Encore Wire Corporation (NASDAQ:WIRE) Q3 2023 Earnings Call Transcript

Encore Wire Corporation (NASDAQ:WIRE) Q3 2023 Earnings Call Transcript October 25, 2023

Operator: Thank you for holding. And welcome everyone to the Encore Wire Corporation’s Third Quarter 2023 Earnings Call. [Operator Instructions] Thank you. We’ll now turn the call over to Bret Eckert. Mr. Eckert, please go ahead.

Bret Eckert: Thank you. Thank you, Jack. Good morning. And welcome to the Encore Wire Corporation quarterly conference call. I am Bret Eckert, Executive Vice President and Chief Financial Officer of Encore Wire. With me this morning is Daniel Jones, President, CEO and Chairman of the Board. Before we begin our comments we would like to remind everyone that today’s earnings release and certain of our comments on the call include forward-looking statements. And actual results may differ materially from such forward-looking statements. I would like to refer everyone to the cautionary language included in our earnings release and too the risk factors described in our SEC filings. I will now turn the call over Daniel for some opening remarks. Daniel?

Daniel Jones: Thank you, Bret. And thank you, Jack. 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. This quarter marked our tenth consecutive quarter of elevated margins to spot our continued belief that we are in the midst of a period of gradual margin abatement. As we have discussed at length on prior earnings calls, copper margins began to gradually abate in mid-2021 and aluminum margins peaked in the fourth quarter of 2022. Since then, we have invested heavily and continue to invest in improving our service model and efficiency levels to reduce costs, increase capacity and deepen vertical integration, which we believe should contribute to achieving sustained higher gross margin levels when compared to pre-COVID baselines.

With respect to volume, I am pleased to have shipped a record number of copper and aluminum pounds in the third quarter. These results demonstrate a dynamic shift in volume shift when compared to a pre-COVID baseline. Copper and aluminum pounds shipped in the third quarter of 2023 increased by 21% and 96%, respectively, when compared to the third quarter of 2019. We captured the incremental market share by leveraging our single-site vertically integrated campus, deep supplier relationships and strong workforce to quickly manufacture and ship finished goods to our customers, despite the broader macro challenges facing the sector. The strong performance is also a reflection of our steadfast commitment to outstanding customer service and our intense focus on shipping complete orders quickly combined with our expanded reinvestment initiatives, such as the XLPE compounding facility, which was substantially complete at the end of the third quarter of this year.

Since our inception, we have grown organically under the same value proposition that we were founded on, manufacturing innovative products while providing exceptional customer service focused on quickly shipping complete orders coast to coast. We believe our industry-leading fill rates continue to give us a strategic competitive advantage in the marketplace. Our one-location business model also affords us a higher level of agility in adapting to changing market conditions, structuring our operations to quickly service areas of new and growing demand, such as data centers and renewable energy markets. Demand for our products has remained strong. And our build-to-ship model, combined with the throughput of our modern service center, positions us well to satisfy increases in future demand.

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Q&A Session

We believe that we have made and are making the appropriate sustainable investments to take advantage of future incremental demand for current and new product offerings that will help to facilitate the broad electrification of our economy. We expect that the current legislation in place to help fund the infrastructure needed for broad electrification will bolster long-term demand for many of our product categories. We also expect that this demand will raise the floor for the price of many raw material inputs for years to come. We firmly believe that our historical, recent, and future success is a direct reflection of our unique culture and the strength of our experienced team. We also believe that our one campus location, increasing verticals, deep vendor and customer relationships, and our ability to quickly shift complete orders will remain vital differentiators in our future success.

We continue to believe that our stock is undervalued at current market prices and what we believe are historically low forward valuation multiples, as evidenced by our continued share repurchases in Q3 2023 and remaining repurchase authorization. Since Q1 of 2020, our share repurchase program has returned $686.6 million in capital to shareholders, and our continued purchasing demonstrates our confidence in the long-term value creation potential of our company. With that, I will now turn the call over to Bret to cover the financial performance in the third quarter. Bret?

Bret Eckert: Thank you, Daniel. Third quarter and year-to-date 2023 highlights include: third quarter earnings per diluted share of $4.82; year-to-date earnings per diluted share of $17.40; third quarter net income of $82.1 million; year-to-date net income of $306.3 million; gross profit of 23.3% in the third quarter of 2023; 26.9% year-to-date in 2023; cash on hand of $581.8 million as of September 30, 2023, $730.6 million as of December 31, 2022; capital expenditures of $118.6 million year-to-date in 2023. The company repurchased 710,083 shares during the quarter and 2,185,492 shares year-to-date in 2023. The total cash outlay for share repurchases of $121.2 million during the third quarter of 2023 and $375 million year-to-date in 2023.

The company has repurchased 5,157,769 shares since the first quarter of 2020, which represents approximately 25% of the outstanding shares. Remaining share repurchase authorization of 1,289,917 shares of our common stock still exists through March 31, 2024. In a departure from previous calls, I’m not going to read you the earnings release, but instead highlight a few key points. Copper unit volume increased 6.4% in the third quarter of 2023 versus the third quarter of 2022, despite a very tough volume comp in the prior year quarter. Aluminum wire represented 12.5% of net sales in the third quarter of 2023 compared to 17.4% in the third quarter of 2022. Aluminum volumes in the current quarter were up slightly compared to the prior year quarter.

Copper unit volume increased 6.8% in the third quarter of 2023 versus the second quarter of 2023. The decrease in net sales dollars in each of those periods was driven by an anticipated decrease in the average selling price in the current year periods, which is consistent with the gradual margin abatement we have been discussing over the past several years. Gross profit percentage for the third quarter of 2023 was 23.3% compared to 26.1% in the second quarter of 2023. The average selling price of wire per copper pound sold decreased 4.3% in the third quarter of 2023 versus the second quarter of 2023, while the average cost of copper pound purchased decreased 2%. This resulted in the continued gradual, albeit slowing, abatement of copper spreads during the quarter, primarily driven by the decrease in the average selling price noted above and partially offset by a decrease in the average cost per pound of copper purchased, which resulted in the decreased gross profit margin in the third quarter of 2023 compared to the second quarter of 2023.

We believe the earnings for the first nine months of 2023 were exceptional and remain significantly above historical level. This is a testament to our organic growth strategy, one-location business model, historic and recent reinvestments in the business, and our hardworking employees, all driven by a culture of relentless attention to detail. At a macro level, persistent tightness in the availability of certain raw materials, ongoing global uncertainties, and the continued suppressed availability of skilled labor kept overall spreads elevated in the third quarter of 2023. Our balance sheet and cash flow generation remain very strong, allowing us to continue to reinvest in the business, while consistently repurchasing shares of our common stock.

Since the first quarter of 2020, we have distributed just under $700 million to shareholders through share repurchases and dividends. And we believe that the outlook for our business positions us well to continue to build long-term value for our shareholders. Incremental investments to deepen vertical integration in our manufacturing processes, as well as other projects focused on driving efficiencies and increasing capacity, will continue to improve our service model. These types of organic investments have fueled our consistent growth since inception and position us favorably to continue to profitably capture market share for years to come. In 2022, we began construction on a new state-of-the-art cross-linked polyethylene, XLPE as we call it, facility, compounding facility, to deepen vertical integration related to wire and cable insulation.

XLPE insulation is used in many applications, including data centers, oil and gas, transit, wastewater treatment facilities, utilities, and wind and solar applications. As Daniel mentioned, the new facility was substantially completed in the third quarter of 2023. Capital spending in 2023 through 2025 will further expand vertical integration in our manufacturing processes to reduce costs, as well as modernize select wire manufacturing facilities to increase capacity and efficiency, and improve our position as a sustainable and environmentally responsible company. Total capital expenditures were $148.4 million in 2022 and $118.6 million in the first nine months of 2023. We expect total capital expenditures to range from $160 million to $170 million in 2023; $150 million to $170 million in 2024; and $80 million to $100 million in 2025.

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.

Daniel Jones: Thank you, Bret. Our strong performance in the nine months of 2023 positions us well for the future. Our outlook for demand remains strong, and our single-site, vertically integrated business model gives us a competitive advantage in the market today. The opening of the new service center in May of 2021, the opening of Plant 7 in the third quarter of 2022, the new XLPE facility that Bret mentioned in the third quarter of 2023, and the other capital projects under construction or planned, should provide us the capacity and efficiency to competitively capture market share over the long term. Our unique business model continues to serve us well in current market conditions and remains as a competitive advantage, giving us unmatched operational agility and speed to market and serving our customers’ evolving needs.