Houston Wire & Cable Earnings

Last week Houston Wire & Cable held it’s Q4 / 2015 annual earnings call.  As many in the industry know, Houston Wire and Cable, while categorized as a manufacturer, is, in reality, more of a master distributor given that they represent other brands. They compete against companies such as Omni Cable, WireXpress, Distributor Wire & Cable and a few others.  Reportedly there have been known to be differences in how the various companies go to market, however, primarily, they all sell through distributors.

Recently we shared insights regarding Encore, which shed some light on the copper market.  Perhaps HWCC does the same?

Highlights from the Houston Wire & Cable call:

• Q4 headwinds included “price of oil, deflation in copper, steel and aluminum, and the strength of the US dollar” as they impact the industrial end markets.
• Sales decreased 10% adjusted for deflation in metals. (attributed mostly to the energy space with the remainder focused on industrial.)
• Gross margins are 21.5%, down 160 basis points due to lower product margin, lower rebates, higher freight costs
• Invoice count decreased 7.5%.
• Sales results in core business (essentially MRO and is 69% of the business) declined 13%, adjusted for metals.  (the question becomes, did the others decline similarly and hence HWCC lost share? According to 1 competitor, their 2015 business was up, albeit marginally, which may infer taking share or that their business mix is not as industrial MRO-oriented.)
• Projects are 31% of the business and revenues declined 3%
• 30% of company revenues come from oil & gas market
• Extreme focus on expense management, gross margin retention / optimization and inventory management
• Over the year reduced their employee count by 24 people (6%) and incurred salary cuts

Regarding 2016:

• same headwinds will continue (and from talking to a wire manufacturer, they wouldn’t be surprised at a $2.00-2.25 average for 2016 and, as you may recall from our Rexel outlook overview, they were bearish on copper)
• Seeing more success in non-resi construction, which outperforms, YTD, the industrial market.
• Seeking further “inventory re-profiling”
• See a “slow appreciation” in copper in 2016 but “it’s too soon to call it”
• Margins could contract another 50-100 basis points based upon market weakness (and probably customer leverage as suppliers chase business.)
• Open to some M&A but needs to be based upon what electrical distributors sell (and doesn’t compete with them / they already have access to) given their 2-tier distribution model

Some additional insight courtesy of an investment firm (and we’ll leave out the investing advice):

• Q4 results were “below expectations” and expect 2016 to be another “challenging” year for the reasons previously mentioned.
• HWCC mentioned that February trends improved somewhat but there wasn’t confidence for projecting a continuation, at this time
• If current metal prices holes, expect high single digit headwinds for first half of year due to comparisons
• Incremental cost savings opportunities are “limited” according to management

It is a somewhat interesting report as others mention end-markets, new segments / opportunities and some initiatives or commentary on the marketplace … something that could differentiate them. Perhaps Houston Wire is cautious? Perhaps there isn’t much of a differentiation?

So, the question for distributors, why one wire / cable master distributor vs another? Is it all about price and availability (which wasn’t mentioned although inventory “re-profiling” was mentioned which could impact availability)?