Houston Wire & Cable Company's (HWCC) CEO Jim Pokluda on Q1 2019 Results - Earnings Call Transcript

About: Houston Wire & Cable Company (HWCC)
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Earning Call Audio

Houston Wire & Cable Company (NASDAQ:HWCC) Q1 2019 Results Earnings Conference Call May 10, 2019 3:00 PM ET

Company Participants

Jim Pokluda – President and Chief Executive Officer

Chris Micklas – Vice President and Chief Financial Officer

Conference Call Participants

David Nierenberg – Nierenberg Investments


Ladies and gentlemen, thank you for standing by. Welcome to Houston Wire & Cable Company's First Quarter 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 and are summarized in the 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 whenever you are ready.

Jim Pokluda

Thank you, Sydney. Good afternoon, everyone, and thanks for joining us on our call today. Our apologies on the last-minute time change for today's call. But if you've been watching the weather channel lately, I'm sure you've noticed that for the past week we've been dealing incredible amounts of rains and tornadoes. Frankly, we were concerned we wouldn't be able to make into the office this morning, so we decided to move the call to this afternoon.

The good news is that everybody made it in okay and the rain has stopped, at least for now, so everything's okay. I'll begin today's call with an update of our first quarter 2019 results, and then out provide some updates in our current outlook as we move further into 2019. I'll then turn the call over to Chris, who will discuss our financial performance in greater detail. Overall, we were pleased with the profitability achievements -- achieved in the first quarter.

Gross margin, operating income, net income and EPS all improved significantly over the prior year, and revenue grew about 3.4% when adjusting for one less business day and the impact of metals. Chris will go into further detail of these results during his prepared remarks in just a few moments. Q1 2019 transactional volume per day, which we measure as invoice count, decreased approximately 3.9% versus Q1 2018.

The majority of the decline resulted from reduced activity in fasteners and steel wire rope fabrication end markets, which offset gains made in electrical wiring cable and steel wire rope end markets. We estimate that sales results in our core business for services, maintenance, repair and operations demand decreased 1% from the prior year quarter and represented 83% of our total revenue. Product and geographic demand mix remain very similar to what we experienced in the past few quarters, and activity levels in both industrial and commercial construction were largely unchanged.

We estimate that project sales increased 5% from the prior year period and represented 17% of our income of our revenue. Activity in this space continues to be concentrated in industrial end markets and heavy manufacturing in oil and gas space. On the last call, I discussed four of our high-level goals and priorities for 2019. They included growing revenue at two times GDP, improving gross margin, reducing our operating expense as a percentage of sales and allocating capital wisely. Here's how we did.

The first item, revenue, adjusted for one less billing day in metals, grew about 3.4%. This compares to industry growth based on publicly available data that ranges from less than zero to slightly over 2%. As I've mentioned on previous calls, we are laser-focused on growth but it has to be disciplined and profitable growth. With that thought in mind, I'd say that we missed our growth goal of 2x GDP as present estimates for Q1 GDP are 3.2.

The good news is that certain areas of our business performed quite well including our largest business unit, electrical wiring cable and bulk steel wire rope. Unfortunately though, these results were largely offset by reduced demand in steel wire rope fabrication and fastener end markets which pulled our overall total company average down. Moving on to the second item, gross margin. We made great gains here, improved 80 basis points and posted 24.9% for the quarter, outstanding results and super execution of pricing discipline from our teams.

Pull-through at 77% was also very good as highlighted by our 18.1% increase in operating income and 17.3% increase in net income. Item three, OpEx to sales. Sequentially, we reduced operating expenses almost $400,000, so certainly good news on a sequential improvement basis. Lean projects are driving out cost. Cost control programs are working, and recent distribution center on investments are delivering improved efficiencies in customer service.

On a year-over-year basis our ratio of expenses to sales slipped 10 basis points and I'm disappointed with these results. But as we are a small company, it's not uncommon to experience choppiness from quarter-to-quarter in certain KPIs. The trick here is to make sure that we don't let our zeal for expense reduction get in the way of making wise investments that will help drive for long-term growth. With revenue growth, we also realize great expense leverage, and ultimately that's our goal. With the long view in mind, I believe we will be able to make significant improvements in this area.

And finally item four: Allocate capital wisely. In our view, the best capital allocation strategy is one that is very disciplined, executed consistently over several quarters and when changed, only for good reason. Our present capital allocation strategy is to reduce debt and to obtain a debt-to-EBITDA ratio in the range of 2.5 to 3. In Q1 of 2018, we – in Q1 of year 2018, we’re at 7.6% and we finished the year at 4.4%. At present, we are at 4.7% which is up slightly from the end of 2018 but not unexpected as we exit the seasonally slow period of the year and prepare for the construction season.

As I near the end of my prepared remarks, I'll move on to our assessment of current market conditions. April decelerated slightly, however, May is off to a good start. Our project pipeline is growing and based on initial estimates, our April book-to-bill ratio is approximately 107. End market feedback suggests that in a very broad context certain areas are starting to decelerate as many core U.S. economy sectors are entering the back half of the business cycle. However, as our products are often used at the latter end of the business cycle, we tend to follow broad market moves by two to three quarters.

That being the case, we haven't really seen much change in overall business activity. Despite my economic cycle comment, most macros are still positive. Customers are active, and our business looks and feels much like it did last year this time. Given all of the above, our outlook remains positive.

With that, I'll now turn the call over to Chris Micklas our Vice President and CFO, for a detailed analysis of our financial results. Chris?

Chris Micklas

Thanks, Jim, and good afternoon everybody. Today, throughout my prepared remarks, I will cover the first quarter 2019 financial results. In the quarter, HWC had net income of $2.3 million and earned $0.14 per share, which is up $0.02 per share from the same period last year and has an increase of $0.04 per share sequentially.

Sales for the quarter were $85.3 million, an increase of a third of a percent over the first quarter 2018. As Jim mentioned, the headline sales number only shows slight growth. However, there was one less business day in the quarter of 2019 and we have to make in the metal impact – impacted the number by over 1%. Therefore, adjusting for those factors, we estimated on a similar basis sales growth of 3.4%. Our sales continue to be driven by the same underlying factors that have existed for over a year now, which is increased industrial activity, selling discipline and favorable product.

Gross margin for the first quarter was 24.9%, up 80 basis points from the first quarter 2018 and 100 basis points up sequentially. Operating expenses in the first quarter of 2019 were $17.4 million, up $177,000 from the first quarter of 2018 that sequentially operating expenses declined by $393,000 and we believe these results demonstrate our ability to moderate expenses in line with our sales.

This can be further evidence in our profit pull through defined as change in EBIT divided by change in gross margin, which was 77% and our expense to sales ratio was 20.4%, which was a 10 basis point increase from the first quarter of 2018. Operating income for the quarter was $3.9 million, which is $593,000 improvement over the first quarter of 2018 and $673,000 improvement sequentially.

Interest expense in the first quarter was $741,000, which is an increase of $97,000 from prior year with the average debt in the first quarter of 2019 down $3.5 million from 2018, but this reduction in debt was more than offset by a 60 basis point increase in interest rates from 3.3%. Sequentially, interest rates were down $10,000 as our average debt increased $2.9 million, but it was offset by a decrease of 20 basis points in our interest rates. Finally, on the income statement, our tax rate was 26.8%, 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 first quarter of 2019, we use $8.5 million in operation. I would like to expand more on our usage of cash because this is the result of normal seasonal activities such as payment of yearly customer volume rebates and employee bonuses as well as increases in sales and operational activities such as building inventory after the winter and holiday seasons.

This resulted in net debt at the end of the first quarter of 2019 of $78.7 million, a reduction of $4.7 million from the same time last year and our average debt comparing those periods is down $3.5 million. We believe this shows we are following our seasonal patterns and are on track to accomplish our stated goal of reducing debt by year end. Cash paid for capital expenditures during the quarter was $278,000 and we anticipate about $2 million for the full year of 2019.

We remain in compliance with the covenants of our $100 million asset based credit facility. At the end of the quarter, we had $20.6 million in available capacity and also to reiterate something we discussed in our year end call, we recently extended our bank agreement with Bank of America until 2024. To close, I would like to say our performance and results for 2019 have been encouraging.

Moving forward, our top priorities remain executing on our strategic growth and operating plan, driving profitable growth, using lean techniques to drive out waste, disciplined expense management and retiring debt. Multiple projects involving streamlining order fulfillment, efficiency maximization and improvements in utilization of working capital continue. We are pleased with the progress we have made and we look forward to continued success.

This concludes the prepared remarks. And at this time, I'll turn the call back over to the operator.

Question-and-Answer Session


Thank you. [Operator Instructions] And our first question comes from the line of David Nierenberg with Nierenberg Investments. Your line is now open.

David Nierenberg

Hi, guys.

Jim Pokluda

Hey, good afternoon, David.

Chris Micklas


David Nierenberg

Good afternoon. Nice of you to swim to work today.

Jim Pokluda

It's been quite an adventure, Dave.

David Nierenberg

Well, it's been a week when the capital markets around the world have been obsessed with the prospects of trade war between China and the United States. I know you guys have been very busy looking for additional supply sources around the world and trying as best you can to mitigate potential adverse impacts of a trade war, although I recognize with you too that you cannot control the price of copper. But I'd love to hear an update about what the company has been doing to try to mitigate that otherwise and what do you expect to be doing in the future?

Jim Pokluda

Yeah, certainly, David. That whole dynamic, really, remains kind of a jump ball. But it's something we have to keep our really call close eye on and frankly, repair for extreme scenarios. And we have scenario plan multiple. If we look at our various product categories and end markets, the area where we source the majority of products internationally is the fastener, it's the fastener end of our business. When we acquired the business a few years ago, about 95% of those goods were sourced from Taiwan. And for competitive reasons, I don't think it's wise to break that up into what we're doing today. But I think it's certainly fair play and good form to share with you that that is no longer the case.

We, upon acquiring the company, shifted spend to China and that's clearly what's been involved in this trade war. But in preparation for what may happen, and what's already happened, we expanded to other Asian countries. The tariff construct is remarkably complex by, not only product category but literally, by size of SKU within a product category, very, very complex. And I think our team has done an excellent, excellent job, very good job, redirecting spend to other areas where the impact of these tariffs won't be felt. And we began working on that quite some time ago.

An area that we can't control are the supply lanes, the shipping lanes, which have really been somewhat sinusoidal. At times, extremely full and other times maybe 160-degree off of that phase, not that busy at all. That's wreaked havoc with the supply chain, and that's just an unfortunate reality of what's going on out in the marketplace. Steel wire rope is also a category where we source products from overseas, primarily Asian countries. And they too have been affected by the tariff construct. Just like I explained for fasteners, we were well ahead of that evolving trend and have done a good job of shifting spend where we can.

And then frankly, passing the increases along to the marketplace where we couldn't source from new countries without a tariff burden. On the electrical wire and cable end of the business, the supermajority of our goods remain sourced from the United States. We have excellent suppliers in the U.S., product quality is very good and the deliveries have been good. We do source some of our products internationally there but not nearly to the same extent. So I would say our exposure, for the most part, this isn't true for every product category, but for the most part, hasn't impacted electrical like it has the potential to impact other product categories in our business.

David Nierenberg

Thank you, Jim. It sounds like the preponderance of the company's overall sales are insulated from the tariffs directly, although much of it could be affected by the fluctuating prices of copper commodity. Do I get that right?

Jim Pokluda

Yes, yes. And the tangent of that is what's going on with copper has generally flowed with -- to other strategic metals. Not always, but if copper's going up, nickel's usually going up, aluminum's usually going up. It's not always the case. Frankly, it wasn't the case last quarter. Copper actually fell on a year-over-year basis whereas nickel and steel went up, and now steel's on its way back down. So there is some correlation but not always.

David Nierenberg

Okay, so with all this stuff going on, tornadoes in Houston and global hurricanes between the United States and China, my calculation is that sequentially, although your revenues dropped about 3% from Q4, your EPS rose 40% and your EBITDA rose 18%. So just keep doing that. Keep defying gravity and we'll all be happy.

Jim Pokluda

That sounds like the most excellent plan, David. Roger that.

David Nierenberg

And the other thing is that, as Chris said, seasonal factors produced a negative first quarter cash flow although the same thing happened in Q1 last year, I recall. But it sounds like you guys are of the opinion that as we proceed through the rest of 2019, you will keep working down that debt-to-equity ratio but implying a positive free cash flow towards debt reduction.

Chris Micklas

That’s correct. And David, to take you back one more year, it happened in 2017 as well. So it’s very consistent pattern.

David Nierenberg

Okay, so we look forward to seeing that ratio improve as we proceed through the year. And then perhaps in the new year, we'll be able to have some conversations about what you might do with free cash once you have gotten the net debt down to the targeted level. So anyway, congratulations again on a tremendous sequential improvement as well as year-on-year improvement, and we look forward to your latest miracle.

Jim Pokluda

Thank you, David. And just sort of to elaborate a little bit on what you said with the -- in which we agree wholeheartedly, the Board and I. Objective number one is to reduce debt. We have to be smart about that and not throw the baby out with the bathwater, as they say. We wouldn't want to wind inventories down to a level where customer service was compromised. But I don't think that's necessary to cash flow. Retiring debt is the number one priority and we have some work to do there. And once we accomplish that goal, we get on to other more strategic conversations about what to do with the cash flow. And we already have a plan there. So it's not like we haven't thought about that, and we're looking forward to that, the execution of phase two. But right now, laser-focused on retiring debt.

David Nierenberg

Thank you team. Good luck on your…

Jim Pokluda

You’re welcome. Roger that.

Chris Micklas

Thank you.


And I am not showing any further questions at this time. I would now like to turn the call back to your speakers for any closing remarks.

Jim Pokluda

Okay, thank you, Sydney. 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 on the call today and we look forward to success in the period ahead. Good day, everyone.