WIRE
#Yes.
Thank you, Maddie, and good morning, ladies and gentlemen, and welcome to the Encore Wire Corporation quarterly conference call.
As stated, I'm <UNK> <UNK>, the President, Chief Executive Officer and Chairman of the Board of Encore Wire.
With me this morning is <UNK> <UNK>, our Chief Financial Officer.
We're pleased to report a great fourth quarter and full year.
Our unit sales were up in both copper and aluminum building wire for the year.
One of the key metrics to our earnings is the spread between the price of the copper wire sold and the cost of raw copper purchased in any given period.
The copper wire spread increased 9.9% in 2017 versus 2016, as the average price of copper purchased increased 25.4% in 2017 versus 2016 and the average selling price of wire sold increased 19.8%.
We're also encouraged by the fact spreads improved during the fourth quarter of 2017 versus the third quarter of 2017.
Copper spreads increased on a sequential quarterly comparison, climbing 2.7%.
In addition, as a result of the December federal tax legislation changes, we recognized a $13.5 million decrease in our deferred tax liability, offset by the special bonus of $1,000 we gave to all of our employees, except for the corporate officers, resulting in a net one-time gain of $0.60 per share.
The $2.61 in net earnings per common share from core operations is the second best year in our history and is a 60% increase over last year.
The overall construction and building wire markets remain strong.
The anecdotal information confirms our belief that there are still large commercial and industrial projects in the pipeline.
The U.S. economy appears strong as in ---+ as is the construction activity, and we believe that some of our financially stressed competitors have struggled and acted erratically in what we consider a strong business environment.
When volumes are good, margins should also be strong.
Based on discussions with our distributor customers and their contractor customers, we believe there is a good outlook for construction projects for the next year.
We continue to strive to lead and support industry price increases in an effort to maintain and increase margins.
We believe our superior order fill rates continue to enhance our position.
As orders come in from electrical contractors, the distributors can count on our fill rates to ensure quick deliveries from coast-to-coast.
We believe our performance is impressive, and we thank our employees and associates for their efforts.
We also thank stockholders for their continued support.
<UNK> <UNK>, our Chief Financial Officer, will now discuss our results.
<UNK>.
Thank you, <UNK>.
In a minute, we'll review Encore's financial results for the quarter.
After the financial review, we'll take any questions you may have.
Each of you should have already received a copy of Encore's press release covering Encore's financial results.
This release is available on the Internet.
Or you can call Denis McCarthy at (800) 962-9473, and we'll be glad to get you a copy.
Before we review financials, let me indicate that throughout this conference call, we may make 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, www.encorewire.com.
Now the financials.
Net sales for the fourth quarter of 2017 were $301.3 million compared to $239.2 million during the fourth quarter of 2016.
Unit volume, measured in copper pounds contained in the wire sold, increased 5.8%.
And the average selling price per copper pound sold increased 22.8% in the fourth quarter of 2017 versus the same period in 2016.
Sales prices increased primarily due to higher copper prices, which increased 30.1% versus the fourth quarter of 2016.
Net income for the fourth quarter of 2017 was $28.5 million versus $11.4 million in the fourth quarter of 2016.
Fully diluted net earnings per common share were $1.36 in the fourth quarter of 2017 versus $0.55 in the fourth quarter of 2016.
The $1.36 fully diluted net earnings per common share in the fourth quarter of 2017 include $0.76 from core operations and $0.65 from the adjustment of deferred tax liabilities, offset by $0.05 associated with a special bonus of $1,000 paid to all employees of the company except corporate officers.
Net sales for the year ended December 31, 2017, were $1.164 billion versus $940.8 million during the same period in 2016.
Copper unit volume increased 5.6% in 2017 versus 2016, coupled with a 19.8% increase in the average selling price per copper pound sold in 2017 versus 2016.
Sales prices increased primarily due to higher copper prices, which increased 25.4% in 2017 versus 2016.
Net income for the year ended December 31, 2017, was $67 million versus $33.8 million for the same period in 2016.
Fully diluted net earnings per common share were $3.21 for the year ended December 31, 2017, versus $1.63 for the same period in 2016.
As delineated for the fourth quarter of 2017 above or earlier, the resulting fully diluted net earnings per common share for the year from core operations were $2.61 per share.
On a sequential quarter comparison, net sales for the fourth quarter of 2017 were $301.3 million versus $292 million during the third quarter of 2017.
Copper unit volume decreased 1.7% on a sequential quarter comparison, in line with the fact that the fourth quarter is generally a slightly slower quarter in the construction and building wire industries.
The unit volume decrease was more than offset by the 5.7% increase in the average selling price of wire per copper pound sold.
Net income for the fourth quarter of 2017 increased to $28.5 million versus $14 million in the third quarter of 2017.
Fully diluted net income per common share was $1.36 in the fourth quarter of 2017 versus $0.67 in the third quarter of 2017.
Our balance sheet remains very strong.
We have no long-term debt and our revolving line of credit is paid to 0.
In addition, we had $123.4 million in cash at the end of the quarter.
We also declared another cash dividend during the quarter.
This conference call will be available for replay after the conclusion of this session.
If you wish to hear the taped replay, please call (888) 843-7419 and enter the conference reference number 8977327 and the pound sign, or you can visit our website.
I'll now turn the floor back over to <UNK> <UNK>, our Chairman, President and CEO.
<UNK>.
Thank you, <UNK>.
As we highlighted, Encore performed well in the past quarter, and we believe we're well positioned for the future.
Maddie, we'll now take questions from listeners.
If you're speaking specifically to '17 and Q4, that was the most expensive quarter in 2017 for copper.
I think the average was over $3 in the fourth quarter, something of that nature.
And the second quarter was the low at $2.57 or $2.58.
From that perspective, typically in the past, Bill, what's happened in our industry is we tend to make a little more money when there is a slow methodical increase in copper, which we have not had in quite a while.
We're getting quite a bit of volatility.
But in the same category, the volatility itself has led to, and we've had enough of it over time, to where the jobs and the business that are coming out are moving forward.
So the ---+ regardless of interest rates or financial influences of really any magnitude, there is ---+ the cycle continues.
And when our product delivers into that building wire cycle, it's typically shielded from those financial influences, including sometimes the price of the metal swing one way or the other.
Most of the deals are done and shipping out pretty quickly.
The lead time from a purchase order to delivery has shortened, which helps with the volatility of the metal.
As far as adding things to stock because of the volatility, the reverse is true.
From what we see, most of our distributors are keeping inventories as lean as possible because of the volatility, which kind of feeds into our model a little bit better with our fill rates and short lead times into 50 states.
There's a lot of thoughts on them, but supposition and whatever, but our guess is that Prysmian had a really good, well-thought-out plan, and they're most likely in the process of evaluating what they have and what they've bought and sorting out different people's responsibilities and what have you, like anybody would be.
And once those lines are clear on who's going to be responsible for what product categories, I think we'll have a better picture.
But overall, without ---+ I don't want to get into naming names or anything, but in that process, my personality thinks it has to be better with Prysmian watching the bottom line versus what we were going through for the few years there that they clearly were for sale ---+ where General was for sale in the market.
Yes.
Chris, we're supposed to stick to Q4 and 2017, but I don't mind answering that question at all.
What we're looking at is several options.
We literally just had a board meeting this past Monday.
And we're considering a few options there, and hopefully, something will come from that pretty quickly.
As you know, if you followed our story very much, depending on what copper does or what copper doesn't, the demand on the cash is pretty extreme.
The majority of any type of exposure that we have as far as a bank line or any of the debt service that we need to take on, for that matter, would be relative to copper.
So as we're sitting, it looks like a lot of cash.
We have some ideas of what we want to do with it.
And hopefully, restating I think we'll have something come off it here pretty quickly.
Are you wanting questions, or is your question relative to '18 or is it about '17 announcement and Q4 announcement.
Got you.
We saw a really active market in the fourth quarter.
And again, the lead time from a quote to a purchase order shortened a little bit, which is a good sign.
The size of the average order that we take in increased a little bit toward the end of the year, which was a great sign.
Everybody is paying their bills on time.
All the things that we watch, <UNK>, wrapping up 2017, ended on an uptick as far as the indicators that we try to watch.
Yes.
We're running all of the plants currently 5 to 5.5 days.
Occasionally, we'll run 6 days on a cleanup basis.
The flexibility that we have here manufacturing-wise, it's hard to give you just a straight utilization rate that would be pertinent.
But in that sense, we're running 24 hours a day, 5, 5.5 days a week, maintaining our order fill rates, growing the business and growing it with the existing customer base that we have.
5.5 days would be the easy answer to give you.
As far as a percentage on that, it depends on the product mix from commercial to industrial to residential, because that does change.
We had a really good 2017 in the residential area.
All 3 areas were up pretty good.
So in an overall generic answer to your question, I would say we're running about 65% to 70% at the current product mix.
We can do some things here differently if we need to.
We can swap machines over and run this for that and we can share plant time.
And there's quite a few things we can do.
And I would love to stress the plant and see how many pounds we could put through in a month.
All said and done, it just ---+ it feels like right now that we're really busy.
You only look up and you still have 1.5 days or so to catch up and fill in some orders.
So right now, it's good, not great, but good.
Well, after almost 30 years in the industry, there is not an answer to your question.
If you're looking at '17, it'd be restating the press release if I told you what the spreads were.
But in general, over a cup of coffee, if you and I were speaking about my opinion on spreads going forward, I think if business is similar in '18 to what it was in '17 and the metals numbers are similar, I think the spreads will be similar.
I'll be honest with you.
I don't know what the price of copper is going to be 2 to 4 years out.
But I'm very bullish on copper.
I've only been bearish twice, maybe 3 times, and I was wrong both for 3 ---+ all 3 times.
So I'm super-bullish on copper and aluminum going forward.
Again though, in that vein, we're not betting our inventory or purchasing or whatever.
I think copper is going to go up, but I'm not buying a bunch of extra in anticipation of my opinion coming true.
So it's just a real tough question to give you what will happen when 65% of our cost is copper.
And as you know, there was a difference of about $0.50 a pound in just 2017 from one quarter to the next.
From second quarter to fourth quarter, it was right at $0.50 difference.
So it's tough.
I mean, I'm not trying to evade your question at all.
It's just I'm bullish on the future as far as copper goes.
Well, let me break that down into 2 pieces, if I could, Bob.
And let's go historically, pre the Trump tax reform act.
And so if we look at what we were trending through 3 quarters, it was right in the 31% to 32% range.
And that was basically coming off of, on a federal basis, the 35% statutory rate, which was reduced by the Jobs Creation Act or Section 199, as they refer to it, which really favored Encore Wire.
And we were able to get a 3% to 4% break of the 35%, because we do manufacture all of our product right here in McKinney, Texas.
And that act was designed to incentivize people to produce in the United States.
On top of that, we had about 2% at most state tax rate in all the municipalities and jurisdictions we sell in, in the United States.
So it came out to about a blended 33%, 34%.
The Trump tax rate eliminates the Section 199 deduction.
However, it takes the rate from 35% to 21%.
So for the full year, we pull down our deferred tax liability, which we had been building plants and equipment, we had been taking accelerated depreciation on those for taxes as allowed with bonus depreciation and had been deferring paying income tax into the future.
To that extent, when the law came effective, we were able to reduce that future liability from a 35% rate to a 21% rate.
And therefore, our effective tax rate for the year, having said all of that, wound up being 16%, that's with the big adjustment.
Right.
You will look at basically coming down from a federal rate of, let's just say, 32%, 33% to 21%, a solid 10%.
Yes.
CapEx for last year clocked in net of a few little proceeds of assets at $20.7 million net CapEx.
The current schedule we have for projects that are either on the books with POs issued or contemplated and a few projects that <UNK> and the board and our manufacturing people are working on.
Right now, our projection is we'll spend, in '18, somewhere in the neighborhood of $25 million to $30 million.
Yes, sir.
We've been very loyal over the years to a pretty good group of vendors and what have you.
So we could not be more pleased with the service and the people that we deal with and so forth on the copper.
We do very well on our sourcing.
We've got probably the best team from a purchasing standpoint, reputation-wise and so forth in the industry, headed up by Janet.
They all do a great job.
The planning for the volatility is a little easier than it would appear to be because the way things are done on an average basis.
But things are a little bit tighter, as you know, Bill.
And then I'm sure that it's no secret, every publication that you read today has some article or comment about the trucking industry.
Trucks are tight, but they're tight for everyone.
So we've dealt with that over the years as well.
But for the most part, the service and the quality that we receive from our vendors, we blend our own plastic on site here.
We compound.
So we buy the raw materials.
And they're world-class vendors.
They do a great job for us.
Again, like I've stated, the copper folks do a phenomenal job for us.
Their office folks as well as their outside sales folks do a great job for us.
We're very well taken care of.
The trucking thing is tight inbound.
It's tight outbound.
It's going to continue, I believe, to be tight.
A lot of changes went into effect, as most industry folks know, from a trucking standpoint back in December about the drivers' requirements.
And then equipment is tight.
It feels like we're super busy, Bill, and things are going along pretty well.
We came out the other side of some of those devastating hurricanes that hit the Gulf where most of the world's PVC supply ---+ at least there's a presence down there for most of the world's supply.
But in that vein, we've not had supply disruptions from the raw material standpoint.
And I think that's a testament not only to the folks that we've chosen to buy from, but the reputation of our purchasing department is pretty solid.
So pallets are tight.
Stretch film can be tight.
I mean, everything that you buy today as a consumable item on the shipping dock is a little bit tighter.
So people are busy.
People are ramping up to catch up.
And we're rolling along, but we've not experienced any outages of anything, but it is tighter for sure.
Yes, sir, yes.
We're very proud to be in Texas and also McKinney.
We think it's a great spot to be.
We didn't announce anything in the fourth quarter nor in 2017, [<UNK>].
And other than the response that I gave the earlier caller from Hilltop, Chris, we're working on some things.
We just haven't announced anything yet.
Right.
That's a great question.
There is discrepancies in pricing in different markets for whatever reason.
And some of it does make business sense.
Some of it doesn't.
The only thing I can figure is, it's not their money or they wouldn't be spending it that way.
The other side of it would be, though, specific to your market share questions.
We have a pretty good idea of our market share along with one of our larger competitors.
It's easier to lump those 2 together than it would be to split those 2 out in a specific market versus the other.
But being the only publicly traded company in the area, there's no real public numbers as far as that goes.
So we're going on some anecdotal stuff that we pick up and experience in time.
And we feel really good about our market share in some areas.
And there's other areas where there's a lot of room for improvement.
Again, though, we only specifically do the 50 states.
Outside of that, I really couldn't comment.
We don't compete outside of the 50 states.
We have had ---+ over the years, [<UNK>], we probably had 25 or 30 competitors way back.
And we're down to just 6 or 7 maybe.
And competitively speaking, in 2017, there was some disruption from imported materials and imported wires in some product categories that was super-disruptive.
But in spite of that, as you saw in the earnings, we had a really good year.
So I don't know if that answered your questions.
I just have to be super careful on being really specific on market share stuff.
And I think 4 out of the 6 competitors are on the call.
Yes, sir.
We made some voluntary changes on the increase in pay.
It was our choice.
We started to earn more, so we pay more, in that sense.
So overall, our labor was up a little bit.
We ---+ the availability of people, there are some holes that we'd like to see filled.
But rather than sit back and wait for someone else to do that, we've established some of our own in-house training.
And we've partnered with some local colleges and formed some classes that we're teaching.
And we also have departmentally set up over the last 12 to 18 months ways for folks to earn a GED or hospital equivalent here.
There's just a lot of things we're doing as far as projects.
But in the big picture, we could use 35 or 40 good people today.
We will probably hire half of that and continue to search for the other half.
And by that time, we'll need another 15 or 20 folks.
So we're constantly hiring and upgrading and trying to doing the things as most companies are doing, I would think.
And I do think that there's some unemployment in this area that we're in.
So we're getting some really pretty good applicants.
And the volume, again, is not great, but it's good.
And most of the folks that we're hiring in, they want to work.
You've just got to be careful not to hire them in June and July in Texas, because August, it's going to be hot.
And there's things that we try to do to adjust for that.
And in '17, and the fourth quarter specifically, we did hire quite a few people and we also upped their pay scale across the board.
I couldn't decide ---+ I could give you our management incentive programs without speaking to specifically.
But we did change up a few of them in 2017, not significantly.
There's quite a few that come to mind specifically, but I really don't want to go too far into the personnel side of what we're doing specifically on the call.
As I mentioned, 4 of our 6 major competitors are on the line.
And there's a pretty good competition for people in our industry.
So I'd rather not go too far into that.
Not ---+ in broad terms.
Yes, not specifically to any one specific person or area, but they are in broad terms, yes.
Yes.
It's tough to give you an exact number, <UNK>.
What ends up happening is, it's not one specific lump that comes in.
It's over time.
It's not an immediate kick.
However, as you would think, nonmetallic, which is a residential product, has paper inside the jacket.
And if that gets wet, it can grow bacteria and decompose.
So residential product has to be removed anywhere you saw water that would encroach on someone's residential property.
So in that vein, we did ship a significant amount of residential product into those geographical areas that were hit.
There was also some pretty heavy-duty industrial cable that goes in as an emergency power type cable.
But outside of that, <UNK>, it's a pretty long, drawn out, slow process to decide if they're going to rebuild, if they're going to completely tear down, if they're going to refurbish, whatever the decision is going to be.
The Houston market was somewhat different than other areas in the past.
They went against the grain and rebuilt a lot of those neighborhoods pretty quickly.
And so we did see a bump in that area.
But again, it's more a little slower and longer over time than it would be within a particular month or particular quarter.
Other than, the caveat being Houston was pretty quick and a nice little uptick in that market.
But the rejuvenation part of it continues on and then they'll decide to tear down and rebuild and the whole timing of insurance payments, and there's still quite a few vehicles that were flooded sitting in fields that were leased out.
And they're still hauling trash and debris and whatever out of a lot of those areas.
So it's a long drawn out process.
We still are seeing recovery effort type construction things in New Orleans from several years back.
So as tragic as it is for a lot of people and it is awful, it's a long drawn out ---+ we do get to ship some material into those areas.
Yes.
We saw some photographs and actually talked to some folks that were on the ground.
I guess, I should have qualified saying a long, slow, drawn out.
That's truly a longer, slower, more drawn out scenario.
But look, the material is starting to flow into those areas and basic supply-demand takes over, and there'll be some positive stuff business-wise that comes out of that for sure.
Okay.
Well, Maddie, thank you so much for handling the call.
And we appreciate the callers and look forward to speaking to you after the release of Q1 '18.
Thank you very much.
