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Good morning and welcome to the Encore Wire Second Quarter Earnings Conference Call. My name is Zenera [ph] and I will be the operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions]. Please note that this conference is being recorded.
I will now turn the call over to Mr. Daniel Jones, Chairman, President and CEO. Mr. Jones, you may begin.
Thank you, Zenera, and good morning, ladies and gentlemen and welcome to the Encore Wire Corporation quarterly conference call. As Zenera state, I am Daniel Jones, the President, CEO and Chairman of the Board of Encore Wire; and with me this morning is Frank Bilban, our Chief Financial Officer.
We are pleased with our improved results in the second quarter and on the year-to-date comparison. There are some key items to note. Net sales dollars increased significantly in both the quarterly and six-month comparisons of 2018 to 2017. The increased top line was driven primarily by higher copper raw material prices. Unit volumes bounced back strongly in the second quarter of 2018 versus the first quarter of 2018, rising 16.5% in copper pound shipped. Margins increased in both the quarterly and six months comparisons of 2018 versus 2017.
One of the key metrics to our earnings is the spread between the price of copper wires sold in the cost of raw copper purchased in any given period. The copper spread increased 14.2% in the second quarter of 2018 versus the second quarter of 2017, an increased 12.1% on the six-month comparison while declining 1.1% on a sequential quarter comparison.
The copper spread expanded 14.2% as the average price of copper purchase increased 18.7% in the second quarter of 2018 versus second quarter of 2017, while the average selling price of wires sold increased 17.2%. The percentage change on sales is on a higher nominal dollar amount and on purchases and therefore spreads change on a nominal dollar basis. The $0.32 increase in sequential quarterly earnings was driven primarily by the strong rebounding unit sales including an $0.11 positive variance in stock compensation expense in the second quarter of 2018 versus the first quarter of 2018.
In aluminum wire which represented 7.3% of our net sales in the second quarter of 2018, we continued to experience pressure on margins due to import competition from China. We will continue to monitor conditions regarding aluminum wire and we'll take action to enforce our rights under the U.S. Trade Remedy Laws if redetermined that further actions is warranted.
The U.S. economy appears to be strong as is construction activity and based on discussions with our customers and their customers, we believe there is a good outlook for construction projects going forward. We believe our superior order fill rates continue to enhance our competitive 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 tremendous efforts. We clearly have the best people in the industry. We also thank our stockholders for their continued support.
Frank Bilban, our Chief Financial Officer will now discuss our results. Frank?
Thank you, Daniel. In a minute, we'll review Encore's financial results for the quarter. After the financial review, we'll take any questions you might have. Each of you should have already received a copy of our press release covering Encore's financial results. This release is available on the internet or you can call Elizabeth Campbell at (800)-962-9473 who will be glad to get your 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 involves certain risks and uncertainties that could cause actual results to differ materially from those discussed here 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 www.encorewire.com.
Now the financials. Net sales for the second quarter ended June 30, 2018 were $336.8 million compared to $291.5 million during the second quarter of 2017. Copper unit volume measured in pounds in copper contained in the wires sold increased one-tenth of 1% in the second quarter of 2018 versus the second quarter of 2017. The average selling price of wire per copper pound sold increased 17.2% in the second quarter of 2018 versus the second quarter of 2017. Copper wire sales prices increased primarily due to the higher price of copper purchase which increased 18.7% versus the second quarter of 2017.
Net income for the second quarter of 2018 was $18.1 million versus $10.9 million in the second quarter of 2017. Fully diluted net earnings per common share increased 64.8% to $0.86 in the second quarter of 2018 versus $0.52 in the second quarter of 2017. Net sales for the six months ended June 30, 2018 were $628.2 million, compared to $570.9 million during the same period in 2017.
Copper unit volume measured in pounds in copper contained in the wires sold decreased 3.8% in the six months ended June 30, 2018 versus the six months ended June 30, 2017. The average selling price of wire per copper pound sold increased 16.4% in the six months ended June 30, 2018 versus the six months ended June 30, 2017, driving the 10% increase in net sales dollars. Copper wires sales prices increased primarily due to the higher price of copper purchased, which increased 18.5% in the six months ended June 30, 2018 versus the same period in 2017.
Net income for the six months ended June 30, 2018 increased 19.9% to $29.4 million versus $24.6 million in the same period of 2017. Fully diluted net earnings per common share were $1.41 in the six months ended June 30, 2018 versus $1.18 in the same period in 2017.
On a sequential quarterly comparison, net sales for the second quarter of 2018 were $336.8 million versus $291.4 million during the first quarter of 2018. Sales dollars increased due to a 16.5% unit volume increase of copper building wires sold offset slightly by 1.3% decrease in the average selling price per pound of copper wire sold on a sequential quarterly basis.
Copper wire sales decreased primarily due to a decrease of 1.4% in the price of copper purchase. Net income for the second quarter of 2018 was $18.1 million versus $11.4 million in the first quarter of 2018. Fully diluted net income per common share was $0.86 in the second quarter of 2018 versus $0.54 in the first quarter of 2018.
Our balance sheet remains very strong. We have no long-term debt and our revolving line of credit is paid down to zero. In addition, we had $102 million of cash at the end of the quarter. We also declared another cash dividend during the quarter.
We'd like you to know that this conference call will be available for replay after the conclusion of the session. If you wish to hear the calls replay, please dial (888)-843-7419 and enter the conference reference 6219252 and the pound sign, or you can visit our website where it is also available.
I'll now turn the call back over to Daniel Jones, our Chairman, President and CEO. Daniel?
Thank you, Frank. As we highlighted, Encore performed well in the past quarter and we believe we're well-positioned to go forward. We'll now take questions from the audience.
Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Julio Romero. Please go ahead, your line is open.
Hey. Good morning, Frank, good morning, Dan. So we've seen copper prices just drop about $0.15 to $0.20 here through the first month of the third quarter. Can you comment to how that's affecting industry pricing and how you see spreads? How can we at least expect spreads trending on the go-forward basis?
That's a great question. Unfortunately, this is a second quarter call, so I really couldn't comment on the third quarter in any specific detail, but we saw the same thing toward the tail end of Q2. I don't have the numbers exactly in front of me, but there was about $0.34 or $0.35 per pound drop within the month of June. Typically what that means for us, Julio, the volatility depending on the timing of when that drop occurs based on the buying cycle distribution, typically can move the volume one way or the other, but the business is still there at the job site. The business is still there. And for the contractor's demands, it will catch up at some point. If there's a trend or a bias on the downside, it would last a little bit. At some point they have to step in and buy product.
Also as the trend that the bias turns and goes to the upside -- the same thing happens. But it does move the timing of the volume potentially a little bit one way or the other. But overall, the market accepted the volatility pretty well in Q2. We sent out and saw industry attempts at price increases throughout the volatility in Q2 and you get ahead of it on the way up and you try to drop anchor on the way down. We were able to do that pretty well in Q2 and if I were able to speak on Q3 after 30 years of doing this, this is how it is. So we're going to take advantage of those opportunities in Q3 going forward and business is good.
Got it. And just thinking about Q3 here. You've got a tough comp coming up here in terms of the third quarter of last year in regards to copper spreads as well as pricing. Just given the drop in copper spreads quarter-to-date, is it fair to assume that any real margin accretion is going to come from volume leverage?
You know, it's a lot of ifs. Three or four ifs involved in that.
Sure.
Again, as the demand is pretty decent in the market, at some point they have to have the material, so holding off, waiting for a bottom or missing the bottom out on copper or whatever it is that folks or watching hasn't indexed to jump in on the buying cycle, that attitude in Q2 -- I'm not supposed to speak too much on Q3 -- but it's the kind of the scene, the rate of the business is pretty good. So the volatility has less of an effect, if that makes sense, because from quote to delivery, that cycle has shortened quite a bit this calendar year and we certainly see that going on right now.
Got it. That's helpful. And then maybe just lastly, you've got a nice cash balance here. Is there any updates on CapEx spend? I think last quarter you mentioned you were looking at things in the service and offering categories. Just any update there in regards to what and maybe when we can expect the cash deployment?
Again, watching copper move one way or the other has a pretty good effect on what we're doing with the cash as we continue to grow the cash a little bit to try to not be too specific because we haven't announced anything, but we certainly have our eye on a project and timing is just as important as anything. So as that kind of unfolds, we'll get back to you with some news or whatever. But as we sit, I'd rather not announce anything specifically on this call. We spend most likely -- I don't know, frankly it was $34 million -- right now we're projecting this year to come in between $34 million and $39 million. We're going to spend a little bit anyway, Julio, but as far as announcing the next big project, we've been sitting and doing some things in house as you know for over a year and that's about the wait period. I'm guessing if things continue as is and as the customer demand unfolds, we will have an announcement for you.
That's helpful. And then just lastly, what was the CapEx spend in the quarter? I'm sorry if I missed it earlier.
In the quarter, we spent $70.4 [ph] million.
Got it. That's all I have.
For the year-to-date, that would make $14.8 million, Julio.
Got it. Thanks a lot, guys. Thanks for taking my questions.
We appreciate it.
Our next question comes from Zane Karimi. Please go ahead, your line is open.
I was just wondering if you could give us some color on what were the puts and takes within SG&A this quarter and if freight costs are captured within that, how much were they up?
Okay. SG&A. Are you comparing it just for reference Q2 to Q2 or sequentially Q2 to Q1?
Q2 to Q2.
All right, Q2 to Q2. Freight as a percent of sales in Q2 of '17 was 2.3%. This year it's 2.7%, so it is up, commence it with some of the issues we've talked about last quarter with all the new regulations in trucking and the shortage in trucking and truckers that are plaguing the industry nationwide I'm sure a lot of your other companies are talking about. Diesel is up as well. However, Daniel has been making a big push with our people both internally and externally and that per pound cost of freight did come down on a sequential quarter basis. So we are doing everything internally. We tend to control that.
Commissions, G&A state study, there's really two components of sales: it's freight and commission. Freight was 2.7% this quarter, commissions were flat at 2.5%, but the dollar value was up $1 million because of the higher sales. The G&A component itself was down $1.1 million '17 to '18 and the biggest primary driver of that was the stock compensation expense. Stock comp expense here, we give most for the people here stock appreciation rights. GAAP rules require us to mark that liability to market at the end of each quarter and in doing so, you're just at the winds of the stock market and so at the end of Q1, for example this year, the stock was higher than it was at the end of Q2. So we got to take in some credit on that basis here in Q2.
Got you. Thank you for that. And then taking a minor pivot there by talking about volumes, did you guys walk away from volumes this quarter? We just asked based on we have thought volumes would be up, given a slower Q1?
Yes, Zane. Good question on the volume. There were some opportunities there that we chose to pass on for -- I'm not sure where some of the competitors were coming. I think they made a mistake most likely on some of the quotes or whatever, but that was the early-to-mid part of the quarter. Last tailwind part of the quarter as I indicated earlier, there are quite a few ups and downs with the price of copper and a lot of price sheets initiated a little bit of confusion in the market toward the tail end of the quarter, but not as much. There's a one or two, basically two really good competitors in the market day in and day out and as you know, you've heard from us before, there's a few, little lackey at times, but it was earlier to mid-point of the quarter more so than toward the end. But if things kind of come back down and they had a little bump in copper that forces discipline, cures a lot of ills.
Thank you for that. And then one final if I may. What regions do you see the most activity in moving forward?
Really, geographically speaking, it's coast to coast. There's a few pockets that are not doing as well as others, but most areas are up versus this time last year. This is quite a bit of job activity. Summer months, typically July is vacation month for U.S. and August in Europe. So the copper influence on a world-wide basis has a lot to do with the timing of execution of the purchase orders for those jobs, but if stock business is good for distribution, the job business is picked up quite a bit. Geographically, there's really not a dead spot.
Currently as most folks know, the data centers that are going in, we're looking for the certain obviously to move in somewhere and some of those data centers are going in to areas on the map that you really wouldn't predict. But for the most part, West Coast has been good, East Coast has been good, we're getting paid on time by both coast which is a good sign and then up and middle is always solid. Don't see any real down numbers, any one particular geographic area and then residential, commercial, industrial, pretty much across the board, we're running our plants, our competitors are running their plants. As I stated earlier, business is good. I wouldn't tell you it's great, but it's really good.
Great. Thank you very much for the time today. I'll jump back in queue.
Thanks for the call.
Thanks, Zane.
Thank you. Our next question is from Bill Baldwin. Please go ahead, your line is open.
Thank you. Good morning, Dan and Frank.
Good morning, Bill.
Hey, Bill.
Hard work paying off.
Yes, sir.
Can you give some idea of what your maintenance CapEx is running generally now at the company?
Well, it's a bit of a guess, Bill. If you were to really freeze us in place and not to do anything for upgrade for expansions over a five-year period at least, I would say to maintain the plants; we'd have to spend at least $15 million a year. At some years that could be $20 million and in some years that could be a little less, but depreciation right now is running about $13 million to $14 million and I'd say that's a fair barometer with a little extra here and there.
Okay. Personally you configured, do you have upside in your production in both the copper building wire and aluminum building wire going forward? Do you have the ability to increase production?
Yes, sir. We are running basically 5-6 days and based on the product mix as the orders come in, we actually have machinery that we may or may not run, so without given exact numbers, we're already built, we'd sure love some orders if you know some folks.
Okay, very good. Well, it sounds like it's just a matter of timing for all of that to happen. Was the level of discounting in the aluminum building wire market -- were the level of pressure coming from this low-cost import? Was it pretty much similar in the second quarter as we saw in the first quarter?
On a comparative basis, the first two quarters were -- the words that are coming to mind are nasty, and cheaters and whatever. But in the interim, we're not sitting back, whining about anything. The deal is assessing the remedies and looking into what our options are. And as those things kind of unfold, Bill, we're going to take whichever action is warranted. But toward the end, after all the conversations publicly and what have you, it's clearly a hot topic here, it's a topic of interest for our industry. Again, we're assessing our options and what those remedies might be. I'm trying to be clear, but also be super kind at the same time and [indiscernible].
I understand. Are you getting any help from commerce on this, Dan? Are they over the head trying to come to some resolution?
The short answer is yes.
Okay, very good. Okay, well, thank you very much for your time.
You bet, Bill. Thank you. Appreciate the support.
Thank you. And our next question comes from Brad Evans. Please go ahead, your line is open.
Daniel, can I interpret from your comments that you think you exited the second quarter with some pent up demand in the marketplace based upon the year-over-year volume growth that you reported on top; would you marry that with how you describe the market as being relatively strong?
Yes, I mean that's fair. April and May were what they were and June came in and there was quite a bit of volatility on the comax [ph]. Like I said, there was somewhat $0.30 per pound swing intra-June and that causes little disruption and can be perceived as a little bit of chaos actually in the marketplace. For example, you put process increase [ph] out and because copper was up on a bias for two or three days or what have you and then you sit and wait for the business to come in at the new sheet and then copper drops the next two or three days and you'll get advised the other way. So in that type of activity, if you will, if you don't have decent demand at some level, it could be even more disruptive. The point is for Q2, we have really good demand and whether around the country other than being a little bit warm -- in Texas and what have you -- things are going along really well. Job sites are moving along. There's a lot of activity, there are some labor issues as reported in the paper obviously that hits our industry just like it would any other and some transportation issues, getting stuff shipped on time and getting it out and it's not because you don't have the product, it's because I think it's a pretty common conversation now that the transportation industry standalone has got some challenges going forward what have you.
But hey, listen, all this funnels into we had a really good quarter. Our customers are paying us on time, they're getting paid on time, the quote to purchase order timeframe has shrunken a little bit. We like that type of energy, we feed off of it, we like the pressure of just in time service levels. All of those things are going on. I can't speak too much to Q3 on a Q2 call, but just because the quarter ended June 30, our activity, business, energy and all that kind of stuff, we don't feel like we'll stop anything on June 30.
I appreciate that color and you kind of dovetailed into my next question actually. You look at the year-to-date volatility both with copper pricing, input pricing and demand and the spread has been quite impressive both in the first quarter and as well as the second quarter. You probably already answered part of my question, but to maybe have you amplify it a little bit because we've already articulated, there has been a great deal of volatility in copper input cost, you've got rising raw material cost in other area as you mentioned, diesel labor and then the trucking market as you just discussed. I mean, there are a lot of factors right now that would auger [ph] for folks to be -- I guess it could be easy to lose money in this business pretty faster when not pay attention to price on a real time basis, understanding the fact that there's a lot of moving pieces here that are moving in a volatile fashion. And as you said before, with your central location, a lot of this volatility plays into your strengths.
We think so and that's not by accident. As you mentioned, when you see all the cost are up, everything you mentioned is up a little here and there, whatever and you see the volatility in copper. I think we started off January around $325 [ph] million or so, you bounced around and just can't get too excited. On the upside you can't panic, on the downside if copper starts moving because about the time you get comfortable with the bias one way or the other, not a trend any longer, it turns. And all these years or whatever, I can go back into thinking of things. But it's really not as dependent on copper as most people that we compete with thinks it is. I'm not saying everybody runs their business that way and I don't pretend to know in detail what they're doing, but you get it down day in copper of $0.03 or $0.04, that doesn't necessarily correlate with the lower sell price on building wire -- and I don't want to go too far to that because I can see there are some attorneys on the call if you look at the screen.
The point is the volatility, we've dealt with it in the past, we have a history, have a track record, all those things and as I stated in my prepared comments, we have the best people in the industry -- no question and we know what we're doing. This is what we do. We do building wire. We're not in a bunch of other items categorically. Folks are working hard doing what they're supposed to do, I'm sure across the industry, but this is what we do, Brad. We live with this volatility and then if you look at the month average, it's not as topsy-turvy as within the month. But again, we've got good strong demand right now for the product and regardless of what copper is doing, those job sites, they need building wire. Folks on the service and delivery and potentially charging a little bit of a premium here and there when it's available -- I'd love to gauge [ph] if possible. All those things are in play right now and again, business is good. It's not running over us, but business is good.
I appreciate that color. Daniel, could you just amplify just in terms of with how tight the trucking market is -- the truck load market is today? How big of an advantage does that create for Encore in the marketplace?
What happens, a truckload shipment is our goal. In just the Dallas market alone, there are statistical evidence to show that there is 40 or 50 loads of material in this market each day for every truck that's available. You couple that with seasonal industry-type influences in the trucking market -- for example, produce out at South Texas, that there's a vacuum. Trucks can't wait to get down there and haul. Since January, really, a lot of things have changed in that trucking industry. Rules, regulations, whatever came in to effect and there's just not enough trucks for all of the materials that need to be moved around the country. So the competition for those carriers as you can imagine gets a little crazy and then throw into their -- tires are more expensive, driver training, lack of drivers is a huge issue right now. It's not necessarily just the expense on a per mile basis as much as it is availability of the equipment itself. Companies that manufacture trucks and trailers, working seven days a week and people are ordering trucks and ordering trailers, it's chaotic at times but our culture and our approach here on how we treat our vendors including carriers and trucking companies and what have you, we're getting their best attempt to services because we don't mistreat them. We are demanding obviously and we want the value, but the rate of the truck itself on delivery is not important if the step doesn't get delivered.
So in all of that, it's tight. We probably could load a few more trucks each day. I think the effect to put a percentage on it would be somewhere between 5% and 10%, more trucks each day, but we push that to the next day which falls into the weekends. We're loading materials seven days a week, 24 hours a day and fighting the battle on that side, but it's not something that just happened. We've been doing this for a while now and it kind of comes and goes, but this one seems to have a little more staying power because we're not the only company in town that's busy.
Appreciate that. It sounds like that the trucking tightness is almost as important as copper input prices right now in maintaining some discipline on the spread on the marketplace. While it's a challenge, it's probably a different profitability. Thanks a lot, Daniel. I appreciate it.
You bet. Good point and great questions. Thanks, Brad.
Thank you. And our last question comes from Julio Romero. Please go ahead, your line is open.
I had a quick follow-up here on the aluminum side. We saw the Prysmian close on general cable back in June. Just can you comment on what you're hearing from your customers in regards to industry impact? And if we can assume that they become rational in pricing, when does that impact of a firmer industry pricing flow through to your business?
Boy, that's a loaded question, a bunch of good ones.
Yes.
When are they going to get their stuff together? That's a great question. I don't know to what extent that they don't have it together, but from an industry perspective, not singling anyone out, there has been some obvious in the news, discussions about aluminum being dumped, tariffs, whatever. All of that. Aluminum building wire is a big part of that. Everyone in our industry has been affected one way or the other if they were in the category of cheaters and bringing again and assisting with the dumping, that is being addressed. If they're in the category of manufacturing here and distributing here, that's also being assessed and addressed. So specifically to one company or the other, categorically, that's really where it's at. I'm not even going to tell you that one particular manufacturer is guilty over the other one. I think what has been well-reported in the news and well-documented and what have you is the stuff that's imported is coming in in my opinion at an unfair -- whatever, fill in the blank.
The commerce department is working on things and our industry, trade associations, I'm sure are working on remedies and we're assessing as I mentioned our own remedies and [indiscernible] as and when appropriate. But I can't tell you, Julio -- I consider Prysmian to be a good competitor, Jun Cable [ph] has always been a good competitor in that market for the most part, so I don't have enough insight to speak to. They've done something that others haven't. I think they're probably similar to what's happening overall in the industry. You react as best you can to the market conditions and you want to get in the condition that it's in today, you've got to seek some other remedies and I think that's we're at.
Got it. Appreciate the color. Thanks, Dan.
You bet. Thanks, Julio.
Thank you. We have no further audio questions at this time.
Okay, Zenera. Thank you for paneling the call for us. I think it went really well and I look forward to seeing you guys and talking to you folks next quarter.
Thank you, Daniel, and thank you ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.