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Encore Wire Corp (NASDAQ:WIRE)
Q4 2019 Earnings Call
Feb 19, 2020, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Welcome to the Encore Wire Reports Fourth Quarter and Full Year 2019 Results Conference Call. My name is Adrienne, and I'll be your operator for today's call. [Operator Instructions]

I'll now turn the call over to Daniel Jones. Daniel Jones, you may begin.

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

Yes, ma'am. Thank you, Adrienne, and good morning, ladies and gentlemen, and welcome to the Encore Wire Corporation quarterly conference call. I'm Daniel Jones, the President, Chief Executive Officer and Chairman of the Board of Encore Wire. And with me this morning is Bret Eckert, our Chief Financial Officer.

The business in the markets for our products remained strong as evidenced by 4.1% increase in unit volumes in 2019 compared to 2018. The unit volume increase was achieved even though we continued to face vigorous competition in the marketplace. Despite the strong US construction market and demand for building wire, margins were restrained by competitive pricing in the fourth quarter of 2019 versus the fourth quarter of 2018. Gross profit margins fell in concert with the drop in copper prices versus 2018's fourth quarter and full year basis, 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 a given period. The copper spread decreased 11.2% in the fourth quarter of 2019 versus the fourth quarter of 2018, while decreasing 4.9% in the full year comparison. The copper spread contracted 11.2% as the average price of copper purchased decreased 2.8% in the fourth quarter of 2019 versus the fourth quarter of 2018 while the average selling price of wire sold decreased 5.8%. It should be noted that the spreads in the fourth quarter of 2018 were the highest in over a decade. However, we still believe the currently strong end markets can support those margin levels again.

In aluminum wire, which represented 8% of our net sales in 2019, we successfully enforced our rights under the US trade remedy laws. As a result of the International Trade Commission's final affirmative decision, US imports of aluminum wire and cable from China will be required to pay antidumping duties at rates ranging from 47.83% to 52.79% plus countervailing duties at rates ranging from 33.44% to 165.63% depending upon the Chinese export suppliers.

US economy appears strong and as is construction activity. Based on discussions with our distributor customers and their contractor customers, we believe there is a continued good outlook for construction projects for the next 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 also have some exciting news to share about our expansion plans. But first let's cover our financial results. Bret?

Bret J. Eckert -- Chief Financial Officer, Secretary, Treasurer & Vice President

Thank you, Daniel.

In a minute, we will review Encore's financial results for the quarter and year ended December 31, 2019. After the financial review, we will take any questions you may have.

Before we review the financials, let me indicate that throughout this conference call we may make 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 measure presented in accordance with GAAP, including EBITDA, which we believe to be useful supplemental information for investors, are posted on our website.

Now the financial results.

Net sales for the fourth quarter ended December 31, 2019 were $302.3 million compared to $319.7 million for the fourth quarter of 2018. Copper unit volume, measured in pounds of copper contained in the wire sold, decreased 1.6% in the fourth quarter of 2019 versus the fourth quarter of 2018. The average selling price of wire per copper pound sold decreased 5.8% in the fourth quarter of 2019 versus the fourth quarter of 2018. Net income for the fourth quarter of 2019 decreased to $10.5 million versus $25 million in the fourth quarter of 2018. Fully diluted net earnings per common share were $0.50 in the fourth quarter of 2019 versus $1.20 in the fourth quarter of 2018.

Net sales for the year ended December 31, 2019 were $1.275 billion compared to $1.289 billion for the year ended December 31, 2018. Copper unit volume, measured in pounds of copper contained in the wire sold, increased 4.1% in the year ended December 31, 2019 versus the year ended December 31, 2018. The average selling price of the wire per copper pound sold decreased 5.8% in the year ended December 31, 2019 versus the year ended December 31, 2018, more than offsetting the unit volume impact on sales dollars. Net income for the year ended December 31, 2019 decreased to $58.1 million versus $78.2 million in the same period in 2018. Fully diluted net earnings per common share were $2.77 in the current period versus $3.74 in the same period in 2018.

On a sequential quarter basis, net sales for the fourth quarter of 2019 were $302.3 million versus $321.2 million during the third quarter of 2018 [Phonetic]. Sales dollars decreased due to an 8.1% unit volume decrease of copper building wire sold on a sequential quarter comparison. Copper wire sales prices increased 1% while the price of copper purchased increased 1.4%. Net income for the fourth quarter of 2019 was $10.5 million versus $16.4 million in the third quarter of 2019. Fully diluted net income per common share was $0.50 in the fourth quarter of 2019 versus $0.78 in the third quarter of 2019.

Our balance sheet remains very strong. We have no long-term debt and our revolving line of credit is paid down to zero. In addition, we had $231 million in cash at the end of the year. We also declared a cash dividend during the quarter.

A replay of this conference call will be accessible in the Investors section of our website. I'll now turn the floor over to Daniel Jones, our Chairman, President and Chief Executive Officer. Daniel?

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

Thanks, Bret.

As we highlighted, Encore performed well in the past quarter and on a full year basis. We believe we are well positioned for continued growth in the future. We also have some news to share about continued expansion plans, which we expect to proceed in two phases.

Phase one will begin in the first quarter of 2020 with construction of a new 720,000 sq. ft. facility located at the north end of our existing campus. This facility will act as a service center, modernizing our logistics to allow for increased throughput and provide the bandwidth necessary to capture incremental sales volumes. Phase one will allow us to compete at a higher level in the market while further strengthening our industry leading customer service and order fill rates. We expect to complete construction in the second quarter of 2021.

Phase two of our expansion plans will commence following phase one and will focus on repurposing our existing distribution center to expand manufacturing capacity significantly and extend our market reach. Phase two completion is anticipated in 2022.

It's an exciting time for Encore's employees, customers and stakeholders. We've been under construction since inception, and we continue to grow today. Our two phase expansion plans will extend our reach and increase manufacturing capacity to meet the growing needs of our customers. We anticipate total capital expenditures to range from $85 million to $95 million in 2020; $70 million to $90 million in 2021; and $60 million to $80 million in 2022. A strong balance sheet and ability to consistently generate high levels of operating cash flow should provide ample allowance to fund planned capital expenditures.

In closing, we announced yesterday that Don Courtney is retiring from our Board after 31 years of outstanding service. He will serve the remainder of his current term on the Board and will not stand for reelection at the Company's 2020 Annual Meeting of Stockholders. We've identified an individual who'll bring diversity to our Board, with more information forthcoming in our proxy filing in March.

We thank our employees and associates for their tremendous efforts. We also thank our stockholders for their continued support.

We'll now take questions from our listeners, Adrienne.

Questions and Answers:

Operator

[Operator Instructions] And our first question comes from Julio Romero from Sidoti. Your line is open.

Julio Romero -- Sidoti & Company -- Analyst

Hey. Good morning, Dan. Good morning, Bret.

Bret J. Eckert -- Chief Financial Officer, Secretary, Treasurer & Vice President

Good morning.

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

Good morning, Julio.

Julio Romero -- Sidoti & Company -- Analyst

As far as the fourth quarter, I wanted to ask if you have seen any inflation in any of your semi-fixed components such as labor, overhead or maybe on the cost of materials other than copper, and if so, were any of those kind of notable on a year-over-year basis.

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

We had an increase in labor. It took us a few price increases to work that and get that covered. But yes, labor was more expensive. We saw some increases in benzene. And then you also would have something -- to a lesser extent, we had some increase in diesel fuel. There were some things that ticked up in the quarter that we just weren't allowed really in the market to get those price increases to pass through.

Julio Romero -- Sidoti & Company -- Analyst

Okay. That's helpful. Kind of turning to the capital allocation and what you're doing there. I mean, can you maybe talk about what that new service center does for you from a logistics standpoint? Are there any efficiencies that might be able to help you bring down costs? And if so, maybe what will those be?

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

We're in the process now obviously of trying to finalize some of those numbers. But we're looking at turning the orders much faster than we are. Our fill rates run at 100% on a consistent basis. It's really tipping and turning and meeting the demands of the customers today in a field on a speed basis and reliability basis is what we have to have more room for. And then obviously phase two will be as quickly as possible right behind it. Along with our consistent upgrades to existing equipment, we're going to add some capacity in the [Indecipherable] distribution center with more capacity.

Julio Romero -- Sidoti & Company -- Analyst

Got it. And what the product lines would be that you'd like to expand capacity for? Would it be something in the current portfolio or maybe something adjacent to what you currently offer?

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

There'll be some additions, but it will all be under the same umbrella. We're still consistently servicing the electrical distributor market. The requirements in the field for the speed and reliability piece is what the service center will address, and any additional capacity will give us some machine time and some flexibility to add some fringe products that come up from time to time on the job sites that are necessary from a service standpoint.

Julio Romero -- Sidoti & Company -- Analyst

Got it. Thanks for taking the questions. And I'll hop back in queue.

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

You bet. Appreciate it. Thanks for the support.

Bret J. Eckert -- Chief Financial Officer, Secretary, Treasurer & Vice President

Thanks, Julio.

Operator

And our next question comes from Brent Thielman from D.A. Davidson. Your line is open.

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

Great. Thanks. Good morning.

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

Hey, Brent.

Bret J. Eckert -- Chief Financial Officer, Secretary, Treasurer & Vice President

Hey, Brent.

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

Daniel, I guess now that you're able to speak a little more openly about these investments, can you talk about why these were prioritized? There were other things you could be doing with the cash. How do we start to think about the financial implications of this?

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

Well, the market demanding our service to our existing customer base is pushing us in this direction. There is no question. The speed and reliability piece, it comes from the room to move and the services that are in addition to just the product itself that are required today to handle these accounts and some of the end user requirements that are coming in, we need more space to move.

We're moving a lot faster with orders. You can see the finished goods turns that we're putting out. I like 12 [Phonetic]. 13 [Phonetic], 14 [Phonetic] is too fast. It's really a speed and reliability measurement to continue to compete and try to maintain that 1% or 2% premium that we shoot for in the marketplace. We weren't as successful in the fourth quarter as I'd like to have been, but we clearly have to have some bandwidth for speed and reliability on these end user job sites to continue to compete.

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

And do you think this could help to capture additional premium over what you've done historically? And also, do you think you can capture additional market share with this?

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

We do. We think that if we continue to service the way that we're able to do and the improvements that we're investing in, we can potentially keep these things from going out to bid on an auction type basis and maybe hang on to 1 point or 2. The market is changing. It's dynamically changing. There was only two things that sell building wire -- I've said this for 30 years. It's price and delivery. And the price is the easy one. Anybody can cut the price. We're after the delivery side to kind of maintain a 1% or 2% advantage in the marketplace.

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

Okay. And are there pockets of the country -- I mean, historically I've always thought of Encore's able to hit really all areas of the country. But are there are pockets that you feel you're under-penetrated this would allow you to reach a little further into?

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

There is a couple of geographical areas that we don't do as well as we would like. And we have made some strategic changes in 2019 that should pay off for us in early 2020, and we are going to have to have that speed and reliability, access to some flexible machine time, access to some distribution and service time. I mean, some of the unpredictable product category surprises, if you will, on some of these job sites that are not necessarily -- the planning and the volume that comes from some of that is a little less predictable.

So, we're building in a way to support a couple of those areas that that speed and reliability is not what it should be from our perspective. And so it will definitely help us in a couple of areas. I don't want to name them specifically, but there are two. They're both top 5 or 6 consumers in the country area-wise. And so it will definitely help us.

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

Yeah. Okay. And then just on the quarter itself, I mean, looking at the average selling price down around 6%; gross margins a little softer. I guess it all kind of implies competitive conditions got pretty bad in this last quarter. Can you talk a little bit more about what happened? One bad actor, set of actors [Indecipherable]

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

Yeah. What we saw, Brent, is early on October, first three or four days in October, you had COMEX at about $2.50, mid-$2.50s, $2.54 I think is where it was. And then as it continued to rise, historically, that's a fantastic event for us. We put the price increase out in front of that. We're able to do that mid-October in the low $2.60s, $2.63, $2.65 range on COMEX, and that was basically the last successful price increase that we were able to hang on to. You ended up the month -- in October, COMEX was in the mid to high $2.60s and you start off November around that range with price increases but that didn't stick because it went from $2.60 to -- about a $2.60 number, you lose the ability to hold that price increase that was announced and you go back to discounting at old levels and then it runs right back up into the $2.70 range.

So you start the process over again. You put out a price increase announcement [Indecipherable] of December in the low $2.60s, mid-$2.60s and returning to around $2.70 and end up finishing up -- I think the December high was $2.86. So you get 30-some odd cents of volatility from the first week of October to Christmas Day, basically when everybody kind of stops the selling or what have you. And it really wasn't a volume issue as much as it was -- you just had cost right in your face going up on a consistent basis and just no traction on the price increases whatsoever. I don't know that I should name one or two of the bad actors. I mean, I think there's only five or six of us left in the industry, really, but -- it was more of a timing -- I think it was more of a timing of the way the volatility in COMEX was hitting. You announced a price increase and the day you announce it you lose $0.06 or $0.07 a pound in COMEX. You just don't have the ability to hang on to that price increase.

And toward the end of the year, there was some inventory maneuvering and posturing with maybe some of the folks in the market and what have you for year-end programs or what it might be. But it was pretty brutal. And again, it was not relative to the feel in the market. The feel in the market is, we're very busy. I mean, shipments are -- trucks are full and people are paying their bills on time. I mean, we're in a busy time, and that did not match the lack of discipline, if you will, in December. I mean, at the risk of whining, when you look at COMEX going from $2.54 to $2.86 and you were able to get a 4%, maybe a 5% price increase in early October, that's just not -- that's unsustainable. It doesn't cover the cost, and you catch the disease with the industry and [Indecipherable] And that's kind of what happened in the fourth quarter.

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

That's helpful commentary. I appreciate that, Daniel. I guess my last one is, particularly as you think about this market dialog you have with your customers, contractors, distributors and so forth, how does the environment feel this year maybe relative to the last couple of years at this point? I mean, does it feel like market is going to be pretty busy this year -- busier than the last couple of years, setting aside your industry trends itself?

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

It does, from the perspective that we have. We are spending more time, and there is more dialog back and forth with the end users and distributor partners on planning. It's matured well past the cycle of just checking three or four prices and going to the lowest one in the marketplace. Those days are hopefully behind us for the most part. But there is a lot more planning going into the job site itself. And as far as having the time frame from when you quote something or bid something to when it actually becomes an order, that's narrowed quite a bit.

And so when you have those conversations ongoing and you invest some resources on the front end going into these massive jobs that are coming out of the ground, it's actually worth something today. In the past, it might be auctioned one way or the other, but through lack of service -- in the second half of 2019, specifically, we saw some real service issues in the marketplace, both quality and delivery and whatever. And so, it got some people's attention, I mean, in the industry and it did swing the pendulum a little bit in favor of the delivery side versus just the low price.

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

Okay. Thanks so much for the commentary. I appreciate it.

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

You bet. Thanks, Brent. Appreciate the help.

Operator

[Operator Instructions] And our next question is from Bill Baldwin from Crescent. Your line is open.

William Baldwin -- Crescent Securities -- Analyst

Hi. Good morning, Daniel and Bret.

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

Yes, sir. How're you doing?

William Baldwin -- Crescent Securities -- Analyst

A couple of housekeeping items here. Can you indicate to us what the LIFO situation was for the fiscal year 2019?

Bret J. Eckert -- Chief Financial Officer, Secretary, Treasurer & Vice President

Sure, Bill, this is Bret. So LIFO was pretty much a non-event. It was about a $500,000 decrease to cost of sales for the year.

William Baldwin -- Crescent Securities -- Analyst

Okay. And, can you tell us, Bret, how much of your shipments went into the residential market in the Q4 and as for the full year?

Bret J. Eckert -- Chief Financial Officer, Secretary, Treasurer & Vice President

Sure, Bill. So, on the Q4 basis, it was just short of 21%. And then on a full year basis, it was about 21.8%. So pretty consistent...

William Baldwin -- Crescent Securities -- Analyst

Okay. Pretty flat. Okay.

Bret J. Eckert -- Chief Financial Officer, Secretary, Treasurer & Vice President

For the year and the quarter.

William Baldwin -- Crescent Securities -- Analyst

And Daniel, how do you decide time-wise when to announce a price increase? Is that a function of mainly copper prices? Or is that a function of the day of the week? Or, kind of what dictates the timing of announcement of a price increase?

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

Yes, sir. A lot of the timing has to do with any type of cost, not just copper. But as you know, throughout the years, we'd love to just put a price increase out because we think we deserve it. Without the support of COMEX, its' superficial [Phonetic], and the market, as you know, without the bias or the trend on the upside on a consistent basis, they just don't stick. And I could go back over the years and point out non-copper related items that certainly helped. But for the most part, in general, you have to have a trend or a bias with COMEX the days following the announcement of the price increase.

We have a pretty quick mechanism to get that price increase visually accepted in the marketplace. But the actual execution of the orders for us -- and I won't go too deep into this -- but for us, we don't have forward pricing with folks unless it's an off-the-normal price sheet path in some manner. But for us, it's a daily situation. I mean, we look at each day where we are. It has a lot to do with the market itself and intel in the market. As you know, there's four or five of us here, including me, that travel with customers quite a bit. We have customers into the office several a week and the discussions back and forth and whatever about market conditions. And any time we see a cost creep or heading into a busy time frame, there's a lot that goes into it.

But the timing of it itself -- once you post that price increase, you kind of have to let it settle in. I mean, sometimes it's a quick answer. Sometimes it takes a couple of days, maybe three days of pretty strict discipline. You can imagine the way some of the calls would go. But it's that two or three day window where you have to have the support that's visual each day of COMEX copper of a bias or a trend. And unfortunately in Q4, there were four, maybe five price increase attempts that once they were put out, we lost $0.06 or $0.07 pretty quickly on COMEX right behind it in the next two or three days after the increase. And that just undermines the price increase that you put out in the market.

Plus, specifically, as you know, in the past, we will sit and wait and see what happens. But there are some folks that are super-fast to pull the trigger and not just go back to the old sheet, but they'll actually discount further in. That issue has existed for my 31 years. I don't know how to correct what other companies do or don't do. But again, we used to have 30-some odd competitors. We're down to five or six. So, I guess it takes care of itself in the long run.

William Baldwin -- Crescent Securities -- Analyst

I appreciate the insight there, Daniel. I know it's difficult to talk on these calls because you got your competitors on [Phonetic] here.

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

Yes, sir [Speech Overlap]

William Baldwin -- Crescent Securities -- Analyst

But none of these other competitors are public. We don't get to see any of their data. And the way they perform -- and I don't know if you can comment or not -- but the way they perform in the marketplace, it makes you think they've got a lot of unused capacity out there. I mean, you're a person that is seemingly striving to satisfy your customers on a timely basis and service them and these guys are out there to discount when like copper prices are going up. I mean, have they got a ton of excess capacity that they got to fill? Do you have any feel for that, Daniel?

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

As far as I know, all plants are running. I don't know who has a ton of capacity. Maybe they're trying to run to some budget number that they -- I don't know. I mean, I don't know. I mean, it's been this way for [Speech Overlap]

William Baldwin -- Crescent Securities -- Analyst

Okay. So it's just hard to get a feel for their [Phonetic] capacity just because you don't have any public numbers there. So, I understand. Thank you so much for your time and congratulations on your capital projects here. It seems to me like, Daniel -- you might not use the word, but it looks like to me this is a transformational event for Encore Wire as far as looking out over the next five to 10 years.

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

Yes, sir. We're pretty excited about it, Bill. Appreciate the support.

William Baldwin -- Crescent Securities -- Analyst

Yeah. I would think so.

Operator

And your next question comes from Julio Romero from Sidoti. Your line is open.

Julio Romero -- Sidoti & Company -- Analyst

Hey, thanks for taking the follow-up. Just how should we think about incremental sales volumes post expansion in 2022? Should that kind of allow you to grow with certain percentage kind of above market? Or should I think about that as an incremental X amount of units per year?

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

Well, I'd like to stick to 2019 and Q4, if we can. And I don't want to say too much about anything exact yet. We've been super-cautious about putting this news out to begin with. But as close as I can get you to a fair answer, Julio, is we're going to go after some areas where we think we can do a fantastic job and make a little bit of money. We're not interested in getting larger and poor. That's not the case. We're going to use the service center for speed and reliability. We're going to pick up our pace on turning these orders around, and the reliability piece, we're pretty good at, we're going to be great at.

As far as the additional capacity that we add in the existing distribution center building, it's going to be under the same umbrella that we currently operate with a few fringe items to add to that service piece, which allows us to charge a little bit more in the marketplace. Historically, we've been able to be 1%, maybe 2% premium in the marketplace for that service and that delivery. That's going to be our approach again. What we're not going to do is go in the marketplace and try to gain any type of volume and some standpoint from cutting prices. 30 years of watching other people do that, it just doesn't work that way.

So, it's more on the speed and reliability piece in phase one, with the flexibility of additional machine time in phase two with some added fringe products. And we're hoping that those -- and today, based on the norm today, we think we can pick up 2 percentage points on the existing and the new volume that we'll be picking up.

Julio Romero -- Sidoti & Company -- Analyst

Fair enough. Thanks for taking the questions. And best of luck in 2020.

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

Yes, sir. Thank you.

Operator

And we have no further questions. I'll turn the call back for final remarks.

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

Okay. Bret, do you have anything to add?

Bret J. Eckert -- Chief Financial Officer, Secretary, Treasurer & Vice President

No.

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

Adrienne, thank you for handling the call. We appreciate the support of you, folks, and being patient while we answered the questions. Thank you. Talk to you next quarter.

Operator

[Operator Closing Remarks]

Duration: 34 minutes

Call participants:

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

Bret J. Eckert -- Chief Financial Officer, Secretary, Treasurer & Vice President

Julio Romero -- Sidoti & Company -- Analyst

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

William Baldwin -- Crescent Securities -- Analyst

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