U.S. Markets closed

Edited Transcript of HBP earnings conference call or presentation 29-Oct-19 3:00pm GMT

Q3 2019 Huttig Building Products Inc Earnings Call

ST. LOUIS Dec 5, 2019 (Thomson StreetEvents) -- Edited Transcript of Huttig Building Products Inc earnings conference call or presentation Tuesday, October 29, 2019 at 3:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Jon P. Vrabely

Huttig Building Products, Inc. - President, CEO & Director

* Philip W. Keipp

Huttig Building Products, Inc. - VP & CFO

* Robert Furio

Huttig Building Products, Inc. - Executive VP & COO

================================================================================

Conference Call Participants

================================================================================

* Alan W. Weber

Robotti & Company Advisors, LLC - Research Associate

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good morning and welcome to the Huttig Building Products Third Quarter 2019 Earnings Call. (Operator Instructions) As a reminder, today's program is being recorded.

I would now like to turn the call over to Phil Keipp, Vice President and Chief Financial Officer. Please go ahead, sir.

--------------------------------------------------------------------------------

Philip W. Keipp, Huttig Building Products, Inc. - VP & CFO [2]

--------------------------------------------------------------------------------

Thank you, and welcome to Huttig's Third Quarter 2019 Earnings Call. With me this morning is Jon Vrabely, President and Chief Executive Officer; and Bob Furio, Executive Vice President and Chief Operating Officer.

During the call today, we will discuss our third quarter financial results and provide commentary on other aspects of our business. Following our prepared remarks, the operator will open up the line for questions.

Let me take a moment to remind you that today's discussion reflects management's views as of today and may include forward-looking statements. Actual results could differ materially from those currently anticipated, and Huttig disclaims any obligation to update information discussed on this call as a result of developments that occur afterward.

Also, to the extent you're listening to this call and replay, information could have already changed. Additional information about factors that could potentially impact the financial results is included in the earnings release issued yesterday and in our filings with the SEC.

During this call, certain non-GAAP financial measures will be discussed. A description of any non-GAAP adjustments and reconciliation to the most comparable GAAP measures can be found in the earnings release issued yesterday and on the company's website at www.huttig.com. Today's call is being webcast live and is being recorded. If you ask a question, it will be included in our live transmission and in any future use of the recording. You can replay the call on the Investor Relations page of the website under press releases.

Now it is my pleasure to turn the call over to Bob.

--------------------------------------------------------------------------------

Robert Furio, Huttig Building Products, Inc. - Executive VP & COO [3]

--------------------------------------------------------------------------------

Thank you, Phil. Good morning, and thank you for joining our third quarter 2019 earnings call. I will provide an update on our operational performance, and Phil will discuss our third quarter and year-to-date financial results. Although the housing market has shown some recent lift, total residential housing starts remain lower as compared to the first 9 months of 2018. One of the largest market drivers is single-family starts, which were down nearly 2% in the first 9 months of 2019 as compared to 2018. Additionally, the temporary disruption caused by our ERP system upgrade, which was completed in the second quarter, has dissipated and is now behind us. However, as expected, and as discussed in our last call, there was some residual impact as we move to the third quarter. Perhaps, the largest impact from the disruption was in our millwork production business as reported within our millwork sales category. This is due to the nature and complexity of the quoting, order entry and underlying production processes. Sales in this category were down $5.2 million in the third quarter as compared to a year ago. While we cannot determine the exact dollar impact attributable to the system disruption, we do believe it had a meaningful impact in the context of our third quarter millwork sales decline.

Our IT team has worked hard in addressing the underlying issues so that we can now return to a more normalized process.

During the quarter, sales of wood products are down $4.6 million as compared to a year ago and $10.4 million on a year-to-date basis. The decline is largely due to market volatility in multi-family and commercial projects in the markets we serve as well as the impact from commodity pricing across certain products within the category and our continued deemphasis of lower-margin, highly-commoditized product categories. There have been a number of positive trends in our business, which further reinforces our focus across our strategic growth product categories. For example, we are beginning to experience higher-margin trends across the majority of our Huttig Group business, particularly in the fastener category while also focusing on increasing sales out of the warehouse. We have made a concerted effort to focus our sales growth on higher-margin products, which is reflected in our shipping margins across these lines and is also indicative of the sales decline on lower margin, more commoditized products that are subject to a more competitive pricing environment. Sales to our traditional core customer base remain a strong focus point for us. We view this channel as a significant growth opportunity as it ties in nicely with our strategic initiatives.

The results from our initiatives have taken root and are showing progress. As an illustrative example, in the third quarter, sales of packaged fasteners to pro lumber dealers were up approximately 79%, and underlying margins grew approximately 590 basis points as compared to the same period a year ago. These trends are in line with our overall fastener market strategy based on our long-term projected sales mix in this category.

From a working capital perspective, while progress has been made, we still have much work to do. Our overall inventory levels are down $11 million or 7% from a year ago. Huttig group fastener inventories are down approximately 9% from the beginning of the year. However, we continue to have a significant amount of fastener inventory from the initial inventory build over the last 2 years. We have been and continue to analyze and rebalance our fastener inventory, selectively fulfilling replenishment requirements through internal transfers, while placing strict controls on product procurement.

While this process has added labor and transportation costs to our operating expense structure, we expect to have the majority of the work completed by the end of 2019. We carry the full breadth and depth of fastener products across our branch network to support future sales growth. As we continue to execute our sales plan and gain share across all customer segments, we will continue to reduce and rightsize our fastener inventories.

Working capital, and more specifically, inventory management, remains a top priority.

Now I'd like to turn the call over to Phil to discuss our financial performance.

--------------------------------------------------------------------------------

Philip W. Keipp, Huttig Building Products, Inc. - VP & CFO [4]

--------------------------------------------------------------------------------

Thank you, Bob. Third quarter 2019 net sales were $215.7 million, which is $6.3 million or 2.8% lower than the third quarter of 2018. Through the first 9 months of 2019, net sales were $631.6 million, which is $11.8 million or 1.8% lower than 2018. As Bob mentioned, our sales performance is indicative of the headwinds we have faced in 2019. Gross margins were 20.7% of net sales during the third quarter of 2019, compared to 20.1% a year ago. The increase generally reflects our focus on higher-margin sales opportunities and related changes in sales mix, including the higher-margin trends in the third quarter that Bob previously discussed.

Through the first 9 months of 2019, gross margins were 20% of net sales compared to 19.9% a year ago.

Operating expenses were $41.4 million during the third quarter of 2019, compared to $41.1 million a year ago. Personnel costs decreased $300,000 as lower compensation and contract labor costs were partially offset by higher medical expenses. Nonpersonnel costs increased $600,000 for the quarter, primarily due to maintenance costs and depreciation, including software depreciation from our recent ERP system upgrade. Other decreases in operating expenses were offset by higher facility costs, including those from our expansion efforts. As a percentage of sales, operating expenses increased to 19.2% in the third quarter of 2019, compared to 18.5% in the prior year period.

Year-to-date, operating expenses were $122 million compared to $123.2 million in 2018. Personnel costs decreased $700,000 as lower wages and variable compensation costs were offset by a significant increase in medical costs, which were $1.6 million higher in 2018, driven by higher medical claims. Nonpersonnel costs decreased $500,000 in the first 9 months of 2019, primarily due to nonrecurring litigation settlement costs of approximately $3.4 million in 2018, which were largely offset by increases in facility costs, including increases from our expansion efforts, depreciation and amortization, including costs from our recent software upgrade and higher maintenance costs.

As a percentage of sales, operating expenses were 19.3% in 2019, compared to 19.1% in 2018. Adjusted for nonrecurring litigation and settlement costs, operating expenses were 18.6% of sales in 2018.

Operating income was $3.3 million in the third quarter of 2019 as compared to $3.5 million a year ago. For the first 9 months ended September 30, operating profit was $4.4 million and $5.1 million in 2019 and 2018, respectively.

We recorded an $11.8 million noncash tax charge in the second quarter of 2019 related to an increase in our deferred tax asset valuation allowance. The increase was required based on applying the criteria under U.S. GAAP. Most of our net deferred tax asset is comprised of federal tax loss carryforwards, which will not begin to expire until 2030. The deferred tax valuation allowance will be assessed in each reporting period and the amount of our net deferred tax assets considered realizable could be adjusted in the future periods based on our financial performance. The net operating loss carryforwards remain available to offset future taxable income.

As a result of the foregoing, we reported net income of $1.6 million during the third quarter of 2019 as compared to net income of $1.2 million in the third quarter of 2018. Year-to-date, after noncash tax charge in 2019, we incurred a net loss of $11.9 million as compared to net income of $900,000 in 2018.

Adjusted EBITDA was $5.3 million during the third quarter of 2019 as compared to $5.5 million for the third quarter of 2018. Adjusted EBITDA was $10.1 million through the first 9 months of 2019 as compared to $14.3 million a year ago. 2018 adjusted EBITDA reflects an add-back of $3.4 million, primarily for the nonrecurring litigation and settlement costs.

With regard to our operating leverage, we ended the third quarter of 2019 with total debt of $153.5 million compared to $168.3 million a year ago, a decline of $14.8 million.

Debt under our senior credit facility declined $15.8 million from $163.6 million a year ago to $147.8 million. During the quarter, we repaid $6.8 million against our senior credit facility. We generated approximately $9.5 million in cash from operating activities in the third quarter of 2019, compared to $13.0 million in the prior year period. For the 9-month period, our cash usage from operating activities declined by $46.6 million as compared to 2018 from $57.1 million to $10.5 million.

The lower level of cash utilization for the current year is primarily due to improved working capital management.

We remain sharply focused on recognizing debt reduction opportunities to improve working capital management and cash provided from operations.

Now I will turn the call over to Jon for closing comments.

--------------------------------------------------------------------------------

Jon P. Vrabely, Huttig Building Products, Inc. - President, CEO & Director [5]

--------------------------------------------------------------------------------

Thank you, Phil. During our last call, I stated that our 2 biggest challenges were margin erosion and expense management. As discussed earlier on this call, we are making progress in growing warehouse sales of our strategic product categories while deemphasizing lower-margin commodity categories. As a result, we are beginning to see the positive impact our progress is having as we increased our gross margins in the quarter by 60 basis points to 20.7% over the prior year quarter.

Going forward, we will continue to focus on profitable growth through increasing share of our strategic product categories across our core and targeted growth customer segments. While we are making progress and beginning to see the positive results in increasing our margins, we have not made meaningful progress in leveraging the expense structure.

Regardless of the negative impact that market volatility, the deemphasis of lower margin, more commoditized products and the ERP upgrade has had on our 2019 sales performance, we are not executing our growth strategy at a fast enough pace to effectively leverage the investments we have made to support the strategy.

Illustratively, using third quarter 2019 results as compared to the same periods in 2018 and 2016, we have prioritized the expense categories across personnel and non-personnel costs that have increased at a much faster rate than sales over the past several years. Even though the business and structure has changed significantly, and although this illustration is based on 1 quarter, it is generally representative of the increase in our expense structure.

In addition, we consistently utilized 2016 results as the comparative benchmark as it was the launch point for our strategic growth initiatives and underlying investments.

Total personnel costs are down $300,000 in 2019 as compared to 2018, but have increased $3.3 million as compared to the same period in 2016. The largest driver of the increase is salaries, which are virtually flat with 2018, but have increased $2.1 million over the same period in 2016.

Total non-personnel costs have increased $600,000 as compared to 2018 and $4.3 million as compared to 2016. The largest increase in non-personnel expense is in contract haul expense, which is down $40,000 to 2018 and up $840,000 to 2016. The increase is primarily driven by the internal rebalancing and transferring of fastener inventory, but the majority of that process will conclude by the end of 2019, and we anticipate that we will experience a meaningful reduction in contract haul expense in 2020. The second largest increase is in building rent expense. We expanded our Saco, Maine and Davenport, Florida locations to accommodate the expansion of our pre-finished operations and have added warehouse space to accommodate the national expansion of Huttig-Grip products. Some of the additional space to accommodate the Huttig-Grip expansion is on short-term leases, and we anticipate exiting much of this temporary space in 2020. Building rent in the third quarter of 2019 was up $280,000 as compared to 2018 and $730,000 as compared to the same period in 2016.

Even though we have faced challenges in the execution of our plan and our financial results have been slower to materialize than planned, we know our growth strategy is viable, and we are committed to taking the necessary actions to align the cost structure with our projected revenue in a manner that does not inhibit our ability to continue to grow our strategic product categories. This is a delicate balance as we need to ensure that we have the appropriate structure and resources to execute our plan. Operator, we will now take questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Our first question comes from the line of Alan Weber from Robotti Advisers.

--------------------------------------------------------------------------------

Alan W. Weber, Robotti & Company Advisors, LLC - Research Associate [2]

--------------------------------------------------------------------------------

Can you talk about the AZEK announcement that you made recently, what that means for the company? And also, when -- I think in previous calls, you were more specific about the Huttig-Grip rollout. Can you just talk about kind of where that is? And in general terms, what your expectations are for next year?

--------------------------------------------------------------------------------

Jon P. Vrabely, Huttig Building Products, Inc. - President, CEO & Director [3]

--------------------------------------------------------------------------------

Yes. So I will -- I'll take the first question on AZEK, and Bob, if you don’t mind, maybe you can handle the second question on Huttig-Grip. So with regards to AZEK, we have had a very strong relationship with AZEK since AZEK had purchased TimberTech. We had a 15-year relationship with TimberTech and -- a very strong relationship, and fortunately, when TimberTech was purchased by AZEK, we were able to continue that relationship. And going back to 2014 or 2015, we were successful in picking up the AZEK product line across most of the geography that we had at the time where we were authorized to sell TimberTech. We have, obviously, continued to build and grow the relationship with AZEK as a key strategic supply partner to Huttig. AZEK underwent some changes in distribution in the western part of the country towards the, I would say, end of Q2, maybe beginning of Q3. And as a result of those changes, we were successful in picking up distribution rights for all AZEK products in the Pacific Northwest. It represents a significant growth opportunity for us in 2020 as AZEK is arguably the most recognized and preferred brand of composite trim products and certainly high-end composite deck and rail products.

So as we move forward, there are opportunities for us to continue to grow our relationship with AZEK, but we are very pleased that they saw us as a key partner to help them execute their growth plans certainly in the Pacific Northwest as we head into 2020.

--------------------------------------------------------------------------------

Robert Furio, Huttig Building Products, Inc. - Executive VP & COO [4]

--------------------------------------------------------------------------------

So as it relates to Huttig-Grip, Alan, I think the best way to state it is pretty much a follow-up from some of my comments. We knew that this was going to be a long-term play and our intent was never to be in the commodity part of the business. While there is a portion of that, that we do have to participate in, our focus has always been on selling programs, programs with packaged nails and screws and get into that shelf space. And we knew that, that was going to take some time to get meaningful market share, but we knew it was a long-term play as well as that opportunity to continue to grow market -- market share is out there for us. And we have focused -- we have taken a specific focus this year on getting those programs in place. We're walking into the selling season, once again, of having dealers willing to convert their stores through the winter months. And our focus is exactly there to deemphasize commodity products, sell profitable programs.

--------------------------------------------------------------------------------

Alan W. Weber, Robotti & Company Advisors, LLC - Research Associate [5]

--------------------------------------------------------------------------------

And in terms of -- is there any like data points? I mean you talked about revenue being up, what the revenues are there or what the number of new customers are?

--------------------------------------------------------------------------------

Jon P. Vrabely, Huttig Building Products, Inc. - President, CEO & Director [6]

--------------------------------------------------------------------------------

Bob is deferring to me. So to answer that question, Alan, I would just tell you that we are making probably more solid progress in penetrating our historical core customer segment of pro lumber dealers than we did certainly in 2018. And I think that is represented in some of the illustrative examples that Bob provided earlier in the call. There is still ample opportunity for us to continue to grow in that segment. I would tell you that we've also done, I think, an admirable job of growing particularly in the roofing wholesale customer segment. But to be frank, across drywall houses, farm and ranch supply houses, concrete supply, general construction supply houses, we have probably not executed to the degree that we had originally planned. And that is contributing to the fact that we still have a significant amount of excess fastener inventory today because we are fully inventoried across the entire category from a breadth and depth perspective to service all customer segments. So we have work to do across some of the targeted growth customer segments, and there is lots of opportunity to continue to penetrate pro lumber dealers as well as looking supply houses across all of the geographies that we service.

--------------------------------------------------------------------------------

Operator [7]

--------------------------------------------------------------------------------

Thank you. And this does conclude the question-and-answer session of today's program. I'd like to hand the program back to Jon Vrabely for any further remarks.

--------------------------------------------------------------------------------

Jon P. Vrabely, Huttig Building Products, Inc. - President, CEO & Director [8]

--------------------------------------------------------------------------------

Thank you, operator. I'd like to thank all of the Huttig associates for the dedication and hard work they put forth on behalf of our stakeholders. I also want to thank our customers and supply partners for the trust they place in us every day to care for their business.

Finally, I thank you for your interest and ownership in the company and for your participation in our call today. We look forward to speaking with you again in February when we report our 2019 annual results.

--------------------------------------------------------------------------------

Operator [9]

--------------------------------------------------------------------------------

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.