Despite persistent tightness and 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 on 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. Also want to thank our shareholders for their continued support. Jack, we’ll now take questions from our listeners.
Operator: Certainly. [Operator Instructions] Christopher Moore with CJS securities. Your line is open.
Christopher Moore: Hey, good morning, guys. Congratulations on another strong quarter. Thanks for taking a few questions.
Daniel Jones: Hi Chris.
Christopher Moore: Good morning. So maybe just we’ll start with gross margins. Obviously, where they normalize is kind of the key question. Fiscal 2024 consensus targeting gross margins right around 20%. So maybe two questions here. Is the 15.2% gross margin in fiscal 2020, is that a reasonable base to work off of?
Daniel Jones: It’s a great question, Chris. And welcome to the call. I’d answer it this way. If you go back late in 2019, but mainly throughout 2020, we made some financial and operational changes that improved realized gross margin and moved it from 13% in 2019 to, I think 15.2% in 2020. I will say this, I don’t believe the annual impact of the changes implemented in 2020 were fully reflected in the 15.2% margin for that year. And then with margins jumping to 33.5% in 2021, 36.9% in 2022 and 26.9% year-to-date in 2023, it’s kind of masked the annualized impact of some of those changes we made in 2020. I think it’s a great baseline to start with. I just wanted to put a little clarity around it. I will tell you that we continue to take things one order at a time, one day at a time, one week at a time, immediate order, immediate ship, always managing this business like our back is against the wall.
I also tell you this remains a pennies business, even when you’re picking up pennies in handfuls. We’re going to continue to put margin over volume and make sure that we’re serving our customers at the highest level. So I think it’s a great place to start. I just think there’s probably some noise in a number as well.
Christopher Moore: Got it. Very helpful. Maybe the second piece of that is just how long will it likely be before the gross margins normalize? I guess, specifically, what are the puts and takes that gross margins could bottom in fiscal 2025?
Daniel Jones: Yes, go ahead.
Bret Eckert: Yes, I was just going to say, Chris, add to that, when you look at the market segments that we’re serving, I mean, it’s no secret that the residential pieces bottom some. There’s a lack of inventory. There’s still some overhang, obviously, with the interest rate, but there’s still a lack of completion on some of the projects that have already been financed because of the supply chain issues with gear industrial steels contributing to that. There’s a lot of houses that are sitting incomplete at this point, and there’s slack in that market to begin with. The commercial market has been bumping along, doing very well, relatively speaking, and then the industrial markets got a pretty good boost. And then you have this overhang, if you will, of the government funding.
So in the markets that we’re serving, and if you couple that with the projected or future demand for our raw materials or the inputs, it’s obviously hard to predict what the margin is going to do or not do at this point, but it looks good going forward.
Christopher Moore: Got it. I appreciate that. And maybe just last one. Given the supply demand backdrop, copper pricing seems a little depressed at this stage. I just wonder if you had any thoughts there?
Daniel Jones: You’re exactly right, Chris. It absolutely is. And you hear from the miners as well. I mean, the fundamentals in copper are just not there, right. You have four days of supply above ground. That’s a vast improvement from the three and a half we were in July, right. And I’m being facetious here, it’s not at all. China is showing some signs of life, despite what you read. You see consumption and production going up there. So 360, 355, copper is just not representative of the supply today. Interest rate increases a stronger dollar, and some uncertainty around global sentiment is obviously playing a role in all of that. But that price has to move up. It’s just way too low. We like an environment where copper prices are moving up steadily.
That’s the easiest way to manage an order. And so, yes, it’s artificially low. The other thing you’re now hearing miners say, and you heard it recently even this week, that price of copper is not enough to incent them to cover the cost of capital it takes to invest. And so they’ll start focusing on some brownfield projects, but they’re slowing greenfield projects. You’re slowing that investment in the face of an already significant supply deficit. So something has to give with regard to that. And I think you’re going to eventually get some strength in the metal as things start to maybe level out a little bit in China, we get our handle on interest rates here. And then demand for all the electrification and grid hardening that’s out there really starts to take effect.
