Encore Wire Corporation (NASDAQ:WIRE) Q2 2023 Earnings Call Transcript

Encore Wire Corporation (NASDAQ:WIRE) Q2 2023 Earnings Call Transcript July 26, 2023

Operator: 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 speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Bret Eckert, Executive Vice President and Chief Financial Officer, you may begin.

Bret Eckert: 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 30, 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: 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 the 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 cost, increased capacity and deepened 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 faced in 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 on line 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 process 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 in 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 indicating second quarter. Bret?

Bret Eckert: 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 30, 2023, that compares to $730.6 million of cash on hand as of December 31, 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 31, 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 ‘23 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 period, 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%, and 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 a 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 remained 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 hard-working 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 remained 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 of 2023, the Board of Directors increased the repurchase authorization back up to a full 2 million shares of our common stock through March 31, 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 and 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 to $180 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 first half of 2023 positions us well for the future. Our outlook for demand remains strong, and our single-site and vertically integrated business model gives us a competitive advantage in the market today. The opening of a 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 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 the voice in the sector. I also want to thank our shareholders for their continued support. Chris, we’ll now take questions from our listeners.

Q&A Session

Operator: [Operator Instructions] Our first question is from Julio Romero with Sidoti & Company.

Julio Romero: I wanted to start with maybe aluminum. The spreads in aluminum seem to be diverging a little bit from what copper is 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?

Bret Eckert: Yes. So, on the spread Julio, as we said, aluminum margins I think really peaked in the fourth quarter, October, November of 2022. And so, a period in which you had copper margins starting to abate in June of ‘21, right, aluminum was still going up. Now, you’ve got them abating as well. So, you saw that continue in the first quarter into the second. There are a lot of imports. If we look at inventories in the U.S., there’s quite a lot of aluminum that is imported there, and a lot of it coming from India. A lot of that inventory is dislocated a little bit. And so, it’s out of market probably by $0.25, $0.30, $0.40 from where the price is today. So, that has an effect on it as you manage through it. And so, 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 it’s abating kind of consistent with what we saw from a copper perspective.

So, it’s running consistent, and I expect those opportunities looking forward to be good on the aluminum side.

Julio Romero: Okay. That’s really helpful there. And then, just could you give us a quick refresher on why copper spreads peaked in ‘21 and aluminum were later in the fourth quarter of ‘22.

Bret Eckert: It’s just the timing a little bit. Aluminum was a catch-up. You got to think about — 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, and everyone is chasing 50, 60, 100 different raw materials, right, the chance to do any value reengineering potentially on a project, there was no time to do it. So, if it was built with copper, it went with copper, right? There were a lot of tightness on that copper side, which we talked about. And so, 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? And so instead of reengineering, they just leaned in.

And so, as they shifted towards that — and there is such tight availability, we all knew China was shut down. And so, aluminum was very, very tight, and that kind of lagged a little bit from a copper perspective. And then, it ebbs and flows as you go through it. Copper prices came down, those projects started going back to being designed on the front end with copper in mind. And so, 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: We also had some volatility, Julio, in aluminum that normally remains just in the copper side on the metal piece. If you look at Q3 — or Q2 specifically, you’ve got as much as $0.10 or $0.12 a pound of aluminum of volatility within each month and overall bias, obviously, our trend was maybe an $0.08 to $0.10 going on the downside. That moves to aluminum piece also when the volatility is there, that’s normally not. If you look at the copper piece within Q2, you had as much as a $0.50 swing on Comex on the copper side. And overall, the low — from one month to the next was as much as $0.26 a pound. So that type of volatility 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 from the actual confirmation of any kind of price increases.

But 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: 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: Yes. I mean we’re in the high-90s. 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 in the last several months is certainly paying off from that — in that respect. As Bret mentioned earlier in his prepared statement — comments, when you look at where the product that we’re shipping is going, there’s more of a time to be received, it feeds into our product category real well and fits the quick ship and complete ship model real well. Again, with the volatility in the metal, there’s maybe anxiety from a purchasing perspective on releases or whatever it might be.

But we did see that get quite a bit better in the end of Q2 once the metal is kind of firmed up which allows us to execute, perform on that service model. As far as what the competitors are doing, we’ve got 1, maybe 2 out there that do a fantastic job. They come in a little bit short of where we are. But they’re doing a good job. And there’s a handful of those that are a little more opportunistic and not so great on the execution.

Julio Romero: Really helpful color there. And then just last one is just on the buyback with the Board for you authorizing the repurchase. Should we expect any change with the pace of repurchases you’ve done in the first half of the year?

Bret Eckert: Well, we’ve been, if nothing else, consistent. The buyback was $126.7 million in the second quarter and $127.1 million in the first. That was not planned, but definitely pretty consistent between the two, north of 700,000 shares. So, I think you can take that — you’d expect to take from the Board coming out and refilling that bucket back up to full 2 million. It’s consistent with what we did in August of last year. And so, second year in a row where we bought back really just short of 1.5 — we did about 1.1 million in the first 6 months of last year, almost 1.5 million in the first 6 months of this year. Looking at the price of the stock today, we remain undervalued, so.

Operator: [Operator Instructions] The next question is from Brent Thielman with D.A. Davidson.

Brent Thielman: I guess, first, just on the spreads. Any specifics on the spread change year-on-year or quarter-on-quarter? And I guess, Daniel, anything you can speak to in terms of the abatement of spread during the quarter? Was it even across the months with the exit rate sort of better or worse? And I guess also to that point, 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: It’s really kind of all over the map, but it was better toward the end — in our favor toward the end of the quarter. The volatility within April, $0.28 or $0.29 in Comex on the copper side. And then right behind that, there was no real security with a $0.07 or $0.08, maybe $0.10 swing within the month for aluminum. And then 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 incurs 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.

And then, like I said, once you get better clarity, if that’s not too strong of a term to use. But if you can get some clarity on the metal piece on the purchasing side, you got to fold that into all the noise that you hear in the news and geopolitically and all of the different programs that the government is putting in place Bipartisan Infrastructure Law, Inflation Reduction Act, CHIPS and Science Act. I mean, there’s a slew of them. There’s 8 or 10 government projects. And so, as you’re navigating through this volatility and trying to get confirmation of what the actual rules are confirmed as these programs come out from the Feds, it really just contributes to that volatility and uncertainty. So, 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. And I look for with the bullish outlook on copper specifically. I can’t believe it would stay this low for very long with the demand numbers that are out there. And as you know, that typically forces demand in our market.

Bret Eckert: Hey Brent, I’ll just jump on that. But one thing, as Daniel said, I mean, during the second quarter, it’s not a usual you’re coming out of the first quarter and you roll it into the summer months. We did see demand kind of start a little slow, and then it just steadily increased throughout the quarter. And as we said, come near record volumes across most of our market segments in June. But June was super strong. And so, you like to see that trading month growing as you come through it. And it’s all the same things that we talked about. We’re still seeing some distributors that are kind of sitting in that cost-cutting mode. So, they’re making those inventory reductions, like we talked about in the first quarter.

That aligns very well. It makes us a preferred supplier, do our fill rates and quick shipments. So, that positions us well from that standpoint. So, 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: Okay. And Bret, again, on the specifics on the spread change year-on-year, quarter-on-quarter, I didn’t see that in the release. Are you providing that?

Bret Eckert: We didn’t. When you look at it, Brent, the challenges are — and the abatement that’s 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 sale price or you’re not able to pass your costs on, right? And so 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 look at the change in our cost, that’s not linear. But 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? But that — when you navigate through this demand starting to catch up, people start 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.

And that hits you a little bit harder, right, as we talked about, making up complete numbers, but 50% of 100 is different than 40% of 90 or 45% of 90. And that’s the math that you have as you go through this. But it’s been — 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 the finished good and how quickly you need it. And all those are drivers ultimately and trying to get the best price we can for that product on that order. And you do that all day every day.

Brent Thielman: Okay. I appreciate all that. And 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: Yes. We always do better in an increasing copper market. Of course, this 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: It’s always been that way, Brent. And we do a really — the team does a fantastic job of how we source raw materials. The increase in cost is the easiest to pass on to customers. And if you do nothing, if you kept your margin flat, again, as I talked about, you get the same margin on the higher top line, which adds to the bottom line.

Brent Thielman: Okay. Helpful, guys. And then 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 unlock some capacity for you. But then again, you have some pretty tough comparables in the second half of the year. So I just wanted to get a sense of how you’re thinking about kind of volume equation going forward?

Daniel Jones: Yes. 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 — 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, 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 renewables side, 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 and that 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, 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 there’s some overlap to our product categories. And so, as we continue to sort those out and work with our distributor partners and end users and what that means for us, we’ll know more as it goes. But the outlook for us is pretty bullish at this point.

Brent Thielman: Okay. And Daniel, are you — I mean, are you capacity constraint in certain areas where 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: Yes. There’s a few areas where we run pretty close, and we’re running 7 days a week in some areas and other areas we’re not. But we’ve been pretty open with the expansions that we’re doing. And we obviously address bottlenecks as they come up and invest when we have the clarity on what’s coming. We don’t always try to just handle the moment that we’re in. We’re going to be ready going forward. The timing of some of the projects, CapEx projects couldn’t be better for us. And so, yes, we’ve addressed those bottlenecks and continue to address them. And you know how we’re focused on the execution piece. We’re going to continue that.

Brent Thielman: Okay. Just a couple of cleanups. Do you have the LIFO impact this quarter? And then also any impact to SG&A and stock appreciation rights that you saw last quarter that went into this quarter?

Bret Eckert: It’s a great question. So two things on the LIFO side, and again, you know how it works, right? It’s just matching, right? And so when you — whenever you have a period in which copper is falling, right, you’re going to have a LIFO pick up but it’s only matching — it’s just the system thing, it’s just matching current cost of current revenues. But LIFO with the fall in copper, it was about $18.6 million in the second quarter of ‘23 versus about $11.5 million in the second quarter of ‘22. But that’s captured in the spread in the margins ultimately that you’re talking about. As far as SG&A, the main driver in 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. The stock price, when you look at it, it changed $0.60. It was $185.33 at the end of March and $185.93 at the end of June. And so, the big thing was from the $137 it was at the end of December. So, the $18 million impact gross that you saw in the first quarter, obviously, is the same gross that you saw for the 6-month period. So that’s about $0.85 on a year-to-date basis.

Operator: The next question is from Alfred Funai with Barga, LLC.

Unidentified Analyst: Good morning. And thank you for taking my questions. And just for interest of disclosure, no, I am not a securities analyst. I’m an investor in Encore. So, I am a friend. My question though was 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 distributing to the margin erosion for that period because of LIFO adjustments?

Bret Eckert: No, because you’re just — the way — 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 on 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. So the quicker I can ship that order, the quicker I lock in that margin. And so, 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. And so, that change you see because of it, you’re costing everything based on averages from the previous month because you don’t know what your average is going to be for that month.

Even though you’re selling at the higher spot or average on any given day, any given order, you don’t know what your ultimately cost is. So, at the end of the month, once you know your cost for the month. That LIFO is just to catch that up, catch up what you were selling at on every single order, every single day. So, it’s 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. That is how we’re selling every single day and it just gets it right. If you could collapse it, you never see it. If you could do it real time, it would have the same — it would come up with the same result.

Unidentified Analyst: 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 observed that it was challenging for them to follow some of the qualifications for 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. But I think you’ve explained, no, there’s not, but that’s the reason for asking the question. So, I will 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 in the cost of sales for roof repairs or any type of damage replacement of that sort that might have impacted that margin?

Bret Eckert: No, sir. Really the SG&A — the only thing that’s going to change SG&A in any of the quarter is we talked about 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. And then, commissions stay at a consistent percentage, but that change is obviously with your top line change. And then freight. 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. So, nothing. Nothing unusual to report.

Unidentified Analyst: Okay. And then finally, if I could ask, probably a taboo type question, but does the Company have any dialogue with these entities, individuals, or whatever they may be, that follow the pattern of shorting the 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’s some that see opportunities to go the other way and try to make money with that mechanism. But, 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: Yes. Alfred, it’s a fantastic question. The answer is, yes. We — I’d say calls from every and all investor and I’ve talked to a lot of them over the years. 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. And so, when we grow our stock price from $40 to $185 or $200, you attract attention. Some of that attention is good, some of that attention isn’t good, right? And 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.

And a bull’s going to look at that and go, I get it. And you’re still doing fantastic, and a bear’s going to look at it and play the story against you. And so, earnings go down and they say, see, I told you so. And we’ve been talking about that abatement, like I said, for several years on end. So there’s always ones that look at it, hopefully you convert those shorts to long as you go through this process. It’s frustrating. 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. But 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.

Unidentified Analyst: Well, thank you. You’ve answered my questions. You’re doing — you and Daniel and whole team are doing a great job. And thank you for what you’re doing.

Bret Eckert: Thank you for your investment, Alfred. We appreciate it.

Operator: The next question is from George Tokarz, an investor.

Unidentified Analyst: Guys, can you hear me?

Bret Eckert: Yes, sir.

Unidentified Analyst: Hey. I bought the Company’s stock 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, 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: Well, I think that 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? What everyone’s trying to figure out is where do you land on this. If you started this journey and gross margin was 15.2% in 2020, where do we go back to? And that’s what a lot of the investments that are out there. And then you got to look at the overall demand constructs and supply constructs. Because we do think is, as Daniel said in his comments that we do think we can land and have historical — I mean, current margins land in an area above what we saw historically, right, and try to figure out exactly where that is. But there’s so many things at play here, right?

Copper supply, you got 2.5 days above ground. It was 3.5 to 4 when we talked in the first quarter. There was a recent meeting in New York that was represented by some of the largest mines globally. And they landed — those leaders landed on about a 6 million deficit, 6 million metric ton deficit per year in the near-term, in the next 12 to 18 months. I mean, to put it in perspective, that’s like adding another chili, who’s one of your largest suppliers in the world. And so, the deficit clearly sits there. Demand that you’re seeing coming in from data centers or AI or electric vehicles, 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.

And so all that, put it in a blender, hit pulse, right, and you come up with the impact on the margin. And so, I think we’re trying to give a lot of transparency. Am I proud of $6 this quarter? Absolutely. Going from $3.68 to $26.22 in 2021 to $36.91 in 2022. 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.

Unidentified Analyst: 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. Do you guys hedge at all on your copper by any chance?

Bret Eckert: No, sir. I do the best hedge that’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. And so, I’m turning finished goods inventories right now, 12 to 14 times. And so, 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 on the market. You’re just locking in the margin you thought you had.

Unidentified Analyst: Excellent. Well, you Texas boys are doing really good and God bless you. Are you going to make guidance for the rest of the year do you think?

Bret Eckert: Well, we don’t give guidance, George, just because of all the things we talked about and the uncertainty in copper prices. But I think if you go back and look at my comments and Daniel’s comments, 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 — has the latest technology that uses the same number of servers in half the footprint, air cooled, with a lot less energy consumption. I mean, you’re going to have more power in one building, I think that’s ever been done before.

And so, that process continues to drive it. That keeps things optimistic. And then, 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. And so as that starts to kind of trickle down, as they figure out this Build America Buy America initiative, we’re super well positioned to be able to serve that. And that’s why we’re making the investments we’re making.

Unidentified Analyst: That’s very exciting. Thank you very much for your commentary. I don’t want to monopolize your time.

Daniel Jones: Thank you, George. We appreciate your support.

Operator: We have no further questions. At this time, I’ll turn it back to the presenters for any closing remarks.

Bret Eckert: Chris, thank you. And I appreciate everyone’s time today and your investment in Encore Wire.

Operator: This concludes today’s conference call. You may now disconnect. Thank you.