Encore Wire Corporation (NASDAQ:WIRE ) Q2 2022 Earnings Conference Call July 26, 2022 11:00 AM ET

Daniel Jones - President, CEO and Chairman of the Board

Brent Thielman - D.A. Davidson

Julio Romero - Sidoti & Company

Bill Baldwin - Baldwin Anthony Securities

Welcome to the Encore Wire Reports Second Quarter 2020 Results Conference Call. My name is Richard, and I'll be your operator for today's call. [Operator Instructions] As a reminder, this conference is being recorded.

I will now turn the call over to Bret Eckert. Mr. Eckert, you may begin.

Thanks, Richard. 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 second quarter ended June 30, 2022. 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 direct 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?

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 and support.

The results for the second quarter of 2022 established another high watermark both financially and operationally for Encore Wire. Our continued strong earnings in 2022 validate that our single-site campus model is a strategic competitive advantage in the market today, giving us unmatched flexibility to quickly pivot and adapt to ever-changing market dynamics.

Our manufacturing scale and flexibility, coupled with our value-added services continue to drive job site efficiency. Stable demand, coupled with global uncertainties, persistent tightness and availability of certain raw materials and the general inability of the sector to meet demand for the timely delivery of finished goods kept strong throughout the first half of 2022.

By continuing to execute on our core values of providing unbeatable customer service and high order fill rates, we were able to increase both copper and aluminum volumes shipped in the second quarter and year-to-date periods in 2022 over 2021 levels.

Volumes shipped were also up over first quarter 2022 levels. This marks the third consecutive quarter of volume growth, driven by continued increased demand for data center, health care, and renewable product solutions. We believe existing market conditions and the current outlook to support existing volume levels as well as support gross margin abatement continuing at a gradual pace. Copper unit volumes increased 2.7% on a comparative quarter basis and 5.5% on a year-to-date basis. Comex prices decreased gradually throughout the second quarter while other raw material costs and inputs continue to rise.

Copper spreads increased 22% on a year-to-date basis, but decreased 4.4% on a comparative quarter basis. Aluminum spreads increased for both the quarter and year-to-date periods and 2022 compared to 2021. With the new capacity coming online this year, we believe Encore Wire remains well positioned to capture incremental market share and volume growth in the current economic environment. As we address the near-term challenges, we remain focused on the long-term opportunities for our business, including improving our position as a sustainable, environmentally responsible leader in our industry.

We believe that our superior fill rates and deep vertical integration will 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?

Net sales for the second quarter ended June 30, 2022, were $838.2 million compared to $744.4 million for the second quarter of 2021. Copper unit volume measured in the pounds of copper contained in the wires sold increased 2.7% in the second quarter of '22 versus the second quarter of 2021. Gross profit percentage for the second quarter of 2022 was 38.3% compared to 37.3% in the second quarter of 2021.

The average selling price of wire per copper pound sold decreased 0.7% in the second quarter of '22 versus the second quarter of 2021, while the average cost of copper per pound purchased increased 3.2%. Net income for the second quarter of 2022 was $210.5 million versus $183.1 million in the second quarter of 2021. Fully diluted earnings per common share were $10.71 in the second quarter of 2022 versus $8.82 in the second quarter of 2021.

On a sequential quarter basis, fully diluted earnings per common share of $10.71 in the second quarter of 2022 exceeded fully diluted earnings per common share of $7.97 in the first quarter of 2022. Net sales for the first six months ended June 30, 2022, were $1.56 billion compared to $1.189 billion for the first six months of 2021. Copper unit volume measured in the pounds of copper contained in the wire sold increased 5.5% in the six months ended June 30, 2022, versus the six months ended June 30, 2021. Gross profit percentage for the six months ended June 30, 2022, was 36.2% compared to 30.4% for the first six months of 2021.

The average selling price of wire per copper pound sold increased 15.6% in the first six months of 2022 versus the six months ended June 30, 2021, while the average cost of copper per pound purchased increased 10.2% for the same period comparison. Net income for the six months ended June 30, 2022, was $372.1 million versus $224.2 million in the six months ended June 30, 2021. Fully diluted earnings per common share were $18.62 in the six months ended June 30, 2022, versus $10.81 in the six months ended June 30, 2021.

Aluminum wire represented 15% and 13.4%, respectively, of our net sales in the quarter and six months ended June 30, 2022. Aluminum wire volumes and spreads have increased for both the quarter and six months ended June 30, 2022, compared -- comparative periods in the prior year. The favorable market conditions through the second quarter ended June 30, 2022, were driven by stable demand for our products, persistent tightness in the availability of certain raw materials, ongoing global uncertainties, and suppressed availability of skilled labor kept spreads strong through the second quarter of 2022.

This marks the fifth consecutive quarter of elevated margins and spreads. Our balance sheet remains very strong. We have no long-term debt. Our revolving line of credit remains untapped. We had $469.5 million in cash at the end of the quarter. During the second quarter, we repurchased 607,105 shares of our common stock. On a year-to-date basis, we repurchased 1,108,022 shares of our common stock for a total cash outlay of $131.9 million.

Since the first quarter of 2020, we have repurchased 2,224,829 shares of our common stock at an average price of $96.71. We also declared a $0.02 cash dividend during the quarter. The repurposing of our vacated distribution center to expand manufacturing capacity and extend our market reach was substantially completed in the second quarter of 2022. The incremental investments announced in July of 2021 continue in earnest, focused on broadening our position as a low-cost sustainable manufacturer in the sector and increasing manufacturing capacity to drive growth.

Capital spending in 2022 through 2024 will expand vertical integration in our manufacturing processes to reduce costs as well as modernize select manufacturing facilities to increase capacity and efficiency and improve our position as a sustainable and environmentally responsible company in our industry. Total capital expenditures were $75 million in the first half of 2022 compared to $118 million for the full year of 2021.

We expect total capital expenditures to range from $150 million to $170 million in 2022, $150 million to $170 million in 2023 and $80 million to $100 million in 2024. Those ranges remain unchanged from last quarter. We expect to continue 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.

The strong performance in the second quarter ended June 30, 2022, further attests to the strength of our on-campus vertically integrated low-cost business model which continues to thrive under current market conditions.

We wouldn't have this level of success without the consistent, exceptional performance on our long-term suppliers, our deep relationships and strong internal management team, coupled with consistent execution, positioned us favorably in the market, allowing us to maintain our overall low-cost structure.

Looking ahead, we remain solely committed to execute upon the core values of our company, unbeatable customer service, nimble operations and quick deliveries coast-to-coast. In addition, we have the best distributor partners and rep force in the industry. I want to close by recognizing our employees for their hard work and commitment to safety and excellence.

Our performance over the past five quarters could not happen without their extraordinary efforts. Our success in the market continues to allow us the opportunity to incrementally invest in our team as we position Encore as an employer of choice in the sector. I also want to thank our shareholders for their continued support.

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

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

Hi, thanks, good morning Daniel, Bret.

Daniel, maybe first, can you just talk about the aluminum business. I don't think we've seen that product at sort of 15% of revenue before. What's behind the strength there and also the widening spreads?

Yes. There were a large number of projects that came online requiring the aluminum conductors, some of those in lieu of copper in an effort to reduce some cost from the quote perspective, by the time the product was shipped or the PO was left. Additionally, we had some utility projects that included upgrades, hardening expansions, consumed some of the domestic aluminum wire capacity.

There were some lockdowns in China that maybe prevented some of the import of aluminum wire. It was ocean freight, shipping costs, port congestion. There were a lot of things that led to the aluminum growth for us. And then those factors that we spoke about created an environment to where we could ship on time and leverage it in our capacity and our service level to meet the demand.

Okay. Okay. I appreciate that. And Daniel, the way you guys talk about the supply side of some of these inputs, I guess, in particular, copper. It sort of seems at odds with what we're seeing in market prices today. I mean any additional perspective as we sort of think about those conditions persisting?

Yes. There's a couple of things specific. The consumption side of copper outlook, we see it as outpacing the supply side by a number. But what we had in the second quarter, when you have copper prices decreasing toward the end of the quarter like we had with this pretty strong pace on the demand side, in a few of the sectors, you typically see a halt or a lack of commitment for inventory on the distribution side.

So it really feeds into our model having a just-in-time delivery, and we take on the added pressure to deliver maybe a few more job sites rather than into distributor inventory. We welcome that. It fits our flexibility on the production side, and it really puts the new service center added services and whatever to test on those 88 dock doors, and we saw some of that in Q2.

The demand side is still good in a lot of sectors. And it puts the pressure on that copper consumption side, we still see it as being pretty strong. And hopefully, the process will reflect that going forward.

Okay. I appreciate that. And then in on the demand side, I mean, I guess, historically, I sort of think of Encore Wire is focused within the core of the house or a building, but it seems like the product as its place in some infrastructure applications, whether that's related to electrical grid or EV infrastructure. Can you talk about some of those demand drivers, whether those can be a meaningful place for Encore within all that?

Yes. Great question, Brent. What we're seeing, as everybody is seeing the pressure on the residential numbers and starts. There's a lot of conflicting data in the market when it comes to residential. The RV market is still relatively strong, both in parked RVs and towable RVs and motorized RVs and what have you.

But what we're really seeing the consistent demand data centers, healthcare and institutions, schools, universities, whatever, the industrial side is pretty strong from an energy perspective and then also in the renewable sector.

A lot of strength in each one of those markets. You do see a little bit of the aluminum demand versus copper and then back and forth, but it's all pretty good across the board, you mentioned those four or five sectors. And so we're busy. We're incredibly busy. The second quarter was very busy for us and really regardless of what happens in that residential sector for us, we're busy. We're doing other things and the product is going out the door and residential numbers are what they are.

Okay. Appreciate that. But just last one for me. Just doesn't look like any changes to the CapEx outlook from what you relayed last quarter. How are you approaching any sort of future plans that sort of could be additive to what you've already laid out? Just with the backdrop of what looks like some softening in the economy here in the last few months. I mean, how do you sort of assess that here going forward?

Yes. We keep an eye on it, Brent. We're moving ahead with our projects. Each one of the projects will either lower our cost or increase our service model. So we're moving forward. We're spending in that CapEx category about as fast as we want to. Some of the projects are a little slower than what we would like, but we're moving ahead. I mean you've got nonresidential construction sectors that are experiencing some double-digit growth. So we're moving. We're moving ahead.

The commitment to service and the constant striving to lower cost and finding ways to be better environmentally. All those things play into these expansions and CapEx projects. And so we're moving. We're going to continue to move and adapt to the way the demand has shifted a little bit more maybe away from residential specifically, but when you talk about some of the manufacturing and mining and hotels and commercial, a lot of the industrial projects, I mean we're moving pretty quickly on all of our projects.

Okay. Thanks guys. I'll pass it on.

Thank you. Our next question line comes from Julio Romero from Sidoti & Company. Please go ahead.

Hi, good morning Daniel and Brent.

So you guys talked about the end-market demand being driven by data centers, education, renewables, decarbonization and being a little bit more disconnected from like headline, residential and non-residential, so to speak. I was hoping you could speak on how does that translate the product mix? Like what product lines are now as a result of that seeing increased demand as a result of those increased data center renewables being a bigger part of your mix?

Yes, fantastic. So it's the industrial cable, commercial cables that we make, basically, the non-res plants, the armored cable plant. We're busy in all categories. And as you know, Julio, from visiting here in the past, we're super flexible with our capacity.

So as the market continues to adapt and change and the demand comes in for the other categories, it's more commercial and industrial product, traditional categories, but we can quickly adapt our residential capacities to manufacture the products that we need to continue the high service level, which seems to be driving most of this.

I'll just add to that, Julio, these data center projects are increasing in size. Speed to completion has never been higher and diversity. And so it's a lot more of the same that goes into that. But the key is more of it and faster, right? And our on-campus model allows us to pivot and serve that very, very well. And so we've seen expansion there. We talked about the health care side, that's mainly low voltage. So whether it's expansion, whether that's new health care or whether not powering life-saving equipment, our wire plays very well in that space.

And then from a renewable side, Green Connect products, power generation, distribution solutions for solar, vehicle charging, battery storage, utility applications. It's a lot of what we've done. I think this market is just when you look at it and you go back two years, right, there are five consecutive quarters now elevated margins and spreads, three consecutive quarters of volume growth as you go through this. This market changes, right, not just changing quarterly or monthly or weekly, it can change daily and speed and who fast slowing.

So -- you look at our ability and we talk about this warm-campus model, how we are built from a service standpoint, taking order to ship an order we're able to move very, very quickly, and that's been a differentiator and continues to be a differentiator in the market we're in today.

And then when you overlay persistent tightness in raw materials that continues today, a very tight labor market, we're able to continue to adapt pivot, move in the direction we need to move in whether or not those raw material costs are going up or down and we kind of saw the opposite trend. You saw what copper did what aluminum did in the quarter, and the results were still very strong. And that's just a testament to our ability to respond to what the market needs.

Great. No, that's a great comprehensive answer. So you are able to kind of flex your manufacturing capacity across product lines, if needed. I guess my follow-up to that would be, can your competitors do that? Can your competitors flex capacity to the extent that you guys can?

Probably so. Back when I was in my 20s and 30s, decades ago, they used to let me go through their plants. So I've been through most of our competitors' locations, but it's been quite some time. And I think all of our competitors are running their plants. Everybody is busy. I'm sure they've got some way of reacting. I'll leave it at that. Julio?

Can you hear me or no?

Okay. Just on spreads, if you could just speak to how they've trended sequentially. And as you exited June, how did that spread compared to maybe the spread for the second quarter overall?

Well, let's just look sequentially, fantastic question. I appreciate you bringing that up. I mean net sales was up almost 16% over the first quarter. Gross profit 38.3% in the second quarter versus 33.7% in the first quarter and then go back to the underlying dynamic that we talked about, which is the volatility in the raw material and it highlighted, it's a lot more like we've been saying throughout this pandemic is just the metal, right? You still got to insulate it cable and jacket and -- you got to put it on a reel, right?

And you got to get it have to get it to the job site or to the distributor and all that goes into it with the labor component of making the finished good but saw gross profit move almost 5 points from the second -- from the first to the second quarter. Net income was up 30%. Earnings per share was up 34.6%. Copper pounds shipped second quarter over the first, it's up 8.8% and the spread is up about 7.5%. And so take what you will from those trends. It continues to be taking what the market gives you in adapting and pivoting and doing what we need to do to continue to serve our customers.

Great. Well, very nice job and thanks very much for taking the questions.

Thank you. [Operator Instructions] Our next question comes from [Ronit Patel], Private Investor. Please go ahead.

Hi guys. How are you doing this morning?

We're good. How are you doing?

Doing great. So I just had a couple of quick questions. The first one being related to the AR balance. I've seen -- maybe just -- if you could just provide a little bit of color about the growing balance and about the accounts receivable turnover to help individual investors like me kind of understand that cycle, I guess.

Yes, it's a great question. I'll tell you, we ended June with about $605 million or so in accounts receivable. That balance remains 99.8% current. We had no write-offs during the quarter. Our receivables typically turn. It's in the low to mid-60s. But all in, you're looking at about a 70-or-so day turn. It ebbs and flows based on the receivable. But that balance every single quarter is poured out into cash and then you replace it with the next quarter sales. And I'll tell you, all in, there's nothing within that a concern to me. It's very consistent with what sales has been doing. So it grew as sales grew in the quarter, but nothing to report there.

No, that makes sense. Thanks for that clarification. The 60-day cycle definitely helps out. And -- my next question is related to capital allocation. So you guys have been doing a pretty healthy buyback and the pace at the current pace you're likely to exhaust the existing plan that was put in actually fairly recently. What are your thoughts kind of on when that runs out? Is the plan to refresh it or are you guys thinking more dividends?

I'll tell you that. I mean, and I've said this consistently. Every single time we sit down with the Board and Daniel and I talked, we go through what's the highest and best use of cash in that capital and cash allocation. And the triggers we have our capital expenditures, and Daniel has been very clear. It's about either taking costs out of the system or improving our service levels, and we continue to execute on that plan.

Stock buybacks has always been one, and we did announce the extended stock buyback up to 2 million shares through March of 2023. And we bought back about 1.1 million under the authorization.

When we meet with the board again, we'll go through the same exercise and discussion and refresh again what is the highest and best use of that cash and then act accordingly. So we look at it every time we meet. Daniel and I talked about it constantly, and we'll continue to evaluate those three triggers. The dividend being the lesser the three. I still think the focus will be on the first two.

Okay. Yes, thanks. And then my last question is related to just -- I think I asked something similar to this last quarter, but you guys have a great story, and it's probably one of the least known story for how great it is. Any plans to kind of get the story out there through conference participation this year or any other means I go?

Yes, great question. Investor outreach continues to be very significant. We attend all the conferences we can. One of the things we're in the process of doing this tees up well. And if folks didn't take notice, if you look at the bottom of the second page of the press release, where we say Encore Wire or the company's description, that was deliberately changed and that word is different than what it's historically been. We'll continue to push that out.

We've been ready to launch an updated investor deck that will be available this week. And it gets a little bit more into the markets we talked about, data centers, renewables; what commercial, industrial and residential looks like in today's world about the Infrastructure Bill, the $450 billion Infrastructure Bill.

I talked about what's been driving some of our gross margin. And then just from a supply standpoint, the tightness in supply and some of the outlook that you could look out towards from a copper perspective, where the fundamentals are just not aligned. You got 3.5 days of copper above ground right now in a price that did not support it. And so once things ease a little bit or a little bit of good news comes out of China, you could see that swing very quickly.

And so we are going to try to make a conscious effort to really kind of change a little bit as to maybe understanding where our products are being utilized today compared to what they were utilized previously and how that fits into the hardening of the grid and the modernization and the decarbonization and the renewable world.

Awesome. Awesome, well, that's all music to my ears. So, that's all the questions I had.

Thank you for your investment, sir.

Thank you. Our next question on line comes from Mr. Bill Baldwin from Baldwin Anthony Securities. Please go ahead.

Yes, good morning and congratulations on continued outstanding execution. A couple of housekeeping items here. Bret, what percent of the revenues did come out of the residential market here in Q2?

So Q2 residential was right at 30%, and that compares to about 34% in the second quarter of last year. If you compare it to the first -- yeah, so 30% for the second quarter '22, 30.8% for the first quarter of '22. So you can see a little bit. And if you went all the way back to the second quarter of '21, it was 34%. But if you remember, the second quarter of '21 coming out of COVID, right, that's when residential was METEOR, right? It was a lot of pent-up demand. And then it went from METEOR to just really, really hot, and it's kind of sustain that.

Where are you seeing the primary tightness in your raw materials? What specific raw materials continue to be tight? And do you expect that to continue through the rest of the year?

Yes. I think it's a whirlwind today, Bill. I do see it continuing. The players change, right? One gets a little easier and three more get tighter. And then those two of those three start to get a little better and four others pop their head up. The metal remains very, very tight, and that's not changing. And it continues to be challenged from that standpoint.

And our long-term relationship with our partners, they've been phenomenal. They continue to perform day in and day out, and that's a huge differentiator because we can't deliver finished goods without raw materials.

But just about every raw material we need from the biggest to the smallest there's still some level of tightness or challenges, right? And as I say, those ebb and flow. But I don't -- yeah, I think that's the world we're in today. There's -- you still can buy a boat. We're still waiting for windows and doors, and it's just kind of become the norm. So I think this tightness is here to stay for some time.

What trends are you seeing in freight availability and freight rates for your threshold today?

Yes. It's gotten a little bit better, okay? It's still higher than what we've seen historically. But we've been able to -- high grade a little bit. Our third-party trucking broker has done a phenomenal job of navigating that market starting to pull in those reductions. Again, it's still higher than what we experienced historically, but it's getting a lot better, and we're getting realigned with the providers and truckers that we like to be aligned with.

Very good. And lastly, as you get more into large project work, things of that nature on the non-res side and perhaps there's other drivers also. Are you where you want to be with your distributor situation in all geographic markets or is there opportunities to either upgrade or add distributors to broaden out your market reach geographically or customer-wise?

Bill, this is Daniel. We have really good distribution in all markets. Currently, there's one or two that we'll be taking on going forward. But for the most part, we're in a good spot, really good spot. The difficulty from a sales perspective, a lot of times is taking on some maybe too fast. But as we've discussed pretty openly as we continue to ramp up this CapEx on our service level and lower cost approach, we'll continue as the market evolves to upgrade. As you know, pretty consistent and committed to getting paid on time and so we watch that pretty closely.

And that's a testament to the quality of our distributor network that we have in place and the sales reps in the field, knowing which projects to go after. I mean we're doing. They're doing a fantastic job. As Bret indicated, for our receivables to be where they are and to be basically 100% current, that tells you the quality of the distributor and the sales rep that we've got out there.

Well, no question. Execution has been fantastic across the broad spectrum, obviously, of all your facets of your business. So congratulations.

Thank you. [Operator Instructions] And I'm showing we have no questions in queue.

All right, Richard. Well, thank you very much for participation in the questions today, and we look forward to the third quarter call. Appreciate it.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.