Houston Wire & Cable Company
Q2 2019 Earnings Call Transcript

Published: 9 Aug 2019

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome to Houston Wire & Cable Company Second Quarter 2019 Earnings Conference Call. My name is Michelle, and I'll be your operator for today.Joining us on the call today are Jim Pokluda, President and Chief Executive Officer; and Chris Micklas, Vice President and Chief Financial Officer. Today's call is being recorded for replay purposes and all participants are in a listen-only mode. At the end of the financial discussion, we will conduct a question-and-answer session and instructions will be given at that time.Comments during today's call may include forward-looking statements. Any such statements are based on assumptions that the company believes are reasonable, but subject to risk factors that are summarized in press releases and SEC filings. Forward-looking statements are not guarantees and actual results could differ materially from what is indicated in such statements. Any forward-looking statements speak only as of the date of this call and the company undertakes no obligation to publicly update such statements. If you did not receive a copy of the earnings press release that was distributed earlier this morning, a copy can be found under the Investor Relations page of the company's website at www.houwire.com.At this time, I would like to turn the call over to Jim Pokluda, President and Chief Executive Officer. Please begin, when you are ready.

[Jim Pokluda:]

Thank you, Michelle. Hello everyone and thank you for joining us on our call today. This morning I'll provide an update of our second quarter 2019 results and current outlook for the second half of 2019, and then I'll pass the call over to Chris, who will discuss our financial performance in greater detail. As a reminder, today I'll be referring to revenue results on a metals-adjusted basis.Overall revenue declined 6.9% versus the second quarter of 2018, which was the highest revenue quarter in 15 quarters and increased slightly on a sequential basis versus the first quarter of this year. The operating environment in Q2 was generally good, but as the market matured -- quarter matured, we began to experience reduced industrial demand in midstream oil and gas and fastener end markets.Year-over-year improvements with gross margin and reduction of operating expenses were able to offset the impact of the revenue decline, but not entirely and earnings per share decreased $0.06 versus the prior year period. Despite market headwinds I am pleased with the progress we have made in several areas of our business, including gross margin which has increased 30 basis points to 24.1% reduction of $448,000 in operating expenses, reduction of year-over-year debt of $7 million and generation of $6.8 million in operating cash flow. We estimate that sales results in our core business, which services maintenance repair and operations demand decreased 9% from the prior year period and was flat sequentially.Trade war disputes negatively impacted demand from industrial end markets and reduced activity in offshore and onshore oil and gas geographies additionally contributed to the revenue decline. The trade war also cost supply chain and logistics disruptions with international suppliers of fasteners, which has resulted in inventory shortages and reduced product sales. June revenues were most impacted by these supply disruptions. However, conditions are slowly improving and we expect better sales performance in the second half of this year.We estimate that project sales increase 4% versus the prior year period and increase 1% sequentially. Activity continues to be concentrated in industrial end markets and heavy manufacturing oil and gas and environmental compliance upgrades for fossil fuel power generation.Despite seeing reduced activity in certain industrial end markets, we are executing well in the areas of our business that are within our control. Operational excellence is at peak levels. Customer satisfaction is very high. Expense management, working capital management and prudent allocation of capital will remain as top priorities. We are also pleased to announce the recent cost savings development involving our distribution platform as well as the reactivation of the company's stock purchase program, both of which Chris will further discuss in his prepared remarks.With that, I'll now turn the call over to Chris for a more detailed analysis of our Q2 results. Chris?

[Chris Micklas:]

Thanks Jim and good morning. Today throughout my prepared remarks, I will cover the second quarter 2019 results, but first would like to highlight a few points that I believe are important accomplishments during the quarter. These are that despite recent market softness we were able to generate $6.3 million in cash from operations. We offset a meaningful portion of the reduced sales through margin improvement and reduced operating expenses, while continuing to execute on multiple improvement projects.In the second quarter 2019, HWC had a net income of $1.6 million and earned $0.10 per share, which is down $0.06 per share from the same period last year. Sales for the quarter were $85.3 million, a decrease of 9.1% from the second quarter of 2018 with metals negatively impacting the results by 2.2%.We offset approximately $700,000 of loss margin from the sales decline with an increase of 30 basis points of gross margin to 24.1% and lowered operating expense by $448,000 or 2.5%. To achieve this operating expense improvement, we managed staffing costs down 6.7%, which is at a similar level to the metal adjusted sales decline.Other operating expenses rose 2.9% as we continued to focus and invest in system enhancements that will benefit us moving forward with improvements in our customer interface and strategic digital initiatives.Interest expenses in the quarter were $738,000, which is down $35,000 from prior year with the average debt in the second quarter of 2019, down $8.2 million from the second quarter of 2018. However, the majority of this reduction was offset by a 20 basis point increase in interest rates from 3.7%.Finally on the income statement. Our year-to-date tax rate is 27.5%, which is consistent with our communicated expected range of between 26% and 28%.Turning the attention to the balance sheet, cash flow and liquidity. During the second quarter of 2019, we generated $6.3 million from operations and our working capital was $130.4 million, an improvement of $3.8 million in the quarter. We believe that seasonal business activities make monitoring debt levels on a year-over-year basis the better metric for tracking our progress.Our debt at the end of the second quarter of 2019 was at $73.1 million, which is a $7 million reduction from the $80.1 million in the second quarter of 2018 and on a quarterly average basis is $8.2 million lower.I will point out that inventory has increased by $11 million. This is a temporary increase as a result of the timing associated with purchases at the end of the quarter. As we have demonstrated in the past, we make decisions based on market factors and manage our working capital accordingly.Currently we are operating consistent with our seasonal business pattern, believe our end markets remain good, our focused on executing our efficiency programs and on track for accomplishing our stated goal of reducing debt by year-end.Cash paid for capital expenditures during the quarter was $597,000 and year-to-date is $875,000 and we anticipate about $2 million for the full year. We remain in compliance with the covenants of our $100 million asset based facility. At the end of the quarter we have $25.2 million in available capacity.At this point, I'd like to discuss two items that happened at the end of the -- after the end of the second quarter. One is the modification of our Vertex Attleboro lease and the second is the reinstatement of our share buyback program.Starting with the Attleboro lease modification. In July, we agreed with our landlord to modify the terms of our lease agreement at our Vertex's, Massachusetts facility. This includes early termination of the lease on November 30 of this year and subleasing a portion of the space until the end of November. In connection with these changes we will pay the landlord approximately $2.5 million.The value for us in this agreement is a net savings of approximately $4 million in future rent, property taxes, insurance, utilities and anticipated maintenance. Additionally we are now freed up to strategically locate our facilities along improved transportation corridors that are closer to our end customers. We are planning by year-end to be operating in two new facilities, one a more efficient with greater capacity facility in Chicago; and an equally modern facility in the Mid-Atlantic region. As a result, after combining the Attleboro savings and the additional costs from the new facilities, we will be saving approximately $2 million over the next four years.Moving to the second item. Although our financial performance remained significantly above, our results during the industrial slowdown of the 2015 and 2016 periods, the stock performance have been disappointing. Despite the recent market headwinds, Board members and executives continue to show confidence by increasing their holdings in HWCC stock. Yesterday, our press release was notification of our reinstatement of the stock buyback program that has been suspended since 2016. Currently, the program has $9.2 million available for purchasing outstanding shares of common stock from time to time depending on market conditions, trading activity business conditions and other factors.In closing, I'd like to reiterate that despite some market challenges, we're able to continue to improve in several areas. In particular, we generated cash, cut expenses and implemented several business improvement programs. Moving forward, our top priorities remain executing our strategic growth and operating plan, driving profitable growth, using lean techniques to drive out waste, disciplined expense management and improving shareholder return, the retirement of debt and repurchasing shares. We continued to execute on multiple projects involving streamlining order fulfillment, efficiency maximization, improvement in our working capital utilization.This concludes the prepared remarks and I'd like to turn the call back over to the operator.

[Operator:]

Thank you. [Operator Instructions] Our first question comes from David Nierenberg of Nierenberg Investment. Your line is open.

[David Nierenberg:]

Good morning, guys.

[Jim Pokluda:]

Good morning, David.

[Chris Micklas:]

Good morning, David.

[David Nierenberg:]

You did a nice job protecting a profitability in the second quarter as the quarter went along and the trade war disputes hurt business confidence so, thank you for doing that.

[Jim Pokluda:]

You're welcome.

[David Nierenberg:]

And thank you also for reinstating the share repurchase program with $9.2 million, I think you said left remaining which at current market prices which you are at least in our opinion quite well with -- by itself create an opportunity to repurchase as many as two million shares. As Chris mentioned, in the past two years, there has been an eye-opening amount of personal purchases of shares, both by outside directors as well as by Chris beginning with when he joined us as our new CFO on repeated occasions as well as Jim often not returning shares for tax purposes, but paying the taxes to take the shares.So the level of support by the insiders for the shares over the last few years has been quite remarkable, quite sustained and most of it done at considerably higher prices than where the share price is today. So I hope that you will use all means to take advantage of the gift which Mr. Market is making to you by pricing the stock as low as it is right now and that you will manage your working capital down to more normal seasonal levels both in terms of DSO and inventory use that free cash flow both to continue paying down debt and to seize the gift which Mr. Market is giving to you.As you know, I've often wondered what benefit Houston Wire has from being a public company with no analytical coverage and with very little daily trading volume. It certainly doesn't provide much liquidity to anybody, but one gift that the market does give you from time to time is a severely mispriced share price and you've got it now and carpe diem.

[Jim Pokluda:]

Okay. That was a lot very constructive. And I think you did an excellent job summarizing a lot of what's going on right now.

[Operator:]

[Operator Instructions] Our next question comes from David Benedict of Nierenberg Investment. Your line is open.

[Unidentified Analyst:]

Hi, guys. Just wanted to echo David's comments and had a couple of questions of my own. Just noticed the difference between MRO and projects and markets, I was hoping you could tell us a little more about the different trends going on there?

[Jim Pokluda:]

Sure. You'll recall that projects and the percentage of projects relative to revenue can vacillate widely. In a robust CapEx market, we've seen projects been as high as 40% 45% of overall revenues. In a less aggressive project market, it hovers around the 20% level and that's really been for the most part. A few quarters we jumped up to the high 20s.There's been a lot of discussion in the marketplace on the heels of the trade war about what that will mean for CapEx in the United States. The consensus opinion now is that it will hurt it. But as we've seen in the financial markets just over the past couple of days, how widely they can move based on snips and market news.What that tells me is that, although there is definitely uncertainty in the marketplace which can lead to long-term consequences and concern it can also correct very quickly. For example, in the event and when we eventually do resolve these issues CapEx will return to normal levels.But in the interim period and this is really important, it doesn't mean that it will stop. These capital projects are planned years in advance

[Unidentified Analyst:]

Thank you. And one follow-up on the projects side. My recollection was that you tend to get more business from those large projects as they move along. And my understanding is also that we -- maybe in the earlier stages of some of the big petchem and LNG sort of work around the Gulf Coast, can you comment on the level of visibility into your pipeline and the growth outlook over the next couple of years in projects?

[Jim Pokluda:]

Sure. We definitely are later cycle, when it comes to projects, generally follow broad market moves by at least a quarter. These projects that you're referring to

[Unidentified Analyst:]

Great. Thank you. And next time we get on the margins and cost control in a maintenance environment. Appreciate the work.

[Jim Pokluda:]

You bet. You're welcome.

[Operator:]

Our next question is a follow-up from David Nierenberg of Nierenberg Investment. Your line is open.

[David Nierenberg:]

This wasn't intended to be a Damon and David filibuster, but thank you for giving us the update about the last five weeks which is gratifying and encouraging to hear about. When I was speaking before I forgot to share historical recollection about what the company was able to do during the last downturn. So while Chris wasn't here at the time, Jim has near-perfect recollection and he can correct anything that I might say that would be inaccurate.But my recollection was that after the price of oil peaked about five years ago and started to come down at the beginning of that time, your net debt was slightly in excess of $60 million. And you skillfully managed your costs and your balance sheet so that during the downturn, you were able to reduce debt by over $30 million from over $60 million to under $30 million. And at the very same time, you continued to pay a dividend much of the time.And in roughly the same time, you repurchased approximately 9% of issued and outstanding shares. You did all of those things and so you have shown that you can do this. And given the size of inventory right now, given the DSO and given other asset allocation possibilities seems to me you have another opportunity to simultaneously reduce debt and do a substantial repurchase.Final thing I'd say from watching many companies over many years many companies announce repurchases, but don't necessarily follow through. The only time a repurchase really helps your stakeholders is when it is material and when it is continuing. $9.2 million at the current share price is a really nice place to begin. I hope that you energetically use them all up and go back to your excellent Board of Directors ultimately and ask to do some more. Thanks.

[Jim Pokluda:]

Okay. Thank you, Dave. Well it sounds like your memory is pretty good too, so no need for me to attempt to correct that. Your description of what occurred is very accurate. Once again thank you for all those comments.

[Operator:]

There are no further questions. I'd like to turn the call back over to Jim Pokluda for any closing remarks.

[Jim Pokluda:]

Thanks, Michelle, and thanks to our valued team members for their continued hard work and dedication to the company. To our shareholders, we appreciate you joining us today and look forward to success in the period ahead. Good day everyone.

[Operator:]

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a great day.