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Encore Wire Corporation (WIRE) Q3 2021 Earnings Call Transcript

By Motley Fool Transcribers – Oct 27, 2021 at 4:01PM

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WIRE earnings call for the period ending September 30, 2021.

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Encore Wire Corporation (WIRE 2.61%)
Q3 2021 Earnings Call
Oct 27, 2021, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

All parties, please stand by. Your conference will be good. Just a moment. Once again, please standby. The Encore Wire Reports Third Quarter Results will start momentarily. Thank you.

Good morning and welcome to the Encore Wire Reports Third Quarter Results Conference. My name is Brandon and I'll be your operator for today. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session [Operator Instructions] Please note this conference is being recorded. I will now turn it over to Bret Eckert, and you may begin sir.

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

Thanks, Brandon. Good morning and welcome to the Encore Wire Corporation quarterly conference call. My name is Bret Eckert, Chief Financial Officer of Encore Wire. With me this morning is Daniel Jones, President, CEO and Chairman of the Board. In a minute, we will review Encore's financial results for the 3 months and 9 months ended September 30, 2021. 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 GAAP, including EBITDA, which we believe to be useful supplemental information for investors are posted on our website. I'll now turn the call over to Daniel for some opening remarks. Daniel?

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

Good morning everyone, and thank you for joining us on the call and for your interest in Encore Wire. We appreciate your continued investment confidence to support. The health and safety of our employees and their families remains our top priority and we are following CDC guidelines and maintaining safe working conditions, while we continue to serve our customers. The strong earnings in the third quarter ended September 30, 2021 are testament to the grit and determination of our employees to serve our customers coupled with exceptional performance of our suppliers and vendors. We remain laser focused on fulfilling the core values of our company, unbeatable, customer service nimble operations in quick deliveries coast to coast

Encore's one location vertically integrated business model, strong management team and deep raw material supplier relationships have allowed us to remain fully operational while maintaining our high standard for fill rates to meet customer demand. By continuing to adapt to the evolving needs of our customers, we were able to increase copper volumes, so both over the third quarter of 2020 as well as on a year-to-date basis over 2020 comparative levels. We believe we can sustain this volume growth compared to prior period levels for the remainder of 2021. Copper unit volumes increased 7.9% and 13.3% for the 3-month and 9-month periods ended September 30, 2021 compared to the commensurate periods in the prior year. COMEX copper prices remained fairly stable throughout the quarter before pulling back slightly to end the quarter. However, all other raw material costs continued to rise during the quarter. The upward volatility positively impacted and supported current market spreads. Copper spreads increased 181% on a comparative quarter basis and 155.1% on a year-to-date basis.

We believe Encore Wire remains well positioned to capture market share and incremental growth in the current economic environment. As we address the near-term challenges, we remain focused on the long-term opportunities for our business. We believe that our superior order fill rates and deep vertical integration continue to enhance our competitive position. As customers -- as orders come in from electrical contractors, our distributors can continue to depend on us for quick deliveries. I'll now turn the call over to Bret to cover our financial results Bret?

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

Thank you, Daniel. Net sales for the third quarter ended September 30, 2021 were $716.3 million compared to $339.7 million for the third quarter of 2020. Copper unit volume, measured in pounds of copper contained in the wire sold, increased 7.9% in the third quarter of 2021 versus the third quarter of 2020.

Gross profit percentage for the third quarter of 2021 was 37.8% compared to 15.7% in the third quarter of 2020. The average selling price of wire per copper pound sold increased 95.5% in the third quarter of 2021 versus the third quarter of 2020, while the average cost of copper per pound purchased increased 48%. Net income for the third quarter of 2021 was $175.5 million versus $21 million in the third quarter of 2020. Fully diluted net earnings per common share were $8.51 in the third quarter of 2021 versus $1.02 in the third quarter of 2020.

Net sales for the nine months ended September 30, 2021 were $1.905 billion compared to $896.1 million for the nine months ended September 30, 2020. Copper unit volume, measured in pounds of copper contained in the wire sold, increased 13.3% in the nine months ended September 30, 2021 versus the nine months ended September 30, 2020.

Gross profit percentage for the nine months ended September 30, 2021 was 33.2% compared to 15.1% for the nine months ended September 30, 2020. The average selling price of wire per copper pound sold increased 91% in the nine months ended September 30, 2021 versus the nine months ended September 30, 2020, while the average cost of copper per pound purchased increased 55.6% for the same period comparison. Net income for the nine months ended September 30, 2021 was $399.8 million versus $52.0 million in the nine months ended September 30, 2020. Fully diluted net earnings per common share were $19.31 in the nine months ended September 30, 2021 versus $2.51 in the nine months ended September 30, 2020.

Aluminum wire represented 9.1% and 7.5%, respectively, of our net sales in the quarter and nine months ended September 30, 2021. Aluminum wire volumes have increased for both the quarter and nine-months ended September 30, 2021 compared to the comparative periods in the prior year.

The favorable market conditions in the third quarter and nine months ended September 30 were driven by rising raw material prices and continued demand for our products. In addition, production challenges across the sector, including inconsistent access to raw material, disruptions in the distribution network and access to skilled labor created unique market conditions in the second and third quarter of 2021. We expect these conditions will abate in the future, but we are unable to predict the timing of that abatement or whether such abatement will be gradual or abrupt.

Our balance sheet remains very strong. We have no long-term debt and our revolving line of credit remains untapped. In addition, we repurchased 3,379 shares in the open market during the quarter and declared a $0.02 cash dividend. Our 2-phase expansion plans announced last year remain on schedule. The new service center opened in mid-May and is fully operational today. Phase 2, which is focused on repurposing our now vacated distribution center to expand manufacturing capacity and extend our market reach is on schedule for an early 2022 opening. As announced in July 2021, current market conditions have afforded us the opportunity to accelerate our capital expenditure plans and incrementally invest across our campus. We believe these investments will broaden our position as a low-cost manufacturer in the sector and further increase manufacturing capacity to accelerate growth. The incremental spending in 2021 through 2023 will expand vertical integration in our manufacturing processes to reduce costs as well as modernize select wire manufacturing facilities to increase capacity and efficiency.

Capital expenditures are now expected to range from $115 million to $125 million in 2021, $150 million to $170 million in 2022 and $120 million to $140 million in 2023. We expect to fund these investments with existing cash reserves and operating cash flows.

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

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

Thank you, Bret. The results in the third quarter ended September 30, 2021 further attest to the strength of our one campus vertically integrated low cost business model which has proven successful since inception and is driving under the current market conditions. We remain focused and nimble adapting to changing customer needs and fluid market dynamics. Throughout the third quarter of 2021, sales prices and margins remained strong as we successfully navigated raw material price volatility and availability challenges. Our steady, enduring relationships with suppliers and vendors positioned us favorably in the market aligning us to maintain our overall low cost structure.

I want to take a brief moment to recognize our employees and associates for their hard work, perseverance and household during these unprecedented times. Our performance this year could not have happened without their extraordinary efforts and contributions. These results have allowed us the opportunity to incrementally invest in our team as we continue to position Encore as an employer of choice in the sector. I'll also want to thank our stockholders for their continued support. Brandon will now take questions from the listeners.

Questions and Answers:

Operator

Thank you, sir. We will now begin the question-and-answer session. [Operator Instructions] And from Sidoti and Company, we have Julio Romero. Please go ahead.

Julio Romero -- Sidoti & Company -- Analyst

Thank you. Good morning, Daniel and Bret.

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

Good morning.

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

Good morning.

Julio Romero -- Sidoti & Company -- Analyst

So my first question would be on pricing. Can you speak to the selling prices you realized as you exited the September quarter and maybe talk about the selling prices as you exited the quarter were higher or lower than the overall quarter average.

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

You want to take that one, Bret.

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

Let me -- I'll start and then I'll jump to you if that works for you. Julio, great question, I think as you navigated through the quarter and we had said in the last call, we felt that margins probably peaked in June and I stick with that statement, although it was gradual. If you looked at what copper did overall during the quarter. I think that aligned pretty consistently what sales price has done over the quarter. So it was fairly steady with the gradual change from the peak in June.

Julio Romero -- Sidoti & Company -- Analyst

Okay. I was hoping you could speak to the competitive environment a bit. Obviously the reliability piece is working well for you guys. I mean, is there a sense of urgency for some of your other competitors to maybe try to improve their reliability or is that just not the way that they operate.

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

The overall market, Julio, is still dealing with quite a few challenges as far as labor shortages throughout the industry. There is persistent supply chain issues. The input cost across the board are up and then to speak just a little bit to the pricing in the quarter. When you start the month off and you can pick any of the three months of the quarter and you see the volatility as much as $0.35 or $0.40 a pound on just copper. In the past obviously the biggest or the easiest thing for folks to track and what have you [Phonetic], but the pricing piece of it is more today and continues to be focused on the delivery side. So when you look at what the competitors are doing or not doing we're more focused really on what we're able to do more than what they're doing in the market. We've built some brand preference, if you will, as much as can be built based on the service piece and that's where we're making it happen. I mean the execution at the distributor level and the contractor job side level is where we're making it happen and quite frankly it's just not as hard of a topic to talk about what the competitors are doing or not doing at this moment. I mean we're just doing our thing and the execution is really where it's at.

Julio Romero -- Sidoti & Company -- Analyst

Got it. So I guess, maybe if I could ask that another way. I mean if -- what part of the reliability value prop, would you say is the most difficult for your competitors to replicate?

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

I have to answer a deep question there. I don't know, I don't know what their -- I don't think it's any one issue for them to address really. I think they're all doing very well. I haven't heard of any complete shutdowns or walkouts or really haven't heard of anything in the market that's leading to any issues that I could speak to. I think they're all doing very well. I'm sure they're right in orders and shipping and doing the things that they do and it's a pretty robust market for the residential piece as you know, and as that starts to kind of maybe drift toward more normal numbers, it's time for the commercial to take off and industrial piece has been pretty strong with crude oil coming back to about 80 bucks. I don't know specifically what to tell you. I don't have anything bad to say about any, and I think we're all probably doing really well in this market.

Julio Romero -- Sidoti & Company -- Analyst

Okay. I guess just last one for me is, it was very nice to see you repurchase some shares at these levels. If you could give us a quick refresher of how you think about repurchases and then more broadly a refresher on your overall capital allocation priorities.

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

You want me to take that one. Daniel.

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

Yeah.

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

So, just kicking it off Julio, great question. As we said before, when we look at our highest and best use of cash, we continue to look toward three triggers and first is capex. Can we take out costs from the system and from the process and or can we expand manufacturing capacity and efficiency and so that's continued -- that's what we've done from the very start of inception and how this campus was built under Daniel's leadership and that's a continued focus today. The next step would be looking at in no particular order share repurchases and then something with the dividend. Those really are the three uses of cash that we've always focused on, given the fact that we've never done an acquisition in our history. As you -- was disclosed in the 10-Q, we had authorized through the Board, it's in the 10-K as well, for the repurchase of up to a million shares. I think that authorization expires in March of 2022.

Julio Romero -- Sidoti & Company -- Analyst

Okay. Very nice quarter, gentlemen. I'll hop back in queue.

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

Appreciate the support.

Operator

From D.A. Davidson. We have Brent Thielman. Please go ahead.

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

Thank you. Good morning. Hey, Daniel. Maybe on the supply of raw material side. I mean anything with purchasing copper, resins or anything else that's used in manufacturing process, are you seeing anything [is up] for you, in particular right now, or is it all pretty tight.

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

It's better than it was, but there are still pockets of obviously challenges to get things in here. As we mentioned in the prepared remarks, we've got a fantastic purchasing department and they're very good at what they do. We've built relationships over many years and we rely on it and push it and all those things, and then one of the things that sticks out is on the supply chain execution piece. We're really good at matching each quote real-time where -- our personnel is not to put a price out there and wait and see what happens. Every quote comes through is a real-time quote that we're matching up to the moment, supply chain cost increases, a penny here, a penny there. Aluminum, I think year-to-date is up almost $0.60 a pound. Natural gas is doubled. Plasticizers up $0.40 or $0.50 a pound. I mean, everything that we touch, diesel's up 60-70 cents a gallon, everything is more expensive, Brent. So it forces discipline in this industry, which you've heard me say before. You can dilly dally with some quotes and put a price out there and leave it for a couple of days if you want to but in this market that's not what we do and it doesn't work for us. The challenge each day of getting raw materials in here and down to shipping expensed item, stretch film, pallets, reels, whatever it might be, we're just super attendant to detail. We've got a fantastic team. We've got one campus and you just do what you got to do to get the stuff in here and it's not you roll your sleeves up and get after, Brent. It has been part of our time during the day chasing things down and making certain they get here. Spare parts for equipment, anything you can think of. Propane for the forklifts, whatever it might be. So, it's a team effort and again we go in and try to search with the purchasing team and see what we can do to help and quite frankly with our balance sheet and with our cash position, we're able to do some things that maybe other folks are not able to do and we take advantage of that. Any chance that we can, certainly don't mind spending money as long as it's going to lower cost or increase our service level, we can charge more. So it's a long answer to your question, but the supply chain piece, I think really what it comes down to, again is that execution on matching up that supply side to that real-time quote.

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

Okay, I appreciate that, Daniel. When I -- I guess when I look at the volume growth over the last couple of quarters, it's a little challenging, I think from our side, because you had so much disruption a year ago when you try to compare it, but then you've also got the service in our investment which presumably is kind of helping you out right now too. And I guess maybe just take a step back, Daniel, I mean what, how -- what is the market feel like today. I mean what sectors are strong and driving the growth. How much is the service center investments sort of helping you today. I mean any qualitative commentary you can offer on that, I think could be really helpful.

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

Yeah, I mean, the backlog in the quote volume remains remarkably high. Our success rate, our hit rate on the quotes is fantastic. Residential market, I think we'll probably get closer to normal, but it's still a very robust market for us. And then again with crude being $83 or so whatever it is a barrel and industrial sectors picked up pretty strong, the commercial construction market. Even though I don't think you see it yet in some of the reports that are lagging maybe, is that commercial continues to gain some momentum. That's really a good use of some of our larger products and from a pounds per foot standpoint. In every market that we ship into seems to have some type of supply chain disruption, structural steel, switchgear. We've even mentioned and experienced challenges for PVC raw materials. I mean, everything we ship into is experiencing volatility with some forced discipline which is allowing us to execute and charge for it. The solar or photovoltaic market is really hot right now. It's a good market. The utility market is gearing up obviously for grid upgrades. We're seeing -- we're seeing good numbers come in really across the board. If you had to pick one that was not as good as others, it would be the commercial piece, which is a weld [Phonetic] positive, because when it comes, it comes pretty quickly typically right behind that residential industrial piece, and so really kind of across the board we're seeing good things happen.

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

That's great. Daniel, maybe a last question. I think I know what kind of answer, I'm going to get here, but you've got a war chest here in terms of the balance sheet and probably going to get even bigger, I guess. Among that different things you're already doing right now in terms for that money to work in the business. Are you evaluating to new sectors to spin off a few there in the utility side. Are there new areas that you're looking hard at that you're not in now that could present an opportunity now that you've got a balance sheet with so much cash on it that you could go after. I just think a thought there would be great.

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

Yeah, it's like you've been sitting in the office with us or something, Brent. But yeah, we're pedaling as fast as we can and we've got our eyes on some stuff out in front of us and moving as quickly as we can, is the best way to put it. The key for for any of these expansions, anytime we spend the money that we're spending is to lower cost or increase, maximize our service offering. All those things are very easily done. The key is getting the right guy or girl in the right spot to make it happen and so that's where we're at. Things are going along great. We've had some fantastic additions to the team and that's probably all I should tell you.

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

Okay, congrats on the tremendous quarter.

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

Yeah, appreciate your support.

[Operator Instructions] From Baldwin Securities. We have Bill Baldwin. Please go ahead.

Bill Baldwin -- Baldwin Anthony Securities -- Analyst

Yeah, good morning, Daniel and Bret. Fantastic execution again this quarter.

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

Thank you.

Bill Baldwin -- Baldwin Anthony Securities -- Analyst

On your capex that you laid out, '23 was increased pretty materially. Is that kind of pulling same scores that have been in recent schedule for 2024, but due to the cash flow generation you decided to move that up to 2023. Is that kind of what's going on there, just acceleration of perhaps longer term plans coming in now to the 3-year plan.

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

I'll take that, Daniel. Bill, it's a great question. Really, it's just a little bit of balancing as we look out and we've got a list of projects. Obviously, we announced some of those in July but as you kind of navigate that cash spend piece of it, there is always those amounts that, is it going to hit in November and December or is it going to trickle in the January, February, and so if you get your estimate then and kind of clarify those based on lead times for machine orders, getting the right contractors in for the work we need done, it was just a little bit of balancing from that standpoint. So it's probably a little of both.

Bill Baldwin -- Baldwin Anthony Securities -- Analyst

Okay, thank you.

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

Thanks, Bill.

Operator

Standing by for any further question.

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

Well. Brandon, you've done a great job and I appreciate you folks calling in and support us and look forward to next quarter call. Thank you.

Operator

[Operator Closing Remarks]

Duration: 30 minutes

Call participants:

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

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

Julio Romero -- Sidoti & Company -- Analyst

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

Bill Baldwin -- Baldwin Anthony Securities -- Analyst

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