Q4 2019 Earnings Call
Ladies and gentlemen, your conference calls scheduled to begin momentarily. Thank you for your patience and please continue to standby.
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Joining us on the call Argenta quota, President and Chief Executive Officer, and Krish, Nicholas 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 answer session and instructions will be given at that.
Hi.
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 ask you see filings forward looking statements are not guarantees and actual results could differ materially from what is it.
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 web.
Site at Www Dot H O U W.I.R.E. dotcom at this time I'd like to turn the call over to Jim Pokluda, President and Chief Executive Officer. Please begin when you're ready.
Thank you Sydney good morning, everyone.
Thank you for joining us on our call today.
As most of your were 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 would be helpful to change our traditional flow that 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 krona virus.
And how we're performing so far in Q1, when I'm done I'll pass the call over to Chris will discuss our financial performance in greater detail with that let's begin.
Well last year's results were disappointing 2019 was also a year of significant significant operational change for our company and today as a result, or 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 prove to produce improved results in 2000.
And in 20.
First major accomplishment I'll mention is the exit of the Attleboro, Massachusetts distribute distribution center.
Although the closure required a great deal of work and we incurred a significant one time expense to do this which reduced 2019 earnings moving forward. It's a big when there's a bit more detail early last year. We conducted a detailed review of vertexs position in the value chain, which at a high level included analysis of end market.
The strength customer concentration distribution platform footprint in operating efficiencies results of the work revealed that Attleboro, which was HW Ccs largest distribution center was no longer a geographically desirable location to service customer demand and that did not provide inefficient platform to service our diverse base fastener.
Customers for these reasons, we decided to exit the facility and Rick locate inventory to state of the arc 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.
Beginning to realize an annualized net savings of approximately $1 million per year.
Another win was in the area of information technology and the completion of two multi year 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 in advance enterprise strategy. This was up.
Very large undertaking that required significant for thought and planning substantial subject matter expertise and solid execution.
Thanks, Lee what was the accomplishes quite exciting and today, we are better position to adopt and leverage new and evolving digital technologies.
The second major project, we completed we're ERP system upgrades at all business units. The vertex upgrade was completed in 2017 in southwest wire rope in southern wire were completed in 2018.
The electrical business unit conversion was largest and our company's history and was completed in 2019. Following nine months of planning testing in implementation all projects were accomplished on time and under budget.
With that let's move onto accomplishments involving our supply chain, which is another critical area of our company.
As you know HW cc is not a manufacturer where a distributor and our ability to manage consistent dependable product flow from our diverse supplier network, both domestic and Nondomestic is critical to our business model.
When trade war tensions and resulting Terry import tariffs first arose in 2018, we took immediate steps to manage supply disruptions with the fasteners and steel while 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 and passing through price increases and experienced minimal margin erosion in this area.
And finally, we renegotiated <unk> 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. We're all play here moving forward our supply lines are intact with reliable high quality partners and competitive pricing.
The fourth and final accomplishment I like dimension involves our progress and success with lean lean processes and methodologies had 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.
All departments were conducted throughout the year.
We all know that lean in pursuit of lane 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 operate.
Patients improve productivity improved inner departmental collaboration approved and safety improve 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 I T infrastructure changes that will reduce expenses and position us to realise increase 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 increase productivity in all areas of our business.
Now, let's move onto an update of how we're dealing with the Toby 19 buyers to begin.
Each WCC is committed to the up most security and safety of our employees and the company's crisis management team has worked diligently to implement workplace recommendations from the CDC Osha and the World Health organization.
At this time end market demand and customer activity has 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 are customers the contracted the virus.
I'll now talk a little bit about market conditions in the latter part of Q4.
Oh, we performed so far in first quarter 2020.
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 marketing sales improvement.
Headwinds rose though.
Mostly in fasteners steel wire rope and markets they worsened 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 and business activity.
At the end of the quarter.
Moving onto the current year, although we do not provide formal earnings guidance, we would like to provide some directional commentary and 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, but it's impossible to predict the economic impact covered we will have on industrial activity. We are positioned however to support and profits 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 southern fourth quarter results as well as an update on progress made in other areas of our business.
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 2019, H. WPC last four cents per share, which is down 14 cents 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 increase spend of $1 million.
Adjusting for those charges, we earned one cents per share in the fourth quarter.
For the full year 2019, we earned 15 cents per share and adjusting for the full year impact of the outer borough costs of $3.3 million.
Earnings were 30 cents per share I would like to again highlight that the value of the closure and relocation over the remaining four years of though is a net savings over $4 million in future rent taxes.
Insurance utilities and anticipated maintenance.
Additionally, weve 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 3300 $38 million down 5.2%.
Fourth quarter and full year 2019 were driven by similar underlying factors of approximately 2% to 3% slower industrial activity.
Hey reception of over 1% due to international supply chain.
Reduction caused by tariffs and trade negotiations.
And a once a 2% declined from the impact of metals on prices.
As Jim has mentioned this slow snow that slowness in the back half of the fourth quarter applied pressure on margins gross margins for the quarter what.
22.7% down 120 basis points from the fourth quarter 2018, and for the full year 2019 margins were 23.6% versus 23.9% in 2018.
Operating expenses in the fourth quarter, 2019 were $18.6 million and adjusting for the 1 million dollar.
Expense for Attleboro were down 23%.
From the fourth quarter 2018 for the full year, excluding outer borough 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 2018, and for the year was $6.9 million or 3.8 million lower.
Than 2018.
Interest expense for the fourth quarter of 2019 decreased the increased 2% too.
$766000 over the prior year.
With the average debt in the fourth quarter 2019 up $10 million offset by a 60 basis point decrease in interest rates from 4.1% for.
For the full year interest expense was up $150000.
With the yearly average debt flat and the average interest rate up 10 basis points at 3.8%.
The full year 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 October 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 rates for the company.
Turning the attention to the balance sheet cash flow and liquidity.
During the fourth quarter of 2019, we used $682000 in operations, bringing the full year cash usage to $5.6 million.
Including cash on hand and bank debt.
Yearend 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 the larger than normal movement in inventory that resulted in over $10 million of additional material at year end.
Second at year end, we purchase additional amounts of high volume fast moving items to optimize the terms of our vendor agreements.
The return on that on this investment in 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 that here.
We are confident in our plan that the inventory impact.
The year end 2019 are temporary and will return to normal levels in the first half of 20 Twond.
And.
We are anticipating operating activities to reduce net debt more than $14 million by year end.
And preparation for this variability.
In international purpose 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 have we had $22.8 million of available capacity.
Cash paid for capital expenditures during the quarter was $700000 and was $2.4 million for the full year 2019.
In closing I would like to say the 2019 with your significant operational change for HSBC.
As we responded to the new tariff implemented lean processes and methodology for expense reduction closed and we relocated our largest fastener distribution center and upgraded our IC capabilities.
This work behind US, we're 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.
Thank you ladies and gentlemen, if you have a question at this time. Please press Star then one on your telephone to withdraw your question. Please press the pound key once again that is star then one.
And I'm not showing any further questions at this time I'd now like to turn the call back to your speakers for any further remarks.
Thank you Sydney, Thanks to all our value team members for their continued hard work and dedication to the company to our shareholders. We appreciate you joining us on the call today.
We look forward to success in period ahead.
Good day everyone.
Ladies and gentlemen, this concludes today's conference call.
Thank you for your participation you may now disconnect.
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