Huttig Building Products, Inc.
Q2 2017 Earnings Call Transcript

Published: 5 Aug 2017

[Operator:]

Good morning, and welcome to the Huttig Building Products Second Quarter 2017 Earnings Call. [Operator Instructions] I would now like to turn the conference over to our host, Vice President and Chief Financial Officer, Oscar Martinez. Please go ahead, sir.

[Oscar Martinez:]

Thank you, and welcome, everyone, to our earnings call. With me this morning is Jon Vrabely, President and Chief Executive Officer of Huttig. Today, we’ll discuss our operating and financial results for the second quarter of 2017. We’ll also update you on our outlook and expectations for the rest of the year. Following our prepared remarks, we’ll open the call for questions. Let me just 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’re listening to this call on a replay, information could already have 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’ll 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 on our website. Now it’s my pleasure to turn our call over to Jon. Jon?

[Jon Vrabely:]

Thank you, Oscar. Good morning, everyone, and thank you for joining us. Today, we will update you on our continued progress in the implementation of our strategic plan and our financial results for the second quarter and year-to-date through June 30, 2017. I will focus on the implementation status of our strategic plan, and Oscar will provide a comprehensive report on our financial performance. As we have discussed on prior calls, 2017 is a critical and pivotal year for Huttig. Our intermediate- to long-term goals are lofty and are very straightforward. We are working to create a company that is highly diversified in the products we sell and the market segments we serve, so our future performance is never again so directly linked to the cyclical nature of the residential new home construction market. We’re working to create a company that possesses the ability to consistently grow at an accelerated rate beyond the market and our peers, regardless of the market environment. We’re working to accelerate our growth and enterprise value as rapidly as possible to create a company that attracts new investors and increases the liquidity of our stock. Lastly, we’re working to create a company that breaks through the financial constraint of large commodity type distribution businesses and establishes a new financial model that creates significant value for our shareholders and warrants best-in-class valuation multiples. We have successfully created the quantifiable opportunities that are required to achieve our goals. In addition, we’re confident that we had developed the right strategic plan to capitalize on those opportunities. Achieving these lofty goals, truly required a fundamental and monumental transformation of virtually every aspect of our business. The entire senior leadership team and management teams fully understand the strategic execution and financial risks associated with this process as well as the impact it is having on our 2017 results. We are aligned in our goals and have a clear understanding of what has to be done to accomplish our mission, and we are all fully committed to achieving our goals. 2017 is the first full year that we have embarked on this very complex, transformational change process. Executing and managing through a change process of this magnitude is never easy and never goes exactly as planned. As anticipated, we have experienced execution challenges, and while some timelines have slipped, we are on the right strategic path and have made significant progress in executing our plans that will transform this company. To that end, the investments we’re making in 2017 are necessary to establish the foundation that will position us to successfully achieve our goals. In a prioritized and phased approach, we are simultaneously implementing 4 key strategic initiatives across the entire organization. 2017 marks the first year that we are investing in a comprehensive people initiative to turn Huttig into a top-performing disciplined organization that strives for the highest level of associated engagement with the best and most empowered people. To do this, we have plans to drive associate engagement through better recruiting, hiring, training and development. In late 2016, we embarked on a company-wide safety campaign to further invest in training and equipment to continue to build a culture of safety. 2017 marks the second year of our investment in our information technology platform. Our goal is to have the most technologically advanced customer interface and operational systems that drive costs out of the business and make us the easiest company in the space to do business with. We’ve upgraded our technology infrastructure and are halfway through a comprehensive upgrade of all of our software applications, including our ERP system. We continue to invest in our margin enhancement initiative and have made strong progress increasing our gross profit over the past several years. Our goal is to focus on products that are complex, requiring scale and value-add services, which generally carry higher transaction values and gross margin opportunities. 2017 marks the first full year of executing our accelerated growth initiative, under which we are increasing penetration into the Repair, Remodel segment and expanding our private label Huttig-Grip brand nationally. Further penetration of the R&R segment defends our value proposition as the largest wholesale door fabricator to the pro channel in the U.S. and supports our margin enhancement initiative, as products sold into the Repair, Remodel segment generally carry higher gross margin opportunities. In early 2017, we completed a significant investment in an automated high-capacity door finishing line in Florida that is currently servicing all of our southeastern branch locations. We are now in the process of replicating that investment in New England where we expect to be fully operational in 2018. Upon completion of the New England project, we will be able to effectively service the Eastern United States with the highest quality and most consistent prefinished door program in the industry. In addition to the Repair, Remodel penetration initiative, we are approximately seven months into the national expansion of our private label Huttig-Grip construction fastener and building product lines. The national expansion of the Huttig-Grip line is complex and has required a significant investment to launch. We have completed the configuration of 20 warehouses, purchased and installed nearly $1 million of new racking, added 300,000 square feet of additional warehouse space and added more than 50 new associates that are dedicated to executing the expansion and growth of the private label Huttig-Grip product lines. We have been and will continue to invest in our global supply chain management organization. We are expanding our global supply partner base to ensure we have the highest quality products and possess the manufacturing capacity at the most competitive cost to support the quality and growth of our private label brands. We have a clear understanding of the significant impact these investments are having on our financial performance, and have previously communicated that 2017 is going to be an investment year for Huttig. We have and will continue to measure our planned results against each respective investment, and as necessary will adjust each plan and subsequent investment. Operating costs increased nearly $14 million in the first half of 2017 as compared to 2016. Approximately 80% or $11 million of the increase is directly related to the execution of our strategic plan. In addition, approximately $2 million of those costs associated with the execution of our strategic initiatives are legal fees incurred through June 30, 2017, to defend four separate lawsuits that have been filed by PrimeSource, a Platinum Equity portfolio company, against Huttig and 11 of our employees. The complaints allege amongst other things, the breach of fiduciary duties and misappropriation and misuse of trade secrets of PrimeSource by certain former employees of PrimeSource on behalf of Huttig. We are not deterred and will continue to vigorously defend these suits as we believe they are all without merit and are an attempt by PrimeSource to maintain their significant position in the marketplace and to distract Huttig from executing its Huttig-Grip growth strategy. We continue to receive positive feedback and encouragement from many of our customers that support additional sources of supply in the market and support our growth initiatives. We believe that all industry participants benefit from having choices and healthy competition in the marketplace, and we are prepared to continue to aggressively fight for that right, even though we expect we may continue to incur significant legal expenses related to the matters. The company and certain employee defendants filed counterclaims against PrimeSource alleging amongst other things that PrimeSource has asserted and is maintaining its trade secret misappropriation claims in bad faith, tortuously interfered with Huttig’s business relationships, filed sham litigation and engaged in other exclusionary and predatory conduct in violation of Section 2 of the Sherman Act. While all of these investments are certainly a drag on our profitability in the first half of 2017, they are deliberate and are required to set the foundation to continue to execute our strategy. We are very close to having the foundation and structure in place. And as we look to the second half of 2017 and into 2018, we will transition our focus to executing the revenue growth plans associated with these strategic investments, which we believe will fundamentally transform our company and propel our profitable growth. I’d like to turn the call back over to Oscar to discuss the income statement and balance sheet.

[Oscar Martinez:]

Thank you, Jon. Second quarter sales of $198.7 million were essentially flat to last year. Sales were impacted by a promotional winter buy program, which shifted direct sales into the first quarter from the second quarter. The impact is evident when comparing sales with the first half of this year, which were 5% higher than last year. By comparison, housing starts grew 4% during that period. The growth from our initiatives lagged our plan to the first half of 2017. However, we’re confident that we’re on the right path and expect to see continued improvement as our initiatives take hold. Our operating expenses of $38.1 million were 19% of net sales for the quarter compared to 16% in the second quarter of 2016. As Jon said, this is a significant investment, but we have hired the bulk of the team, we need to execute our strategy and we don’t expect our personal expenses to increase significantly. Our second quarter net income from continuing operations was $2.2 million, compared to net income of $10.4 million in the second quarter of 2016. And adjusted EBITDA was $5.9 million, compared to $11.5 million for the second quarter of 2016. Turning to the balance sheet. We ended the second quarter of 2017 with total available liquidity of $57.1 million, compared to $74.7 million at the end of the second quarter of 2016. The decrease in liquidity was primarily due to the fact that our collateral outgrew the size of our facility. But on July 14th of this year, we increased the total facility size to $250 million, eliminating that gap. We also extended the maturity of the revolving credit facility until July of 2022, and lowered the interest rate by 25 to 50 basis points. Each of our banks increased our commitment levels, and we appreciate the confidence they’ve demonstrated in funding our growth initiatives. Working capital was 16.9% of quarterly sales compared to 13.3% in the prior year period. As anticipated, we built inventory in support of the Huttig-Grip initiative and we’ll continue to make additional investments throughout the balance of 2017. We’re also using our receivables to capture specific sales opportunities with extended credit terms, most of which come due in the third quarter. Our balance sheet helps us compete effectively against smaller regional players who cannot offer the same terms. We ended the second quarter with total debt-to-capitalization net of cash of 58% compared to 54%. Our sole financial covenant is a fixed charge coverage ratio, and we’re comfortable we have ample room to comply with this covenant. We’ll invest additional working capital as we execute our growth initiatives, and we expect to take things from our accelerated growth strategy and believe that if the underlying fundamentals of the residential housing market continue their current trajectory, we will grow at a faster rate in the market and ultimately these initiatives could put us on a run rate to generate over $1 billion in sales by the end of 2019. Finally, I’m proud to report that Huttig was added to the Russell 2000 Index, recognizing the continued growth of our business. This growth could not have been possible without the dedication of our associates, vendors and customers and their support of our strategic initiatives. With that, I’ll turn it back to the operator so we can take your questions. Operator [Operator Instructions] We have a question from Alan Weber of Robotti & Company. Your line is open.

[Alan Weber:]

So Jon, can you go through -- you kind of -- can you go through, as you see -- you mentioned the initiatives, can you just talk about kind of what you see the cost of those initiatives and the revenue or earning or EBITDA opportunity?

[Jon Vrabely:]

Alan, we certainly understand internally the investment that we have made by initiative. And while some are directly tied to revenue growth initiatives and are easily turned into pro forma P&Ls and return on invested capital calculations, some of the investments such as the investment in our people initiative or our IT initiative are not so easily tied or quantifiable to target revenue growth opportunities. So we have and know exactly how many dollars we have invested by initiative incrementally through the second quarter of 2017 as compared to ‘16. And I think without getting into specific details, we just do not publicly disclose that. I will tell you that the investments that we have made in the Huttig-Grip initiative are significantly higher at this point than any other initiative, and we believe the revenue opportunity associated with that initiative is also significantly higher than any of our other accelerated growth initiatives. So doesn’t provide a lot of specifics, Alan, because we just are not prepared to disclose those specifics for many reasons, but...

[Alan Weber:]

That’s fine. Jon, so on the Huttig-Grip, when do you expect or hope to start to really see revenue from that?

[Jon Vrabely:]

So the short answer to that is, we are actually seeing some revenue from that in the second quarter, but not of any significant to really impact the total company. At this point, I think the best way that I can describe where we are is that, we have made the majority of the investment to launch that product line nationally and while there are a few remaining pieces to button up, we really should be in a position by the end of the third quarter to truly go to the market and have the majority of all of the product lines in play to begin to pitch program, selling and buying opportunities to convert entire customer program in 2018. But we anticipate that for the balance of 2017 that we will absolutely continue to see our revenue grow across every product line associated with that Huttig-Grip initiative.

[Alan Weber:]

Okay. So really by the end of ‘18 is a fair point for an outsider to determine financially how it’s going?

[Jon Vrabely:]

Honestly, Alan, I think it’ll be sooner than the end of ‘18. I will tell you that internally we believe over the course of the next 3 to 6 months, we will have a very good indication if our thought process around the entire investment was correct or whether or not we need to begin to make adjustments.

[Alan Weber:]

Okay, great. And do the lawsuits -- are the lawsuits other than you having the expense of legal and like that, are they changing the roll out of what you are intending to do there?

[Jon Vrabely:]

I would say that it hasn’t necessarily changed the implementation or execution plan. But I think it has certainly been a bit of a diversion and drag on resources, internal resources, in addition to the obvious costs associated with the defense.

[Operator:]

Our next question is from Boris Vilidnitsky [ph] of Barclays.

[Unidentified Analyst:]

I had a couple of questions for you. So maybe continuing Alan’s points about the revenue and your guidance of $1 billion in kind of 2, 3 years’ time frame. So we’re basically -- to get to these figures we’re assuming a very strong acceleration in the revenue growth. So if you’re looking at this year, maybe high single digits or probably looking at around 20% or so for the next couple of years, which is higher than you guys have done for quite some time. Have you -- how comfortable are you guys with these orders? Have you had initial discussions with clients? Are people already waiting for these products to come on the market, that’s the first question. Can we start with that, please?

[Jon Vrabely:]

Yes. So we’ve obviously been in communication with virtually all of our existing customers with regards to certainly the Huttig-Grip rollout. And I will tell you that the overwhelming feedback has been incredibly positive. And the number one question that we are asked consistently is, when will you have the program in place so that we can begin to truly evaluate the value prop associated with your offering compared to competitors offerings in the market. And we are assuring those customers that we will in a position in the relatively near future to discuss the full program across both construction fasteners and building products. And we’ll certainly be geared up and in a position to begin certainly pushing for program conversion opportunities for the 2018 selling season, which generally happens throughout the course of the fourth quarter of the prior year. So Boris, the general feedback, I would say, has been overwhelmingly positive. And we are pushing incredibly hard to ensure that we have all of the underlying and fundamental support mechanisms in place so that we execute flawlessly once we begin to present those conversion programs and ramp up our revenue.

[Oscar Martinez:]

And the other thing I would say, Boris, is that, in prior calls we talked about the size of this market. It’s a significant market, and we really think it’s begging for another national distributor. So it’s a, we think, $2.5 billion market and we think that by the time we get to that, that run rate that we mentioned in this call that we’re capturing 7% to 10% of that market. And so, yes, it is significant, but that’s why the investment is so meaningful, because it is across the organization on a national basis to really achieve the economies of scale and the sourcing capabilities that really drive the capabilities that we think are going to get us there.

[Unidentified Analyst:]

Understood. Maybe just a couple of follow-ups on this one -- on this point. So how long are -- obviously, this market is already being serviced at the moment. How long are these contracts. So once your customers will get a sense of your product, start comparing it to what they currently have, I’m assuming they have some form of an agreements with an existing supplier, so how long will it take for them to get out of that agreement or anything of that sort?

[Jon Vrabely:]

Yes. Generally, to be frank, our customers, particularly in the pro channel -- the pro lumber dealer customer segment and even in the pro specialty dealer customer segments, while there may be a program in place, there are generally no time commitments or terms associated from a timing perspective or the duration of any purchasing commitment. So even with our core business today, where we’ve had long-established relationships with customers across all of the product lines that we sell, every one of those customers for the most part could potentially switch that business at any point in time.

[Oscar Martinez:]

Yes. I mean, we -- it’s the good and the bad of the industry, right? We live and die by the quality of the service proposition on a day-in day-out basis. We’ve been doing it for 130 years, and so we think we’ve got that figured out. But the reality is, it is -- that there’s buying programs out there, but it’s nothing more than just a marketing arrangement. There is no contractual obligations for the most part.

[Unidentified Analyst:]

And then in your remark, you mentioned that one of your advantages is, obviously, going to be the countrywide scale, that obviously for some of the global color the nationwide customer is going to be very beneficial to deal with you instead of some of the local suppliers. Could you remind us though what percentage of your customers at the moment is nationwide or very, very large at the present? Because maybe I’m struggling, then why would the local supplier necessarily -- local customer, excuse me, change to your product if they’re already, for example, getting the service level from some of the local competitors?

[Jon Vrabely:]

So -- I’m going to be very close. I can’t tell you with certainty that this number is going to be exact. But approximately 45% to 46% of our current revenue stream is derived from customers that we classify as national account customers. So a significant portion of our revenue stream is derived from multi-location companies or national buying groups and cooperatives. And you asked a very, very good question about why would a local independent lumberyard or local independent specialty dealer, what would be their potential -- the value prop associated with them potentially switching. Well, a significant portion of our existing revenue, even more than the national account revenue that we derive, is derived from local or regional pro lumber dealers and pro specialty dealers. So based on our value prop, which includes our service capabilities, our product mix, our focus on branded products, focused on our value-add services, products that are complex that many of our customers don’t possess the scale to be able to buy on a direct basis, those aspects of our value proposition as well as just the resources that we possess being a national company. The total amount of inventory that we have, that we can transfer on a very rapid basis from branch to branch brings incredible value to local independent one-step suppliers. The piece that they really can’t leverage, that is a significant part of our value prop, is the fact that we do have national coverage and are aligned with, in many cases, the most preferred brand of product at the consumer, builder, contractor or pro dealer level. So our value prop consists of four key components, three of which are universal to virtually any customer and the last aspect of our value prop is really our broad geographical coverage, which really truly would only bring value to customers that also have a large geographical coverage area.

[Unidentified Analyst:]

Makes sense. So if we can switch to cost, maybe I’m getting something on my numbers just to make sure. So on the fastener side, you’re talking about $2.5 billion market. You’re thinking of somewhere between 7% and 10% market share that puts us at $250 million of revenues. You’re talking about 18% gross margin that’s $45 million gross profit. You’re talking about $25 million or so of operating income that puts OpEx at about $20 million. Will you agree with sort of the back of the envelope calculation?

[Oscar Martinez:]

Yes, it gets a little rougher when we get down to the operating expenses, right? Certainly, 7% to 10%, $250 million on the upper end of that gets you there. The gross margin will get established over time and it’s tough for us to really break that out on a line-by-line basis, right? And then OpEx, we have the bulk of a team that we think we need for the expansion. So I mean, this is the team we go forward with. We may add a few more resources as we establish a little more volume. So certainly the OpEx that we are seeing now is about there. So it’s not too far from where you’re landing. I was going to say I’m happy to work through the specific numbers on a more detailed call with you, you understand we can get into any level of detail of course.

[Unidentified Analyst:]

Yes, just from -- just size-wise just making sure I’m getting it right just on the [Indiscernible] and the one point of that. So you guys mentioned $11 million increase in cost directly related to the execution of the new plan. We subtract $2 million for legal fees that puts us at $9 million-or-so. If we’re talking about, again, very, very, very back of the envelope, if we’re talking about $20 million increase in OpEx, we’re somewhere roughly halfway there in terms of cost? Would you agree with roughly with this math?

[Jon Vrabely:]

Well, I would tell you that of that $9 million, some of those costs are onetime costs. So they would not be baked into the ongoing OpEx structure in addition to the $2 million, right, that you’ve already backed out for legal. There are also additional onetime costs in those numbers that will not be recurring.

[Unidentified Analyst:]

Right. Yes, even that my figure was conservative. So we still need to more than double what we would expend so far.

[Oscar Martinez:]

Oh, you’re saying -- your fundamental question is, just the $20 million of operating expenses assumed in that?

[Unidentified Analyst:]

Yes, exactly.

[Oscar Martinez:]

Again, we don’t break it up to that level of detail. But if you look at the rest of our financials, certainly we don’t have that level of expense. So right now, just for comparison sake, right, in the quarter $200 million the operating expenses for the entire organization were $38 million. And obviously, part of the benefit that we have in attacking this market is that we’re going to realize some economies of scale. We don’t need to add a brand-new distribution center and brand-new inside sales reps and everything else, we just get the piggyback on what we already have with the exception of the expenses that Jon said like we are expanding some of the facilities or added some racking and that will incur some operating expenses. But I think on an ongoing basis, as you look at Huttig-Grip, if you kind of model that out, I think you don’t pick up a full redundancy of all these expenses right, if you double that. Even if you say $200 million just conveniently as we did in the quarter, $200 million of revenue, even if you say that was the Huttig-Grip’s revenue for the year in 2020 or whenever your model is, that I don’t think you would see a full computation of our operating expense.

[Unidentified Analyst:]

Understood. Perfect, very detailed answer. I promise last question out of me. You guys mentioned the constitutable using that a little bit to fight off some of the smaller players. I was just wondering was it kind of a one-off or you seeing just increased competition or what is the thinking there?

[Oscar Martinez:]

No, it’s -- yes, just opportunistic where we see a -- I mean, our bad debt expense is knock on wood, terrific, right? We have a very good credit department. We analyze our credit not just on a spreadsheet, but also with feedback from the field and we track. Because it’s a very local relationship, we track how lumber yards are doing and how our customers are doing. So we have a sense for when things are going wrong and when they are going right. So having established that level of comfort with credit, what we do is, on selective cases or with specific programs, like in this case we had a big winter buy program in the fourth quarter in New England. We will extend credits just to try and compete, right, and this is simply recognizing that we just signed a brand-new 5-year deal on a credit facility that borrows at LIBOR plus 1.5%, and we’re just putting that low interest rate to work. Because I’m pretty sure our small distributor competitors on a local basis don’t have access to that kind of a cost to capital. And so it’s just merely putting it to work where we can, but it’s nothing -- it’s not a trend that we’re establishing. It’s just a tool that we’re going to use if it helps us drive into a new market.

[Operator:]

Our next question is from Chris Colvin of Breach Inlet Capital.

[Chris Colvin:]

Glad you reiterated $1 billion revenue run rate in a couple of years. Can you also confirm do you expect to see growth through the remainder of the year given kind of the pause this quarter?

[Jon Vrabely:]

Chris, this is Jon Vrabely. I’ll answer that. And I will tell you that there are several components of how we try to plan and estimate growth. So the first is in our core business with kind of the traditional customers that we have always done business with in the core product line that Huttig has sold historically. And that core business, in the way that we plan that core business, is basically driven around what is happening in the market. And then on top of that, we plan growth around specific initiatives that we are investing in. But to be frank, the drivers of the -- what we would say are the needle-moving increases in revenue are truly acquisitions, which at this point in time, while we are opportunistically still kind of keeping our ear to the ground, we are fully engaged in the all-out effort to implement and execute the repair, remodel penetration strategy as well as Huttig-Grip. So we are behind the curve, as Oscar said, from a planned perspective on what we had anticipated seeing from both of those initiatives halfway through 2017. I think we will continue to get traction as we continue through Q3 and Q4. But to put a number on what we would anticipate that growth being from either one of those initiatives, to be frank it’s just incredibly risky at this point because we still have a tremendous amount of work to do to truly ramp up the foundational pieces that need to be in place to fully launch Huttig-Grip. And to be frank, we can grow in the Repair, Remodel segment, and we’re obviously making significant investments to continue to grow in that segment for a variety of reasons. But the revenue growth that we would see in the second half of the year as a result of that initiative, it’s not going to significantly move the needle as compared to when we are fully operational and functional in the Huttig-Grip initiative. And that is truly the initiative that will move the needle. And while we are close, I’m not comfortable at this point in time truly defining it. I think by the time we get through the next 90 days and we’re having this call at the end of October, I’ll be in a much better position and I think our organization will be in a much better position to begin to potentially define and stick a stake in the ground to say, okay, this is what we anticipate over the course of the next 90 days to maybe 365 days.

[Oscar Martinez:]

And let me just add a little context to that, because the fourth quarter picks up the holiday period, right, so Thanksgiving, the end of the year. So even though you actually might have business days, those are very low activity days. So historically always lower than the first quarter. So if you’re just trading fourth quarter with first quarter that you have to face that. But here what’s the reality is. We have 101 shipping days left as of today in the year and every single one of our branch managers and every single one of our sales manager has that number very clear, and they know what the task at hand is. So our plan is certainly to execute and deliver growth over the second half of the year, but the question now comes down to the realities of the market, right? So our intent is to continue delivering the growth that we think we can capture.

[Chris Colvin:]

To be clear, to just interrupt is. My question is, if you look at your business, you grew organically mid- to high single digits for multiple years as the housing recovery continued and people continued to spend on R&R. This quarter the growth was flat. So I understand there is the initiatives and you’ll don’t have yet a good sense of what kind of growth that’s going to drive, but Jon, your answer almost made it sound as if, which I’m assuming I’m going to interpret wrong, but you can confirm, that your core business isn’t growing and so it’s a matter of those initiatives. Because I was really asking, okay, you might get some upside on these core initiatives, but given we’re in July and we have the holidays, this isn’t going to be a big driver this year and it wasn’t expected to be. It’s a 2018 and thereafter story. So the core business though, I assume, is still growing. Because if you look at housing and you listen to homebuilders and you just walk around your neighborhood, I mean, the housing market is certainly still going. So that’s what I was trying to understand, was there some kind of pause? There is clearly a pause this quarter with part of the sales, I understand being pulled in first quarter. But what do we expect second half of the year regardless of these initiatives, unless the initiatives are causing a distraction so that you are not able to grow the core business?

[Jon Vrabely:]

Yes, I would -- I think because of the -- so first let me address that last statement that you made, right. Has the pace of change and the amount of change that we are simultaneously driving through the organization, could that have impacted sales in our core business? I will tell you the amount and pace of that change that we are driving through the organization through the first six months of this year, I’d be stupid to not think that it could have had some level of impact. That stated, we’ve tried to minimize and specifically have set up the pursuit and implementation and execution of these initiatives to mitigate and minimize that level of impact. I think through Q2, and Oscar can certainly tell you the number specifically because he spoke to them in his presentation. I believe, we’ve grown year-to-date 5% and the housing market was up in total 4%. So yes, we through a sales -- what we have called internally a sales culture initiative, which is to continue to drive better planning and better sales management in our core business, the expectation is that we will grow the core business and we will continue to grow the core business above market growth. And then where we get the exponential growth that truly leverages our organizational cost structure and truly drives the return on invested capital around the initiatives is as a result of that incremental growth associated with the initiatives that we are making significant investments in. So if you interpret it or if I said that we’re content with market level growth in the core business or that we don’t expect the core business to grow, we expect every aspect of our business to grow, whether it is core or investments we’re making in initiatives.

[Chris Colvin:]

And you had made a similar comment at the beginning of the call and maybe related to that growth, you have the Florida -- the door line finish in Florida. Can you maybe talk about a little bit, just briefly here, that the benefit of that or expected benefit of that Florida door line? And then are you seeing any of that yet today? And related to that, what the potential benefits will be for the New England door line, which I think you said will be done at some point in 2018?

[Jon Vrabely:]

Yes. Early -- the anticipated -- so the anticipated completion date of the New England project is end of Q1 of 2018. So what we’ve seen in the Southeast, and I think it’s actually a great question, because I think it will help explain to everyone on the call, I would say, just the amount of focus and energy it takes to actually build a market. So in Florida, as an example, we started selling prefinished exterior doors 4 years ago, 5 years ago maybe. 2 to 3 years ago we brought those service capabilities in-house, and then completed the significant CapEx investment to increase our capacity 10x in early 2017. The change in strategy with regards to making that significant investment in Florida was twofold. The first was just to service the business that we had grown in Florida, we were out of capacity and saw our lead times extending way beyond what they should be to continue to grow the business, and yet we were still growing the business. So the market opportunity in Florida that we’ve been working to develop for 4 to 5 years has really materialized and continues to materialize. By building this highly automated and high-capacity line in Davenport, Florida, provides us with the ability because of the kind of market expected lead times on prefinished, prehung doors, we can service virtually the entire southeastern part of the United States from Florida and still meet or exceed market anticipated lead times in Mississippi, Georgia, the Carolinas, Cape Girardeau, Missouri. And the value of those products and the gross profit associated with those products far outweighs the incremental cost associated with transporting those products long distances versus investing CapEx to have those prefinished services on a local level. That said, in virtually every market outside of Florida in the Southeast, we did not have a, what I would say, is a high value proposition associated with prefinished exterior doors until we brought the prefinished line on in Florida in the first quarter of this year. So while we are growing and we’re actually seeing benefit in Florida, where we’ve been in that category for 5 years, now we have the ability and the value prop and the right product to help those other 6 or 7 locations in the Southeast get into the category in a much bigger way, but they are really in the infancy stages of going out in their specific trading areas and developing that market in those markets. So we’ve made the investment in the prefinished equipment and prefinished capacity and it sets the stage for us to continue to grow in Florida, but it really sets the stage for us in the that they have a best-in-class product and they are now armed with a value prop that allows them to go on and to begin to develop and consistently grow in the future in that category.

[Chris Colvin:]

That’s very helpful. And so as part of your R&R initiatives, I assume is it this sales force that’s now going around the Southeast and saying, hey, we can provide these finished doors to you. Is that right?

[Jon Vrabely:]

It’s another great question, Chris. And what we -- the way that we approach the R&R initiative -- the R&R penetration initiative, is virtually the same way that we are approaching the Huttig-Grip initiative from a resourcing and sales planning perspective. So first order of business, leverage our existing customer base through every outside sales rep that we have in the organization, where once we possess that kind of best-in-class value prop in the category, then leverage our existing relationships to sell those products into our existing customers. We -- in order to accomplish that, we will add what we call product specialists or market segment specialists that focus on the specific products that we are introducing that are truly experts in the products that we are rolling out or making an investment in, or in the Repair/Remodel segment we will add product specialists dedicated segment sales people that then begin to expand our customer base outside of pro lumber dealers into pro specialty dealers, national retailers, local retailers. So it’s a multipronged approach, where we do need to add incremental sales resources to begin to tap into customer bases that -- and customer segments that maybe we have not traditionally sold into, whereby expanding these capabilities opens up that new customer segment. And that exists in both the R&R initiative as well as the Huttig-Grip expansion initiative.

[Chris Colvin:]

Okay, very helpful. And the New England, is that -- can you quantify how much capacity is being expanded there with that door line?

[Jon Vrabely:]

Yes, it’s not quite the degree that we expanded in Florida, but it’s very close. The investment was a little bit less for the CapEx piece, but the capacity is going to be very close and the equipment that we’ve committed to purchase for that line is expandable up to the Florida capacity and the incremental investment to expand that line up to the Florida capacity would basically bring that total investment at that point in time up to what we invested in the Florida equipment and CapEx spend.

[Chris Colvin:]

Got it. And then your revolver availability, you said it was $36 million in the press release, but does that include the recent expansion? Or is the...

[Oscar Martinez:]

The press release is just after June 30, and the expansion, obviously, was papered by June 30, but not executed. So that’s on a balance sheet perspective. Today, it’s pretty close to where we were last year. But as of June 30, we were not.

[Chris Colvin:]

So where were you last year?

[Oscar Martinez:]

$76.1 million at the end of second quarter last year. Today, we’re sitting, I would say, within 3% or 5% of that. So pretty close to that.

[Chris Colvin:]

Okay, that’s helpful. And then maybe last one is on OpEx. To be clear, it sounds like the $11 million invested in the first half of the year on these initiatives, $2 million of that was legal expenses, is that correct?

[Jon Vrabely:]

You are correct.

[Chris Colvin:]

So it’s $9 million. So of that $9 million, when another gentleman asked a question, you said part of that is more of a onetime expense. Can you quantify all of that $9 million, so effectively an $18 million run rate? Is it $1 million of that $18 million is temporary, is it $7 million? Can you give us some kind of quantification as we try to build out our kind of forecast here of what the ongoing business looks like?

[Jon Vrabely:]

Sure. Let me say it this way. This would be probably the most -- it would be the most comfortable answer that I can give you, Chris, is that without a doubt, a minimum of $2 million that is in the $9 million -- let me think through what I was about to say. So part of the incremental cost on a year-over-year basis includes first quarter operating cost for the acquisition that we closed in early April of 2016, right? So we had incremental operating costs associated with our accelerated growth strategy that we did not have in the first quarter or first half of 2016. Do you understand what I’m saying?

[Chris Colvin:]

I think so.

[Jon Vrabely:]

So we had a full year -- a full half-year of costs associated with the acquisition, when in 2016 we only had a quarter -- one quarter of costs associated with the acquisition.

[Oscar Martinez:]

So you’re just telling we didn’t pick up on the acquisition, right? You then pick up the first quarter.

[Jon Vrabely:]

Correct. So there is part of that incremental cost, right, associated with that acquisition that is higher in ‘17 versus ‘16. Now do those costs go away? No, they don’t go away, but there is an incremental piece of that in ‘17 that we didn’t experience in ‘16. So for me to say, other than that $2 million, how much is truly onetime? It’s not the majority, but there certainly are some investments that we’ve made that are not going to be recurring.

[Chris Colvin:]

Okay. So if I understood you right, of the $9 million, you’re saying the $2 million of that when we look out...

[Jon Vrabely:]

Yes, so I would tell you, I wanted to stop myself because I was including in that the incremental change on a year-over-year basis of the acquisition, right. But in thinking through that logically, I don’t know that it is mathematically and logically correct to not count that as ongoing because it will be, right, the cost to operate...

[Chris Colvin:]

That is ongoing.

[Jon Vrabely:]

Right. I mean...

[Oscar Martinez:]

Really, the reality, I would say, Chris, is of the $9 million, some of those are related to onetime initiatives, right? And it’s not a majority of the $9 million. The bulk of the $9 million repeats and continues. And as you know, we can’t really breakup the detail, but as we get into that, we’ll try to be as transparent as possible on this quarter.

[Chris Colvin:]

Yes, I think maybe that was a confusing way to ask the question. I think the better sense is...

[Jon Vrabely:]

Chris, I’m sorry. I got to really wrap this up because we got to go and I think there’s probably more people on the call, but if you want to clarify just really quick, do it, but otherwise we’ll follow-up later on, please.

[Chris Colvin:]

I think, and you can address this maybe the next time. But just saying, today’s run rate, it’s $38 million of quarterly OpEx, how much of that going forward would you expect to see, I think, is the easiest way to think about it going forward? But yes, we can discuss off-line.

[Operator:]

And the final question is from [indiscernible]. Your line is open.

[Unidentified Analyst:]

Oscar, just a quick question. You did a nice job of getting the credit facility redone. Have you thought about just as a signaling effect, so as both offensive and defensive announcing a very minus -- a modest stock buyback or something so that you can sort of share with your investment community the enthusiasm you have for 2018?

[Oscar Martinez:]

Okay, I love that question because we are enthusiastic about the program. Buyback is one of the, obviously, the choice of the capital that we have and it’s a question that is up for our board. The facility does allow buybacks, but as you know, right now, we are very focused on growth. So we haven’t really had those discussions in any level of detail. But me being, having been around with a couple of other credit facilities as well as Don, we’re very focused on allowing that flexibility. So the possibility is there, but we have no plans right now.

[Jon Vrabely:]

I would like to certainly thank all of our associates for their contributions and continued success. Everybody is working diligently in the implementation and execution of our strategic plan. We would also like to thank our customers and our supply partners for the trust they place in us every day to care for their business. And finally, I would like to thank all of you for your interest and ownership in our company, and your participation in our call today. We look forward to speaking to you in approximately 90 days, as we will report third quarter results. Thank you very much.

[Operator:]

Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the program. You may now disconnect. Have a wonderful day.