Houston Wire & Cable Company
Q1 2017 Earnings Call Transcript

Published: 10 May 2017

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome to the Houston Wire & Cable Company's First Quarter 2017 Earnings Conference Call. My name is Teyara and I will be your operator for today. Joining us on the call today are Jim Pokluda, President and Chief Executive Officer; and Nic Graham, 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 go ahead when you are ready.

[James Pokluda:]

Thank you, Teyara. Good morning, everyone, and thank you for joining us on our call today. We'll begin with a quick update on the Vertex acquisition and then move on to an overview of our first quarter 2017 results. I'll then turn the call over to Nic, who will discuss our financial performance in additional detail. Even though I spend just a little over month and a half since we last reported, we've continued to make significant progress with the integration of Vertex. The Vertex branch in Tampa is now being consolidated into our electrical facility in Tampa. The Vertex distribution center in Chicago has been reorganized for improved efficiencies. The HWC electrical facility in Chicago has been reconfigures and modified to provide services for Vertex and the Vertex Houston consolidation into the HWC Houston facility will be completed with week. This Houston consolidation marks a major milestone in our integration plan as now all facility consolidations are complete, finished ahead of schedule and fully integrated on HWC's ERP platform. With these moves behind us, our focus will now increasing shift to driving operational excellence and superior customer experience. Moving on to our overall company performance for the quarter, sales for the first quarter increased 21.6% over the prior year period and 13.6% sequentially versus Q4 2016. Excluding Vertex, sales increased 9.6% year-over-year. We are pleased to see the momentum experienced in January and February continued in March, which on an organic sales per day basis reached their highest level since October 2015. Improved industrial market conditions largely driven by recovering activity in oil and gas drove majority of our sales growth during the quarter. Although we are certainly pleased their daily sales trends are improving, they still remain somewhat choppy and indicates us their broad market recoveries will likely be slow and inconsistent. Gross margin at 21.5% increased 80 basis points during the first quarter of 2016, primarily due to higher margins generated by Vertex, improving market conditions in metals. The balance of my year-over-year comments will exclude contributions from Vertex. Q1 2017 transactional volume per day which we measure as invoice count increased slightly over 7% versus Q1 of 2016, was the highest count since Q4 2014 and increased 8.6% sequentially versus Q4 2016. The present book-to-bill ratio was 104%. We estimate the sales results in our core business which services, maintenance, repair and operations demand increased approximately 21% from the prior quarter, or approximately 18% on adjusted for metals and represented 84% of our total revenue. Growth continued in new products that target residential and non-residential construction and regions with exposure to oil and gas and general manufacturing covered from the low set in the fourth quarter of the prior year. Although it's disappointing to see that the average price per barrel oil slip back to a pricing level in the mid-40s, it is encouraging that the end in Q1 2017, rotary rig count in the U.S. was 802, up 378 from the closing level 424 year earlier and up 167 from the fourth quarter of 2016. The increase in rig count is driven an increase in demand for both our copper and steel wire products, primarily in upstream and midstream markets, which are the first to benefit from large moves in the land based rig count. The offshore rig count at 22 remains very low by historical standards and continues to be a significant headwind for high performance copper wire, steel wire rope and fabricated lifting products used in offshore markets. Project sales in the fourth quarter decreased 34% from 2016 when adjusted for metals and represents approximately 16% of our revenue. Our three primary end markets for projects include utility power generation and environmental compliance, industrials and infrastructure. Project sales in the utility power generation and environmental compliance were down approximately 24% year-over-year. The majority of the decline was a result of reduction in investment in new construction of fossil fuel power plants and environmental control devices such as flue gas desulfurization and selective catalytic reduction units offset slightly by an increase in substation construction. Project sales in the industrial end-market declined approximately 39% year-over-year. Reduced oil and gas activity drove the majority of this decline followed by general manufacturing. I'll remind the audience that because of our position in the supply chain, we are later cycle participant in the very large oil and gas projects currently in process on Gulf Coast. As such sometimes it can be a little tricky reporting our estimate project revenues when oil and gas markets begin showing signs of recovery. As an example in the case of oil and gas, although our major project business is down, we did experience a nice pick up in smaller orders captured in the MRO revenue stream. Most of the pickup occurred in the medium to large operations component of the MRO's brand and that's what helped drive 18% metals adjusted sales growth in that area of our business. It's kind of a judgment call on whether to identify these types of operations orders as projects. In our case, we feel it best not to do so in the interest of remaining consistent with our formal established reporting practices. Q1 project sales in the infrastructure end-market decline approximately 45% year-over-year. The majority of the decline resulted from the ongoing reduction in spend from a large telecommunications project offset to some degree by growth in transportation and residential and commercial construction. If the new political administration's abundance of commentary involving the need to invest in U.S. infrastructure is adopted as policy, we believe this area of our business could experience nice to tailwind in growth for several years. As we move further into 2017, our outlook for the year remains positive. Rarely our market recovery is linear though, so we must be mindful that the recent trends could experience some choppiness as evidenced by the recent pullback in the price per pound of copper and the reduction in the price of oil. This far into Q2 though, the positive trend experienced in Q1 appear to be continuing. Our year-over-year MRO sales have grown for three consecutive quarters and our sales funnel continues to indicate a build in later cycle project activity. Before I pass the call over to Nic, I would like to close by emphasizing our ongoing commitment to driving stream expense management in all areas of our business. It's nice to see that the markets are showing signs of recovery. And although we will continue to invest in resources to capitalize on emerging opportunities, our commitment to driving a lean cost structure will remain a top priority in the present market environment. I'll now turn the call over to Nic Graham, our Vice President and CFO for detailed analysis of our financial results. Nic?

[Nicol Graham:]

Thanks, Jim, and good morning, ladies and gentleman. As Jim mentioned, it was an encouraging quarter for sales and gross margins and hopefully an indicator that industrial demand is starting to recover all be at that project business remains like luster. A quick update on the Vertex acquisition, we have now finalized the working capital adjustment with the previous owners. We set to Vertex's purchase price at $32.2 million, slightly lower than initial estimate. Funds out HWC have now been received. As part of the fair market valuation process upon acquisition, Vertex's inventory valuation was stepped up by $350,000. The step up is being amortized over nine month period. So in Q4, 2016 and in Q's quarters Q1 and Q2 of 2017, there's an additional charge in cost of sales at just over $115,000. Some comments on operating performance, the integration process has gone well and head of plan. However, it was not achieved without additional costs. We identified approximately $400,000 of direct costs associated with the integration. But that does not include the countless hours spent by both HWC and Vertex's management and personnel in executing the integration plan, which I estimate to be approximately $100,000. And they not only include the physical facility moves, but also the consolidation of the administrative functions into our corporate platform. Now that the Vertex brands consolidation is complete, management can now focus on growing the business. As Jim mentioned, transaction volume was up considerably quarter-over-quarter and sequencing. And while a positive sign, it did result in higher levels of distribution expenses to accommodate the increase in volume. The non-recurring expense item just discussed with the primary reasons behind the OpEx increase on a sequential basis. In addition, Q4, 2016 operating expenses were positively impacted by credits for vacation pay accruals and other employee related benefit costs for Vertex of approximately $150,000. We did achieve some improvement in leverage as a ratio of OpEx to sales eliminated the acquisition expenses from both periods and adjusting for the Q4, 2016 credits improved from 23.3% in Q4, 2016 to 21.3% in Q1 2107. OpEx value and savings remains key focus point going forward. EBITDA for the quarter, when adjusted for the integration expenses and the inventory step up reached $1.2 million, up from the $700,000 level in Q1 2016. The impact of these adjustments on EPS is estimated to be about to about $2.5. Turning to the balance sheet, our levels increased from year end 2016 levels and slightly higher than we had estimated. Reducing this investment remains the integral part of our business plan. Our working capital increased by 11% or $11.4 million, the biggest single component was a $6.8 million increase in account receivable, the result of very strong sales growth for the quarter and $2 million of cash funds not plucks [ph] until April. Despite increasing in account receivable, we did improve our day sales outstanding, excluding Vertex, a decrease from 56.2 days in 2106 to 50.3 days for the quarter. Including the Vertex accounts receivable in the calculation, the consolidated DSO stands at 49.1 days. While customer receivable aging including those of Vertex were in line with our expectations. We continue to watch for changes in payment patterns and marketing customer credit lines very closely. We're still a little concerned about possible collection issues with those customers paid directly or indirectly to the oil and gas market. Bad debt experience however has so far remained in line with historic norms. Our debt level did increase as we funded the higher levels of working capital, primarily the increase in receivables as business activity improved and reduction in the bank overdraft of $2.4 million. At the end of the quarter, our debt to equity ratio was 79.9%, higher than the 2016 year-end ratio of 67%. This ratio was negatively impacted by $2 million in cash receipts that came in in the first day of April and $1 million vendor rebate which was also received in April. Taking effect to these two items into account, we reduce the debt to equity ratio to 76.7%. As previously mentioned - excuse me, as mentioned previously, we project a decrease in our inventory investment over the balance of the year, hence reducing our working capital investment and freeing up funds for ultimate users. Our CapEx cash outlay during the quarter was $930,000, which included the payment of $230,000 for a piece of equipment at the Houston steel wire rope division which was add in late December 2016. We're still projecting a total spend of $1.8 million for 2017. At quarter end, availability under our credit facility was $24.2 million more than adequate to fund our operations. We also remained and still compliance with the availability covenants of the facility. Looking ahead at some of the current initiatives for 2017, work on those areas of Vertex operations where additional operating efficiencies can be attained including freight and supply contracts, streamline and automate wherever possible continued them to repost our initiative with the goal of reducing the working capital investment and making sure that our current operating expense spent is provides a maximum return. That includes prepared remarks. At this time, I'll turn the call back over to the operator. Teyara?

[Operator:]

Thank you. [Operator Instructions] Our first question comes from the line of Sam Darkatsh from Raymond James. Your line is open.

[Sam Darkatsh:]

Good morning, Jim. Good morning, Nic. How are you?

[Nicol Graham:]

Good morning, Sam.

[James Pokluda:]

Hey, Good morning, Sam. Fine. Sam, I just quite cater here, we cut the travel conflict with some other folks is going to be a lightly attended call and I know you're very respectful of others they might be in queue. You may not have that issue today, so no pressure we can just have a lovely little chat however you like to proceed.

[Sam Darkatsh:]

What a welcome treat. Thank you, Jim.

[James Pokluda:]

My pleasure.

[Sam Darkatsh:]

So, all right. I've got I guess three or four questions. The first, I want to make sure I understood makes some of the items that occurred in the first quarter that are non-recurring. So I was scribbling that it looks like $400,000 in direct integration costs and then perhaps another 100,000 in indirect costs. First off, am I right that those are the two primary exclusions? And then secondly is all that 100,000 behind us, so oil like-for-like basis it won't reoccur in Q2?

[Nicol Graham:]

You're correct, Sam. That the 400 and the 100 were the costs. The 400 should not reoccur. There were some specific costs involved obviously in integration and some additional professional fee. But those are done and gone. We've now got Vertex on the computer platform. We're still fine tuning a few things. I think the bulk of the additional $100,000 will go away, because you imagine that we have flashed all these locations not only that involve the Vertex focus, but we have managers, distribution managers traveling all across the country backwards and forwards helping these folks achieve this integration. And that's done. As Jim mention, the Houston facility is going to take place this weekend, but that's just, that's four miles up the road. So I don't think that's any issue there. But the one thing to that I did mention is a step up in value. We've got one more quarter a best step up in value, which will hit Q2 but that is outside of that those $400,000 and $100,000 we just talked about.

[Sam Darkatsh:]

Helpful. Okay. And then, Jim I guess the next two, three questions will be for you. So, MRO growth of 20 some odd percent, the obvious question is how sustainable is that based on what you are not only seeing but anticipating in your conversations with your customers?

[James Pokluda:]

Well, admittedly we're coming off of some lower comps and as you know when that happens, it's easier in the early innings. So we have to keep that in mind. However, I think there's a lot of runway because the hard data that I get from the business and the voice of customer experiences that I have regularly indicate that we are still in a recovery mode and there never as linear as you would hope as I've said, but I definitely believe that will continue to recover throughout the year. We've got a little time here, so I'll give you a little bit more granularity that I typically wouldn't do, but hopefully this will help. If you look at - let's take a look at March, March was a very good month, is a best month we've had in 16 months. And I'm excluding Vertex from these comments because I don't have all that data and I'm working off recall here, but nonetheless March was the best month in 16 months. If you look at that daily trends the macros in March and compare that to April, sales were down a little bit in April about 5.8% and that's really not unexpected because they probably as good as March. So sales pullback per day a little bit in April, but gross, gross margin dollar contribution per day in April was only down 3.4%. And that's gross margin before rebates and freight et cetera. So there was a little bit of a pullback in April. However, if you look at the average daily performance for those two metrics in Q1, average sales per day in Q1 in gross, gross margin per day in Q1, sales were up 33 basis points in April versus what was produced in Q1 on average. And gross, gross margin dollars were up 1.3%, which gives me some peace of mind with respect to some linearity and the return to what we'll call a normal market. So in summary, easier comps in beginning, I don't know how long will sustain 22 plus percent growth, but I do see headroom moving forward.

[Sam Darkatsh:]

I'm confused, the 5.8% decline in April, is that month-over-month or year-over-year? Is that April versus April last year or April versus March?

[James Pokluda:]

Oh. Sorry. That sequentially, so that's April of 2017 versus March of 2017. So our metrics pull back a little bit in April versus March.

[Sam Darkatsh:]

But you said that's typical, so do you have the year-on-year numbers to give us some perspective?

[James Pokluda:]

If I had I might sharing with you, I'm doing this from recall, so I'm sorry, Sam, I just don't have that at my fingertips.

[Sam Darkatsh:]

But I guess what I'm guessing at with your comments is that you would guess that both of them were comfortably up on year-on-year basis and that April might be up by more than the normal seasonal month-over-month trend, is that how to read that?

[James Pokluda:]

Yes, yes. I'm quite certain that April is up year-over-year. I just can't - I don't have those numbers theta.

[Sam Darkatsh:]

And any funkiness because of the Easter holiday timing this year?

[James Pokluda:]

Yeah, yeah, there was a little bit of that. So we had 23 days in March and 20 in April. But I am quite certain that April in 2017 was improved fairly significantly over April in 2016.

[Sam Darkatsh:]

That are you're stating sales dollars, you're stating invoices, you're stating orders, what metric are you are you looking at, Jim?

[James Pokluda:]

In that instance I'm referring to revenue. So the 5.8% decline from March to April is in revenue. And 30 basis point increases in April versus the average in Q1 was also in revenue.

[Sam Darkatsh:]

Would invoices be perhaps less than that, so maybe pricing is getting a little bit more from or it's just hard to tell right now?

[James Pokluda:]

No, actually invoices are up. And I've got a chart on that, invoices - can give a calculator. I don't want to give these - let me see. These numbers, the hard numbers Sam, that's probably little bit too much but I don't mind sharing percentages with you. One last business day. They're up about 2%.

[Sam Darkatsh:]

And that's month-over-month or year-over-year?

[James Pokluda:]

We've have look at more calculation. So are closer to 4%, invoice count is up approximately 4% more in April of 2017 versus April of 2016 on a per day basis.

[Sam Darkatsh:]

And what with March?

[James Pokluda:]

Man, I shouldn't have told you, we're going to have all this time.

[Sam Darkatsh:]

Well, I mean, I'm just going to take advantage until started the hook comes up offstage.

[James Pokluda:]

All right, now hang on. 8.3%.

[Sam Darkatsh:]

And that's on a daily basis, so that make adjust for the Easter kind of I guess. Okay. And I guess last question mostly for you would be gross margin expectations, I mean fourth quarter you have 30 bps year-on-year, first quarter you have 80 bps year-on-year, but Vertex is kind of screwing the math up a little bit in terms of figuring out what the organic gross margin trends are doing. How would you have us look and assume or model for gross margins over the next year quarters?

[James Pokluda:]

Well, we have some tailwind finally because copper even though it's pulled back, copper is definitely up on a year-over-year basis and that's helped in other areas of our businesses. I am sure you know steel was up substantially and aluminum was up as well. So metals are helping out here and that eases the pressure on our pricing construct because our average cost accounting treatment. So actually I think we do have a little bit more headroom in margins. If to put a number on it, some bumper rails on it for the year, this is tricky because you're right, Vertex shows some complications into it, but I'd say in our historical businesses, steel and electrical another 30 to 40 basis points.

[Sam Darkatsh:]

From here?

[James Pokluda:]

Yes.

[Sam Darkatsh:]

Okay. I guess I do have one more final question. You are helpful with respect to the three different project verticals that you tend to focus on, where might you see the recovery first, either again looking at your order book or just theoretically where might you see the first green shoot be at power gen, industrials or infrastructure you think?

[James Pokluda:]

Sadly, it won't be power gen. What we've seen happen there over the past several years is really been quite remarkable. Coal is incredibly bet, is even at bet at this point. And natural gas you know it's just not what it was five years ago, that guys are talking about natural gas now is maybe here and there for peakers, okay. So I know there are gas plans going on but it's just not as robust as it's been in the past. So I don't expect any material recovery or return to what we experience in years past in the power generation spend. It will still be an important part of our business. But the drivers are different today than they were years ago. Without question, the largest end market for projects for us is the industrial space. The two biggest components of that are the combination of upstream and midstream and then downstream. And the total spend when things are quote unquote normal in downstream tends to fairly closely parallel to combine spend in upstream and midstream. So as markets recover, we almost always see it in midstream first, you see the tank farms, the bottleneck projects the pipeline work, we've talked about that before. As the product moves to market either are the big ethane jobs or cracker jobs, liquefaction trains, those megaprojects are bid out with suppliers from all over the world and it takes a couple of years to get that stuff going. We come in in the tail end of that as I've mentioned before. So the work to answer your question latter part of this year, next year, I would expect more traction there. With respect to midstream work, we're beginning to experience that now. And hopeful and have reason to believe that it will remain steady and slowly build. General manufacturing is very difficult to predict. To some extend that's a function of industrial product and capacity utilization. You've seen those numbers, they actually look good. The economist forecast this year to be a good year. And those macros continue to hold steady if not growth slightly. So I think it's reasonable to presume that that work will slowly build. Infrastructure is coming but you know there is still some bets on that. We know Capitol Hill has been very hawkish on that and the numbers they throw around are incredible, trillion dollars, that's a big number. But we have to see it. So let's set some of those components parts. Let's look at public workspace for example. Our wastewater infrastructure in this country is terrible. And wastewater construction end markets are actually in recession right now. We stand a benefit there, if what our President talks about is actually going to come true. Tunnels, roads, bridges are all aging, we'll benefit from that spent. It tends to be a little bit smaller opportunity for us relative to industrial markets. I'll remind you that in industrial spend, our specialty wire and cables generally about 3% of the total install cost but in infrastructure it's closer to 1%, an exception might be something like a dam which uses wider cable and wastewaters pretty lucrative. But road work and other public works are not quite as lucrative. So I hope that helps.

[Sam Darkatsh:]

That was terrific Jim. Thank you. And have rest of your day. I appreciate the time.

[James Pokluda:]

You're welcome. Thanks Sam.

[Operator:]

Thank you. At this time, I am showing no further questions. I would like to turn the call back over to Jim Pokluda for closing remarks.

[James Pokluda:]

Thanks, Teyara. And 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 period ahead. Good day, everyone.

[Operator:]

Ladies and gentlemen, that does conclude today's program. You may now disconnect. Everyone have a great day.