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Edited Transcript of HWCC earnings conference call or presentation 15-Mar-19 3:00pm GMT

Q4 2018 Houston Wire & Cable Co Earnings Call

HOUSTON Mar 22, 2019 (Thomson StreetEvents) -- Edited Transcript of Houston Wire & Cable Co earnings conference call or presentation Friday, March 15, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Christopher M. Micklas

Houston Wire & Cable Company - CFO, Treasurer, Secretary & CAO

* James L. Pokluda

Houston Wire & Cable Company - President, CEO & Director

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Conference Call Participants

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* Damon Benedict

Nierenberg Investment Management Company, Inc. - Senior Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by. Welcome to Houston Wire & Cable Company's Fourth Quarter 2018 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 Chris Micklas, Vice President and Chief Financial Officer. Today's call is being recorded for replay purposes. (Operator Instructions)

Comments during today's call may include forward-looking statements. Any 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.

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James L. Pokluda, Houston Wire & Cable Company - President, CEO & Director [2]

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Thank you, Howard. Good morning, everyone, and thank you for joining us on our call today. I'll begin today's call with an update of our fourth quarter and full year 2018 results, some updates on what we are seeing thus far into 2019 and high-level comments on outlook and priorities for 2019. I'll then turn the call over to Chris, who will discuss our financial performance in additional detail.

We are pleased that the positive market and customer demand trends experienced in the third quarter of 2018 continued into the fourth quarter. Q4 2018 marked the eight consecutive quarter with year-over-year sales growth since Q4 2016. Metal prices were a slight headwind in the period, and we estimate it reduced revenue by approximately 1%.

Gross margin at 23.9% was very good and although down from the prior year period, which was primarily the result of 2017 customer and supplier rebate adjustments, increased 10 basis points sequentially over Q3 2018. Product mix and outstanding pricing discipline drove these results.

Q4 2018 transactional volume per day, which we measure as invoice count, decreased approximately 7% versus Q4 2017. The majority of this decline resulted from reduced activity in fastener end markets and pricing discipline, which has resulted in eliminating undesirable, low-profit margin orders.

We estimate that sales results in our core business with services, maintenance, repair and operations demand, increased 10% from the prior year quarter and represented 78% of our total revenue. The primary drivers of these results occurred from solid demand in both industrial and commercial construction markets, driven to various extent from increases in land-based rig count in oil and gas investment activity. We estimate that project sales represented 22% of our revenue and decreased 1% from the prior year period. Activity in this space continues to be concentrated in industrial end markets and heavy manufacturing in oil and gas states.

Moving on to discuss full year 2018 results. We posted revenue growth of 12.3%, which was 2 to 3x above the industry average. We made great gains in improving gross margin, reduced operating expenses relative to sales and drove very high levels of operating profit pull-through, which grew operating income over 200%. Also, on an unadjusted basis, accounting for cash and the bank overdraft, debt was reduced $6.7 million.

So overall, when compared to 2017, solid results and we are generally pleased. You'll note that I used the word generally, and that's because we believe we still have more work to do and plenty of room to further grow and improve. Here's why we feel that way: We saw 2017 as an ongoing period of a recovery cycle and, in that context, 2018, a recovery year from a story that began in late 2016. During the Q4 2016 earnings release, we called that quarter as the bottom, at least where HWC is modeled, of the so-called industrial recession. That was a tough time for sure, but it helped us to catalyze the solid recovery plan that we are executing today. From there, 2017 began to show signs of life but was mostly unremarkable throughout H1. In H2 of that year though, the recovery began in earnest, and we started to get some traction. We finished the year with improved results over 2016 and a sense of optimism for 2018. It turns out that we were right to think that way about 2018 because our results in the year demonstrated significant progress over 2017 with almost every KPI and net income increased $8.6 million.

And with that, it takes us to today. One of the benefits of being a late year-end reporter is that by the time we report the year-end results, the present year quarter is almost complete. That being the case, I thought it would be helpful to talk a little bit about our performance thus far into 2019 and also how we think at a high level involving some of our plans and priorities for 2019.

Let's begin with how we're doing so far in 2019. On a revenue per day basis, January, February and March are all above prior year, and our book-to-bill ratio is 102%. So by these numbers, we're off to a good start, and many thanks to our great teams for all their hard work that produced these results.

I'll also say that I don't believe these results are a situation where a rising tide is raising all ships. As recent economic reports indicate, the many ships in this metaphor may actually be stagnant. Rather, I believe that our results are a function of our team's ability to execute on our business recovery plans, and I'll share a few of the plans' highlights and high priorities next.

Number one, grow revenue at a rate of 2x GDP. We all know that GDP is certainly a broad macro. But many in our industry find it a good marker, and we agree. Our industry, generally speaking, grows at a rate equal to 1x GDP. But we believe that we can do better than that. In recovering economic conditions, we have the track record to prove it. As mentioned earlier in my prepared remarks, we grew the company a little over 12% in 2018 versus the industry average, which was substantially less. Our results in other economic recovery periods show similar results. And finally, for the first item, robust business development plans with well-defined goals and controls are being executed at all reporting units in all key areas of their respective businesses. And as you have seen for the last 8 quarters, we are making good progress.

Moving on to Item 2, improved gross margin. I've mentioned this several times already in my prepared remarks, so I won't further belabor the point here, other than to say 2 things, and I'll be very direct: Number one, congrats to the team for executing so well in this area. Number two, a few years ago, we made the bold decision not to chase the pricing from the ankle biters in our industry. That's a sucker's bet that leads to nothing good, the worst of which is lousy customer service. We didn't take the bait. Instead, we executed our plan, increased gross margin and continued to provide best-in-class product quality, world-class customer service and industry-leading operational excellence. Is that worth a point or 2? We think so and so do our customers.

Item 3, reduce operating expenses as a percentage of revenue. Last year, we made great progress in this area and reduced expenses as a percentage of sales by 140 basis points. Super job, team, but we're not done. Where do we go from here? Great question. As you've heard me say several times in past calls, we are laser-focused on expense control and reduction, and that certainly hasn't changed. It's full steam ahead in this area. But in 2018, we dug in even deeper and embarked in a major company-wide lean initiative. Today, lean and its principles and processes have become part of our continuous improvement and cost-conscious culture. As you know, lean is a journey, not a destination, and this initiative is an important part of our go-forward expense reduction strategy.

And finally, Item #4, allocate capital wisely. In 2018, we reduced our debt-to-EBITDA leverage to 4.4. In 2017, it was 10. That's great progress for sure, and we're closing in on our goal of a range of 2.5 to 3 but we're not there yet. Stay tuned for continuous progress in 2019, as debt reduction is our primary capital allocation priority for the year. As a corollary to this objective though, as we retire debt, we also increased our capacity for financing activities, which drives our optionality for strategic acquisitions, which is also an important, albeit less immediate, priority that we'll keep an eye on.

As I end -- as I near the end of my prepared remarks, I'll wrap up by saying that our business continues to stabilize and incrementally improve all KPIs. And we have a robust -- and we have robust strategic plans to deliver consistent, above-average industry results. 2018 was a solid recovery year. We delivered material results, significantly improved profitability, reduced debt and we're well positioned for further growth in 2019.

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

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Christopher M. Micklas, Houston Wire & Cable Company - CFO, Treasurer, Secretary & CAO [3]

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Thanks, Jim, and good morning. Today, throughout my prepared remarks, I will cover the fourth quarter and full year results.

In the fourth quarter of 2018, HWC earned $0.10 per share, which is down $0.02 per share for the same period last year. I will cover this in more detail throughout my remarks. But adjusting for fourth quarter 2017 timing differences primarily related to customer and vendor rebates and taxes, we earned on this basis $0.02 per share more in the fourth quarter of 2018 than in the fourth quarter of 2017. For the full year of 2018, HWC earned $0.52 per share, which represents a $0.53 per share increase from the net loss of $0.01 in 2017. After adjusting for timing differences relating to a deferred tax valuation allowance during the full year of 2018, we earned $0.48 per share as compared to $0.04 per share in 2017.

Sales for the quarter were $87.9 million, an increase of 7%, and for the year were $356.9 million, up 12.3%. The fourth quarter and full year of 2018 were driven by the same underlying factors of increased industrial activity, selling discipline and favorable product mix that was slightly offset by commodity prices in the fourth quarter of 2018.

Gross margins for the fourth quarter were 2,000 -- were 23.9%, down 150 basis points from the fourth quarter 2017. As Jim mentioned and as discussed on last year's call, 2017 was a year of recovery, with the first and second half being very different. Therefore, adjustments were made to customer and vendor rebates during the fourth quarter of 2017 that favorably impacted the quarter's results. As we look at the full year of 2018, quarterly margins were consistently between 23.8% and 24.1%, in average, 23.9%. The margin rate for the full year of 2018 represents an improvement of 100 basis points over 2017.

Operating expenses in the fourth quarter of 2018 were $17.8 million and were slightly down from the fourth quarter of 2017. For the full year 2018, expenses were $71.3 million, up $3.3 million. This was the result of improved sales volume, which drove increases in variable operating and selling expenses.

The full year's operating profit pull-through, defined as changes in EBIT divided by change in gross margin, was 71 -- 74.1%. And our expense to sales ratio was 20%, which was 140 basis point improvement over the full year 2017.

Operating income for the quarter was $3.2 million, which was flat with the fourth quarter of 2017. For the year, operating income was $13.9 million, a 3x improvement over $4.6 million in 2017.

Interest expenses for the fourth quarter of 2018 increased $170,000 from the prior year, with average debt for the fourth quarter of 2018 down $4.4 million, but more than offset by the 110 basis point increase in interest rates from 3%. During the full year, interest expense was up $834,000, with the yearly average debt $5 million higher and the average interest rate up 90 basis points.

As I mentioned earlier, the fourth quarter and full year of 2017 and '18 contain tax adjustments. These adjustments relate to the implementation of the 2017 Tax Cuts and Jobs Act, the accounting for deferred tax valuation allowance and share-based compensation. The simplest way to look at our taxes is net of these adjustments. Therefore, our effective tax rate for 2018 was 28%, which is consistent with our communicated range of 26% to 28%. We continue to manage the relevant aspects of the 2017 Act, and we do not believe there are any additional material impacts to our expected range.

Turning the attention to the balance sheet, cash flow and liquidity. During the fourth quarter of 2018, we generated $3.8 million from operations, bringing the full year cash from operations to $5.3 million. Including the cash on hand with our bank debt, year-end net debt was $69.9 million, which was down $6.7 million as compared with year-end 2017 after adjusting for the bank overdraft and was $13.4 million lower than the highest level reached at the first quarter of 2018. Highlighting a clearer view of 2018, we were able to grow the business and grow profitability by over $8 million while only increasing adjusted working capital by $2.2 million. Cash paid for capital expenditures during the quarter was $293,000 and was $1.5 million for the full year of 2018. We remain in compliance with the covenants of our $100 million asset-based credit facility. At year-end, we had $28.7 million of available capacity. And finally, we are very pleased to announce that we have recently extended our banking agreement with Bank of America until March of 2024.

To close, I would like to say our performance and results for 2018 have been encouraging. Moving forward, our top priorities remain executing our strategic growth plan, driving profitable growth, using lean techniques to drive out waste, disciplined expense management and retirement of debt. Multiple projects involving streamlining order fulfillment, efficiency maximization and improvements in utilization of our working capital will continue. We are pleased with the progress we have made, but we look forward to continued success in 2019.

This concludes my prepared remarks. And I'll turn the call back over to the operator.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We have a question or comment from the line of Damon Benedict from Nierenberg Investments.

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Damon Benedict, Nierenberg Investment Management Company, Inc. - Senior Analyst [2]

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More of a comment than a question here. But Jim, the recipe you described in your prepared remarks, growing revenue at a faster rate than the industry, and then GDP, improving gross margin, leveraging operating expense, and then reducing debt with strong cash flow and generating reduction in interest expense and optionality for further deployment, that's a powerful recipe. And we note that if your over 200% operating income increased last year, as you pointed out, and then adjusted EPS increase at a far faster rate, we look forward to you continuing to execute on those plans. It's a really strong recipe for earnings growth. And we know that, that doesn't happen magically. Growing revenue at a faster rate than the industry, along with an increase in both gross margin and operating expense control, is a tough thing to do. So thank you for all the hard work that you've put in to making this happen. It was a great recovery year in 2018. And thank you to all your employees, too. The stock market might not recognize your progress yet, but we are certainly appreciative of everything you're doing as large shareholders.

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James L. Pokluda, Houston Wire & Cable Company - President, CEO & Director [3]

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Well, Damon, that's super. Thanks a million for all of that sincere comments, and I certainly appreciate it, and I know our team members do too. And I think it was wise of you to comment that it's more than just the management team doing this. This is a sales and marketing company. And as you look at the distribution of our employees, it's very, very heavily weighted to inside and outside sales resources and operational team members. The commitment in these people is just really amazing. I've been here for a long time, as you know, and I'm not alone. We can still walk -- Chris and I can still walk out on the shop floor -- or Chris is new, but Chris and I can walk out on the shop floor and see guys that have been here 20 years ago. The conscientiousness and the hard work, the dedication really, really is very rewarding. And to your point about the recipe, rarely in business, as we all know, was there a silver bullet. That's just very, very unlikely to occur. Rather, businesses that can demonstrate their ability to execute on a well-architected plan through incremental improvements across all areas of the business can have a very, very powerful, cumulative effect. The cumulative benefit of margin improvement, expense reduction, top line increase over time, slow and steady, really is the way we think about this business. This is not a flash in the pan company. We don't have silver bullet plans to get us to the finish line. If one comes up, of course, we'll execute on that. But that's really not the strategy. The strategy is just good, solid business management, have a rock-solid balance sheet, improve the most important KPIs consistently year over year over year. As you retire debt -- as we retire debt, build up a keg of dry powder, as I mentioned in my remarks, that makes it much easier for us to go out and tuck in a strategic acquisition. And in that respect, that might be a little bit of a game changer. And we've made incredible gains last year. Over 10x leverage, down to 4-ish, that's wonderful. We've got the finish line in our crosshairs, and we're going to get there through a disciplined execution of our plan. So I know I sort of got on my soapbox here a little bit, but it's something that we all feel very strongly about. And I appreciate you answering -- I appreciate you asking that question.

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Damon Benedict, Nierenberg Investment Management Company, Inc. - Senior Analyst [4]

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Nothing further. I will follow up on details another time.

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James L. Pokluda, Houston Wire & Cable Company - President, CEO & Director [5]

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Okay. All right. Thanks, Damon. You're probably the last guy in the queue, but operator, we're happy to keep going if there's anybody else in line.

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Operator [6]

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(Operator Instructions) I'm showing no additional audio questions in the queue at this time, sir.

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James L. Pokluda, Houston Wire & Cable Company - President, CEO & Director [7]

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Okay. We're going to get back to work. Thank you, Howard, and thanks to our valued team members for their hard work and dedication to the company. We appreciate you joining us on the call today, and we look forward to further success in the period ahead. Good day, everyone.

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Operator [8]

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Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone, have a wonderful day.