Houston Wire & Cable Company
Q4 2019 Earnings Call Transcript

Published: 13 Mar 2020

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome to Houston Wire & Cable Company's Fourth Quarter and Year-Ended 2019 Earnings Conference Call. My name is Sydney, and I will be your operator for today.Joining us on the call 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, Sydney. Good morning, everyone, and thank you for joining us on our call today. As most of you are aware, being a micro-cap company, it won't be a surprise if there are no questions after Chris and I finish our prepared remarks. That being the case, we thought it would be helpful to change our traditional flow a bit.And today I'll spend the majority of my time providing updates on the progress we've made to strengthen our company, what we're doing involving the coronavirus, and how we're performing so far in Q1. When I'm done, I'll pass the call over to Chris, who will discuss our financial performance in greater detail.With that, let's begin. Our last year's results were disappointing. 2019 was also a year of significant operational change for our company. And today as a result of the completion of several key projects, a few of which I'll highlight. We have significantly increased our value proposition and placed ourselves in a position to produce improved results in 2020.The first major accomplishment I'll mention is the exit of the Attleboro, Massachusetts Distribution Center. Although, the closure required a great deal of work, and we incurred a significant onetime expense to do this, which reduced 2019 earnings. Moving forward, it's a big win. Here's a bit more detail. Early last year we conducted a detailed review of Vertex's position in the value chain, which at a high level included analysis of end market strength, customer concentration, distribution platform, footprint and operating efficiencies.Results of the work revealed that Attleboro, which was HWCC's largest distribution center was no longer a geographically desirable location to service customer demand, and it did not provide an efficient platform to service our diverse base of fastener customers. For these reasons, we decided to exit the facility and relocate inventory to state of the art facilities in Chicago and New Jersey. Although the exit was expensive, these are nonrecurring expenses.The positive news is now that the moves are behind us, we're servicing customers with much improved fill rates, superior operating efficiencies, and beginning to realize an annualized net savings of approximately $1 million per year.Another one was in the area of information technology, and the completion of two multiyear projects. The first project was a major infrastructure and system architecture upgrade, that now provides an efficient, scalable and cost-effective platform, that will accelerate the use of technologies and enable an advanced enterprise strategy. This was a very large undertaking that required significant forethought and planning, substantial subject matter expertise and solid execution. Frankly, what was accomplished is quite exciting, and today we are better positioned to adopt and leverage new and evolving digital technologies.The second major project we completed were ERP system upgrades at all business units. The Vertex upgrade was completed in 2017, and Southwest Wire Rope and Southern Wire were completed in 2018. The electrical business unit conversion was the largest in our company's history, and was completed in 2019 following nine months of planning, testing and implementation. All projects were accomplished on time and under budget.With that, let's move on to accomplishments involving our supply chain, which is another critical area of our company. As you know, HWCC is not a manufacturer, we're a distributor. And our ability to manage consistent dependable product flow from our diverse supplier network, both domestic and non-domestic is critical to our business model. When trade war tensions and resulting import tariffs first arose in 2018, we took immediate steps to manage supply disruptions with the fasteners and steel wire rope products that are sourced overseas.Although we experienced periods of disruption and reduced sales with fasteners, inventories were rebuilt by the end of Q4 last year, and today sales are improving. Price increases from tariffs also pressured margins. However, we're very disciplined in passing through price increases and experienced minimal margin erosion in this area.And finally, we renegotiated existing supply agreements where possible, and where that wasn't possible, we transitioned to new suppliers, proper planning, strong supplier relationships, and great edge execution were all play here. Moving forward, our supply lines are intact with reliable high-quality partners and competitive pricing.The fourth and final accomplishment I'd like to mention involves our progress and success with LEAN. LEAN processes and methodologies have become an important part of our DNA, and continuous improvements through multiple kaizen events that identify process, efficiency and productivity improvements and expense savings in all business units, in all departments were conducted throughout the year.We all know that LEAN and the pursuit of LEAN, is a journey and not a destination. Along the journey, accomplishments accumulate, some big, some small and they create meaningful results. 2019 was a year where we really gained traction with our implementation of LEAN and delivered meaningful results. Distribution centers, operations improved, productivity improved, interdepartmental collaboration improved and safety improved. All-in-all, it was a big year for LEAN, and we expect further advancements in 2020.To summarize, we made lots of very real, very tangible progress with multiple initiatives that strengthened our company. Annual savings of $1 million per year with the Attleboro closure and new and more efficient distribution centers. IT infrastructure changes that will reduce expenses and position us to realize increased leverage from digital technologies, supply chain retooling, that provides cost effective supply of quality products in all categories, and LEAN implementation to drive continuous improvement and increase productivity in all areas of our business.Now, let's move on to an update of how we're dealing with the COVID-19 virus. To begin, HWCC is committed to the utmost security and safety of our employees, and the company's crisis management team has worked diligently to implement workplace recommendations from CDC, OSHA, and the World Health Organization. At this time, end market demand and customer activity have not slowed down. Supply lines are intact, and fill rates are high. To-date, we are unaware of any individuals, either internally or externally, including suppliers or customers that have contracted the virus.I'll now talk a little bit about market conditions in the latter part of Q4, how we performed so far in the first quarter of 2020, and what we're seeing in the market today. With respect to our financial results in the fourth quarter, we were certainly disappointed. As earlier in the quarter there were signs of market and sales improvement, headwinds rose though, mostly in fasteners steel wire rope end markets. They worsen throughout the period, and the combination of the December holiday season, which uniquely affected vacation schedules last year. And intermittent supply chain disruptions from the retooling of our supply chain, that have since been corrected, all combined into a significant slowdown in business activity at the end of the quarter.Moving on to the current year, although, we do not provide formal earnings guidance, we would like to provide some directional commentary on what we've experienced so far. Thus far into Q1, customer demand and business activity have improved on a sequential basis, versus the fourth quarter of last year, where it's impossible to predict the economic impact COVID will have on industrial activity. We're positioned however, to support and profit from economic recovery as it occurs.Finally, as we move further into the year, we're highly focused on what is in our control and top priorities remain delivering best-in-class customer service, executing prudent expense management and driving operational excellence with the end result of reducing debt.With that, I'll now turn the call over to Chris for more detailed analysis of our fourth quarter results, as well as an update on progress made in other areas of our business.

[Chris Micklas:]

Thanks, Jim and good morning, everyone. Today throughout my prepared remarks, I will cover the fourth quarter and full year results. In the fourth quarter of 2019, HWC lost $0.04 per share, which is down $0.14 per share for the same period last year. As discussed on previous calls, we closed and relocated our Attleboro Massachusetts, Vertex distribution center in the fourth quarter, which resulted in an increased spend of $1 million. Adjusting for those charges we earned $0.01 per share in the fourth quarter.For the full year 2019, we earned $0.15 per share and adjusting for the full year impact of the Attleboro cost of $3.3 million, earnings were $0.30 per share. I would like to again highlight that the value of the closure and relocation over the remaining four years of the lease, is a net savings of over $4 million in future rent, taxes, insurance utilities, and anticipated maintenance. Additionally, we've located our facilities along improved transportation corridors and closer to our customers.Sales for the quarter were $82.3 million, a decrease of 6.4% and for the full year were $338 million, down 5.2%. The fourth quarter and full year of 2019 were driven by similar underlying factors of approximately 2% to 3% slower industrial activity, a reduction of over 1% due to international supply chain disruption caused by tariffs and trade negotiations, and a 1% to 2% decline from the impact of metals on the prices.As Jim has mentioned, the slowness in the back-half of the fourth quarter applied pressure on margins. Gross margins for the quarter was 22.7%, down 120 basis points from the fourth quarter of 2018, and for the full year 2019 margins were 23.6%, versus 23.9% in 2018.Operating expenses in the fourth quarter of 2019 were $18.6 million, and adjusting for the $1 million expense for Attleboro were down 0.3% from the fourth quarter of 2018. For the full year, excluding Attleboro expenses were down $1.6 million, or 2.2% from the prior year. And this is a result of lower sales volume, and also the savings Jim mentioned from the multiple LEAN projects.Adjusting for Attleboro related costs, operating income for the fourth quarter was $1.1 million, which was down $3.3 million in the fourth quarter of 2018, and for the year was $6.9 million, or $3.8 million lower than 2018. Interest expense for the fourth quarter of 2019 increased 2% to $766,000 over the prior year, with the average debt in the fourth quarter of 2019 up $10 million, offset by a 60 basis point decrease in interest rates from 4.1%. For the full year, interest expense was up $150,000 with the yearly average debt flat, and the average interest rate up 10 basis points at 3.8%.The full year of 2019 tax rate was 33% versus 21% in 2018. The tax rate is adversely impacted approximately 3% due to the nondeductible expenses, applied over a lower operating income because of the Attleboro expenses, while in 2018, benefited from adjustments in evaluation allowance. We continue to believe that 26% to 28% should be considered the long-term tax rate for the company.Turning the attention to the balance sheet cash flow and liquidity, during the fourth quarter of 2019, we used $682,000 in operations, bringing the full year cash usage to $5.6 million. Including cash on hand and bank debt, year-end net debt was $79.4 million, which was an increase of $9.5 million, compared with year-end 2018. The increase in debt was mainly caused by additional inventory resulting from two factors.First, the disruption in our supply from Asia caused a larger than normal movement in inventory, that resulted in over $10 million of additional material at year-end. Second, at year-end, we purchased additional amount of high volume, fast moving items to optimize the terms of our vendor agreements. The return on this investment and inventories significantly outweigh the carrying costs.At this point, we are seeing improvements in international supply deliveries and we have sold a portion of the inventory purchase at year-end. We are confident in our plan that the inventory impact from the year-end 2019 are temporary, and will return to normal levels in the first-half of 2020. And we're anticipating operating activities to reduce net debt more than $14 million by year-end. In preparation for this variability in international purchases, during the fourth quarter, we increased our Bank of America asset based credit facility by $15 million.We are in compliance with the covenants of our $115 million asset based credit facility and at year-end, we had $22.8 million of available capacity. Cash paid for capital expenditures during the quarter was $700,000 and was $2.4 million for the full year of 2019.In closing, I would like to say, the 2019 was a year of significant operational change for HWC, as we responded to the new tariffs, implemented LEAN processes and methodologies for expense reduction, closed and relocated our largest fastener distribution center and upgraded our IT capabilities. With this work behind us, we are better positioned in 2020, to more efficiently service our customer, and we are focused on improving working capital to reduce debt.This concludes my prepared remarks and at this time, I will turn the call back over to the operator.

[Jim Pokluda:]

Thank you, Sydney. Thanks to all our valued team members for their continued hard work and dedication to the company. To our shareholders, we appreciate you joining us on the call today, and look forward to success in the periods ahead. Good day, everyone.

[Operator:]

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.