Q2 2019 Earnings Call

Hi, gentlemen, thank you for your patience and please continue to standby the Houston wire and cable companies second quarter 2019 earnings call will begin momentarily. Thank you for your patience and please continue to standby.

My name is Michelle and I'll be your operator for today.

Joining us on the call today.

Jim Pokluda, President and Chief Executive Officer.

And Chris Smith, Vice President and Chief Financial Officer.

Today's call is being recorded for replay purposes, and all participants are in listen only mode.

At the end of the financial discussion, we will conduct a question 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 actually see falling.

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 on the Investor Relations page at the company's website at Www Dot Hugh Wired Dot 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.

Thank you Michelle slower one.

Thank you for joining us on our call today. This morning, I'll provide an update over second quarter 2019 results and current outlook for the second half of 2019, and then I'll pass the call over to Chris who will discuss our financial performance in greater detail.

As a reminder, today I'll be referring to revenue results on a metals adjusted basis.

Overall revenue declined 6.9% versus the second quarter of 2018, which was the highest revenue quarter and 15 quarters and increased slightly on a sequential basis versus the first quarter of this year.

The operating environment in Q2 is generally good but as a market mature toward a mature we began to experience reduced industrial demand in midstream oil and gas and fastener end markets.

Year over year improvements with gross margin and reduction of operating expenses were able to offset the impact of the revenue decline.

But not entirely and earnings per share.

Decreased six cents versus the prior year period.

Despite market headwinds I am pleased with the progress we have made in several areas of our business.

Including gross margin, which has increased 30 basis points to 24.1%.

Reduction of 448000 in operating expenses.

Reduction of year over year debt of 7 million and generation of 6.8 million in operating cash flow.

We estimate the sales results in our core business, which services may maintenance repair and operations demand decreased 9% from the prior year period and was flat sequentially.

Trade war disputes negatively impacted demand from industrial end markets and reduced activity in offshore and onshore oil and gas geographies. Additionally contributed to the revenue decline.

The trade were also calls supply chain and logistics disruptions with international suppliers to fasteners, which has resulted in inventory shortages and reduced product sales.

June revenues for most impacted by these supply disruptions. However conditions are slowly improving and we expect better sales performance in the second half of this year.

We estimate the project sales increased 4% versus the prior year period and increased 1% sequentially.

Activity continues to be concentrated in industrial end markets in heavy and manufacturing oil and gas and environmental compliance upgrades for fossil fuel power generation.

Despite seeing reduced activity in certain industrial end markets, we are executing well in the areas of our business that are within our control.

Operational excellence is at peak levels customer satisfaction is very high expense management, working capital management and prudent allocation of capital will remain his top priorities.

We're also pleased to announce the recent cost savings development involving our distribution platform as well as the reactivation of the company's stock purchase program.

Both of which Chris will further discuss in his prepared remarks.

With that I'll now turn the call over to Chris for a more detailed analysis of our Q2 results Chris.

Thanks, Jim and good morning.

Todays throughout my prepared remarks, I will cover the second quarter 2019 results.

But first I would like to highlight a few points that I believe are important accomplishments during the quarter.

These are that despite recent market softness we were able to generate 6.3 million in cash from operations.

We offset a meaningful portion of the reduced sales to margin improvement and reduced operating expenses, while continuing to execute on multiple improvement process projects.

In the second quarter 2019, each WPC had a net income of $1.6 million in around 10 cents per share, which is down six cents per share from the same period last year.

Sales for the quarter were 800, there were $885.3 million a decrease of 9.1% from the second quarter of 2018 with metals negatively impacting the results by 2.2%.

We offset approximately $700000 of lost margin from the sales decline.

With an increase of 30 basis points of gross margin to 21% to 24.1%.

And lowered operating expense by $448000 or 2.5%.

To achieve this operating expense improvement, we manage staffing costs down 6.7%.

Which is simple which is at a similar level to the metal adjusted sales decline.

Other operating expenses rose, 2.9% as we continue to focus and invest and system enhancements that will benefit us moving forward with improvements in our customer interface and strategic digital initiatives.

Interest expenses in the quarter.

Were $738000, which is down $35000 from prior year with the average debt in the second quarter of 2019 down $8.2 million from the second quarter of 2018.

However, the majority of this reduction was offset by a 20 basis point increase in interest rates from 3.7%.

Finally on the income statement.

Our year to date tax rate is 27.5%, which is consistent with our communicated expected range of between 26 and 28%.

Turning the attention to the balance sheet cash.

SEC tivity make monitoring debt debt levels on a year over year basis, the better metrics are tracking our progress.

Our debt at the end of the second quarter of 2019 was at $73.1 million, which is a $7 million reduction from the $80.1 million in the second quarter of 2018.

And on a quarterly average basis is $8.2 million lower.

I will point out that the inventory has increased by $11 million.

This is a temporary increase as a result of the timing associated with purchases at the ended the quarter.

Have we have demonstrated in the past we make decisions based on market factors and manage our manage our working capital accordingly.

Currently we are operating consistent with our seasonal business patterns believe our end markets remain good.

Our focused on executing our efficiency programs and on track for accomplishing our stated goal of reducing debt by year end.

Cash paid for capital expenditures during the quarter.

Was $597000 and year to date is.

$875000, and we anticipate about $2 million for the full year.

We remain in compliance with the covenants of our 100 million dollar asset based facility.

At the ended the quarter, we have $25.2 million in available capacity.

At this point I'd like to discuss two items that happened at the end of the SEC. After the end of the second quarter.

One is the modification of our Virtex out overall lease and the second is the reinstatement of our share buyback program.

Starting with the outer borough lease modification.

In July we agreed with our landlord to modify the terms of our lease agreement at our Vertexs, Massachusetts facility.

This includes early termination of the lease on November Thirtyth of this year and subleasing of a portion of the space until the end of November .

In connection with these changes we will pay the landlord approximately $2.5 million.

Just the value for us in this agreement is a net savings of approximately $4 million in future rent property taxes insurance utilities and anticipated maintenance.

Additionally, we are now freed up just strategically locate our facilities along improved transportation corridors that are closer to our end customers.

We are planning by year end two to be operating in two new facilities.

One a more efficient with greater capacity facility in Chicago.

And and an equally modern facility in the mid Atlantic equities.

As a result.

After combining the attleboro savings and the additional costs from the new facilities.

We will be saving approximately $2 million over the next four years.

Moving to the second item.

Although our financial performance remained significantly above.

Our results during the industrial slowdown of the 2015 and 2016 period the stock performance has been disappointing.

Despite the Mark the recent market headwinds board members and executives continue to show confidence by increasing their holdings and H. WCC stock.

Yesterday, our press release.

Was notification of our of our reinstatement of the stock buyback program that has been suspended since 2016.

Currently the program has.

$9.2 million available.

For purchasing outstanding.

Shares of common stock from time to time, depending on market conditions trading activity business conditions and other factors.

In closing I'd like to reiterate.

That despite some market challenges, we were able to continue to improve in several areas in particular.

We generated cash cut expenses and implemented seven several business improvement programs.

Moving forward, our top priorities remain executing our strategic growth and operating plan driving profitable growth using lean techniques to drive out waste disciplined expense management.

And improving shareholder return through retirement of debt and repurchasing shares.

We continue to execute on multiple projects involving streamlining order fulfillment.

Efficiency maximization improvement in our working capital utilization.

This concludes the prepared remarks, and I'd like to turn the call back over to the operator.

Thank you if you would like to participate in the question and answer session. Please press star one.

If your question has been answered me like to remove yourself from the queue you May press the pound key.

Once again Thats Star then one if you'd like to ask a question.

Our first question comes from David Nierenberg Nierenberg investments your line is open.

Good morning, guys.

Good morning, David Good morning, David.

You did a nice job.

Protecting profitability in the second quarter of <unk>.

As the quarter went along and.

Trade war disputes of Herc business confidence.

Well, thank you for doing that.

And well.

Thank you also for reinstating a share repurchase program with us.

9.2 million I think you said left remaining which at current market prices.

What's you are.

At least in our opinion quite well would by itself create an opportunity to repurchase as many as 2 million shares.

As.

As as Chris mentioned in the past two years, there has been an eye opening amount of.

Personal purchases of shares.

Both fly outside directors as well as by Chris beginning with when he joined us as a.

Our new CFO on repeated occasions as well as.

Jim often are not returning shares for tax purposes, but paying the taxes to pick the shares so the level of support by the insiders for the shares.

Over the last two years, so it's been quite remarkable quite sustained.

And most of it done at considerably higher prices.

And.

Where the share price is today. So I hope that you will use all means to take advantage of the gift which Mr market is making to you.

By pricing the stock as low as it is Oh, right now and that you will.

Manage youre, a working capital down to a more normal seasonal levels. Both in terms of dsos and inventory and use that free cash flow both to continue paying down debt.

And to seize the gift which Mr market is giving to you.

As you know.

I've, often wondered what benefit Usten wire has from being a public company.

With no analytical coverage and with very little daily trading volume. It certainly doesn't provide a much liquidity to anybody but one gift that the market does give you from time to time is a severely mispriced or share price and you have got it now and Carpe-diem.

Okay.

That was like a very constructive and Ah. Thank you did an excellent job summarizing a lot of what's going on right now.

Once again, if youd like to ask a question. Please press Star then one.

Our next question comes from David Benedict of Nierenberg investment your line is open.

Hi, guys just wanted to Echo David's comments and had a couple of questions on my own.

Just a notice the.

Difference between MRO and.

Projects end markets and so hoping you could tell us a little more about the.

Different trends going on there.

Sure.

Uh huh.

You'll recall that projects.

And the percentage of projects relative to revenue can vacillate wide widely.

And they have robust capex market.

We've seen projects been as high as 40, 45% of overall revenues.

In a in a less aggressive project market it hovers around to the 20% level and that's that's where we've been for the most part a few quarters, we've jumped up to the high Twentys.

Ah Theres been a lot of discussion in the marketplace on the heels of the trade war about what that will mean for capex in the United States.

The consensus opinion now is that it will hurt it.

But as we've seen in the financial markets just over the past couple of days.

Oh, how widely.

They can.

Move.

Based on.

Snips of market news.

What that tells me is that although there is a.

Definitely.

Uncertainty in the marketplace.

Which can lead to long term.

Consequences and concern.

It can also correct very quickly.

For example.

In the event and when we eventually do resolve these issues.

Capex will.

Return to normal levels.

But in the interim period.

And this is really important.

It doesn't mean that it will stop.

These capital projects are planned years in advance.

Licensing approval.

Our permits et cetera.

The larger petrochemical projects are three to five years out offshore projects entire decade.

So although in the near term.

As evidenced by the financial markets. There are wide strings huge up days huge down days huge recovery days.

With the long view in mind.

It's important to just push those issues to the side.

A bad day in the market.

A a confusing tweet and on on Capitol Hill doesn't mean that all the major projects are going to be cancelled.

That's not practical at all.

But.

People think near term, they're very myopic and they can let their thoughts run away with them.

Oh, my gosh the markets down.

Capex is dead for the next several years it just doesn't work like that.

Now im not saying that.

The trade wars won't have an impact on on Capex.

What I am saying is it's far too soon to call that.

So I.

Buys our management team and our investors to please keep that in mind.

Now with respect to the MRO end of the business, which is.

In this case is about 80% of our revenue.

We have seen a pullback.

Discrete manufacturing is down.

OEM activity is down Theres been molaison onshore oil and gas markets fits and starts along the midstream infrastructure and that has impacted our sales.

But again I don't see that as a.

At least certainly with respect to oil and gas markets I don't see that as a permanent state in fact for the past several weeks our performance has been very good.

And all product categories fasteners steel wire rope electrical cable.

Started to turn about five weeks ago.

So we ended the quarter.

June .

Down versus the first couple of months of the quarter.

July .

Looked and felt a lot like June .

But really started to improve towards the latter part of the month in August has been quite good.

So we acknowledge we're reacting we have countermeasures corrective action plans in place.

For how we will operate in the MRO environment that has been.

Weakened a little bit by trade war issues.

But we're seeing.

Improvements recently and Thats encouraging.

So here's the way in summary that we think about this.

Capex is often discussed in the marketplace.

Far too soon to presume.

That it's dead in the water that could change quickly and what's in process will remain and process.

And MRO was down.

We're heavy industrial supply company and Weve experienced.

The.

Pullbacks and Malays in the marketplace.

However.

In the Grand scheme of things, we have a small market share our value proposition remains highly leverageable in fact, theres a very lucid argument for why it's even more leverageable in a time like this if you think about distributors, whose overall revenues are are 7% to 10% and specialty wire.

This is a time when many of them lean on us more than ever to support them with those product categories.

So when I think about and MRO.

Myself my team has disappointed that it's pulled back.

But were operating well and the environment, we're controlling things, we can control and as of late we have seen.

Signs of improvement so a really long.

Answer to your question Damon.

But it was a question that allowed us to get a lot of the story out so thank you for asking it.

Thank you and one follow up on the.

The project side My recollection was that you tend to get more business from those large projects as they move along.

And my understanding is also that we may be in the earlier stages at some of the big pet Cam and LNG sort of work around the Gulf Coast.

Can you comment on the level of visibility into your.

Pipeline and the growth outlook over the next couple of years and projects.

Sure.

We definitely are later cycle when it comes to projects.

Generally follow broad market moves by at least a quarter.

These projects that you're referring to.

Hydro Cracker Hydrocrackers liquefaction.

Trains.

Cogeneration power facility upgrades.

Heavy crude.

Upgrades.

Those are all in process as I said those have been on the books for five years.

Things like GTL, we've talked about that.

They.

They go south when oil falls below $80, a barrel, so I'm not referring to those projects in this comp in these comments, we're not counting them at all.

But the the refining the olefin work the cracker work the LNG work the terminals.

That's business as usual, we've experienced a little bit of summer doldrums, which is not uncommon.

But the big work is still out there.

The outlook for the next five years remains positive our book to Bill ratio is positive and.

To your question about pipeline, that's that's growing as well.

We're not happy with this quarter.

10 cents is okay, it's not great.

But were still very busy.

Great. Thank you and nice job again on on.

Margins and cost control and tough environment appreciate the work.

You bet you're welcome.

Our next question is a follow up from David Nierenberg of Nierenberg investment your line is open.

Welcome to the eminent David filibuster.

[laughter].

Thank you for giving us.

About five weeks, which is gratifying and encouraging.

Hear about.

When I was speaking before.

I forgot to.

Sure.

Oracle recollection.

About what the company was able to go after.

Well, Chris wasn't here at the time, Jim near Perfect recollection, correct anything.

And accurate.

But my recollection was that after the price of oil producing about five years ago and started to come down.

At the beginning of that time.

Your net debt slightly in excess of $60 million.

And your skillfully managed or cough and your balance sheet.

During the downturn.

Oh, you were able to reduce debt by over $30 million from over 62 under 30.

And at the very same time continue to pay a dividend much of the time and and roughly the same time.

Repurchased approximately 9% of issued and outstanding shares due to all of those things.

So you have shown that you can do that.

And given the size of inventory right now.

Even so.

Given other asset allocation possibilities.

Seems to me you have another opportunity to far more pain, if we reduce that.

Two.

Substantial repurchase.

Final thing I'd say.

From watching many companies over many years with that many companies have announced repurchases.

Don't necessarily follow through.

The only time a repurchase really helps your stakeholders.

This morning, it is material and when it is continuing.

9.2 million at the current share price is a really nice place to be again, I hope to do energetic.

It all up.

And go back to your excellent board of directors, ultimately and they have to do some more.

Okay. Thank you Dave.

Well it sounds like your memory is pretty good too.

So.

No need for me to.

Attempt to correct that.

Your description of what occurred is very accurate once again, thank you for all those comments.

There are no further questions like to turn the call back over to Jim Pokluda for any closing remarks.

Thanks Michelle.

Thanks to our valued team members for their continued hard work and dedication to the company.

So our shareholders. We appreciate you joining us today and look forward to success in the period ahead.

Good day everyone.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect everyone have a great day.