Houston Wire & Cable Company
Q3 2015 Earnings Call Transcript

Published: 7 Nov 2015

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome to Houston Wire & Cable Company’s Third Quarter 2015 Earnings Conference Call. My name is Howard 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 begin when you’re ready.

[Jim Pokluda:]

Thank you, Howard. Good morning, everyone. And thank you for joining us on our call today. I’ll begin today’s call with an overview of our third quarter 2015 results and then I will turn the call over to Nic, who will discuss our financial performance in greater detail. Third quarter market conditions were challenging and the level of industrial activity remained disappointing. The combination of continued metals deflation, and the reduction in oil and gas related activity severely affected our operating results in comparison to the prior year period. Sales decreased 19.1% or approximately 10% when adjusted for declining metals prices. Gross margin at 20.6% decreased 120 basis points from the third quarter of 2014, primarily due to lower product margins and vendor rebates, partially offset by lower customer incentives. Product gross margin, excluding the impact of vendor rebates and customer incentives, declined approximately 81 basis points quarter-over-quarter and increased 3 basis points for the comparative nine-month year-to-date period. Transactional volume, which we measure as invoice count, decreased approximately 12% versus the record level it reached in Q3 2014. Moving forward, I will discuss results on a metals adjusted basis. We estimate that sales results in our core business, which services MRO demand, decreased approximately 11% and represented approximately 67% of our total revenue. MRO activity was down across all geographic markets, with the largest quarterly declines experienced in the West Coast, Central, and Eastern regions. The rate of year-over-year decline was flat in the South Central region, and on a sequential quarter-over-quarter basis, sales increases in the South Central region were offset by decreases in remaining regions. Project sales decreased 9% and represented approximately 33% 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 market was up approximately 1% year-over-year. Sales and business activity improved in alternative fuel power generation and substation construction, and decreased in fossil fuel power generation and environmental compliance devices. Project sales within the industrial segment declined approximately 35% year-over-year. Upstream and midstream oil and gas markets continued to experience the most negative economic impact from today’s difficult operating environment, closely followed by downstream oil and gas and mining and minerals. Project sales in the infrastructure segment increased approximately 34% year-over-year. Spend involving a large telecommunications project drove improved results in this area, as well as significant improvement in transportation and wastewater end-markets. As we move into the fourth quarter of 2015, we believe the long-term fundamentals of our targeted markets are intact, although still likely to experience and be subject to inconsistent performance due to decreased demand which has been largely driven by the reduction in the price of oil. Not content to wait or hope for the transition of today’s headwinds to an eventual market recovery tailwind, we continue to move forward with new services and products. The recent launch of our digital portal, called My ePower, greatly enhances the digital interface with our customers by providing an abundance of account specific data and resources. Sales of new products that expand our reach into markets less concentrated in the heavy industrial oil and gas space, continue to gain traction. And very recently we announced an initiative with Emerson Industrial Automation and Appleton Group Company, a leading manufacturer of a broad line of components for current and non-current carrying electrical distribution devices, to provide Appleton and O-Z/Gedney distributors an option to purchase select conduit fittings with inconsistent demand from our local inventories. We will offer the channel accelerated availability to help authorized distributors, capture sales of conduit fittings that in the past may have been lost to stockouts or longer lead times. Houston Wire & Cable and Appleton Group are very excited about this opportunity and believe it will be a positive experience for all her partners. As I near the end of my prepared remarks, I will emphasize, as I have done on prior calls, that we remain exceedingly close to the areas of our business where despite the difficult operating environment, we have control. We are laser focused on expense management, gross margin retention and optimization, strategic inventory management, capital allocation, product line expansion, and providing a superior customer experience with industry-leading operational excellence. We believe we have taken the appropriate steps to operate in the present environment and continue to execute our business plan through a group of highly motivated and talented individuals. I will now turn the call over to Nic Graham, our Vice President and CFO, for a detailed analysis of our financial results. Nic?

[Nic Graham:]

Thanks, Jim. And good morning, ladies and gentlemen. It was another quarter where activity levels continued the lackluster trend of the first half of the year. The depressed market conditions and related low demand level, caused us to fall short of our expectations. The sales level achieved and the resulting lower gross profit dollars, compressed operating income; net income; and EPS. When operational activity falls this short of more normal demand levels, our results are heavily impacted, as our operating model is more influenced by fixed costs, such as employees; facilities; and related infrastructure costs. However, we continue to work on those areas of our business where we have the ability to exert influence and are pleased to report the following

[Jim Pokluda:]

Yes, Howard. We regrettably have chosen a time for this conference call that significantly conflicts with several analysts that have called me this morning, saying they will be unable to attend due to prior commitments; a couple are on airplanes and others are at conferences. So, not unexpected that we have no participants for the Q&A session. Afraid, it’s just the reality of some bad timing. So with that, we’ll just proceed forward. Thank you again to our valued team members for their hard work and dedication at the Company. To our shareholders, we extend this special thanks as well. We appreciate you joining us on our call 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 concludes the program. You may now disconnect. Everyone, have a wonderful day.