwin -- Baldwin Anthony -- Analyst

Okay. And in terms of your business, are you beginning to see or do you think the outlook is going to be improved on the residential part of the business as we look at 2020 perhaps latter part of this year but more out the 2021 when the spring season kicks in and so forth, do you see that business looking better to you?

Daniel L. Jones -- Chairman, President and Chief Executive Officer

Yes, we -- this is Daniel, again, Bill. We've seen some -- there's some good signs on the residential piece. As you know in our first three or four years in existence, we were 100% residential. But we are entrenched in that market. We feel like we're doing good things there. We've got a real good manufacturing situation going on with that product category. We're strong on the delivery piece, on the service side. We've got really good distributor partners in the market and we're seeing positive signs and I think [Technical Issues] is in a good spot.

Bill Baldwin -- Baldwin Anthony -- Analyst

[Technical Issues] mortgage rates the way they are, we might see, we are beginning to see some improvement actually on a [Indecipherable] start numbers. I presume you serve that business nationally, just like you do the non-res business. Is that correct?

Frank J. Bilban -- Chief Financial Officer, Secretary, Treasurer and Vice President

Yes, sir. All 50 states for us on the residential, yeah.

Bill Baldwin -- Baldwin Anthony -- Analyst

Right. Thank you very much.

Frank J. Bilban -- Chief Financial Officer, Secretary, Treasurer and Vice President

Yes, sir. Thanks for the support, Bill.

Operator

Our next question comes from Kerry Rigdon. Your line is now open.

Kerry Rigdon -- McPherson & Mayberry -- Analyst

Good morning, gentlemen. I really don't have a question more of a statement. I want to echo the sentiments that have already been made and thank Frank for his commitment to the highest degree of professionalism. It's been a true pleasure.

Frank J. Bilban -- Chief Financial Officer, Secretary, Treasurer and Vice President

Right back at you, Kerry. Thank you.

Operator

[Operator Instructions] And speakers, at this time, I'm showing no further questions. We do have a question from Steve Garvin. Steve, your line is now open.

Steve Garvin -- Analyst

Hi, guys. No question. I just want to echo what Tom and Gary had said. Frank, it's been a pleasure working with you over the years and look forward to catching up when -- maybe we could do some fishing or hunting or maybe a round of golf or something, but congratulations.

Frank J. Bilban -- Chief Financial Officer, Secretary, Treasurer and Vice President

Thank you. And I may have to drive my wife up to see beautiful Niagara Falls.

Steve Garvin -- Analyst

[Indecipherable] June or July though, would you.

Frank J. Bilban -- Chief Financial Officer, Secretary, Treasurer and Vice President

Yeah, you can give us a tour, big guy.

Steve Garvin -- Analyst

All right, thank you.

Frank J. Bilban -- Chief Financial Officer, Secretary, Treasurer and Vice President

Thank you.

Operator

And speakers, at this time, I'm showing no further questions in queue.

Daniel L. Jones -- Chairman, President and Chief Executive Officer

Well, thank you, Sheryl for running the call and thank you for the participation in the questions. We look forward to the next call.

Operator

[Operator Closing Remarks]

Duration: 33 minutes

Call participants:

Daniel L. Jones -- Chairman, President and Chief Executive Officer

Frank J. Bilban -- Chief Financial Officer, Secretary, Treasurer and Vice President

Julio Romero -- Sidoti & Company -- Analyst

Zane Karimi -- D.A. Davidson -- Analyst

Tom Brashear -- Preston Capital Management -- Analyst

Bill Baldwin -- Baldwin Anthony -- Analyst

Kerry Rigdon -- McPherson & Mayberry -- Analyst

Steve Garvin -- Analyst

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