Q4 2019 Encore Wire Corp Earnings Call

Feb 19, 2020 PM UTC 查看原文
WIRE - Encore Wire Corp
Q4 2019 Encore Wire Corp Earnings Call
Feb 19, 2020 / 04:00PM GMT 

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Corporate Participants
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   *  Bret J. Eckert
      Encore Wire Corporation - CFO, VP of Finance, Treasurer & Secretary
   *  Daniel L. Jones
      Encore Wire Corporation - Chairman, President & CEO

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Conference Call Participants
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   *  Brent Edward Thielman
      D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst
   *  Julio Alberto Romero
      Sidoti & Company, LLC - Equity Analyst
   *  William Baldwin
      Crescent Securities Group, Inc. - Analyst

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Presentation
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Operator   [1]
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 Welcome to the Encore Wire reports fourth quarter and full year 2019 results conference call. My name is Adrienne, and I'll be your operator for today's call. (Operator Instructions) Please note this conference is being recorded.

 I'll now turn the call over to Daniel Jones. Daniel Jones, you may begin.

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 Daniel L. Jones,  Encore Wire Corporation - Chairman, President & CEO   [2]
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 Yes, ma'am. Thank you, Adrienne, and good morning, ladies and gentlemen, and welcome to the Encore Wire Corporation quarterly conference call. I'm Daniel Jones, the President, Chief Executive Officer and Chairman of the Board of Encore Wire. And with me this morning is Bret Eckert, our Chief Financial Officer.

 Our business in the markets for our products remained strong as evidenced by a 4.1% increase in unit volumes in 2019 compared with 2018. The unit volume increase was achieved even though we continued to face vigorous competition in the marketplace. Despite the strong U.S. construction market and demand for building wire, margins were restrained by competitive pricing in the fourth quarter of 2019 versus the fourth quarter of 2018. Gross profit margins fell in concert with the drop in copper prices versus 2018's fourth quarter and full year basis, along with the competitive pressure noted above.

 One of the key metrics to our earnings is the spread between the price of copper wire sold and the cost of raw copper purchased in any given period. The copper spread decreased 11.2% in the fourth quarter of 2019 versus the fourth quarter of 2018, while decreasing 4.9% in the full year comparison. The copper spread contracted 11.2% as the average price of copper purchased decreased 2.8% in the fourth quarter of 2019 versus the fourth quarter of 2018, while the average selling price of wire sold decreased 5.8%. It should be noted that the spreads in the fourth quarter of 2018 were the highest in over a decade. However, we still believe the currently strong end markets can support those margin levels again.

 In aluminum wire, which represented 8% of our net sales in 2019, we successfully enforced our rights under the U.S. trade remedy laws. As a result of the International Trade Commission's final affirmative decision, U.S. imports of aluminum wire and cable from China will be required to pay anti-dumping duties at rates ranging from 47.83% to 52.79% plus countervailing duties at rates ranging from 33.44% to 165.63% depending upon the Chinese exporter/supplier.

 U.S. economy appears strong and as is construction activity. Based on discussions with our distributor customers and their contractor customers, we believe there is a continued good outlook for construction projects for the next year. We believe our superior order fill rates continue to enhance our competitive position. As orders come in from electrical contractors, the distributors can count on our order fill rates to ensure quick deliveries from coast to coast.

 We also have some exciting news to share about our expansion plans, but first, let's cover our financial results. Bret?

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 Bret J. Eckert,  Encore Wire Corporation - CFO, VP of Finance, Treasurer & Secretary   [3]
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 Thank you, Daniel. In a minute, we will review Encore's financial results for the quarter and year ended December 31, 2019. 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 make certain statements that might be considered to be forward-looking. In order to comply with securities -- 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.

 Now the financial results. Net sales for the fourth quarter ended December 31, 2019, were $302.3 million compared to $319.7 million for the fourth quarter of 2018. Copper unit volume, measured in pounds of copper contained in the wire sold, decreased 1.6% in the fourth quarter of 2019 versus the fourth quarter of 2018. The average selling price of wire per copper pound sold decreased 5.8% in the fourth quarter of 2019 versus the fourth quarter of 2018. Net income for the fourth quarter of 2019 decreased to $10.5 million versus $25 million in the fourth quarter of 2018. Fully diluted net earnings per common share were $0.50 in the fourth quarter of 2019 versus $1.20 in the fourth quarter of 2018.

 Net sales for the year ended December 31, 2019, were $1.275 billion compared to $1.289 billion for the year ended December 31, 2018. Copper unit volume, measured in pounds of copper contained in the wire sold, increased 4.1% in the year ended December 31, 2019, versus the year ended December 31, 2018. The average selling price of the wire per copper pound sold decreased 5.8% in the year ended December 31, 2019, versus the year ended December 31, 2018, more than offsetting the unit volume impact on sales dollars. Net income for the year ended December 31, 2019, decreased to $58.1 million versus $78.2 million in the same period in 2018. Fully diluted net earnings per common share were $2.77 in the current period versus $3.74 in the same period in 2018.

 On a sequential-quarter basis, net sales for the fourth quarter of 2019 were $302.3 million versus $321.2 million during the third quarter of 2018 (sic) [2019]. Sales dollars decreased due to an 8.1% unit volume decrease of copper building wire sold on a sequential quarter comparison. Copper wire sales prices increased 1%, while the price of copper purchased increased 1.4%. Net income for the fourth quarter of 2019 was $10.5 million versus $16.4 million in the third quarter of 2019. Fully diluted net income per common share was $0.50 in the fourth quarter of 2019 versus $0.78 in the third quarter of 2019.

 Our balance sheet remains very strong. We have no long-term debt and our revolving line of credit is paid down to 0. In addition, we had $231 million in cash at the end of the year. We also declared a cash dividend during the quarter. A replay of this conference call will be accessible on the Investors section of our website.

 I'll now turn the floor over to Daniel Jones, our Chairman, President and Chief Executive Officer. Daniel?

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 Daniel L. Jones,  Encore Wire Corporation - Chairman, President & CEO   [4]
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 Thanks, Bret. As we highlighted, Encore performed well in the past quarter and a full year basis. We believe we're well positioned for continued growth in the future.

 We also have some news to share about continued expansion plans, which we expect to proceed in 2 phases. Phase 1 will begin in the first quarter of 2020 with construction of a new 720,000 square foot facility located at the north end of our existing campus. This facility will act as a service center, modernizing our logistics to allow for increased throughput and provide the bandwidth necessary to capture incremental sales volumes. Phase 1 will allow us to compete at a higher level in the marketplace while further strengthening our industry-leading customer service and order fill rates. We expect to complete construction in the second quarter of 2021. Phase 2 of our expansion plans will commence following Phase 1 and will focus on repurposing our existing distribution center to expand manufacturing capacity significantly and extend our market reach. Phase 2 completion is anticipated in 2022.

 This is an exciting time for Encore's employees, customers and stakeholders. We've been under construction since inception. We continue to grow today. Our 2-phase expansion plans will extend our reach and increase manufacturing capacity to meet the growing needs of our customers. We anticipate total capital expenditures to range from $85 million to $95 million in 2020, $70 million to $90 million in 2021, and $60 million to $80 million in 2022. Our strong balance sheet and ability to consistently generate high levels of operating cash flow should provide ample allowance to fund planned capital expenditures.

 In closing, we announced yesterday that Don Courtney was retiring from our Board after 31 years of outstanding service. He will serve the remainder of his current term on the Board and will not stand for reelection at the company's 2020 Annual Meeting of Stockholders. We've identified an individual that brings diversity to our Board with more information forthcoming in our proxy filing in March. We thank our employees and associates for their tremendous efforts. We also thank our stockholders for their continued support.

 We'll now take questions from our listeners, Adrienne.

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Questions and Answers
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Operator   [1]
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 (Operator Instructions) And our first question comes from Julio Romero from Sidoti.

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 Julio Alberto Romero,  Sidoti & Company, LLC - Equity Analyst   [2]
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 As far as the fourth quarter, I wanted to ask if you have seen any inflation in many of your -- in any of your semi-fixed components such as labor, overhead or maybe on the cost of materials other than copper. And if so, were any of those kind of notable on a year-over-year basis?

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 Daniel L. Jones,  Encore Wire Corporation - Chairman, President & CEO   [3]
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 We had an increase in labor. It took us a few increase -- price increases to work that in and get that covered. But yes, labor was more expensive. We saw some increases in benzene. And then we also would have had -- something to a lesser extent, we had some increase in diesel fuel. There were some things that picked up in the quarter that we just weren't allowed really in the market to get those price increases to pass through.

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 Julio Alberto Romero,  Sidoti & Company, LLC - Equity Analyst   [4]
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 Okay. That's helpful. Kind of turning to the capital allocation and what you're doing there, I mean can you maybe talk about what that new service center does for you from a logistics standpoint? Are there any efficiencies that might be able to help you bring down costs? And if so, maybe what would those be?

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 Daniel L. Jones,  Encore Wire Corporation - Chairman, President & CEO   [5]
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 We're in the process now, obviously, of trying to finalize some of those numbers, but we're looking at turning the orders much faster than we currently are. Our fill rate's running right at 100% on a consistent basis and really tipping and turning and meeting the demands of the customers today in the field on a speed basis, on a reliability basis is what we have to have more room for. And obviously, Phase 2 will be as quickly as possible right behind it. Along with our consistent upgrades to existing equipment, we're going to add some capacity in the -- we're going to build a distribution center with more capacity.

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 Julio Alberto Romero,  Sidoti & Company, LLC - Equity Analyst   [6]
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 Got it. And any color on what the product lines would be that you'd like to expand capacity for, would it be something in the current portfolio or maybe something adjacent to what you currently offer?

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 Daniel L. Jones,  Encore Wire Corporation - Chairman, President & CEO   [7]
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 There will be some additions, but it will all be under the same umbrella. We're still consistently servicing the electrical distributor market, the requirements in the field for the speed and reliability piece the service center will address -- I mean additional capacity will give us some machine time and some flexibility to add some fringe products that come up from time to time on the job sites that are necessary from a service standpoint.

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Operator   [8]
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 And your next question comes from Brent Thielman from D.A. Davidson.

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 Brent Edward Thielman,  D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst   [9]
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 Daniel, I guess now that you're able to speak a little more openly about these investments, can you talk about why these were prioritized? There were other things you could be doing with the cash. And how do we start to think about the financial implications of this?

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 Daniel L. Jones,  Encore Wire Corporation - Chairman, President & CEO   [10]
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 Well, the market is demanding. Our service to our existing customer base is pushing us in this direction. There's no question. The speed and reliability piece that comes from the room to move and the services that are in addition to just the product itself that are required today to handle these accounts and some of the end user requirements that are coming in. We need more space to move. We're moving a lot faster with orders. You can see the finished goods turns that we're putting out. I like 12. 13, 14 is too fast. It's really a speed and reliability measurement to continue to compete and try to maintain that 1% or 2% premium that we shoot for in the marketplace. We weren't as successful in the fourth quarter as I'd like to have been, but we clearly have to have some bandwidth for speed and reliability on these end user job sites to continue to compete.

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 Brent Edward Thielman,  D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst   [11]
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 And do you think this could help you capture additional premium over what you've done historically? And also, do you think you can capture additional market share with this?

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 Daniel L. Jones,  Encore Wire Corporation - Chairman, President & CEO   [12]
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 We do. We think that if we continue to service the way that we're able to do and the improvements that we're investing in, we can potentially keep these things from going out to bid on an auction-type basis and maybe hang on to a point or 2. The market is changing. It's dynamically changing. There's only 2 things that sell building wire. I've said this for 30 years. It's price and delivery. And the price is the easy one. Anybody can cut the price. We're after the delivery side to kind of maintain a 1% or 2% advantage in the marketplace.

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 Brent Edward Thielman,  D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst   [13]
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 Okay. And are there pockets of the country -- I mean historically, I've always thought of Encore as able to hit really all areas of the country, but any pockets that you feel you're underpenetrated, this would allow you to reach a little further into?

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 Daniel L. Jones,  Encore Wire Corporation - Chairman, President & CEO   [14]
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 There is a couple of geographical areas that we don't do as well as we would like. And we have made some strategic changes in 2019 that should pay off for us in early 2020. And we are going to have to have that speed and reliability, access to some flexible machine time, access to some distribution and service times. I mean it's some of the unpredictable product category surprises, if you will, on some of these job sites that are not necessarily -- the planning and the volume that comes from, some of that is a little less predictable. So we're building in a way to support a couple of those areas that speed and reliability is not what it should be from our perspective. And so it will definitely help us in a couple of areas. I don't want to name them specifically, but there are 2. They're both top 5 or 6 consumers in the country area-wise. And so it will definitely help us.

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 Brent Edward Thielman,  D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst   [15]
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 Yes. Okay. And then just on the quarter itself, I mean looking at the average selling price down around 6% gross margins, a little softer. I guess it all kind of implies competitive conditions got pretty bad in this last quarter. Can you talk a little bit more about what happened, one bad actor, set of actors and what went on there?

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 Daniel L. Jones,  Encore Wire Corporation - Chairman, President & CEO   [16]
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 Yes. What we saw, Brent, is early October, first 3 or 4 days in October, we had COMEX at about $2.50 -- mid-$2.50s, $2.54, I think, is where it was. And then as it continued to rise historically, that's a fantastic event for us. We put the price increase out in front of that. We were able to do that mid-October in the low $2.60s, $2.63, $2.65 range on COMEX, and that was basically the last successful price increase that we were able to hang on to. And we ended up the month -- in October, COMEX was in the mid- to high $3.60s and we started off November around that range with price increases that didn't stick because it went from $2.60 to -- about a $2.60 number. You lose the ability to hold that price increase that was announced. And you go back to discounting at old levels and then it runs right back up into the $2.70 range.

 So you start the process over and put out a price increase announcement and roll into December in the low $2.60s, mid-$2.60s and around $2.70 and end up finishing up -- I think the December high was $2.86. You got -- so we got 30-some-odd cents of volatility from the first week of October to Christmas Day basically when everybody kind of stops the selling or what have you. And it really wasn't a volume issue as much as it was -- you just had cost right in your face going up on a consistent basis and just no traction on the price increases whatsoever. And I don't know that I should name 1 or 2 of the bad actors. I mean I think there's only 5 or 6 of us left in the industry really. But it was more of a timing, I think. I think it's more of a timing of the way the volatility in COMEX was hitting. You announced a price increase, and the day you announced it, you lose $0.06 or $0.07 a pound in COMEX. You just don't have the ability to hang on to that price increase.

 And toward the end of the year, there's some inventory maneuvering and posturing with maybe some of the folks in the market, what have you, for year-end programs or what it might be, but it was pretty brutal. And again, it was not relative to the feel in the market. The feel in the market is we're very busy and shipments are -- trucks are full and people are paying their bills on time. And it's -- we're in a busy time and that did not match the lack of discipline, if you will, in December. I mean at the risk of whining, when you look at COMEX going from $2.54 to $2.86 and you're able to get a 4%, maybe a 5% price increase in early October, that's just not the thing. That's unsustainable. It doesn't cover the cost and you catch the disease with the industry and you feel it needed. And that's kind of what happened in the fourth quarter.

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 Brent Edward Thielman,  D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst   [17]
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 That's helpful commentary. I appreciate that, Daniel. I guess my last one is, particularly as you think about this market, dialogue you have with your customers, contractors, distributors and so forth, how does the environment feel this year maybe relative to the last couple of years at this point? I mean does it feel like market is going to be pretty busy this year, busier than the last couple of years setting aside the -- your industry trends itself?

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 Daniel L. Jones,  Encore Wire Corporation - Chairman, President & CEO   [18]
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 It does. From the perspective that we have, we're spending more time and there's more dialogue back and forth with the end users and distributor partners on planning. It's matured well past the cycle of just checking 3 or 4 prices and you want the lowest one in the marketplace. Those days are hopefully behind us for the most part, but there's a lot more planning going into the job site itself. And as far as having the time frame from when you quote something or bid something to when it actually becomes an order, that's narrowed quite a bit.

 And so when you have those conversations ongoing and you invest some resources on the front end going into these massive jobs that are coming out of the ground, it's actually worth something today. In the past, it might be auctioned one way or the other. But through lack of service in the second half of 2019 specifically, we saw some real service issues in the marketplace, both quality and delivery and whatever. And so it got some people's attention, I mean, in the industry, and it did swing the pendulum a little bit in favor of the delivery side versus just the low price.

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Operator   [19]
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 (Operator Instructions) And your next question is from Bill Baldwin from Crescent.

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 William Baldwin,  Crescent Securities Group, Inc. - Analyst   [20]
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 A couple of housekeeping items here. Can you indicate to us what the LIFO situation was for the fiscal year 2019?

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 Bret J. Eckert,  Encore Wire Corporation - CFO, VP of Finance, Treasurer & Secretary   [21]
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 Sure, Bill. This is Bret. So LIFO was pretty much a nonevent. It was about a $500,000 decrease to cost of sales for the year.

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 William Baldwin,  Crescent Securities Group, Inc. - Analyst   [22]
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 Okay. And can you tell us, Bret, how much of your shipments went into the residential markets in the Q4 and for the full year?

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 Bret J. Eckert,  Encore Wire Corporation - CFO, VP of Finance, Treasurer & Secretary   [23]
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 Sure, Bill. So on a Q4 basis, it was just short of 21%. And then on a full year basis, it was about 21.8%, so pretty consistent.

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 William Baldwin,  Crescent Securities Group, Inc. - Analyst   [24]
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 Okay. Pretty flat.

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 Bret J. Eckert,  Encore Wire Corporation - CFO, VP of Finance, Treasurer & Secretary   [25]
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 For the year and the quarter.

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 William Baldwin,  Crescent Securities Group, Inc. - Analyst   [26]
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 Okay. And Daniel, how do you decide time-wise, plans to announce a price increase? Is that a function of copper -- mainly copper prices? Or is that a function of the day of the week? Or kind of what dictates the timing on announcement of a price increase?

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 Daniel L. Jones,  Encore Wire Corporation - Chairman, President & CEO   [27]
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 Yes, sir. A lot of the timing has to do with any type of cost, not just copper. But as you know, throughout the years, we'd love to just put a price increase out because we think we deserve it. Without the support of copper, COMEX is super visual in the market. As you know, without the bias or the trend on the upside on a consistent basis, they just don't stick. I could go back over the years and point out noncopper-related items that certainly helped. But for the most part, in general, you have to have a trend or a bias with COMEX. The days following the announcement of the price increase, we have -- it's a pretty quick mechanism to get that price increase visually accepted in the marketplace.

 But the actual execution of the orders for us -- I don't want to go too deep into this, but for us, we don't have forward pricing with folks unless it's an off-the-normal price sheet path in some manner. But for us, it's a daily situation. I mean we look at each day where we are. It has a lot to do with the market itself and intel in the market. As you know, there's 4 or 5 of us here, including me, that travel with customers quite a bit. We have customers into the office several a week and the discussions back and forth and whatever about market conditions. And any time we see a cost creep or heading into a busy time frame, there's a lot that goes into it, Bill, but the timing of it itself once you post that price increase, you kind of have to set and let it settle in and it -- sometimes, it's a quick answer. Sometimes, it takes a couple of days, maybe 3 days of pretty strict discipline.

 You can imagine the way some of the calls would go, but it's that 2- or 3-day window where you have to have the support, get some visual each day of COMEX copper of a bias or a trend. And unfortunately, in Q4, there were 4, maybe 5 price increase attempts that once they were put out, we lost $0.06 or $0.07 pretty quickly on COMEX right behind in the next 2 or 3 days after the increase. And that just underlines the price increase that you put out in the market. For us specifically, as you know, in the past we'll sit and wait and see what happens. But there are some folks that are super-fast to pull the trigger and not just go back to the old sheet, but they'll actually discount further. And that issue has existed for about 31 years. I don't know how to correct what other companies do or don't do. But again, we used to have 30-some-odd competitors. We're down to 5 or 6. So I guess it takes care of itself in the long run.

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 William Baldwin,  Crescent Securities Group, Inc. - Analyst   [28]
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 I appreciate the insight there, Daniel. I know it's difficult to call -- talk on these calls because you got your competitors on here.

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 Daniel L. Jones,  Encore Wire Corporation - Chairman, President & CEO   [29]
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 Yes, sir. Really a lot of...

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 William Baldwin,  Crescent Securities Group, Inc. - Analyst   [30]
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 Unfortunately, none of these other competitors are public. We don't get to see any of their data.

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 Daniel L. Jones,  Encore Wire Corporation - Chairman, President & CEO   [31]
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 Right.

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 William Baldwin,  Crescent Securities Group, Inc. - Analyst   [32]
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 And the way they perform and -- I don't know if you can comment or not. But the way they perform in the marketplace, it makes you think they've got a lot of unused capacity out there. I mean here, you're a person that seems trying to satisfy your customers on a timely basis and service them, and these guys are out there to discount while copper prices are going up. I mean have they got a ton of excess capacity that they've got to fill? Do you have any feel for that, Daniel?

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 Daniel L. Jones,  Encore Wire Corporation - Chairman, President & CEO   [33]
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 As far as I know, all plants are running. I don't know who has a ton of capacity. Maybe they are trying to run to some budget number that they -- I don't know. I mean -- I don't know. I mean it's been this way for multiple years.

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 William Baldwin,  Crescent Securities Group, Inc. - Analyst   [34]
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 Okay. So it's just hard to get a feel for what capacity is, because you don't have any public numbers here. So I understand. Congratulations on your capital projects here. It seems to me like -- Daniel, you might not use the word, but it looks like to me this is the transformational event for Encore Wire as far as looking out over the next 5 to 10 years.

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 Daniel L. Jones,  Encore Wire Corporation - Chairman, President & CEO   [35]
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 Yes, sir. We're pretty excited about it, Bill. Appreciate your support.

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Operator   [36]
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 And your next question comes from Julio Romero from Sidoti.

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 Julio Alberto Romero,  Sidoti & Company, LLC - Equity Analyst   [37]
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 Just -- how should we think about incremental sales volumes post expansion in 2022? Should that kind of allow you to grow a certain percentage kind of above market? Or should I think about that as an incremental x amount of units per year?

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 Daniel L. Jones,  Encore Wire Corporation - Chairman, President & CEO   [38]
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 Well, I'd like to stick to 2019 and Q4, if we can. And I don't want to say too much about anything exact yet. We've been super cautious about putting this news out to begin with. But as close as I can give you to a fair answer, Julio, is we're going to go after some areas where we think we can do a fantastic job and make a little bit of money. I'm -- we're not interested in getting larger and poorer. That's not the case. We're going to use the service center for speed and reliability. We're going to pick up our pace on turning these orders around. And on the reliability piece, we're pretty good at, we're going to be great at.

 As far as the additional capacity that we add in the existing distribution center building, it's going to be under the same umbrella that we currently operate with a few fringe items to add to that service piece, which allows us to charge a little bit more in the marketplace. Historically, we've been able to be 1%, maybe 2% premium in the marketplace for that service and that delivery. That's going to be our approach again. What we're not going to do is go into marketplace and try to gain any type of volume and some standpoint from cutting prices. 30 years of watching other people do that, it just doesn't work that way. So it's more on the speed and reliability piece in Phase 1 with flexibility of additional machine time and Phase 2 with some added fringe products. And we're hoping that those -- and today, based on the facts as we know them today, we think we can pick up a couple of percentage points on the existing and the new volume that we'll be picking up.

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Operator   [39]
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 And we have no further questions. I'll turn the call back for final remarks.

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 Daniel L. Jones,  Encore Wire Corporation - Chairman, President & CEO   [40]
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 Okay. Bret, do you have anything you can add?

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 Bret J. Eckert,  Encore Wire Corporation - CFO, VP of Finance, Treasurer & Secretary   [41]
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 No.

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 Daniel L. Jones,  Encore Wire Corporation - Chairman, President & CEO   [42]
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 Adrienne, thank you for handling the call. We appreciate the support of you folks and being patient while we answered the questions. Thank you. Talk to you next quarter.

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Operator   [43]
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 Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.




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