Huttig Building Products, Inc.
Q1 2018 Earnings Call Transcript

Published: 1 May 2018

[Operator:]

Good morning, and welcome to the Huttig Building Products First Quarter 2018 Earnings Call. Participants will be in a listen-only mode until the end of the call then the company will have a question-and-answer session. I would now like to turn the call over to our host, Corporate Controller and Treasurer, Jim Murphy. Please, go ahead, sir.

[Jim Murphy:]

Thank you and welcome to our first quarter 2018 earnings call. With me this morning is Jon Vrabely, President and Chief Executive Officer; and David Fishbein, Executive Vice President and Chief Marketing Officer. Today, we will discuss our first quarter operating and financial results, and we will provide our outlook for the balance of 2018. Following our prepared remarks, we will open the call 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 in this call as a result of developments that occur afterwards. Also, to the extent you are listening to this call on a replay, information could have already changed. Additional information about factors that could potentially impact our financial results is included in the earnings release issued yesterday and our filings with the SEC. During this call, we will discuss certain non-GAAP financial measures. 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 our website. Today's call is being webcast live and 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 our Investor Relations page of our website under Financials. And now it is now my pleasure to turn the call over to Jon.

[Jon Vrabely:]

Thank you, Jim. Good morning and thank you for joining our call today. It has been less than 60 since we reported our fourth quarter and full year 2017 results. So our call today will primarily focus on our first quarter financial results. Before I turn the call over to Jim to discuss our financial performance, I will provide a brief update on the continued execution of our strategic plan. During our last call, I detailed the investments we made throughout 2017 to set the foundation and build the structure to execute our growth and diversification strategy. Our goal is to transform Huttig to a more diversified company that possess a significant sustainable above market growth opportunities for many years into the future. While the process of transforming a 133-year-old company whose performance has historically risen and fallen in direct correlation to the single family new construction market into a top performing accountable growth oriented and diversified company is not for those faint of change, commitment and hard work. I am pleased to report that we continue to make progress that is beginning to be reflected in our financial results. Our revenue growth trajectory continued in the first quarter of 2018. Sales were approximately $198 million, which represents an approximate increase of 13% over the first quarter of 2017. Total housing starts during the quarter were up approximately 8% with single family starts increasing approximately 7% and multifamily starts increasing approximately 10.5%. Based on our segment revenue mix, we believe that we grew our share of the residential new construction and repair and remodel segment well above the market for the products we sell. During the quarter, we grew prefinished door revenue by 18% and Huttig-Grip revenue by 90% as compared to the same prior year period. To put our Huttig-Grip growth into perspective, we generated approximately 44% more incremental revenue in Huttig-Grip products in the quarter than we achieved in all of 2017. In addition, we continue to make progress in closing the profitability gap associated with the Huttig-Grip expansion plan. In the third quarter of 2017 incremental gross profit dollars from incremental Huttig-Grip revenue covered approximately 11% of the same period incremental investment costs. In the fourth quarter of 2017, the coverage ratio increased to approximately 28% and in the first quarter of 2018 increased to approximately 44%. In the fourth quarter of 2017, we transitioned from building the foundation and structure to support our growth initiatives to implementing and executing our sales plans. With the sales execution plan well underway, we continued our progress during the first quarter of 2018 initiating the operational execution stage of the plan, which focuses on inventory replenishment and management, working capital management and operating expense management. As we embarked on this process to transform our company, we made decisions over the course of the past year that we knew would delay our initial implementation timeline and add to our investment costs, but those decisions were made to ensure that we went to market with the best products and programs that provided us the best opportunity for success. Now that we have fully transitioned to the sales and operational execution stages of our strategy, albeit later than originally planned, we are beginning to see the progress we have made in our sales trends and financial results. Strategically, we are on track and continue to believe that the investments we made in operating expenses and capital will accelerate our growth and diversify our business, which will improve operating leverage any increase the value of the company over the intermediate term. We remain committed to executing our strategy to transform Huttig into a more diversified company that possesses significant sustainable above market growth opportunities for many years into the future. We believe this transformation will result in the creation of a company that breaks through the financial constraints of large commodity type distribution businesses to establish a new financial model that creates significant value for our shareholders and provides the opportunity for best-in-class valuation multiples. Now, I’d like to turn the call back over to Jim to discuss the income statement and balance sheet.

[Jim Murphy:]

Thank you. As Jon mentioned, first quarter net sales of approximately $198 million represented an increase of nearly 13% when compared to the first quarter of 2017. This increase was primarily attributed to an 8% increase in new residential construction activity as well as growth derived from the execution of our strategic initiatives. All of our product categories millwork products, building products and wood products experienced revenue growth when compared to the first quarter of 2017. Gross margins were 19.5% of net sales during the first quarter of 2018 compared to 20.2% for the same period last year. The 70 basis point reduction in gross margin percent was largely driven by the increase in direct sales volumes as well as the proportional increase in building products sales as compared to the growth of other high margin product categories. Our operating expenses were $39.2 million during the first quarter of 2018 or 19.8% of net sales compared to $37 million or 21.1% of net sales during the first quarter 2017. The increase was primarily due to higher personnel cost, which increased $1.7 million as a result of the investments we made throughout 2017 to build the sales and supply chain organizations as well as warehouse personnel and drivers to adequately service our revenue growth. The 130 basis point improvement in the operating expense ratio was largely achieved by our ability to leverage our revenue growth across our preexisting structure as well as the investments we made to achieve and service the growth. As Jon mentioned, we will continue to focus on leverage and expense management throughout 2018 and believe that we can continue to add significant revenue growth without materially adding cost to the new structure. Our efforts and momentum resulting in a net loss from continuing operations of $0.5 million during the first quarter 2018 as compared to a net loss from continuing operations of $0.9 million in the first quarter of 2017, representing an improvement of nearly 44%. Our adjusted EBITDA was $1.4 million during the quarter as compared to $0.1 million for the first quarter 2017, an increase of $1.3 million. Turning to the balance sheet, we ended the quarter with total debt of $146.7 million, an increase of approximately $44 million from December 31, 2017, which resulted in a total debt to capitalization net of cash of 68.7% at March 31, 2018, compared to 60.7% at December 31, 2017. This increase is primarily related to the initial inventory build required to support the Huttig-Grip initiative as well as the traditional seasonal inventory build in our core products. With virtually all of the initial Huttig-Grip inventory build in place, we anticipate that the balance of 2018 will reflect a more normalized trend with debt levels continuing to increase to the second quarter and then coming down throughout the second half of the year. Looking at our cash flows, we reported approximately $40.1 million in cash used in operations for the first quarter 2018 and ended the quarter with approximately $139 million of inventory on hand, an increase of nearly $27 million from December 31, 2017. As we stated during our last call, the lead times associated with sourcing the majority of our private label construction fastener products internationally is substantially longer than many of our legacy product lines in our core business, which requires more working capital to support on hand and in transit inventory, but this investment offers the opportunity for increased gross margins. As a result, our working capital ratio for the first quarter of 2018 was 20.2% of quarterly sales compared to 15.4% in the prior year period. As we fully transitioned into the sales execution stage of our strategic initiatives during the fourth quarter of 2017, we are encouraged by our first quarter operating results. We will continue to focus on the execution of our growth plans and we are now in a position to focus on our gross margins, working capital management and expense management and barring any unanticipated interruption in our revenue growth trends, we anticipate that we will continue to leverage our revenue and strengthen the balance sheet throughout the remainder of the year. Operator, we will now take questions.

[Operator:]

[Operator Instructions] Our first question comes from Don Koch with Koch Investments. Your line is now open.

[Don Koch:]

Jon, help me here and I apologize for the simplistic concept, but I sort of see you as a truck going down the road with $800 million of goods or sales and you've added on this Huttig-Grip, which supposedly as higher margins and higher value and you've made a major investment in order to get both the inventory and also the delivery system by buying people and by buying systems. How far along are you from, I guess, the remarks? Are you 80% through the investment to get the Huttig-Grip up and out or you 90% or do you still have – or you only 50% where you have to make a major continued investment of 2018 and 2019 to ensure that you have the penetration that you want on the Huttig-Grip product.

[Jon Vrabely:]

Good morning, Don. So as we mentioned on the call, we stated that we believe that we are virtually through all of the investment in the entire growth strategy and that we believe we can continue to layer on to the new structure significant revenue growth with out materially needing to add incremental cost to the new structure. So you know to put a percentage on it, I mean, I don't foresee us needing to add materially to the cost structure to continue to add significant revenue growth.

[Don Koch:]

Okay, thank you. Do you see any other things other than the sort of Grip product that you can add on to that sort of train that's going down the highway?

[Jon Vrabely:]

Well, we are in full swing and still executing the Huttig-Grip initiative as well as our repair remodel segment penetration initiative. So at this point, I would tell you that the opportunity just in those two sales initiatives is significant that we are focused right now on fully executing those two initiatives to their fullest as flawlessly as possible. So I would say in the foreseeable future, our focus is on execution of those two growth initiatives, which offer significant opportunity for Huttig for many years to come.

[Don Koch:]

Okay, thank you.

[Jon Vrabely:]

You’re welcome, sir. Thank you.

[Operator:]

[Operator Instructions] Our next question comes from Robert Maltbie with Singular Research. Your line is now open.

[Robert Maltbie:]

Hi, Jon. Hi, Jim. Congratulations on a really solid quarter.

[Jim Murphy:]

Thank you.

[Jon Vrabely:]

Thank you, Robert.

[Robert Maltbie:]

A couple of questions. I know you're engaged in a search for a CFO and I wanted to inquire on the progress there.

[Jon Vrabely:]

Yes, so we are deeply engaged in that search process. It is in full swing. It is being headed up by our Vice President of Human Resources. And I would just tell you that as you know that is a process that could potentially take some time, but we are deeply engaged in it and moving through the process as rapidly as possible.

[Robert Maltbie:]

Terrific. I missed the section where you are discussed the per segment performance regarding estimated margins. Did you breakout some of the segments like the Huttig-Grip margins versus the other segments?

[Jon Vrabely:]

From a margin perspective, we did not. We did breakout our sales as we always do by segment at millwork products, building products and wood products that we grew in each of those segment categories throughout the course of Q1, but with regards to your question specifically we stated that we grew our building products sales at a much higher rate than our say higher margin value add products, which negatively impacted our overall margins for the quarter as compared to prior year.

[Jim Murphy:]

And Robert, this is Jim. We’ll have some additional details when our Q comes out today – later on today related to revenues from each of those product categories. So that will come out this afternoon.

[Robert Maltbie:]

Okay. And where do you anticipate the peak in the increased personnel cost to service the other Huttig-Grip initiative? And do you have estimates as to how much incremental cost that would be?

[Jon Vrabely:]

Yes, so again I don’t foresee us significantly adding more costs to the existing structure. There are some variable costs that are outside – through the outside of the realm of our control. But yes to those, we do not believe that we will need to add material cost to the existing structure to continue to see the revenue trends that we have seen and started to see in Q4 of last year as well as trending into Q1 of this year.

[Robert Maltbie:]

Thank you. I’ll go back into the queue.

[Operator:]

Our next question comes from Alan Weber with Robotti Advisors. Your line is now open.

[Alan Weber:]

Good morning.

[Jon Vrabely:]

Good morning Alan.

[Jim Murphy:]

Hi Alan.

[Alan Weber:]

Hi. So the first question is when you look at the fourth quarter of December, this December fourth quarter of 2017, the revenues were higher this quarter versus the fourth quarter sequentially and the operating expenses were $3 million less. What accounted for that?

[Jon Vrabely:]

Well I think the – so to take it in two parts the revenue increases is really, strictly as a result of us continuing to gain momentum and executing the sales initiatives in both of our primary growth initiatives.

[Alan Weber:]

Right, now that I understood. It was more the revenues were up quite a bit and yet the operating expenses were down.

[Jon Vrabely:]

So I'll do my best to answer that in relation to Q4. So when we had our Q4 call Alan 50 or 60 days ago we talked about the fact that we had seen some unusually high expenses in Q4 that we did not anticipate replicating in the future go forward kind of run rate. It was difficult to fully quantify all of those on a go forward run rate basis because as we continue to push forward in both the repair and remodel growth initiative, as well as Huttig-Grip there are incremental variable sales costs, incremental variable marketing costs associated with the continued growth. We did see relatively high and higher than what we would anticipate moving forward cost structure items with sales and with marketing in Q4. But to really try to nail that down we stated that we believe that they were higher than normal, but it was incredibly difficult to put a real value on those going forward, because as we continue to increase revenues those variable costs will go up incrementally, slightly. But I believe that really, truly for the most part those onetime costs in getting the product lines set up, packaging, labeling, all of that marketing work is behind us. But as we continue to go out and increase our revenue, there will be other costs associated with marketing of the product line and customer conversions that will come into play, which is why it makes it difficult to kind of compare those start up costs to kind of continuing ongoing marketing related costs, as we continue to grow. So but I believe that we anticipated and saw as we continue to transition through the execution plan into expense management, I believe we began to see some of those results in Q1.

[Alan Weber:]

Okay. And then my follow-up is on the Huttig-Grip, how much of the sales now are kind of replenishing to the customer or when does that really start to be – when do you really start to see that?

[Jon Vrabely:]

Yes, so we have for the first time in the call today we have David Fishbein who is our Executive Vice President and Chief Marketing Officer. So David if you don't mind with your familiarity around that initiative with Huttig-Grip. You might answer him.

[David Fishbein:]

Sure, good morning Alan.

[Alan Weber:]

Good morning.

[David Fishbein:]

So there's two components to the question that you just asked. The first one is our packaged nail and screw and collated conversion program, where we convert customers with our program, our Huttig-Grip program and it is inserted into their store. So it is on shelves and it is replenished on a weekly basis in most cases. The other piece of the puzzle is on – I'll just refer to it as bid-and-dicker type business, skid-lock business of either building materials or skids of collated fasteners, or bulk fasteners. And that's a continual process that actually happens daily. So we're in the midst of a bulk of those activities on a daily basis right now, converting customers, as well as converting the call it the commodity type business as well.

[Alan Weber:]

Okay, great thank you very much.

[Jim Murphy:]

Sure.

[Operator:]

Our next question comes from Chris Colvin with Breach Inlet Capital. Your line is now open.

[Chris Colvin:]

Hey thanks for taking the questions. When you said to make sure we understood your comment about Huttig-Grip, is it fair to assume that the dollar sales growth in the first quarter versus the first quarter of last year was 144% of the dollar sales growth in 2017 for Huttig-Grip or am I getting that wrong?

[Jon Vrabely:]

Yes it's really much more impactful than that Chris. So throughout the course of 2017 as we really began to embark on this initiative, we were building inventories and building the structure to support the future sales plan execution stage. So the comment was really that in the first quarter of 2018 we incrementally grew Huttig-Grip sales 44% more than throughout the entire year in 2017. So our growth in Huttig-Grip products in the first quarter exceeded all of our growth in those product categories throughout the entire year. On a quarter-over-quarter basis our revenue of Huttig-Grip products was up 90% as compared to the first quarter of 2017.

[Chris Colvin:]

Got you. And if we look historically your building products product line would grow kind of in line with housing around there call it mid-high single digits. So I guess we could also run the math and in for how much of the growth is coming from Huttig-Grip. There's nothing else that’s really changed your building products segment is that right?

[Jon Vrabely:]

In general yes, the majority of our building products sales in what we would classify as our core business has really not changed much, with the Huttig-Grip expansion though we took a variety of product categories of that. We have historically sold either locally or regionally and have now also as part of the Huttig-Grip National expansion program, nationalized those programs and have introduced those building products programs to our distribution network on a national basis, as well. So it's not just fasteners or construction fasteners that we are growing as part of that Huttig-Grip national expansion initiative, it's also legacy product categories, other building products legacy categories that we have also rolled into the Huttig-Grip national expansion. So it's really a twofold impact that we are seeing. Strategically, it's really one strategy under Huttig-Grip. We have historically sold construction fasteners in Huttig. Prior to this initiative we've sold insulation, roofing shingles and other specialty building products throughout our branch networks. We've taken all of those product categories where Huttig has had historical revenue, but it has been spotty in the sense that it might be the Pacific Northwest in New England, or it might be the southwest, or mid west where we had those product categories and we did a very nice job in selling those product categories either on a branch by branch basis or in some cases across an entire district or region. We’ve grouped all of those products together, put them under one umbrella of the Huttig-Grip brand and Huttig-Grip growth initiative and rolled them all out simultaneously on a national basis to cover the entire geographical footprint that we can service on a national level.

[Chris Colvin:]

Got you. I appreciate the color. I’ll jump back in the queue.

[Operator:]

[Operator Instructions] Our next question comes from [indiscernible]. Your line is now open.

[Unidentified Analyst:]

Yes, good morning. I'm sorry I got on late. Maybe you could – I just want to check and see if you have given any update on the state of the litigation with PrimeSource. And particularly I'm curious about whether this is continuing to have a drag as we look at the operating expense and what are your expectations for that going forward?

[Jon Vrabely:]

Yes so we did not James provide an update on the litigation as generally we do not – we generally do not go into tremendous amount of debt on litigation. But I would tell you that at this point in time we continue to believe that the case has no merits and we are defending our position vigorously. There are certainly incremental legal costs in Q1 that we've experienced. And I would just tell you that I don't foresee that changing anytime soon. And we will continue to do our best to defend the organization as vigorously as possible against what we believe are baseless claims.

[Unidentified Analyst:]

Okay, thank you. So is it fair to say that the cost of litigation is continuing at approximately the same level as it has been over the past several quarters? And second question I have is if you could provide an update on the door manufacturing facilities, I know Florida has been up and running for a bit and I believe there's a new facility you opened recently in Maine. How are those launching and how's the marketing process developing?

[Jon Vrabely:]

So in Florida you are correct that facility we ramped up completion of that facility and it went on line around the end of the first quarter of 2017, took us some time to really get the line stepped up and get it in full flow and we have now been engaged in kind of the proactive marketing and sales effort around that facility since certainly second quarter, end of second quarter of 2017. And obviously we are seeing some growth as a result of that initiative as we talked about our pre-finish door sales growing from 18% on a year-over-year basis. The New England facility, the facility that we are in essence replicating the investment we made in Florida in New England the construction process there is on track and we do expect to be fully functional there throughout the course of the second quarter and believe that we will be in a much better position to grow our value add pre-finished product sales in New England as that facility comes fully on line. So at this point I would say we’re virtually on track in New England and are now focused on leveraging the investment we made in Florida throughout all of the southeast region to further penetrate that repair, remodel segment with both pre-hung and pre-hung, pre-finished doors.

[Unidentified Analyst:]

Okay, great. And as far as litigation, my understanding was that it was running about a $1 million a quarter or something like that. Is it fair to say that it's continuing to proceed at sort of approximate that level?

[Jon Vrabely:]

Yes I would say that it really depends on what happens to be happening at that point in time. In general though I would say you're pretty darn close as far as what the kind of average historical spend, plus or minus any given quarter. And to be frank we would anticipate that if these cases continue to move forward, as well as our counter claim that we will probably spend approximately that much on a per quarter basis moving forward, but it's very difficult to know, it's very difficult to know for sure, but that's what we anticipate currently.

[Unidentified Analyst:]

Okay, great. Thank you very much.

[Jon Vrabely:]

You’re welcome sir.

[Operator:]

And at this time I’m showing no further questions. I’d like to turn the call back over to Mr. Jon Vrabely for closing remarks.

[Jon Vrabely:]

Thank you. This continues to be a very exciting time for our company. We still have a lot of work to do to fully execute our strategy. But I am very pleased to see the results of all of the hard work that’s taken place over the course of the past year to begin to be reflective in our financial performance. I am proud of the work we've done to transform our company. And I want to thank all of the Huttig associates for their contributions to our continued success. 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 our company and your participation in our call today. .And I look forward to speaking to you again when we report our second quarter results. Thank you.

[Operator:]

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