Huttig Building Products, Inc.
Q1 2019 Earnings Call Transcript

Published: 4 May 2019

[Operator:]

Good morning, and welcome to the Huttig Building Products First Quarter 2019 Earnings Call. [Operator Instructions] I would now like to turn the call over to Philip Keipp, Vice President and Chief Financial Officer. Please go ahead, sir.

[Philip Keipp:]

Thank you, and welcome to Huttig's first quarter 2019 earnings call. With me this morning are 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 first quarter financial results and provide commentary of our progress in executing our strategic growth initiatives. Following the 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 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 are listening to this call on 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 a reconciliation to the most comparable GAAP measures can be found in the earnings release issued yesterday and posted 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 our website under Financials. And now it is my pleasure to turn the call over to Bob.

[Bob Furio:]

Thank you, Phil. Good morning, and thank you for joining our call today. It's been less than 60 days since we reported our fourth quarter and full-year 2018 results. So our call today will primarily focus on our first quarter financial results. Before I turn the call back over to Phil to discuss our financial performance, I will provide a brief update on the continued execution of our strategic plan. We continue to focus our efforts on our strategic growth initiatives as well as our key core product lines to drive growth above that of the residential construction market. In the face of a moderate market decline coupled with the impact of inclement weather in many parts of the country, our first quarter revenues were essentially flat with the year-ago, down 0.3%. We believe our growth initiatives continue to provide the foundation for which the company is able to outperform the residential construction market segments we serve. To quantify, based on a 5.3% decline in single-family starts, an 18.9% decline in multi-family starts and moderate growth in repair and remodel market, we estimate our composite market declined approximately 4.4% in the quarter as compared to prior year. As such, based on our sales mix by market segment, we estimate that we grew approximately 4.1% above the market in the quarter. In the face of the market and weather-related challenges, sales on Huttig-Grip products grew 13.4% and sales of prefinished storage grew 14.7% over the prior year quarter, clearly demonstrating that we’re continuing to grow above the market and successfully diversifying our business. As we outlined in our year-end earnings call, for the balance of 2019, we will continue to focus on

[Philip Keipp:]

Thank you, Bob. First quarter 2019 net sales were $197.4 million, which was $0.6 million or 0.3% lower than the first quarter 2018. As Bob discussed, we believe that while our sales performance was generally flat as compared to last year, we continue to generate above market growth based on the traction gained from our growth initiatives. Softening in the housing market, combined with unusually severe weather across many parts of the U.S. adversely impacted our earnings in the quarter. Gross margins were 18.9% of net sales during the first quarter of 2019 compared to 19.5% a year-ago. The reduction in gross margin percent was primarily attributable to a higher proportional increase in Building Products sales as compared to other higher margin product categories as well as a competitive pricing environment and incremental cost associated with customer programs. Our operating expenses were $39.6 million during the first quarter of 2019 compared to $39.2 million in the prior period. Our operating expenses were negatively impacted by unusually high medical claims during the period and higher equipment and facility costs as well as an increase in contract hauling. As a percentage of sales, operating expenses increased to 20.1% in the first quarter 2019 compared to 19.8% a year-ago. Net loss from continuing operations was $3.2 million during the first quarter of 2019 as compared to $0.5 million in the first quarter of 2018. Adjusted EBITDA was a negative $0.3 million during the first quarter of 2019 as compared to a positive $1.4 million a year-ago. Turning to the balance sheet. We ended the first quarter of 2019 with total debt of $145.3 million compared to $146.7 million a year-ago and $138.9 million at the end of 2018. We used approximately $5.6 million in cash from continuing operating -- operating activities in the first quarter 2019 as compared to $39.8 million in the prior year period, a $34.2 million improvement. The lower level of cash utilization is principally due to improved working capital management and, as expected, we did not require our normal large seasonal inventory build in the first quarter based on our ending 2018 inventory position. During the quarter, we borrowed $6.3 million under our revolving credit facility to finance cash operating needs as compared to borrowings of $43.1 million during the prior year quarter. This brought the outstanding balance under our revolving credit facility to $139.3 million at March 31, 2019, as compared to $142.6 million a year-ago and $132.3 million at the end of 2018. Now I will turn the call over to Jon for closing comments.

[Jon Vrabely:]

Thank you, Phil. From a market perspective, residential construction activity in the first quarter was erratic, with two -- with total new residential construction starts declining by nearly 10% as compared to the first quarter last year. Multi-family starts were down 28% in January, 20% in March and 18.9% for the quarter. Single-family starts were down just over 5% for the quarter, but were down more than 12% in February and nearly 10% in March. The weather was equally erratic across most of the country in the quarter, and while impossible to quantify, certainly had a negative impact on the market and the business. While sales were virtually flat to the first and fourth quarters of 2018, we successfully grew above the market and generated mid double-digit growth in Huttig-Grip products and prefinished exterior doors. Flat sales, combined with operational inefficiencies created by the volatile market, further challenged our ability to leverage our cost structure and generate the improvement in profitability that we expected. During our most recent call, I stated that for the first time in more than two years, our entire management team was in a position to focus on what we do best as financial managers and operators. Even if faced with a moderate level of market headwind, we have the tools and know what we need to do to improve our financial performance throughout the balance of the year. We will continue to execute our sales plan and are acting with a sense of urgency to improve our gross profit, improve our operating leverage and increase our cash generation to reduce debt and improve liquidity. Operator, we will now take questions.

[Operator:]

Thank you [Operator Instructions] Thank you. Our first question comes from Alan Weber with Robotti Advisors. Your line is now open.

[Alan Weber:]

Hi. Good morning.

[Jon Vrabely:]

Good morning, Alan.

[Alan Weber:]

Jon, when you talk about the gross margin, specifically towards Huttig-Grip and the building products, can you talk about kind of what you expect from the gross margins in Huttig-Grip? And I guess, if you can talk about the continued conversion of -- maybe you can quantify and put some numbers to it, where you are today.

[Jon Vrabely:]

Yes. So, Alan, we do not provide any level of guidance historically and are not in a position where we want to start to provide guidance. So I will do my best to answer your question or questions. So first, with regards to Huttig-Grip, depending on the product and product line, whether it be building products and/or fasteners, the margins can be quite different depending on the product itself and the customer segment that we are selling into. So as compared to, say categories that we would deem to be historical core products, core building products, in particular, the margins in general will be relatively close to those generated historically in our core building product lines. And there are products within the building -- within the Huttig-Grip category that will generate out of warehouse, higher margins than kind of historical averages and there are some products that will, out of warehouse, generate lower. But in general, margins should be, in total, at where our historical legacy building products margins were. With regards to penetration of pro lumber dealers, we continue to make progress there and are continuing to further penetrate that very important core customer segment of Huttig in pro lumber dealers. And we are seeing our revenue to those core customers continue to increase in Huttig-Grip fasteners as well as Huttig-Grip building products. So it never happens as fast as I would like it to happen, but we certainly are making progress, I think, as represented by our growth of nearly 14% in the quarter of Huttig-Grip products in total.

[Alan Weber:]

And just as a follow-up, is there a way to break out what you think are -- I don't want to call them one-time expenses that impact gross margin when you do the conversions?

[Jon Vrabely:]

To break them out. Well, we certainly internally account for all of the costs associated with conversions, whether it be marketing collateral or returned product. All of those -- any financial impact issues associated with any conversion is certainly accounted for and is included in -- obviously, included in all of our financial reporting. So we do not break it out or report it externally. And to be frank, the -- it just really is not that material from an impact perspective on the sales or margins associated with the category.

[Alan Weber:]

Okay, great. Thank you.

[Operator:]

Thank you. [Operator Instructions] Our next question comes from Richard Dearnley with Longport Partners. Your line is now open.

[Richard Dearnley:]

Good morning. I got on a minute or two late. Did you all break out the Huttig-Grip revenue for the quarter?

[Jon Vrabely:]

Richard, no. What we did do was we disclosed our revenue growth with Huttig-Grip products, which was approximately 14%. We’ve not disclosed Huttig-Grip revenue, specifically.

[Richard Dearnley:]

Okay. What were the conversions in the quarter, comparable to the last couple of quarters? Where -- was -- in a bigger sense, was the marketing effort in the first quarter as successful as it's been in the second half of '18?

[Jon Vrabely:]

I would say that we continue to gain momentum in fastener conversions as reflected by the nearly 14% growth of all Huttig-Grip products in the quarter. I will tell you that our growth in fasteners, specifically was significantly higher than our growth of Huttig-Grip building products. So as compared to prior quarters, we grew conversions at a faster rate in Q1 of '19 than we’ve in any other prior period.

[Richard Dearnley:]

And when you were counting a conversion, is -- since I’m new to your company, I’m still under -- trying to put pieces together. Is a conversion just a lumber dealer or a customer putting Huttig-Grip in and taking the competitor out, or putting Huttig-Grip in and just gaining part of the shelf space with someone else? Does that count -- is that a conversion?

[Jon Vrabely:]

Yes. So very specifically, when we talk about conversions, fastener conversions, we are really referring to our historical core customer segment, particularly, pro lumber dealers and home centers. And pro lumber dealers and home centers are the primary users of packaged product, meaning one in five pound packages. And it's critical to our ability to leverage our pre-initiative cost structure to the customer base that we have historically served and are core to our legacy and current business. So we really talk about conversions and use the term conversions specifically around customers that convert to the Huttig-Grip packaged program. Now there are lots of other customer segments and customers within those segments that are not large users of packaged product. And while we are growing with those customers, generally, we are not tracking them specifically as conversions and we really look at the growth in those customer segments on a quarter-over-quarter and year-to-date -- over year-to-date basis through revenue increases by specific product.

[Operator:]

Thank you. I’m not showing any further questions at this time. I would now like to turn the call back over to Jon Vrabely for any closing remarks.

[Jon Vrabely:]

If I could, I would just like to let Richard know that if he has additional questions, he can certainly reach out as anyone on the call can, to try to schedule a one-on-one with management that might help further explain kind of the strategy in the business. So with that stated, in closing, despite our disappointing results in the quarter, we’ve successfully positioned the company to achieve our strategic growth and diversification objectives. The most difficult aspects of implementing and executing our growth strategy are behind us and we’re focused and engaged in improving the key operational aspects of the business that will improve our profitability. I’m indebted to all of our associates for the dedication and hard work they put forth on behalf of our stakeholders. I want to thank our customers and supply partners for the trust they place in us every day to care for their businesses. Finally, I thank you for your interest and ownership in our company and for your participation in our call today. We look forward to speaking with you again in July when we report our second quarter results. Thank you.

[Operator:]

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