Encore Wire Corp (WIRE) Q4 2020 Earnings Call Transcript

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Encore Wire Corp (WIRE 0.58%)
Q4 2020 Earnings Call
Feb 17, 2021, 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 2020 Results Conference Call. My name is Jenny. I'll be your operator for today's call. [Operator Instructions] Please note that this conference is being recorded.

I will now turn the call over to Daniel Jones. Mr. Jones, you may begin.

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

Thank you, Jenny. And good morning and welcome to the Encore Wire Corporation quarterly conference call. I'm Daniel Jones, President, CEO and Chairman of the Board of Encore Wire and 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. 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 in maintaining safe working conditions, while we continue to serve our customers during this critical time.

Our strong earnings in 2020 again exhibit the strength and resiliency of our business model to deliver exceptional results in challenging times. Our balance sheet remains strong with $183.1 million of cash on hand at December 31st, to fund our growth and expansion plans.

I remain proud of how our employees are responding to the current crisis, allowing us to remain fully operational to serve our customers and drive value for our shareholders. In addition, our one location model allowed us the agility and flexibility to adapt to the changing market conditions during the year.

Detailed below are some key items to note for the fourth quarter and full-year results. Copper unit volumes increased 4.3% on a comparative quarter basis and 3.2% on a sequential quarter basis as we finished 2020 strong. On a full year basis, copper unit volumes decreased 5.4% year-over-year.

COMEX copper prices, which began to experience a steady rise in late March of 2020 continued to increase throughout the fourth quarter, which had a positive impact on spreads. Copper spreads increased 25.3% on a comparative quarter basis and 7.3% on a sequential quarter basis. Copper spreads increased 8.9% for the year ended December 31, 2020 compared to 2019.

The gross profit percentage increased for both the fourth quarter and year ended December 31, 2020 compared to the same periods in 2019, highlighting the strength of our business model. Aluminum wire represented 8.7% and 9.1% of our net sales in the three month and 12 months ended December 31, 2020.

As stated previously, customer buying patterns began to return to more historical levels beginning late in the second quarter and the restored optimism accelerated into the second half of 2020.

Looking ahead, the duration and severity of COVID-19 outbreak and its long-term impact on our business is uncertain at this time. Although we continue to adapt to COVID-19 related developments, we have limited visibility into the extent to which market demand for our products as well as sector manufacturing and distribution capacity may be impacted.

We believe Encore Wire is well positioned to weather the storm and will continue to serve the markets during this critical time. As we navigate the near-term challenges, we remain focused on the long-term opportunities for our business. We believe that our superior order fill rates continue to enhance our competitive position. As orders come in from electrical contractors, our distributors can continue to depend on us for quick deliveries coast-to-coast.

I'll now turn the call over to Bret to cover our financial results. Bret?

Bret Eckert -- Vice President & Chief Financial Officer

Thank you, Daniel. In a minute, we will review Encore's financial results for the fourth quarter and year ended December 31st, 2020. 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 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 Generally Accepted Accounting Principles, including EBITDA, which we believe to be useful supplemental information for investors, are posted on our website.

Net sales for the fourth quarter ended December 31st, 2020 were $380.8 million compared to $302.3 million for the fourth quarter of 2019. Copper unit volume measured in pounds of copper contained in the wire sold, increased 4.3% in the fourth quarter of 2020 versus the fourth quarter of 2019. Gross profit percentage for the fourth quarter of 2020 was 15.4% compared to 11.8% in the fourth quarter of 2019. The average selling price of wire per copper pound sold increased 21.1% in the fourth quarter of 2020 versus the fourth quarter of 2019, while the average cost of copper per pound purchased increased 18.9%.

Net income for the fourth quarter of 2020 was $24.1 million versus $10.5 million in the fourth quarter of 2019. Fully diluted net earnings per common share were $1.17 in the fourth quarter of 2020 versus $0.50 in the fourth quarter of 2019. Net sales for the 12 months ended December 31st 2020 were $1.277 billion compared to $1.275 billion during the same period in 2019. Copper unit volume measured in pounds of copper contained in the wire sold, decreased 5.4% in the 12 months ended December 31st, 2020 versus the 12 months ended December 31st, 2019.

Gross profit percentage for the 12 months ended December 31st 2020 was 15.2% compared to 13% during the same period in 2019. The average selling price of wire per copper pound sold increased 4.7% in the 12 months ended December 31st 2020 versus the 12 months ended December 31st 2019, while the average cost of copper per pound purchased increased 2.6%.

Net income for the 12 months ended 2020 was $76.1 million versus $58 million in the same period in 2019. Fully diluted net earnings per common share were $3.68 in 2020 versus $2.77 in the same period in 2019. On a sequential quarter comparison, net sales for the fourth quarter of 2020 were $380.8 million versus $339.7 million during the third quarter of 2020.

Sales dollars increased due to a 3.2% unit volume increase in copper building wire sold, combined with a 9.1% increase in the average selling price per copper pound -- per pound of copper wire sold on a sequential quarter basis.

Gross profit for the fourth quarter of 2020 was 15.4% compared to 15.7% in the third quarter of 2020. Copper wire sales prices increased 9.1%, while the price of copper purchased increased 10.2%. Net income for the fourth quarter of 2020 was $24.1 million versus $21 million in the third quarter of 2020.

Fully diluted net income per common share was $1.17 in the fourth quarter of 2020 versus $1.02 in the third quarter of 2020. Aluminum wire represented 8.7% and 9.1% respectively of our net sales in the three month and 12-month periods ended December 31st, 2020.

Our balance sheet remains very strong. We have no long-term debt and our revolving line of credit is paid down to zero. On February 9th, 2020, we entered into a new credit agreement with our existing lenders to provide for a $200 million five-year revolving credit and letter of credit facility through February 9th, 2026, replacing the Company's prior $150 million revolving credit and letter of credit facility.

In addition, we had a $183.1 million in cash at the end of the year. Predominantly during the first quarter of 2020, we repurchased 441,250 shares of our common stock in the open market. We also declared a $0.02 cash dividend during the quarter.

Our two-phased expansion plan announced earlier this year continues in earnest and remains on schedule. The construction of the new service center is progressing well with a planned opening in the second quarter of 2021. Phase 2 of our expansion plans will focus on repurposing our existing distribution center to expand manufacturing capacity and extend our market reach.

Spending on Phase 2 has already commenced as we have accelerated the timing of orders with manufacturers, due to the increased lead times required for certain machinery and equipment in the current environment. Phase 2 completion is anticipated in early 2022.

Total capital expenditures were $86 million in 2020. We expect total capex to range from $100 million to $120 million in 2021; $50 million to $70 million in 2022; and $40 million to $60 million in 2023. Our strong balance sheet and ability to consistently generate high levels of operating cash flow should provide ample allowance to fund planned capital expenditures.

I will now turn the floor over to Daniel for a few final remarks.

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

Thank you, Bret. As we highlighted, Encore performed very well in the fourth quarter and year-ended December 31, 2020. Our low-cost structure, one location model and strong balance sheet have enabled us to withstand difficult periods in the past and they're continuing to prove valuable now. I'm very proud of how each of our employees have rallied during this crisis and I want to thank our employees and associates for their tremendous efforts. We also thank our stockholders for their continued support.

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

Questions and Answers:

Operator

Thank you. [Operator Instructions] And our first question comes from Brent Thielman from D.A. Davidson. Please go ahead.

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

Thank you. Good morning, Daniel and Bret.

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

Hey Brent.

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

Hey, congrats on a great quarter. Daniel, I'd love to just get your assessment of where the current demand environment is today? And I suspect we could see some issues with the weather across the country here in the first quarter. But -- maybe what are your customers telling you beyond that?

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

You're talking about currently, in Q1?

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

Well. I think -- yeah, maybe in terms of what's happening across the country in Q1 for the business, but maybe just sort of, generally speaking, what your customers are saying about the demand environment?

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

Yeah. I guess back in March or so of 2020, the feeling was that, there was a huge uncertainty, obviously, with COVID and the effects and what have you. But as the States that were closed and metropolitan areas that were closed down to construction deliveries opened back up, you can see that we did very well later in the year; Q3, Q4 specifically.

And so that demand really is good. It's continuing to be good. There is no question that the current weather that's impacting Texas along with many other states is going to have some type of effect for sure on slowing some stuff down for this week, but it will simply push this week's stuff into the following week and the sense of urgency will be there. And without saying too many forward-looking things, I expect it to continue. Residential was really strong in 2020, looks like there's quite a bit of time frame left in that growth area.

The commercial and industrial piece, we're seeing positive results and the aluminum piece is showing some positive signs. And so, with the tightness of raw materials, specific to copper, but not to forget or diminish or discount the other raw materials, there is a true tightness and so it forces some discipline in the market, which as you know, Brent, being with us for many years, we perform incredibly well when there's processing discipline in the market.

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

Daniel, with copper running -- have you seen any -- has that benefited the aluminum piece to any degree?

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

I think there's always some sentiment that would support that for sure. As you know though, as copper gets super expensive, there's a lot of discussions around or there's -- many times there's discussions around substituting aluminum and what have you. The good thing in this has been, for us anyway that there is a nice mix of both.

The demand has been strong enough in 2020 to support the higher prices on the copper. We hadn't seen a really tremendous amount of substitution, even reran our guess, Brent, maybe March was the COMEX low around $2.11 or $2.10 something like that and then reran up to you know ended up the year, it looks like the average in December was over $3.50.

So, when you have that type of run on COMEX and we also had some price increases along the way with aluminum and supply chain disruptions what have you, the focus on the metal itself is less intense, which is counterintuitive. But it's more about who has the product and who can get it delivered when it's needed. So the price and delivery equation is still predominant in the industry and one without the other is no good.

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

Okay. I guess the question, as you ramp up the service center starting up here in the first half of the year, how should we think about the impact to your COGS, cost of goods sold, SG&A, since I'd suspect it's going to take a few quarters to be running at an optimal level.

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

Yeah, I would think so. I mean, we've already committed to some training employee wise, people, head count, whatever. We've already started that process for the move and to get people up and running a little bit quicker. But where we were with the service piece and requirements on a lot of the market demands that we're in a fight with today, you still have to have that delivery piece. And the order complexion and request in the market today are significantly more complicated than they were three, four years ago from the way that the product needs to be delivered.

There's a few services that we offer on the front end that just four or five years ago may have been performed at some other step in the supply chain. So we had to have some loosening up if you will and some flexibility and some floor space to process some of the larger jobs that have come around. I think with the fantastic job that the sales team and the operations folks have done in the second half of 2020 into Q4, I think that that's going to continue.

And what that means is, we charge for those services, it's a fair amount. I think we'll be able to pay for those extended cost if you will, a little quicker than what we might have otherwise and then being able to charge a little bit more for the product and having the support of the raw materials and on the upside, if that's a trend or a bias whatever it might be time wise, but I think we're going to see the benefits start a little quicker than we would have expected otherwise, just because the market conditions.

And we've already discussed some of the service, things that we do, don't really want to draw a road map for everybody. But I think it's going to be a little bit better than flat. Hopefully, we'll see some contribution maybe quicker than that six month period that you're looking at. We won't actually physically be shipping out of their -- the new DC or the new service center until late in the second quarter.

So there'll be some things that we'll learn on the move and but there'll also be some jobs that we'll be able to handle a little bit more efficiently and be able to charge for those services. And kind of dancing around, what we're going to be doing with the old distribution center, but we're fully aware that service centers don't necessarily pay for themselves. We'll be watching it carefully, Brent, and trying to charge for those services the best we can.

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

Okay. Fair enough last question for me. You know as copper keeps moving up and you mentioned it sounds as though it's forcing some discipline around the industry, Daniel. I wonder if it's allowing you to be more selective in the types of orders and jobs you want to take on and allowing you to put up the sorts and -- at least helping you put up sorts of margins here, but not here today?

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

Yeah, I think that's a fair assumption. We always try to be super selective. We have fantastic customer base, our distribution model lends itself to the higher quality distributors and I think it's important to point out that our receivables is high as they are, they're all current, which is a testament to the quality of the customers that we've had through the COVID whatever in 2020 the challenges they have, they are still paying their bills on time.

So the quality of the customer and the quality of the individual job itself that we go after. It's not by accident. We're not blindly chasing any order that comes across. We have a fantastic group of folks here and they do a fantastic job of going after the orders that we specifically won.

And as you know from -- been familiar with us for years, what we're really trying to do is, is maintain that integrity on that order from start to finish and charge for it. So there is no question that this type of tightness and delivery expectations and -- the whole entire supply chain from raw copper all way through finished goods has been disrupted somewhat.

So, there is no question, you got to have the ability to continue to charge and do the things you got to do. But there is a little higher quality, we've upgraded some distribution in some markets. The sales team upgraded some sales representation in a few markets and we'll continue to do that as best we can.

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

Okay, thank you for taking the questions. I'll pass it on.

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

Thanks, Brent. Appreciate the support. Stay warm.

Operator

[Operator Instructions] Our next question comes from Julio Romero from Sidoti.

Julio Romero -- Sidoti & Co. -- Analyst

Hey, good morning, Daniel and Bret.

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

Good morning.

Julio Romero -- Sidoti & Co. -- Analyst

So, you mentioned earlier that residential was very strong in 2020. Can you maybe talk to the mix of resi versus non-resi in the quarter or the year and whether that end market mix continue into '21?

Bret Eckert -- Vice President & Chief Financial Officer

Yeah. Good question, Julio. This is Bret. In the fourth quarter, our resi was 29.7%. On a full year basis, residential was about 27%. So on a full-year 27% resi versus 21.8% in full year 2019 and then fourth quarter residential 29.7% versus 20.7% in the fourth quarter of 2019. So it was definitely a heavier emphasis as COVID kind of took its grips and people started buying RVs and second homes or remodeling instead of going to Paris.

Julio Romero -- Sidoti & Co. -- Analyst

Got it. And that resi-mix is a little bit higher than traditionally, I think it's been in the past. So, I guess, do you think that mix kind of continues to trend upward for resi or see a steady state to '20? Just how do you see that mix evolving?

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

Yeah, I mean, sitting here today, Julio. We think and it's the opinion of our sales leadership also that through the end of 2022 we see it being pretty strong.

Julio Romero -- Sidoti & Co. -- Analyst

Okay. Yeah, I think Brent asked about it earlier, but on the repurposed service center opening in second quarter, just trying to think about how specifically that impacts the P&L this year? I think you did mentioned it, it allows you to be more efficient and charge more perhaps for that better service. Is there anything I missed there in terms of P&L impact for '21?

Bret Eckert -- Vice President & Chief Financial Officer

I think you've hit it, Julio. I mean, obviously you've got some incremental costs depreciation and otherwise. You'll have some incremental heads. But it's not a huge add, even though the square footage is so much more, really is the layout. It is much more efficient, everything comes in on the south end and goes out on the dock doors on the north end.

So the cut lines are being staged exactly how we want to stage them. And so, I think we'll see ourselves touching product less, which is why you are able to almost double your square footage and not incrementally add that many heads. And so, our ability to move more product with the value prop that we hold in the market is something we're going to look to do as we get our feet under us in the three to six month period.

So I think you're thinking about it the right way. Our goal is to -- we're always been focused on being a low cost provider and that won't change with the new service center.

Julio Romero -- Sidoti & Co. -- Analyst

Your inventory dollars of $92 million ending the year; at first glance, it looks a little lean on a unit basis just given where the copper is, is that a fair assumption?

Bret Eckert -- Vice President & Chief Financial Officer

There was a big push. I mean, we grew it a little bit all in, LIFO in that kind of skews things a bit. But it's pretty consistent year-over-year. You know, it was -- there was a lot of demand as you can see in the third and fourth quarter. And so we were racing in that entire quarter to continue to keep up with orders. And so inventory at the end of the day finished fairly constant year-over-year.

Julio Romero -- Sidoti & Co. -- Analyst

[Indecipherable] was a great quarter and your spreads rose sequentially into what's typically a seasonally weaker fourth quarter and you sound very optimistic, is there any reason why the spread you saw in the fourth quarter can continue into 2021?

Bret Eckert -- Vice President & Chief Financial Officer

Julio, we talked a little bit about this. We've had a lot of discipline as we approached the market. You look at what COMEX copper is doing and kind of what -- you can read out there and see the trends. That's always been an environment that has been supportive for us. And so we will continue to be very focused on that aspect of it and obviously our goal is to continue that. It certainly seems that the underlying margin [Phonetic] is going to support that.

Julio Romero -- Sidoti & Co. -- Analyst

Great, thanks for taking the questions.

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

Thank you. Appreciate it.

Julio Romero -- Sidoti & Co. -- Analyst

Hope you guys are safe out there in McKinney given the storms you foresee.

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

Thanks Julio.

Operator

And we have no further questions at this time.

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

Okay. Jenny, thank you and thank you, folks, for joining us and we look forward to next call. Thank you.

Operator

[Operator Closing Remarks]

Duration: 29 minutes

Call participants:

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

Bret Eckert -- Vice President & Chief Financial Officer

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

Julio Romero -- Sidoti & Co. -- Analyst

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