Encore Wire Corp (WIRE) Q1 2021 Earnings Call Transcript

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Encore Wire Corp (WIRE -0.42%)
Q1 2021 Earnings Call
Apr 27, 2021, 11:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

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. [Operator Instructions] Please note, this conference is being recorded.

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

Daniel L. Jones -- President and Chief Executive Officer

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 in maintaining safe working conditions while we continue to serve our customers during this critical time.

The momentum in the second half of 2020 continued in 2021 with favorable market conditions driving exceptional results for our first quarter ended March 31. Our balance sheet remains strong with $155 million of cash on hand at March 31 to fund our growth and expansion plans. We also expanded our credit facility, which increased borrowing capacity on the line of credit, enhancing our liquidity and further strengthening our financial position.

The earnings in the first quarter of 2021 further highlight the advantage of our one location business model and strong management team in place at Encore.

During the quarter, our team successfully navigated the extreme weather in February, while ensuring a consistent flow of raw materials throughout the quarter to keep our manufacturing facilities fully operational.

Detailed below are some key items to note for the first quarter ended March 31. Copper unit volumes increased 1.1% on a comparative quarter basis, but decreased 1.8% on a sequential quarter basis. Volumes in the current quarter were slightly impacted by closures due to the winter storm in mid-February.

COMEX copper prices experienced a steady rise throughout the first quarter, which had a positive impact on spreads. Copper spreads increased 45.9% on a comparative quarter basis and 23.4% on a sequential quarter basis.

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 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.

The favorable market conditions in the first quarter were partially driven by rising copper prices and demand recovery as the country continues to reopen. In addition, production challenges across the sector, including inconsistent access to raw materials, disruptions in the distribution network and access to skilled labor created unique market conditions in the first quarter of 2021.

Although we were largely able to avoid these factors during the quarter, we do expect these disruptions will begin to abate during the remainder of 2021.

Looking ahead, the duration and severity of the COVID-19 outbreak, this 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 J. Eckert -- Vice President & Chief Financial Officer

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 purchase 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 $0.99 in 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.

Gross profit percentage for the first quarter of 2021 was 19% compared to 15.4% in the fourth quarter of 2020. Copper wire sales prices increased 20.4%, while the price of copper purchased increased 18.8%. Net income for the first quarter of 2021 was $41.2 million versus $24.1 million in the fourth quarter of 2020.

Fully diluted net income per common share was $1.99 in the first quarter of 2021, versus $1.17 in the fourth quarter of 2020. Aluminum wire represented 7.5% of our net sales in the three months ended March 31, 2021, compared to 8.6% of sales in the first quarter of 2020.

Our balance sheet remains very strong. We have no long-term debt. Our revolving line of credit is paid down to zero. On February 9, 2021, 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 9, 2026, replacing the company's prior $150 million revolving credit and letter of credit facility. In addition, we had $155 million in cash at the end of the first quarter.

We also declared a $0.02 cash dividend during the quarter. Our two-phased expansion plan announced last year remains on schedule with the new service center expected to come online in mid-second quarter of this year. Phase 2 of our expansion plan 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.

Capital expenditures are expected 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 -- President and Chief Executive Officer

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.

Questions and Answers:

Operator

Thank you. [Operator Instructions] And our first question comes from Brent Thielman from D.A. Davidson. Your line is open.

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

Great. Thanks, Dan. Good morning.

Daniel L. Jones -- President and Chief Executive Officer

Morning, Brent.

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

Hey 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 L. Jones -- President and Chief Executive Officer

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 -- D.A. Davidson -- Analyst

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 L. Jones -- President and Chief Executive Officer

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 -- D.A. Davidson -- Analyst

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 L. Jones -- President and Chief Executive Officer

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, I mean current, I think our team did a fantastic job from a disciplined 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. But the team responded fantastically well. Obviously, the test in the market is discipline, which our folks reacted, I think, very favorably and it shows in those results.

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

Great. Okay. Well, thank you and congrats on a great quarter. Best of luck here for the second quarter.

Daniel L. Jones -- President and Chief Executive Officer

Thanks, Brent. Thanks for the support.

Operator

[Operator Instructions] And our next question is from Julio Romero from Sidoti & Company. Your line is open.

Julio Romero -- Sidoti & Company -- Analyst

Hey. Good morning, Daniel and Bret.

Bret J. Eckert -- Vice President & Chief Financial Officer

Hey, Julio.

Julio Romero -- Sidoti & Company -- Analyst

Could you give us a little more flavor on the drivers of the copper spread quarter-over-quarter? Certainly, copper 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 there any key drivers of the spread sequentially here?

Daniel L. Jones -- President and Chief Executive Officer

Yes. Without getting too deep into the weeds, 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. And 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 processing 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 playing or ample supply of raw materials, the four or five 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 -- 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 -- Sidoti & Company -- Analyst

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 L. Jones -- President and Chief Executive Officer

Specifically, to the first quarter, there's a lot of things that reset the behaviors and the disciplines in 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 -- Sidoti & Company -- Analyst

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 L. Jones -- President and Chief Executive Officer

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 -- Sidoti & Company -- Analyst

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 L. Jones -- President and Chief Executive Officer

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 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.

Julio Romero -- Sidoti & Company -- Analyst

Okay. Thanks for taking the questions and good luck in the second quarter.

Daniel L. Jones -- President and Chief Executive Officer

Yeah, appreciate you, Julio. Thanks for the support.

Operator

[Operator Instructions] And your next question comes from Bill Baldwin from Baldwin Anthony Securities

Bill Baldwin -- Baldwin Anthony Securities -- Analyst

Good morning, Bret and Daniel.

Daniel L. Jones -- President and Chief Executive Officer

Hello, Bill.

Bret J. Eckert -- Vice President & Chief Financial Officer

Morning, Bill.

Bill Baldwin -- Baldwin Anthony Securities -- Analyst

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 J. Eckert -- Vice President & Chief Financial Officer

Hey, 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 and 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 toward the $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 -- Baldwin Anthony Securities -- Analyst

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 [Speech Overlap] excuse me, Bret, I'm sorry, go ahead.

Bret J. Eckert -- Vice President & Chief Financial Officer

No, I just said we got ahead of it. And that was really partly why we accelerate a lot of these. Our team did a phenomenal job of seeing some challenges in the market and they acted upon it.

Bill Baldwin -- Baldwin Anthony Securities -- Analyst

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 and to start producing?

Bret J. Eckert -- Vice President & Chief Financial Officer

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 -- Baldwin Anthony Securities -- Analyst

Okay. So we'd be safe to say then, certainly by the first half of 2022?

Bret J. Eckert -- Vice President & Chief Financial Officer

Absolutely. Yes, sir.

Bill Baldwin -- Baldwin Anthony Securities -- Analyst

And you're probably shooting for a little bit earlier than that?

Bret J. Eckert -- Vice President & Chief Financial Officer

You know how we run here.

Bill Baldwin -- Baldwin Anthony Securities -- Analyst

I understand. I understand. Well, great job and thank you for you time.

Bret J. Eckert -- Vice President & Chief Financial Officer

Thanks, Bill. Appreciate all your insights.

Operator

[Operator Instructions] And we have no further questions. I'll turn the call back over for final remarks.

Daniel L. Jones -- President and Chief Executive Officer

Thank you, Adrienne, and appreciate the support. Look forward to speaking to you guys next quarter.

Operator

[Operator Closing Remarks]

Duration: 28 minutes

Call participants:

Daniel L. Jones -- President and Chief Executive Officer

Bret J. Eckert -- Vice President & Chief Financial Officer

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

Julio Romero -- Sidoti & Company -- Analyst

Bill Baldwin -- Baldwin Anthony Securities -- Analyst

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