Encore Wire - Q2 2023

Executive Summary

• Q2 2023 delivered resilient profitability despite spread normalization: revenue $636.5M and diluted EPS $6.01, down from $838.2M and $10.71 in Q2 2022 as average selling price fell 24.5% YoY; gross margin compressed to 26.1% from 38.3% YoY as copper spreads abated.
• Sequentially, revenue fell modestly vs Q1 ($660.5M→$636.5M) as price declined, partially offset by 10.4% higher copper volume; EPS declined to $6.01 from $6.50; gross margin 26.1% vs 31.1% in Q1.
• Balance sheet and capital return remained strong: $667.8M cash, no LT debt; 772,931 shares repurchased ($126.7M) and authorization topped up to 2.0M shares through Mar 31, 2024; dividend $0.02 declared.
• Management highlighted “ninth consecutive quarter of elevated margins,” near-record pounds shipped, and continued vertical-integration/capacity investments (XLPE facility expected substantially complete by end Q3’23) as the key drivers and forward catalysts.

What Went Well and What Went Wrong

• What Went Well

  • Near-record shipment throughput; demand “remained strong,” enabling high fill rates and service levels; “ninth consecutive quarter of elevated margins” despite normalization pressures.
  • Strong capital return and flexibility: $126.7M Q2 buybacks (772,931 shares) and authorization increased to 2.0M shares through Mar 31, 2024; $667.8M cash; no long-term debt.
  • Strategic capex on-track: XLPE compounding facility targeted substantially complete by end Q3’23; capex plan maintained through 2025 to deepen vertical integration and efficiency.

• What Went Wrong

  • Price-driven top-line and margin compression: average selling price per copper pound -24.5% YoY; gross margin fell to 26.1% from 38.3% YoY as copper spreads abated.
  • Sequential margin pressure: ASP -12.4% QoQ vs copper cost -5.3%, driving gross margin down to 26.1% from 31.1% in Q1.
  • SG&A elevated YTD by SARs expense vs prior year; YTD 1H23 SARs +$14.6M vs a $3.9M benefit in 1H22 (delta +$18.5M), weighing on operating leverage vs 2022.

Transcript

Operator (participant)

Hello, my name is Chris, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Encore Wire Corporation Second Quarter 2023 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you'd like to ask a question during this time, simply press star, then one on your telephone keypad, and to withdraw your question, please press star one again. Thank you. Bret Eckert, Executive Vice President and Chief Financial Officer, you may begin.

Bret Eckert (EVP and CFO)

Thank you, Chris. Good morning, and welcome to the Encore Wire Corporation quarterly conference call. I'm 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. In a minute, we will review Encore's financial results for the second quarter ended June 30th, 2023. After the financial review, we will take any questions you may have. Before we review the financials, let me indicate that throughout this conference call, we may be making certain statements that might be considered to be forward-looking. In order to comply with certain securities legislation, and instead of attempting to identify each particular statement as forward-looking, we advise you that all such statements involve certain risks and uncertainties that could cause actual results to differ materially from those discussed today.

I refer each of you to the company's SEC reports and news releases for a more detailed discussion of these risks and uncertainties. Also, reconciliations of non-GAAP financial measures discussed during this conference call to the most directly comparable financial measures presented in accordance with GAAP, including EBITDA, which we believe to be useful supplemental information for investors, are posted on our website. I'll now turn the call over to Daniel for some opening remarks. Daniel?

Daniel Jones (President, CEO, and Chairman of the Board)

Good morning, everyone, and thank you, Bret and Chris. 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 ninth consecutive quarter of elevated margins, despite 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've 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, we're pleased to have shipped a near-record number of copper and aluminum pounds in the second quarter. These results demonstrate a dynamic shift in volume shipped when compared to a pre-COVID baseline. Copper and aluminum pounds shipped in the second quarter of 2023 increased by 13% and 78%, respectively, when compared to the second quarter of 2019. We captured this incremental market share by leveraging our single-site, vertically integrated campus, deep supplier relationships, and strong employee base 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, set to come online late in the third quarter of this year. Since our inception, we've 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.

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. We believe that we have made and/or 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 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 ship 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 Q2 of 2023, and increased repurchase authorization. Since Q1 of 2020, our share repurchase program has returned $565.4 million in capital to shareholders.... and our continued purchasing demonstrates our confidence in long-term value creation potential of our company. With that, I'll now turn the call over to Bret to cover some financial performance indicated in the second quarter. Bret?

Bret Eckert (EVP and CFO)

Thank you, Daniel. Second quarter and year-to-date 2023 highlights include second quarter earnings per diluted share of $6.01. Year-to-date earnings per diluted share of $12.53. Second quarter net income of $104.7 million. Year-to-date net income of $224.2 million. Gross profit of 26.1% in the second quarter of 2023, 28.6% year-to-date in 2023. Cash on hand, $667.8 million as of June 30th, 2023. That compares to $730.6 million of cash on hand as of December 31st, 2022. Capital expenditures amounted to just under $75 million in the first half of 2023.

We repurchased 772,931 shares during the second quarter, and 1,475,409 year to date in 2023. Total cash outlay for share repurchases of $126.7 million during the quarter, $253.8 million year to date in 2023. In June of 2023, the board of directors increased the repurchase authorization back up to a full 2 million shares of our common stock through March 31st, 2024. In a departure from previous calls, I am not going to read you the earnings release, but instead highlight a few key points. Copper unit volume increased 1.3% in the second quarter of 2023 versus the second quarter of 2022, despite a very tough comp in the prior year quarter.

Aluminum wire represented 14.4% of net sales in the second quarter of 2023, compared to 15% in the second quarter of 2022. Copper unit volume increased 10.4% in the second quarter of 2023 versus the first quarter of 2023. The decrease in net sales 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 second quarter of 2023, as I said, was 26.1%. That compares to 31.1% in the first quarter of 2023.

The average selling price of wire per copper pound sold decreased 12.4% in the second quarter of 2023 versus the first quarter of 2023, while the average cost of copper pound purchased decreased 5.3%. This resulted in the gradual abatement of copper spreads in the quarter, primarily driven by the decrease in average selling price noted above, which resulted in the decreased gross profit margin in the second quarter of 2023 when you compare it to the first quarter of 2023. We believe the earnings for the first half of 2023 were exceptional and remain significantly above historical levels. This is a testament to our organic growth strategy, one location business model, historic, recent, and other 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 second quarter of 2023. This marks the ninth consecutive quarter of elevated margins and spreads. 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 repurchased 4,447,686 shares of our common stock at an average price of $127.11, for a total cash outlay of $565.4 million.

As previously stated, in June 2023, the board of directors increased the repurchase authorization back up to a full two million shares of our common stock through March 31st, 2024. We also declared a $0.02 cash dividend during the quarter. 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-link polyethylene XLPE 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, wind and solar applications.

As Daniel mentioned, we anticipate the new facility will be substantially completed by the end of 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 $74.7 million in the first six months of 2023. We expect capital expenditures to continue to range from $160 million-$180 million in 2023, $150 million-$170 million in 2024, and $80 million-$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 (President, CEO, and Chairman of the Board)

Thank you, Bret. Our strong performance in the first half 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, which will be 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 a competitive advantage, giving us unmatched operational agility and speed to market in serving our customers' evolving needs.

Despite persistent tightness in the availability of certain raw materials, our supplier partners continue to deliver on their commitments to Encore. We wouldn't have this level of success without the consistent, exceptional performance of our long-term suppliers. 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. I remain confident in the strength of the Encore team in place as we stand ready to navigate any challenges that lie in our path. I want to close by thanking our employees for their hard work and commitment to safety, quality, and excellence. Our continued success would not have happened without their outstanding contributions. Our strong financial results have allowed 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. Chris will now take questions from our listeners.

Operator (participant)

Thank you. As a reminder, if you would like to ask a question, that's star, then one on your telephone keypad. Our first question is from Julio Romero with Sidoti & Company. Your line is open.

Julio Romero (Senior Equity Research Analyst)

Thanks. Hey, good morning, Daniel and Bret.

Bret Eckert (EVP and CFO)

Good morning.

Daniel Jones (President, CEO, and Chairman of the Board)

Yep.

Julio Romero (Senior Equity Research Analyst)

Wanted to start with maybe aluminum. The spreads in aluminum seem to be diverging a little bit from what copper's doing. If you could maybe just touch on that, talk about demand for aluminum. Are there changes in buying patterns from customers, and are imports maybe ramping up there?

Daniel Jones (President, CEO, and Chairman of the Board)

You want to take this, Bret?

Bret Eckert (EVP and CFO)

You know, on the spread, Julio, you know, as we said, aluminum margins, I think, really peaked in the fourth quarter, October or November of 2022. You know, in a period in which you had copper margins starting to abate, you know, in June of 2021, right? Aluminum was still going off. Now you've got them abating as well. You saw that continue in the first quarter into the second. You know, there are a lot of imports. If you look at inventories in the U.S., there's quite a lot, a lot of aluminum that is imported in, a lot of it coming from India. A lot of that inventory is dislocated a little bit. You know, it's out of market probably by $0.25, $0.30, $0.40 from where the price is today.

You know, that has an effect on it as you manage through it. You know, you know, I think the normal or the gradual abatement is just something you're now seeing on the aluminum side that you didn't see before, which is a little new, but, you know, it's abating, kind of, consistent with what we saw from a copper perspective. You know, it's running consistent, and I expect those opportunities looking forward to be good on the aluminum side.

Julio Romero (Senior Equity Research Analyst)

Okay, that's really helpful there. Then just, could you give us a quick refresher on why copper spreads peaked in 2021 and aluminum were later in the fourth quarter of 2022?

Bret Eckert (EVP and CFO)

Yeah, it's just the timing a little bit. You know, aluminum was a catch up. You got to think about, you know, that when you, when you got into the pandemic and everything that was going on and all the strain it took, the impact it had on labor, right? Everyone's chasing 50, 60, 100 different raw materials, right? You know, the chance to do any value reengineering potentially on a project, there was no time to do it. If it was built with copper, it went with copper, right? There was a lot of tightness on that copper side, which we talked about. As things sort of started to settle, you had certain projects, particularly with the run-up in copper, that started to get planned at the front end, right, to be done with aluminum, right?

Instead of value reengineering, they just leaned in. As they shifted towards that, there was such tight availability, we all knew China was shut down, you know, aluminum was very, very tight, and that kind of lagged a little bit from a copper perspective. Then it ebbs and flows as you go through it. You know, copper prices came down. Those projects started going back to being designed on the front end with copper in mind. It's somewhat traditional ebb and flow, but it did get accelerated a little bit or affected a little bit just by the timing of when the pandemic hit and how projects were planned going into it.

Daniel Jones (President, CEO, and Chairman of the Board)

You also had some volatility, Julio, in aluminum that normally remains just in the copper side, on the metal piece. You know, if you look at Q3 or Q2 specifically, you've got as much as $0.10-$0.12 a pound on aluminum of volatility within each month. The overall bias, obviously, or trend, was from the maybe a $0.08-$0.10 swing on the downside. That moves the aluminum piece, also, when the volatility is there, it's normally not. You look at the copper piece, you know, within Q2, you had, you know, as much as a $0.50 swing on COMEX, on the copper side. Overall, you know, the low from one month to the next was as much as $0.26 a pound.

That type of volatility, you know, within a short 90-day window with deliveries, the way that they've been, and with the just-in-time service model, it really puts pressure, you know, from the actual confirmation of any kind of price increases. You know, also, the positive piece of that is June firmed up as compared to April and May, and we were seeing a lot better stability toward the end of the quarter.

Julio Romero (Senior Equity Research Analyst)

Got it. That's certainly good to hear. Can you maybe talk about fill rates, where you guys are with fill rates today and maybe where competitors' fill rates would be at, just ballpark for them?

Daniel Jones (President, CEO, and Chairman of the Board)

Yeah. I mean, we're in the high nineties. We prefer it to be 100. We've got 1 or 2 percentage points on the fill rate to make up. We are shipping fantastically quicker than what we were. Some of the added capacity and incremental capacity that we've added the last several months is certainly paying off from that in that respect. You know, as Bret mentioned earlier in his prepared statement comments, when you look at the where the product that we're shipping is going, there's more of a time to be received that feeds into our product category real well and fits the quick ship and complete ship, you know, model real well.

Again, with the volatility in the metal, you know, there's maybe anxiety from the purchasing perspective on releases or whatever it might be, but we did see that, you know, get quite a bit better in the end of Q2, once the metals kind of firmed up, which allows us to execute and perform on that service model. As far as what the competitors are doing, we've got one, maybe two out there that do a fantastic job. They, they come in a little bit short of where we are, but they're doing a good job. There's a handful of those that are a little more optimistic and not so great on the execution.

Julio Romero (Senior Equity Research Analyst)

Really helpful color there. Just last one is just on the buyback, with the board reauthorizing the repurchase. You know, should we expect any change with the pace of repurchases you've done in the first half of the year?

Bret Eckert (EVP and CFO)

Well, we've been, if nothing else, we are consistent. You know, the buyback was $126.7 million in the second quarter, and $127.1 million in the first. That was not planned, but, you know, definitely pretty consistent between the two, north of 700,000 shares. You know, I think you can take what you'd want, you'd expect to take from the board coming out and refilling that bucket back up to a full $2 million.

It's consistent with what we did in August of last year, second year in a row, where we bought back about $1.1 million in the first six months of last year, almost $1.5 million in the first six months of this year. You know, looking at the price of the stock today, we remain undervalued, so.

Julio Romero (Senior Equity Research Analyst)

Understood. Well, I really appreciate you guys taking the questions. I'll hop back in queue.

Bret Eckert (EVP and CFO)

Thank you, sir.

Daniel Jones (President, CEO, and Chairman of the Board)

Thank you.

Operator (participant)

That's star one, if you'd like to ask a question. The next question is from Brent Thielman, with D.A. Davidson. Your line is open.

Brent Thielman (Managing Director and Senior Research Analyst)

Hey, thanks, Daniel, Bret, good morning. I guess first, just on the spreads, any specifics on the spread change year-over-year or quarter-over-quarter? I guess, Daniel, anything you can speak to in terms of the abatement of spread during the quarter? Was it even across the months? Was the exit rate sort of better or worse? I guess also to that point, you know, is the abatement in spreads consistent across the product categories, or is it kind of all over the map, depending on where the demand environment is?

Daniel Jones (President, CEO, and Chairman of the Board)

It's really kind of all over the map, but it was better toward the end, in our favor, towards the end of the quarter. The volatility within April, you know, $0.28 or $0.29 from COMEX on the copper side. Then, you know, right behind that, there was no real security, you know, with a $0.07 or $0.08, maybe $0.10 swing, within the month for aluminum. Then, you know, you came right back with May, with similar type volatility on those metals. The timing of when those metals hit and the timing of when something is shipped and invoiced contributes to that abatement, in one direction, obviously, and then, kind of halfway takes care of itself and cures itself on the other side.

With that volatility and with the uncertainty, within the month, it moves the timing of some of the larger projects. Like I said, once you get better clarity, if that's, you know, not too strong of a term to use, but if you can get some clarity on the metal piece, on the purchasing side, you know, you got to fold that into all the noise that you hear in the news and geopolitically, you know, all of the different programs that the government is putting in place. You know, Bipartisan Infrastructure Law, the Inflation Reduction Act, CHIPS and Science Act. You know, there's a slew of them.

There's eight or 10 government projects. As you're navigating through this volatility and trying to get confirmation of what the actual rules are, you know, confirmed as these, you know, programs come out from the Feds, it really just contributes to that volatility and uncertainty. Folks are less anxious to pull the trigger, as you can imagine. It did firm up. It looked better toward the end of June, as I said, in our favor. You know, I look for with the, you know, bullish outlook on copper specifically, can't believe it'll stay this low for very long with the demand numbers that are out there. As you know, that typically forces demand in our market.

Bret Eckert (EVP and CFO)

Hey, Brent, I'll.

Brent Thielman (Managing Director and Senior Research Analyst)

Okay.

Bret Eckert (EVP and CFO)

jump on that. One thing I, as Daniel said, during the second quarter, and it's not unusual, you're coming out of the first quarter, and you're rolling into the summer months. You know, we did see demand kind of start a little slow, and then it just steadily increased throughout the quarter. As we said, culminating with near record volumes across most of our market segments in June. June was super strong. You like to see, you know, that trailing month, you know, growing as you come through it, and it's all the same things that we talked about. You know, we're still seeing some distributors that are kind of sitting in that cost-cutting mode.

You know, they're making those inventory reductions like we talked about in the first quarter. That aligns very well. It makes us a preferred supplier due to our fill rates and quick shipments, so that positions us well from that standpoint. You know, the electrical contractor community still, from what we can hear, remains optimistic about the short- and long-term market opportunities, and so we continue to make the investments to be able to handle that incremental volume.

Brent Thielman (Managing Director and Senior Research Analyst)

Okay. Brad, again, on the specifics in the spread change year-over-year, quarter-over-quarter, didn't see that in the release. Are you providing that?

Bret Eckert (EVP and CFO)

We didn't. You know, when you look at it, Brent, you know, the challenges are, and the abatement is happening at the top line, right? It's what we expected, and it's what I talked about in the first quarter. There's only two things that can change. It's either you're not getting as high of a sale price, or you're not able to pass your costs on, right? When you look at the comparison, whether or not it's quarter-over-quarter or sequential, right? Look at the change in the average sales price, and you look at the change in our costs. Now, it's not linear, but, you know, some drop in that sales price is associated with the decrease in copper and aluminum costs that we saw in the quarter, and some is the abatement, right?

That's, you know, when you navigate through this demand starting to catch up, people starting to catch up a little bit more, still dealing with supply issues and with labor issues, that's that gradual abatement you're seeing at the top line. That, it hits you a little bit harder, right, as we talked about. You know, if you're making up complete numbers, but 50% of 100 is different than 40% of 90 or 45% of 90. That's the math that you have as you go through this. It's all the same things we talked about. It's gradual. It really depends on the product or the mix, how many steps it takes to make a finish good, and how quickly you need it.

And all those are drivers, ultimately, in trying to get the best price we can for that product on that order. You do that all day, every day.

Brent Thielman (Managing Director and Senior Research Analyst)

Okay. I appreciate all that. I think this dovetails on some of the comments about, I guess, spreads firming up in the end of June, but I guess with copper prices moving up here, is that better or is it worse for your spreads in this environment where it seems like demand is really good, but you're still seeing some level of normalization from kind of really high pricing levels from a couple of years ago?

Daniel Jones (President, CEO, and Chairman of the Board)

Yeah. We always do better in an increasing copper market. Forces discipline, cleans up a lot of the issues that exist on the downside. It's just much better, much cleaner, operating in a bias or a trend on the upside for the metals. Aluminum also.

Bret Eckert (EVP and CFO)

It's always been that way, Brent. The team does a fantastic job at how we source raw materials. The increase in cost is it's easiest to pass on to customers. If you do nothing, if you kept your margin flat, again, as I talked about, you get that same margin on a higher top line, which adds to the bottom line.

Brent Thielman (Managing Director and Senior Research Analyst)

Okay. Okay, helpful, guys. How should we think about the outlook for volumes? Because, again, it seems like a really good demand environment. I know you have some initiatives coming. Which I presume maybe unlocks some capacity for you. Again, you have some pretty tough comparables in the second half of the year. I just wanted to get a sense of how you're thinking about kind of volume equation going forward.

Daniel Jones (President, CEO, and Chairman of the Board)

You know, June was a good solid month in volume. Residential was stronger for us than expected in June. The commercial piece is holding its own. We still have the industrial piece that's moving. We've got, you know, as I mentioned earlier, there's quite a few dollars being thrown at the industry by the government on these programs that are coming out, that we're still sorting through what the requirements are for Build America, Buy America. You know, what qualifies for Infrastructure Investment and Jobs Act? There's a lot of projects in front of us, the hardening of the grid on the utility piece, the renewable side on the electric vehicle, the NEVI that's coming from the feds. There's quite a few projects being promoted very heavily today from the government.

That, you know, leads over into the distribution side of the product for us. As these things continue to get sorted out and folks qualify and realize what the projects are and what they're not, you know, we'll start to monetize some of those and execute as we do and turn those things into earnings. It's more. I think there's close to $1 trillion in programs that, you know, there's some overlap to our product categories. As we continue to sort those out and work with our distributor partners and end users, on what that means for us, we'll know more as it goes. The outlook for us is, you know, pretty bullish at this point.

Brent Thielman (Managing Director and Senior Research Analyst)

Okay. Daniel, I mean, are you capacity constrained in certain areas where, you know, some of these capital expenditures initiatives you've got internally need to come on to allow some more robust growth in unit volumes? I'm just trying to think about that.

Daniel Jones (President, CEO, and Chairman of the Board)

Yeah, there's a few areas, you know, where we run pretty close, and we're running seven days a week in some areas, and other areas we're not. We've been pretty open with the expansions that we're doing, and we, you know, obviously address bottlenecks as they come up and invest when we have the clarity on what's coming. We don't always, you know, try to just handle the moment that we're in. We're gonna be ready going forward. The timing of some of the projects, CapEx projects, couldn't be better for us. Yeah, we've addressed those bottlenecks and continue to address them. You know, you know how we're focused on the execution piece, and we're going to continue that.

Brent Thielman (Managing Director and Senior Research Analyst)

Okay, just a couple cleanups. Bret, do you have the LIFO impact this quarter? Also, any impact to SG&A in the stock appreciation rights that you saw last quarter that played into this quarter?

Bret Eckert (EVP and CFO)

Yeah. Great question. Two things on the LIFO side, you know, and again, you know how it works, right? It's just matching, right? Whenever you have a period in which copper is falling, right, you're going to have a LIFO pickup, but it's only matching. It's just a system thing. It's just matching current cost with current revenues. LIFO, with the falling copper, was about $18.6 million in the second quarter of 2023 versus about $11.5 million in the second quarter of 2022. That's captured in the spread in the margins ultimately, that you're talking about. As far as SG&A, you know, the main driver in, you know, the second quarter was just more on the top line. As it decreases, your commission number comes down.

SG&A, the big hit for the SARs was really in the first quarter. you know, the stock price, when you look at it changed $0.60. It was $185.33 at the end of March and $185.93 at the end of June. The big swing was from the $137 it was at the end of December. you know, the $18 million impact, gross that you saw in the first quarter obviously is the same gross that you saw for the six-month period. you know, that's, what, $0.85 on a year-to-date basis.

Brent Thielman (Managing Director and Senior Research Analyst)

All right, guys. Thanks for taking all the questions. Really appreciate it.

Bret Eckert (EVP and CFO)

Thank you, sir.

Operator (participant)

The next question is from Alfred Funai with Barga, LLC. Your line is open.

Alfred Funai (President)

Good morning. Thank you for taking my questions. Just in interest of disclosure, no, I am not a securities analyst. I am an investor in Encore, so I'm a friend. My question, though, is a follow-up to what Bret was explaining in terms of some of the unusual, well, not necessarily unusual, but some of the mechanics behind the LIFO adjustments. If you had to characterize the second quarter in relation to the first quarter, you don't see anything unusual then in terms of contributing to the margin erosion for that period because of LIFO adjustments?

Bret Eckert (EVP and CFO)

Because you're just, you know, because we ship our products so quickly, right? It's very self-serving, Alfred, right? Because I know our margin when I take that order and what I think systems costs are, but I only know it for that very point in time. I know what's going to happen the next day, copper and aluminum is going to move... and my cost structure is going to change. The quicker I can ship that order, the quicker I lock in that margin, you know? You know, that's one of the things that we've always focused on with regard to our order fill and getting these orders out very, very quickly, because it is self-serving from that standpoint, even though it's great from a service perspective for customers. That change you see because of it, right?

You're costing everything based on, you know, averages from the previous month, because you don't know what your average is going to be for that month, right? Even though you're selling at the higher spot or average on any given day, any given order, you don't know what your ultimate cost is. At the end of the month, once you know your cost for the month, that LIFO is just to catch that up, to catch up what you were selling at, you know, on every single order, every single day. It's a more of a balance sheet impact. It really does not have any impact on the income statement. It just matches current costs with current revenues, matches how we're selling every single day, and it just gets it right. If you could collapse it, you'd never see it.

If you could do it real time, it would come up with the same result.

Alfred Funai (President)

The reason for asking is there was a comment by Ernst & Young in the audit report, or their opinion, in terms of a matter of emphasis, having to observe that it was challenging for them to follow some of the computations for the LIFO adjustment. I just didn't know if perhaps the second quarter had unfortunately been impacted by perhaps some catch-up adjustments or something of the sort that might be out of the ordinary that would contribute to the lower margin you saw in the month. I think you've explained, no, there's not, but that's the reason for asking the question. I will.

Bret Eckert (EVP and CFO)

Yeah.

Alfred Funai (President)

follow up with another question. The McKinney area obviously was hit by some very unfortunate weather over the past couple of months. Did you have any unusual expenses that were recorded, the cost of sales for roof repairs or any type of, damage replacement of that sort that might have impacted that margin?

Bret Eckert (EVP and CFO)

No, sir. No. Really, the SG&A, you know, the only thing that's gonna change SG&A in any of the quarter is we talked about the stock. The stock comp, which has mainly been driven by the stock appreciation rights, which are variable accounting, not fixed, but we haven't issued any of those since January of 2020. You know, commissions stay at a consistent %, but that changes obviously with your top-line change. Freight. You know, freight's starting to level a little bit. It's really starting to come in with where it was in the middle of the pandemic, and so truck availability is better. Rates are starting to come in a lot better as you manage through it. Nothing unusual to report.

Alfred Funai (President)

Okay. Finally, if I could ask, probably a taboo type question, does the company have any dialogue with these entities, individuals, or whatever they may be, that follow the pattern of shorting this company's stock? I'm just curious why there's such a large percentage of the company's stock that is shorted. Because Encore is an outstanding company in terms of its performance, yet obviously there are some that see opportunities to go the other way and try to make money with that mechanism. You know, is there a dialogue that you try to have with them to try to help make sure they understand the company better, maybe that might cause them not to be short sellers?

Bret Eckert (EVP and CFO)

Yeah, Alfred, it's a fantastic question. The answer is yes. You know, I take calls from every and all investor, and I've talked to a lot of them over the years, right? The challenge is a lot of those folks, they're just looking for volatility, right? They don't care if you go up or they go down, you go down. They just want to be on the right side of it. You know, when we grow our stock price from $40-$185 or $200, you attract attention. Some of that attention is good, some of that attention isn't good, right? There's always folks out there that think they're smarter than anyone else. We've talked about this story for two-plus years, that margins are abating. I mean, we've been crystal clear on that.

A bull is going to look at that and go, "I get it, and you're still doing fantastic." A bear is going to look at it and play the story against you. You know, earnings go down, and they say, "See, I told you so." We've been talking about that abatement, like I said, for several years on end. There's always ones that look at it. You know, hopefully, you convert those shorts to long as you go through this process. It's frustrating. You know, having a consistent buyback is helpful in this process, but at the end of the day, nothing beats execution at the end of the day. I share your frustration with the shorts. I think it's just a part of the market today.

You see it, and given our success, you attract a bit more of that, so.

Alfred Funai (President)

Well, thank you. You've answered my questions. You and Daniel and the whole team are doing a great job, and thank you for what you're doing.

Bret Eckert (EVP and CFO)

Thank you for your investment, Alfred. Appreciate it.

Operator (participant)

The next question is from George Tokarz, an investor. Your line is open.

George Tokarz (Director of Finance)

Guys, can you hear me?

Bret Eckert (EVP and CFO)

Yes, sir.

George Tokarz (Director of Finance)

Hello? Hey.

Bret Eckert (EVP and CFO)

Yes.

George Tokarz (Director of Finance)

You know, I bought the company, the stock, a couple of months ago, and I have to tell you, from an investor's point of view, I was just so impressed with the performance of the company and your staff and yourselves. I think you guys are just being a little hard on yourselves, you know, margin abatement. I mean, from what I understand, these were unusual margins that you experienced because of a supply and demand because of COVID. Would I be correct to suggest that you're simply going back to normal margins?

Bret Eckert (EVP and CFO)

Well, I think you're definitely gravitating down, George, as you go through it, right? The real question is, we're making a lot of investments in the business, right? You know, what everyone's trying to figure out is, where do you land on this, right? If you started this you know, journey and gross margin was 15.2% in 2020. You know, where do we go back to? That's with a lot of the investments that are out there. You got to look at the overall demand constructs and supply constructs, right? We do think, as Daniel may say to his comments, that we do think we can land and have historical I mean, current margins land at an area above what we saw historically, right?

Try to figure out exactly where that is. There's so many things at play here, right? Copper supply, you got 2.5 days above ground. It was 3.5-4 when we talked in the first quarter. You know, there was a recent meeting in New York that was represented by some of the largest mines globally, and those leaders landed on about a 6 million metric ton deficit per year in the near term, the next 12-18 months. I mean, to put it in perspective, that's like adding another Chile, who's one of your largest suppliers in the world. The deficit clearly sits there.

Demand that you're seeing coming in from data centers or AI, or electric vehicles, you know, the U.S. and global infrastructure upgrades are being pushed, semiconductors and CHIPS, onshoring battery plants, renewables, utilities. All that is really setting itself up to drive demand above and beyond some of those historical residential, commercial, industrial sources. All that, put it in a blender, hit pulse, right? You come up with the impact on the margin. I think we're trying to give a lot of transparency. Am I proud of $6 this quarter? Absolutely, right. You know, going from $3.68-$26.22 in 2021, to $36.91 in 2022.

You know, at $12.53, we're still having a fantastic year, and that's a little bit of the point, is new folks come in, recognize that these are elevated margins. They're coming back, and we're making a lot of investment in the business to try to keep it up, keep it as long as we can.

George Tokarz (Director of Finance)

Well, you guys are buying back the stock. You issued a dividend. You have potentially a absolutely wonderful horizon as far as copper, and I love your theme, the electrification of America. Now, do you guys hedge at all on your copper by any chance?

Bret Eckert (EVP and CFO)

No, sir. I do the best hedge there's out there, George, and that is you buy it and sell it in the same month, right? We buy it and change the shape and ship it within a month. I'm turning finished good inventories right now, 12 to 14 times. You know, we do not bet the company on our hedge with regard to copper. We just change the shape very quickly and ship orders as quick as we can, and you cannot beat that. There's no guessing in the market. You're just locking in the margin you thought you had.

George Tokarz (Director of Finance)

Excellent. Well, you Texas boys are doing really good, God bless you. Are you gonna make guidance for the rest of the year, do you think?

Bret Eckert (EVP and CFO)

We don't give guidance, George, you know, just because of all the things we talked about and the uncertainty in copper prices. I think if you go back and look at my comments and Daniel's comments, you know, when you look out on demand that's out there, you look at commercial side data centers continue to be a big driver. They're constantly going through reconfiguration. You kind of started with they were water-cooled, now they're going to air-cooled. You started with an H design, they proposed an X design that never got traction. They're now doing an F design, which is, you know, has the latest technology that uses the same number of servers in half the footprint, air-cooled, with a lot less energy consumption. You're gonna have more power in one building, I think, that's ever been done before.

You know, that process continues to drive it. That keeps things optimistic. You know, all this federal spending, and we got an election year coming up next year, it's still kind of mired up in all the politics you'd expect to be as you go through this. As that starts to kind of trickle down, as they figure out this Build America, Buy America initiatives, you know, we're super well positioned to be able to serve that, and that's why we're making the investments we're making.

George Tokarz (Director of Finance)

That's very exciting. Thank you very much for your commentary. I don't want to monopolize your time.

Daniel Jones (President, CEO, and Chairman of the Board)

Thank you, George. Appreciate the support. I'll see you soon.

George Tokarz (Director of Finance)

You betcha.

Operator (participant)

We have no further questions at this time. We'll turn it back to the presenters for any closing remarks.

Bret Eckert (EVP and CFO)

Chris, thank you. I appreciate everyone's time today and your investment in Encore Wire. You all enjoy the day.

Daniel Jones (President, CEO, and Chairman of the Board)

Yep.

Operator (participant)

This concludes today's conference call. You may now disconnect. Thank you.