Huttig Building Products, Inc.
Q4 2019 Earnings Call Transcript

Published: 3 Mar 2020

[Operator:]

Good morning and welcome to the Huttig Building Products Fourth 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 fourth 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 fourth quarter and full year 2019 operating and financial results and provide commentary on our progress and 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 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 measures will be discussed. A description of any non-GAAP adjustments and reconciliations 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.Now it’s my pleasure to turn the call over to Bob.

[Bob Furio:]

Thank you, Phil. Good morning and thank you for joining our fourth quarter and year end 2019 earnings call. I will provide an update on our operational and sales initiatives and discuss specific factors that affected our fourth quarter and full year performance. Phil will then discuss our overall financial performance for the quarter and fiscal year.While we are not pleased with our financial performance in 2019, there were number of factors that impacted our results that I will discuss in more detail, including significant trends that clearly indicate our performance is turning the corner. Our sales declined at $27.6 million or 3.3% in 2019. The full year 2019 sales decline was due to a combination of factors, including market softness in the first half of the year, temporary disruption from our ERP system upgrade, commodity pricing and market influences in our wood products category, and the impact from our de-emphasis of commoditized product sales. Though the market showed modest signs of recovery in the second half of the year, the growth was primarily concentrated in the fourth quarter and was heavier in the multifamily segment where we have less exposure. The disruption from our ERP system upgrade is behind us and we have seen signs of pricing stabilization in the wood products category.Sales in the fourth quarter of 2019 were down $15.8 million or 7.8% as compared to the prior year quarter. The precipitous decline in quarterly sales was primarily related to higher than normal sales mix of commodity fasteners in the fourth quarter of 2018 as well as our efforts to rationalize high commodity low margin categories and a 20% decline in wood product category sales. Putting this into perspective, the average gross profit of the total sales decline of $15.8 million in the quarter was 13.9% as compared to our total gross profit in the quarter of 19.7%.As we began to see some level of traction in our sales initiatives in 2019, our margins increased 60 basis points and 30 basis points in the third and fourth quarters respectively as compared to a 30 basis point decline in the first 6 months of the year. In addition, the fourth quarter increase of 30 basis points was negatively impacted by 20 basis points as a result of liquidating inventory on a portion of the rationalized categories. While we are seeing signs and we are achieving the sales mix and margin improvement, we are working towards our primary challenge continues to be that we simply have not executed our sales strategy within the timeframe we had originally anticipated. We can and will be better to expedite our strategy as we continue to build off that momentum from customer wins. We have taken a number of steps to put ourselves in a better position to expedite our growth, including realigning our sales structure for certain strategic product lines.From an expense perspective, although our expenses were down $600,000 and $1.9 million for the quarter and year respectively, we were unable to lever our fixed cost structure due to our lower sales volume. In the fourth quarter, we initiated cost reduction actions across personnel and certain non-personnel expenses and recorded a severance charge of $800,000 in the fourth quarter. We also had a number of inefficiencies and one-time transfer costs in our branch network caused by product transfer requirements and other operational necessities to right-size our inventories on a location basis. These inefficiencies dissipated in the fourth quarter and we expect them to further dissipate as we move forward.In summary, while we are not pleased with our financial performance, our associates have worked very hard to meet the plethora of challenges over the last 3 years. We are optimistic that our focus on profitable sales, along with cost control actions, will achieve financial success for our organization.Now, I would like to turn the call over to Phil to discuss our financial performance.

[Philip Keipp:]

Thank you, Bob. Fourth quarter 2019 net sales were $180.4 million, which was $15.8 million or 8.1% lower than the fourth quarter 2018. For the year, 2019 net sales were $812 million, which was $27.6 million or 3.3% lower than 2018. As Bob mentioned, we have made a concerted effort to shift focus to our profitable sales categories, which in the short-term has negatively impacted our sales volume. Gross margin was 19.7% of net sales during the fourth quarter of 2019 compared to 19.4% in the fourth quarter of 2018. For the year, 2019 gross margin was 20% of net sales compared to 19.8% a year ago. The increase in our gross margin percentage was more pronounced in the second half of the year coinciding with our focused mix shift.Operating expenses decreased to $600,000 or 1.4% to $43.6 million, representing 24.2% of net sales in the quarter of 2019 compared to $44.2 million or 22.5% of net sales in the fourth quarter of 2018. The decrease in operating expenses was primarily attributable to lower non-personnel costs as personnel costs were flat in 2018. Fourth quarter 2019 personnel costs included an $800,000 severance charge related to cost reduction actions.Non-personnel costs declined primarily due to lower discretionary spend, including advertising, promotion and travel costs. These declines were partially offset by an increase in insurance charges. For the year, operating expenses decreased $1.9 million or 1.1% to $165.6 million representing 20.4% of net sales in 2019 compared to $167.5 million or 19.9% of net sales in 2018. Personnel expenses decreased to $700,000 in 2019 as lower wages, variable compensation and contract labor costs were partially offset by the aforementioned $800,000 severance charge and a significant increase in medical claims, which were $1.5 million higher than in 2018. Non-personnel expenses decreased $1.2 million in 2019 primarily due to non-recurring litigation settlement costs of approximately $3.3 million in 2018 offset in part by increases in equipment, facility costs, higher insurance costs and depreciation and amortization, including costs form our recent software upgrade. Excluding costs related to the settled litigation in 2018, operating expenses would have been approximately 19.5% of sales.Net loss from continuing operations was $9.4 million during the fourth quarter of 2019 as compared to $6.9 million in fourth quarter of 2018. For the year we generated net loss in continuing operations of $21.3 million and $6 million in 2019 and 2018 respectively. Net loss in continuing operations in 2019 includes a $12.7 million non-cash charge related to an increase in our differed tax valuation allowance.Adjusted EBITDA was a negative $4.9 million during the fourth quarter of 2019 as compared to a negative $4.1 million for the fourth quarter of 2018. Full year adjusted EBITDA was $5.2 million and $10.2 million in 2019 and 2018 respectively. We recognized net loss from discontinued operations of $400,000 in the fourth quarter of 2018. This loss is related to a change in estimate associated with remediation of formally owned property in Montana.Next, I will discuss our balance sheet and liquidity. We have total debt of $136.8 million at December 31 2019 compared to $138.9 million a year ago. Cash provided by continuing operating activity was $6.6 million in fiscal 2019 compared to cash used up to $26.4 million in fiscal 2018 total available liquidity was $33.7 million as of December 31 2019 as compared to $32.3 million at December 31 2018. We paid down bank debt by approximately $16.7 million in the fourth quarter of 2019 bringing the outstanding balance under revolving credit facility to $131.3 million as compared to $132.3 million a year ago. Our liquidity levels varied with a seasonality of our business and are generally lower at the end of the year due to lower collateral levels coupled with lower operating results.Now, I'll return the call over to Jon for closing comments.

[Jon Vrabely:]

Thank you, Phil. Entering 2019 the entire organization was very positive as it was up first full year that all of the investments we have made in the national expansion of our pre-finished door service capabilities and Huttig-Grip products were 100% operational since embarking on our strategy. Our 2019 sales and gross profit plan was focused on straight forward with three primary goals. The first continued to grow our share of our company wide five strategic product categories. Our company likes strategic categories are the categories that we have made investments in over the past several years, and the most valued to the supply chain are generally our highest gross margin categories and provide the greatest opportunity for future profitable growth even though some of these categories are new to Huttig on a national level. They represented approximately 46% of our total sales in 2019 up from approximately 42% entering 2017. The continued growth of these categories will result in higher gross margins well simultaneously allowing us to leverage our cost structure second is continuing to grow our full program Huttig-Grip fastener customer conversions as a result of not having the complete line of package fasteners until mid 2018. Our 2018 sales mix was heavily weighted towards more price sensitive transactional sales versus our 2019 focus of full program sales.Heading into 2019 with the full product line in inventory and available to sell we were able to focus on selling the entire category in a more balanced and normalized manner and intentionally walked away from some level of transactional sales including direct sales that we captured in 2018. While a settled nuance, this skewed our total year-over-year sales comparisons. In 2019 we tripled the number of pro dealers that we have fully converted to Huttig-Grip fastener program and are only scratching the surface of the total opportunity. As a result of the revenue mix shift that we achieved in 2019, our total gross profit in the category increased by nearly 300 basis points as we continue to grow our customer conversions the sales mixed shift will continue to increase our gross profit in a category. Third, rationalize our product lines de-emphasizing or in some cases fully eliminating low margin, price sensitive, highly commoditized products where we do not add value.Heading into 2019, we began the process of identifying and de-emphasizing, non-strategic, non-value add, highly commoditized products across all of our categories. Collectively, this effort in conjunction with the sales mix shift and sales decline of wood products accounted for virtually 100% of the total revenue decline in 2019. Through the first several months of 2019 as planned, we were achieving year-over-year sales growth in the building products and millwork categories. The positive momentum we were experiencing stalled upon the go-live implementation of our ERP upgrade in late spring. Over the course of the next several months, the market softened and combined with the challenges of the ERP upgrade and our de-emphasis of more commoditized products, we began to experience year-over-year sales declines in virtually all product categories.As discussed previously with the progress, we are making through our focused shift towards higher margin product categories and through our product rationalization plans, in the second half of 2019, we began to realize the increase in gross margins that we had anticipated. Looking forward through our focused efforts, we also expect to recognize continued volume growth in these categories.As we move into 2020, we continue to see the signs that our strategy is working without providing specific guidance to sales declines we experienced in the fourth quarter has dissipated and we have seen increase in sales volume as compared to sales volumes in 2020 as compared to 2019 through the first two months of the year. At the same time, we are also seeing an improvement in our shipping profit percentage early in 2020. As we continue to build on past and future customer wins, we expect that the underlying momentum we are seeing will grow and provide sustainable returns that will position Huttig to be a more diverse and profitable company.In closing, I strongly believe in our company, our strategy and our people as we continue to make progress in fully implementing and executing our plan, we are seeing tangible underlying trends that the strategy will deliver the results we are working to achieve. Operator, we will now take questions.

[Operator:]

[Operator Instructions] And our first question comes from Scott Laura. Please proceed with you question.

[Scott Laura:]

Hi, Jon. How are you today?

[Jon Vrabely:]

Good morning.

[Scott Laura:]

[Technical Difficulty] today it’s $1.20. Our sales are $800 million a year and our market cap is $32 million. What are you going to do to turn it around specific?

[Jon Vrabely:]

Well, specifically, as we laid out just moments ago, we are working to continue to roll our sales in our five key strategic companywide categories. We believe that the continued growth in those categories will assist us in changing the margin profile of the company while allowing us to leverage our OpEx structure. We are also and have also taken actions to actually bring the cost structure down in 2020 as related to 2019. And I will tell you, Scott that based off of 2019 results we believe that through these efforts we will begin to make significant improvement in the performance of the company both operationally and financially in 2020.

[Scott Laura:]

Of the follow-up, Jon, current outlook is strategic alternative, a merger or being acquired, do you ever think of that?

[Jon Vrabely:]

While being a public company, Scott, the board is always obligated to listen to any potential interested parties. Obviously, that is not something that we discussed or disclosed, but I would tell you that the board takes their fiduciary responsibility very seriously. And if there were an opportunity, I can tell you that they certainly would evaluate it bearing in mind the best interest of the shareholders.

[Scott Laura:]

Very good. I mean, you have a legal responsibility, Jon and we have heard the same song and dance for 3, 4 years, I think it’s time the board and you hire an investment advisor?

[Operator:]

Thank you. [Operator Instructions] And our next question comes from James Winchester with QVP. Please proceed with your question.

[James Winchester:]

Yes, good morning. I caught part of the charge, the expense of downsizing or rightsizing infrastructure, the sales infrastructure in the fourth quarter, could you just review what expenses were related to reducing the cost structure in the fourth quarter, including the 800k of compensation costs and what you would anticipate the cost benefit would be from that action in 2020? Thank you.

[Philip Keipp:]

Good morning, Jim. The $800,000 severance charge was related to some personal cost reductions that we initiated in the fourth quarter on a go forward basis. We would expect that those reductions will generate savings in excess of a million dollars in addition to some other costs reduction actions that we have taken including reducing some of the disruption that we had in our branches by virtue and Bob alluded to this by virtue of some of the inventory transportation costs that we incurred not only in 2019 but 2018 as well.

[James Winchester:]

Okay. And do you have sense of whether there will be a benefit or at least a reduced expense associated with the completion of the ERP implementation for 2020?

[Bob Furio:]

So, I think that there would, this is Bob I think that there will certainly will be some benefited prices on flexibility that we did not have in our old system where our customers are actually able to go into our doorway program, be able to price doors for their customers enter their orders into our system expedite that entire process I think that from the process standpoint it certainly creates a lot of efficiency eliminates mistake for orders that happen to be re-keyed but it expedites things for our customers is available for them and will be available for them 24/7. So I think that’s a very strong benefit that we have today that we did not have previously.

[Operator:]

Thank you. And I am not showing any further questions at this time. I will now turn the call to Jon Vrabely for any further remarks.

[Jon Vrabely:]

Thank you, operator. I would 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 everyday to care for their businesses. 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 next month when we report our first quarter results.

[Operator:]

Ladies and gentlemen, this concludes today’s conference. Thank you for participating. You may now disconnect.