Huttig Building Products, Inc.
Q2 2020 Earnings Call Transcript

Published: 8 Aug 2020

[Operator:]

Good morning, and welcome to the Huttig Building Products Second Quarter 2020 Earnings Call. Participants will be in a listen-only mode until the end of the call when the company will have a question-and-answer session. [Operator Instructions] I would now like to turn the call over to Mr. Philip Keipp, Vice President and Chief Financial Officer. Please go ahead, sir.

[Philip Keipp:]

Thank you, and welcome to Huttig's second quarter 2020 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 second quarter 2020 operating and financial results and provide commentary on our contingent efforts to combat the effects of the COVID-19 pandemic. 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 because of developments that occur afterward. In addition to the extent you are listening to this call on replay, information could have already changed. Additional information about factors that could potentially affect 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 Financials. And now it is my pleasure to turn the call over to Jon for opening remarks.

[Jon Vrabely:]

Thank you, Phil. Good morning and thank you for joining our second quarter 2020 earnings call. After my initial high-level commentary on our quarterly results, Bob and Phil will discuss our second quarter operating and financial results in greater detail, after which, we will open the call for the Q&A session. I want to begin by expressing my gratitude to all of our associates for the personal sacrifices they continue to make to solidify the future of our company for all Huttig stakeholders. The business environment during the quarter was volatile and challenging. All of our associates have risen to the challenge, demonstrating a level of commitment to the organization and our customers that far exceeded my expectations. Our second quarter results are a testament to the genuine care and fortitude of our associates, and I am sincerely grateful to them for their continued dedication during a period of unprecedented volatility and uncertainty. We began developing our COVID-19 readiness and response plan in late February and finalized the initial version of the plan in early April, which we discussed in detail during our first quarter earnings call. Based on the information that was available at the time, we developed a comprehensive plan and financial model for the second and third quarters of 2020. The plan and financial model drove the actions we executed in the month of March and April. We acted quickly, aggressively and decisively to adjust our cost structure and working capital levels across the entire organization to mitigate an anticipated precipitous decline in sales related to the COVID-19 pandemic. Our actions focused on rightsizing personnel levels; reducing overall personnel costs; suspending all nonessential discretionary spend, including plant capital expenditures; and reducing our inventory levels. Our second quarter operating results were significantly better across every key metric than our initial internal COVID-19 financial model and also reflect marked improvements over the prior year quarter in terms of net operating results, working capital and liquidity. In light of the serious pandemic-related challenges to the U.S. economy that we continue to suffer, as well as all of the pandemic-related challenges we have faced, we are generally pleased with our second quarter performance, and we'll make necessary adjustments as the environment continues to evolve. I will now turn the call over to Bob to discuss our second quarter operating performance.

[Robert Furio:]

Thank you, Jon. Good morning, everyone. I will provide an update on our operational sales initiatives and discuss specific factors that affected our second quarter performance. Phil will then discuss our overall financial performance for the quarter. From an operational perspective, we are very proud of our associates in the way they responded in a very challenging environment. As Jon stated, these are unprecedented challenges faced throughout our entire organization from both a professional as well as a personal perspective. Turning to our operating results. Our sales decreased $26.5 million or 12.1% in the second quarter of 2020. After a nearly 3% increase in net sales in the first quarter, the second quarter decline was caused primarily by changes in the operating environment created by the pandemic. The impact on our sales was further pronounced as certain key suppliers experienced pandemic-related supply chain disruptions. The challenging environment slowed momentum from our strategic sales initiatives, though we did achieve growth in certain key product categories. As discussed in our most recent earnings call, in addition to our national growth strategy, we have established branch-level sales initiatives based on local market opportunities. These initiatives are designed to generate profitable sales growth while addressing the needs of our locally based customers. Our sales in strategic categories are generally at higher margins as compared to other categories, and our efforts to shift product mix toward non-commoditized products are generating the overall desired results. Though total gross margins were down 10 basis points in the second quarter as compared to last year, this reflects the shift in sales mix, including a higher proportional level of direct sales. The shift in sales mix was in part driven by supply chain disruptions in certain product categories. On a year-to-date basis, our gross margins have increased 60 basis points to 20.2%. Some highlights related to our strategic sales initiatives include an 18% growth in fastener warehouse sales with a corresponding margin increase of nearly 540 basis points. Secondly, a significant portion of fastener sales and margin growth has come from additional market share gains as we convert more core and target customer segments to our packaged nail and screw program. Third, sales in prefinished stores, which is a key value-add service proposition for our customers, was negatively impacted in the second quarter due to market conditions created by the pandemic. However, the majority of customers and markets have reopened, demand has rebounded nicely and our order files are growing. And fourth, tech rail and trim sales out of warehouse were up slightly despite the challenging environment with a margin growth of 20 basis points as compared to the second quarter of 2019. These are just some of the highlights related to our strategic growth initiatives. While we continue to focus on our strategic product categories and are gaining more traction every day, we expect that, like the rest of our business, the pandemic will continue to have a mitigating impact as we move to the remainder of 2020. As previously announced, we recorded a $1.5 million restructuring charge in the second quarter related to the closure of our Columbus, Ohio location and the consolidation of our Selkirk, New York and Newington, Connecticut facilities. The Selkirk operation is small, only sold building materials, and the majority of the trading area serviced by Selkirk was also serviced by Newington for millwork products. We anticipate minimal revenue loss, and the consolidation provides the opportunity to leverage the larger fixed cost structure in Newington while eliminating redundant working capital. Taken together, while we expect some level of lost revenues, we expect these actions will have a favorable impact on our operating results. From an operating expense perspective, before the aforementioned restructuring charge, we lowered our expense ratio by 70 basis points as compared to the second quarter of 2019, from 18.8% to 18.1%. The improved leverage was driven by cost reduction actions we took beginning in the fourth quarter of 2019 coupled with the actions taken as part of our COVID-19 readiness and response plan. From a trend perspective, April represented 50% of our total quarterly sales decline and a sales rebound that, in May, were necessary we recalled personnel to ensure we continue to meet our customer service requirements. From a working capital perspective, we reduced inventory levels, $38.8 million or 26.3%, in the second quarter. While we still have work to do, we could not be more pleased with the efforts of our field staff in driving and managing this process. We believe we finished the quarter at a total inventory level that is relatively in line with where it needs to be to service our current level of sales. Going forward, we will continue to adjust our inventory levels as demand dictates, and we'll consistently focus on improving our terms. Now I will turn the call over to Phil to discuss our financial performance.

[Philip Keipp:]

Thank you, Bob. As anticipated, the COVID-19 pandemic negatively affected our sales. However, our COVID-19 readiness and response plan drove an overall improvement in our operating results relative to our initial pandemic forecasts and relative to prior year actual results across certain key financial metrics. Second quarter 2020 sales were $192 million, which was $26.5 million or 12.1% lower than the second quarter of 2019. The decline in sales was caused by the market impact brought by the pandemic plus some level of supply chain disruption at certain key suppliers. Through the first 6 months of 2020, net sales were $395 million, which is $20.9 million or 5% lower than 2019. Our year-to-date sales performance reflects the pre-pandemic growth we experienced in the first quarter. Gross margin was 20.2% of net sales during the second quarter of 2020 compared to 20.3% in the second quarter of 2019. The change in margin is primarily related to sales mix as a higher proportion of our current net sales were from lower-margin categories and from direct sales. As Bob stated, a portion of the mix shift is related to supply chain disruption in certain key product categories. The impact from the mix change was mitigated by growth and higher margins in certain strategic categories. Through the first six months of 2020, gross margins were 20.2% of net sales compared to 19.6% a year ago, reflecting the impact from our focus on higher-margin sales opportunities. As Bob stated, we recognized a $1.5 million restructuring charge in the second quarter related to branch closure and consolidation activities. We expect these activities to be substantially completed by the end of our third quarter. Operating expenses, exclusive of the $1.5 million restructuring charge, decreased to $6.3 million or 15.4% to $34.7 million, representing 18.1% of net sales in the second quarter of 2020 compared to $41 million or 18.8% of net sales in the second quarter of 2019. Personnel expenses declined $4.7 million primarily related to actions taken related to our COVID-19 readiness and response plan, including workforce reductions, wage reductions and suspension of contributions under our employer-sponsored benefit plan as well as lower medical claims costs. Non-personnel expenses decreased $1.6 million as travel and other discretionary spend was curtailed, and we recognized lower fuel costs. Year-to-date, operating expenses, exclusive of the aforementioned $1.5 million restructuring charge, were $73.7 million compared to $80.6 million in 2019. Personnel costs decreased $6.2 million primarily as a result of expense reductions and actions taken in response to the pandemic, including workforce reductions, wage reductions and suspension of contributions to our employer-sponsored benefit plan as well as lower medical claims. Non-personnel costs decreased $700,000 as travel and other discretionary spend was curtailed in the second quarter, and we recognized lower fuel costs. The lower expenses were partially offset by higher workers' compensation and other insurance costs. As a percentage of net sales, again, excluding the $1.5 million restructuring charge, our year-to-date operating expense ratio was 18.7% in 2020 compared to 19.4% in 2019. We conducted a review of our goodwill and reported a $9.5 million noncash impairment charge in the first quarter of 2020. The impairment was largely driven by the sustained decline in our market capitalization coupled with the COVID-19 environment. Operating income in the second quarter was $2.5 million. Adjusted for the $1.5 million restructuring charge, we had operating income of $4 million compared to operating income of $3.3 million a year ago. For the six months ended June 30, our operating loss was $5.1 million. Adjusted for the $1.5 million restructuring charge and $9.5 million noncash goodwill impairment charge, year-to-date operating income was $5.9 million compared to $1.1 million in 2019. As a result of lower debt levels and favorable interest rates, our interest expense declined 50% on a year-over-year basis in the second quarter, from $1.8 million to $900,000. On a year-to-date basis, interest expense was $2.2 million compared to $3.5 million a year ago. 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 reserved increase was required based on under applying 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 deferred tax assets considered realizable could be adjusted in 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 in the second quarter of 2020 compared to a net loss of $10.3 million a year ago. Adjusted for the $1.5 million restructuring charge in 2020 and the $11.8 million tax charge in 2019, net income was $3.1 million and $1.5 million in 2020 and 2019, respectively. Year-to-date, we incurred a net loss of $7.3 million as compared to a net loss of $13.5 million in 2019. Adjusted for the $9.5 million goodwill impairment charge and the $1.5 million restructuring charge in 2020 and adjusting for the $11.8 million tax charge in 2019, year-to-date net income was $3.7 million in 2020 compared to a net loss of $1.7 million a year ago. Adjusted EBITDA was $5.7 million during the second quarter of 2020 as compared to $5.1 million in the second quarter of 2019. For the six months ended June 30, adjusted EBITDA was $9.2 million compared to $4.7 million a year ago. Turning to the balance sheet. We had total debt of $127.3 million at June 30, 2020, compared to $160.3 million a year ago. The decrease in debt was primarily due to improved operating results and lower working capital levels as compared to a year ago largely driven by lower inventories. Cash provided by continuing operating activities was $24.7 million in the second quarter of 2020 compared to cash used of $14.4 million in the second quarter of 2019. Due to seasonality of our business, we typically build working capital in the second quarter, which further highlights the achievements of our field organization. On a year-to-date basis, cash provided by continuing operating activities was $10.3 million in 2020 compared to cash used of $19.8 million in 2019. From an overall liquidity perspective, total available liquidity was $56 million at June 30, 2020, as compared to $39.6 million at June 30, 2019, an increase of $16.4 million. Given the uncertainty in the market created by the pandemic, we continue to keep an open dialogue with our senior lenders and other business partners throughout the supply chain. We believe it is in the best interest of the supply chain partners to work together through this difficult environment. We will continue to take precautionary measures across various cash management touch points, including capital spending, expense control, credit policies and other areas to address the full spectrum of levers available to us. Now I will turn the call over to Jon for closing comments.

[Jon Vrabely:]

Thank you, Phil. During our last call, we detailed the major components of our COVID-19 readiness and response plan. The successful execution of that plan, combined with the commitment and fortitude of our dedicated associates, resulted in our second - solid second quarter performance. In the second quarter, on a year-over-year basis, we achieved meaningful improvements in virtually every aspect of our operating results. We increased our adjusted EBITDA by $600,000, increased our liquidity by $16.4 million, reduced our inventory by $38.8 million, reduced our senior indebtedness by $32.2 million and improved our cash flows from operation activities by $38.9 million. During the quarter, after a precipitous decline in new residential construction in April, the residential construction market began to rebound in May, continued its momentum in June and generally did not experience a level of decline in market activity as many other industries. Total new residential construction start estimates for April 2020 were more than 27% lower than April 2019 and were nearly 19% below March 2020. May 2020 total start estimates were more than 21% below May 2019 and were more than 9% higher than April 2020. June 2020 total start estimates were 2.5% below June 2019 and were nearly 21% above May of 2020. For the quarter, total estimated starts were approximately 17.1% below the prior year quarter. While a potential coincidence, as companies began implementing work-from-home programs in March and throughout the second quarter of 2020, the residential repair/remodel segment generally experienced strong growth, especially in the home center segment. The general sentiment in the residential construction market today is fairly optimistic, but based on the challenges we face as a country to protect the health of the nation and repair the national economy, we anticipate that we will continue to experience significant volatility and uncertainty throughout the balance of 2020 and well into 2021. While the U.S. national employment rate improved during the second quarter, from 14.7% in April to 13.3% in May to 11.1% in June, recent data indicates that as the virus spiked in June and July, the improving unemployment trends could stall. In addition, other macroeconomic indicators, such as the historical decline in GDP during the quarter of 9.5%, a potential spike in renter evictions and homeowner foreclosures, a general uncertainty on the level and duration of continued government stimulus as well as all of the other variables that impact the residential construction market lead us to believe that the near-term future will continue to be somewhat volatile. While we are generally pleased with our second quarter results, our view is that we won the first battle of what is going to be a long war, and by no stretch of the imagination are we declaring victory. We will continue to utilize all of the macroeconomic and industry data available to us as we adjust our plan, but our primary focus will remain on aggressively managing every controllable aspect of the business while simultaneously continuing to implement our key strategic initiatives. Managing through the crisis to date, we successfully established a solid foundation that positions us to be fluid and aggressive in executing and amending our plan as circumstances warrant. Equally important, we achieved efficiencies in several key areas of the operations that we expect to be sustainable and have proven to each other that we can achieve our goals when we pull together as a team. I cannot be more pleased with the manner that all of our associates have pulled together to steer the company through this crisis, and I'm very proud of our entire organization. Operator, we will now take questions.

[Operator:]

[Operator Instructions] Our first question or comment comes from the line of Alan Weber from Robotti Advisors. Your line is open.

[Alan Weber:]

Good morning. How are you Jon?

[Jon Vrabely:]

I'm good Alan, thank you.

[Alan Weber:]

So can you talk about specifically about the supply chain disruptions on the millwork side? Just what actually took place? Are they behind you? And I guess the other general question is can you talk more about July trends?

[Jon Vrabely:]

Yes. So let me take the first part of the question, Alan, and then Bob could happily jump in. But I would say early in the crisis, starting certainly in very late March and into the first part of April, as all companies, I believe, were developing their response plans to COVID, there were a variety of factors, I think, that came into play, including potential plant shutdowns, particularly across our major millwork suppliers, that disrupted their ability to continue to produce and meet at least then-current lead times. In addition to that, one of our major suppliers went on serious allocation, reducing the amount of product that we could purchase by 40% as compared to prior year purchases. So that had a very limiting impact in effect on the product that was available to us. My understanding is that, that limitation is still in place today, so we are -- continue to struggle to, in some cases, get as much of the product that we need. And it certainly has had an impact on our second quarter sales. Bob, do you have anything to...

[Robert Furio:]

Yes. I would just -- Alan, I would just say that demand never really stopped. I mean, where we had states that took very aggressive actions early on, Pennsylvania, New York, Connecticut, Northeast, we certainly had an impact on revenues during that period of time, but the demand was still there and still very -- in a very strong manner. Labor comes into play here in a very large way, not only from cases of COVID in plants but getting people back to work. I think everybody in -- at least in our sector, in our segment of the industry, is struggling with finding people who are willing. I think that would probably be a fair statement. Willing to work. The jobs are out there, we have job openings, but trying to find labor is difficult for us as it is for our suppliers. So there's a downstream effect, there's an upstream effect and really, those are the two factors is demand and labor as far as -- and the impact, obviously, of the COVID that I can -- that I would describe.

[Philip Keipp:]

And Alan, this is Phil. You had asked about sales trends. And normally, we don't comment on improving order activity. But we did see a positive sales trend after precipitous drop in April as we moved into May and then June and when we saw the levels of stabilization taking place. And we've seen that stabilization continue as we move into the third quarter.

[Alan Weber:]

Okay. And then my next question was, can you just talk a little update on Huttig-Grip in terms of conversions or where that stands today?

[Robert Furio:]

I don't have at my fingertips any data as far as conversions go.

[Jon Vrabely:]

Alan I can't comment also on that, Bob. I think that one of the things -- we saw some positive movement in conversions. But in this environment, with travel restrictions and whatnot, it had a mitigating effect, as Bob discussed on the call, on conversion activity. That's not something we typically disclose.

[Robert Furio:]

Right. But I think what's more important is the fact that we are continuing to grow that segment of our business. In spite of our salespeople not being on the road and the fact that we are continuing to do conversions even in this environment, albeit not at the levels that we would like them to be, mainly related to the environment, that segment of our business, that strategic category for us continues to grow day after day. So we are seeing market share growth and we're also seeing margin growth along with it.

[Alan Weber:]

Okay thank you.

[Operator:]

Thank you. Our next question or comment comes from the line of Scott Lars [ph]. Your line is open.

[Unidentified Analyst:]

Yes, good morning, gentlemen. Last week, I'd seen 11 million shares traded of Huttig, and that's almost half our float. Can you shed some color on that, please?

[Philip Keipp:]

Good morning, Scott. Yes, this is Phil. While we are well aware of the unusual activity and trading activity in our stock over the course of the last week, we really can't provide any color on it. We don't really -- we cannot comment on the underlying activity. Something we are aware of and are monitoring.

[Unidentified Analyst:]

Well, when you see a stock undervalued like we are and you see the stock go from $1.50 to $3, now it's sitting at like $1.60, I would think you ought to look into that.

[Philip Keipp:]

Yes, we have. We have, Scott. We - again, we are monitoring it and are well aware of the activity and the pricing.

[Operator:]

Thank you. Our next question or comment comes from the line of Dr. Christian Koch [ph] from Kansas [ph]. Your line is open.

[Unidentified Analyst:]

Yes, this message is for Jon. Can you give us a little input as to kind of the rightsizing of your personnel levels versus your branch-level sales incentives? I mean you guys have really executed on operating margins and operating expenses, but it looks like your sales trajectory is still pretty poor. So I would love to have some understanding, if you've put the right incentives in place but yet you're still pulling down people.

[Jon Vrabely:]

I'm not quite sure I fully understand the question.

[Unidentified Analyst:]

Well, you made the comment that you're rightsizing personnel levels, so that means you're cutting people. But I also, in the same breath, would like to understand your branch-level sales incentives. So how do you stimulate sales? You've executed on operating margins and operating expenses, but it's pretty apparent that your sales trajectory is still pretty poor or lagging. So how do you incentivize your associates and get your topline improving?

[Jon Vrabely:]

So let's say -- so thanks for clarifying the question. I would tell you that our - in general, our compensation for sales associates, whether they be outside general territory OSRs or specialists or, in many cases, even our inside sales reps, our national account directors, are all heavily variable comp incentivized. So the compensation structure, in general, leans towards variable compensation versus fixed, particularly as it relates to our outside sales associates. So the comp structure, I believe, having been a, very early in my career, straight commission outside sales rep, if we have the right type of people in those positions, the cost structure should reward them for growth of our revenue line. That said, a -- in my opinion, a more key component of our sales trends are twofold. The first really is the fundamental change that we are working to achieve in restructuring our product offering and focusing on strategic product categories that offer significant upside long-term opportunity from a growth perspective because we do not possess a significant share in several of those categories that we've made investments in. And to be frank, that has been a little slower to execute than originally planned or anticipated. But as Bob pointed out, we are making progress, and in some cases, significant progress, being those categories that we are or have made investments in. The second is that while we are and have invested in and are working through comprehensive sales planning, comprehensive sales planning and management process, looking to grow those strategic categories, we are also simultaneously still in the process of rationalizing lower margin, more commoditized product categories, which, in some cases, is offsetting the revenue growth that we are achieving in the categories that we are focused on growing, not only in the short term but over the course of the long term. So there is that - there is an offset there in categories that we are and continue to work our way out of that we deem in the intermediate to long-term are just not part of our go-forward portfolio because they are not products that lend themselves to value-add services and do not provide the opportunity for us to really bring value, from our perspective, to our customer segments.

[Unidentified Analyst:]

Okay. Just a follow-up, Jon. Thank you for that. That's actually very helpful. Of the strategic product categories that you talked about, is the major supplier that you're on allocation, the 40% reduction, is that one of those categories?

[Jon Vrabely:]

It is - I will tell you, it is certainly one of the categories across, I would say, the majority of our locations where we are in the prehung door business. So we break our strategic category down by company-wide strategic categories and then also at the branch level, where we have branch strategic categories. And that supplier is certainly a key strategic category for us across the majority of our door shops.

[Unidentified Analyst:]

Great, thank you so much for your input.

[Jon Vrabely:]

Thank you for joining the call.

[Operator:]

Thank you. [Operator Instructions] I'm showing no additional questions in the queue. I'd like to turn the conference back over to Mr. Vrabely for any closing comments.

[Jon Vrabely:]

Thank you, operator. Nationally and globally, the challenges we continue to face today are unprecedented, unpredictable and fraught with risk. The future of our economy and the related impact it has had on our industry, our company, remains highly uncertain. In a matter of months, the COVID-19 global pandemic has affected virtually every aspect of our lives. It has changed the way we live, the way we communicate, the way we interact with each other and the way we conduct business. As a stakeholder in Huttig, I can assure you that our management team and the entire organization are not dissuaded or discouraged by the uncertainty or operating challenges we face related to the virus, and we remain committed to doing everything possible to consistently increase the value of your investment in our company. In closing, I would like to thank all of our associates for their sacrifice, dedication and hard work. Without them, our results would not have been possible. I also want to thank our customers for continuing to place their trust in us to care for their business. I especially want to thank our business partners that we continue to collaborate with as we mutually navigate through these challenging times. Finally, I thank you for your ownership in our company and for your participation in our call today, and we look forward to speaking with you again when we report our third quarter results.

[Operator:]

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone, have a wonderful day. Stay safe.