Encore and Schneider / Square D highlight construction market

Some insights from Encore Wire and Schneider Electric / Square D third quarter earnings.

First from Encore and their analyst call:

• Unit volume for copper was up 1% in pounds and 4% in aluminum pounds in the quarter (while it results in decreased dollars for distributors this infers that the market, and more specifically the construction market has had some growth or that Encore may have picked up a little market share.)
• Aluminum represents 10.6% of Encore’s sales, essentially flat from Q3 2015
• Margin declines due to competitive pricing pressures and the copper spread (price of copper wire sold and the cost or aw copper purchased) decreased.  Copper decreased 10.3% vs Q3 2015 and aluminum decreased 17.9% vs same time period.
• Encore mentioned that a copper competitor and an aluminum competitor have been acting “erratically” in the market and this has lead to tough pricing in the marketplace, and hence the declining margins.  They feel this is “temporary.”
• Feel there is a good 2017 construction outlook based upon discussions with customers and pending projects.  Good quote activity.  Appears to be a decent backlog (which we have heard from some distributors in major metropolitant markets.)
• Distributors have “leaned” inventories due to the marketplace (we’ve also heard this in some other product categories.)
• YTD (through 9 months) copper average selling price / pound is down 14.6% with volume up 6.5%
• The company has zero long-term debt, no outstanding revolving line of credit and $80M in cash.  And this is after declaring another cash dividend.  Given that Southwire acquired United Copper, could Encore be positioning for an acquisition, an investment into facilities / capacity or some product diversification?)
• The wire market used to have about 20-25 competitors back in the late 80’s, now it has 6-7.  Significant consolidation which has helped to bring some “rationality” to the market.
• Encore delivers a 100% fill-rate although they are not at 100% capacity.

In speaking with distributors it appears that the market now focuses on three companies…Southwire, Encore and General Cable with some other regionals involved.  This may create opportunities for master distributors like Omni Cable, Houston Wire, WireXpress and other “wire houses”.

What are you seeing in the wire market?  What is important to you from these companies given the decreased competition and an increased focus on selectivity, “partnering”, product line expansion, marketing while remaining competitive on pricing?  We know more and more distributors are investing into reels and productivity tools to increase their wire share.  How is the profitability?

And from Schneider Electric’s (and primarily Square D in the US) analyst call, where we’ll focus on North America / US comments

• Worldwide sales were flat as was North America with a little growth in the US
  • North America is 28% of Schneider Electric and was up 1% overall
• Growth in the US is coming from the construction market with industrial (oil and gas market) still negative.  Strength in the residential market (no comment on single family vs multi-family, however, multi-family has been driving much of the residential market growth.)
• Some expectation that the pressure in the oil / gas market will ease in coming quarters.
• Canada had weakness and see this market as “more difficult” with oil / gas market as well as conclusion of some major projects.
• Many questions and comments regarding China and the Middle East (inclusive of Turkey).  This can be the challenge with large multi-nationals … limited “color” regarding the US market.

We’re hearing from distributors that Schneider is becoming more aggressive about pursuing new partnerships / distribution and while they say there is nothing to the rumors regarding Schneider and Rockwell, we have heard that Schneider / Square D is pursuing some Rockwell distributors for their gear business (and perhaps non-APR opportunities) and Rockwell “isn’t as vocal”.  Part of the reason may be Rockwell concern about Eaton’s “platform” offering to distributors and that the distributors may not feel as comfortable with only GE and Siemens as gear alternatives.

Key Questions

• How are these two companies performing for you (distributors) or, if you compete with them, what are you seeing in the marketplace?
• And, do you agree with their outlooks regarding the construction market?  Is it occurring in your market?