Huttig Building Products, Inc.
Q3 2017 Earnings Call Transcript

Published: 31 Oct 2017

[Operator:]

Good day ladies and gentlemen and welcome to the Third Quarter 2017, Huttig Building Products Incorporated Earnings Results Call and Webcast Conference Call. [Operator Instructions] I would now like to turn the conference over to our host for today, Oscar Martinez, Chief Financial Officer. You may begin.

[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 Building Products. Today, we’ll discuss our operating and financial results for the third quarter and for the first nine months 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 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 in 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 and on our website. And now it’s my pleasure to turn the call over to Jon Vrabely. Jon.

[Jon Vrabely:]

Thank you, Oscar. Good morning everyone and thank you for joining us. Today we will update you on our continued progress and the implementation of our strategic planned and our financial results for the third quarter and year-to-date through September 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 many of you know, we are nearly one year into an ‘all hands on deck’ transformational change process that lays the foundation and builds the platform to turn Huttig into a more diversified company that possesses a significant sustainable, above market growth opportunities for many years to come. We have successfully created quantified and prioritized the substantial growth opportunities that are required to successfully accomplish this transformation. In addition, we are confident that we have developed the right strategic plan to focus and guide our way towards the achievement of our goals. Through our repair, remodel segment penetration and national expansion of the Huttig-Grip private label brand instruction fasteners and building products initiatives, we will diversify our revenue stream so our future performance is never again so directly linked to the cyclical nature of the residential new home construction market. To provide some perspective on these initiatives, the size of the residential Repair/Remodel market segment and the domestic construction fastener market are so significant that single digit share growth in either market would equate to hundreds of millions of dollars in incremental revenue for Huttig. In addition, on a national scale the barriers to entry in these products and services we are focusing on in both initiatives our relatively high, requiring substantial investments in capital expenditures, working capital, human capital and operating expenses, which provide a unique and timely opportunity for Huttig, prohibiting the majority of our competitors from pursuing a national growth strategy in these segments and products. In addition to the significant investments we are making in our organic growth strategy, we continue to make simultaneous investments in the implementation of our gross margin enhancement people and information technology strategies to successively lay the foundation and build the platform to achieve our goals. We have and will continue to invest in our facilities infrastructure, rolling stock, human capital and working capital, all of which are absolutely required in order to capture and effectively manage this planned incremental growth. We continued to make significant progress in the implementation of our strategic plan during the quarter. We are on schedule with the implementation of our three year information technology plan. We have upgraded our technology infrastructure and are nearly two-thirds of the way through a comprehensive upgrade of all of our software applications, including a companywide upgrade of our ERP system. We are also executing our people plan and will continue to build an HR structure to turn Huttig into a top performing disciplined organization that strives for the highest level of associate engagement with the best and most empowered people. As part of our 2017 safety plan, we made a sizable investment in upgrading our safety equipment and facilities that have successfully reinforced our safety first culture and has reduced the number of our safety incidents. I applaud the effort of all of our associates and managers that has led to our improved performance in this key area of our businesses in 2017. While construction, installation and permitting delays pushed our scheduled launch date back by approximately four months, our high capacity automated prefinished door center in Florida is fully operational and we are focused on executing our Repair/Remodel sales growth plan across the entire Southeast region. In addition, we are making strong progress towards the launch of the Huttig-Grip National expansion program and are rapidly approaching the sales execution stage of this imitative. While we continue to make significant progress in the implementation of all of our strategies in the third quarter, executing and managing through a change process of this magnitude is never easy and never goes exactly as planned. But the monumental change process we have embarked on has had a greater impact on our associates, company and financial performance in 2017 than we had anticipated in trading the year. The complexity and management of multiple interdependent comprehensive plans to simultaneously implement all of our strategies has certainly stressed the organization this year and while some timelines have slipped delaying our ability to fully executive our sales plans, the quantified opportunity is real and our strategy is sound. As we embark on this transformational process and throughout the year, we have communicated that 2017 was going to be an investments year for Huttig. Based on where we are through the third quarter, I would estimate that we are approximately three to six months behind our original organic growth implementation timeline. We only get one opportunity with our customers to demonstrate our ability to effectively handle their business, and while we are very close to being fully operational, we will not fully implement our sales plans until we are absolutely confident in our ability to flawlessly service the business. As a result and as we head into the non-seasonal part of the year, I do not anticipate that we will generate adequate incremental revenue to cover our investment costs over the next two quarters. As we are near the end of the operational preparedness stage and transition into the sales execution stage of our organic growth initiatives, we recently announced several changes to our senior leadership team’s structure that will take effect January 1, 2018. We believe the new structure better supports the transformational change process we are driving through the organization, leverages the industry and managerial experience of the executives that have recently joined Huttig across the entire company and the lines that the Huttig-Grip Division with our corporate structure and field operations. The entire management team is aligned and 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 warrants best-in-class valuation multiples. Now I’d like to turn the call over to Oscar to discuss the income statement and balance sheet.

[Oscar Martinez:]

Thank you, Jon. Third quarter sales of $199.6 million increased $0.04 over the last year. By comparison housing starts increased to 1% during that period. As Jon mentioned, the growth from our initiatives lagged our plan though the first nine months of 2017, but we are confident that we are on the track path and expect to see better results as our initiatives take hold. Hurricanes Harvey and Irma slowed sales in the quarter from Huston to Florida, resulting in a loss of approximately one week’s worth of sales into the affected areas. We expect to see those volumes recovery and grow between now and the first of 2018 as rebuilding efforts continue and insurance claims make their way through the system. Millwork sales were essentially flat for the quarter. As John mentioned, we did not see a traction we were expecting with a new door line in Florida and incurred additional personnel expenses resulting in production days as per the quarter. Production variances occur when there is a mismatch between planned and actual number of units produced. Expanding our prefinished door sales requires more effort than we anticipated, especially in markets outside of Florida where we haven’t historically been this active. As we discussed during last quarter’s call we expect to complete an expanded prefinished door line in the Northeast in early 2018 and we are actively looking to apply the lessons learned in Florida to this market, so we can ensure better execution. Our operating expenses of $38.2 million were 19% of net sales for the quarter compared to 17% in the third quarter of 2016. As Jon said, the increase in our operating expenses, it’s a significant investment. Where we hired the bulk of the team we need to executive our strategy and we expect the cost of that investment to average around $4 million per quarter. Litigation with PrimeSource, including our counterclaim against PrimeSource continued and although we can’t determine when this litigation will end or the ultimate costs to such litigation, we will continue to vigorously defend our right to compete in the market place. Our third quarter net income from continued operations was $1.4 million compared to $4.7 million in the third quarter of 2016 and adjusted-EBITDA was $4.9 million compared to the $9.2 million for the third quarter of 2016. Turning to the balance sheet, we ended the second quarter with total available liquidity of $70.9 million compared to $84.3 million at the end of the third quarter of 2016. As previously discussed, during the quarter we increased the total size of the credit facility to $250 million and extended its maturity until July 2022. Working capital of 16.1% of quarterly sales compared to 13.7% in the prior year period and as anticipated, we built inventory and supported the Huttig-Grip initiative and will continue to do so through the balance of 2017. We use our balance sheets selectively to capture specific sales opportunities with extended credit terms like we did last year with our New England buying share and our balance sheet helps us compete effectively against smaller regional players who cannot offer the same terms. We ended the third quarter with total debt to cap, net of cash of 58% compared to 49% in the third quarter of last year. Our sole financial covenant is a fixed charge coverage ratio and we are comfortable that we have ample room to comply with these covenants. Longer term we expect big things from our accelerated growth strategy and believe that if the underlying fundamentals for the residential housing market continue their current trajectory, we’ll grow at a faster rate than the market and ultimately these initiatives could put us on a runway to generate over $1 billion in sales in the midterm horizon. With that, I’ll turn it back to the operator so we can take your questions.

[Operator:]

Thank you. [Operator Instructions] And our first question comes from Robert Maltbie of Singular Research. Your line is now open.

[Robert Maltbie:]

Hello gentlemen. I am relatively new to your call and story and I appreciate your ambitiousness of your goals, very interesting. My initial question with HB, you mentioned above average long term growth ambitions and are you talking about – I mean you talked about average being at kind of a GDP related cyclical economically exposed business to the new home construction. When you talk about that, are you talking about GDP plus or what type of levels and then my second question relates to housing starts being below the 25 year trend, and I was wondering what the prospects are for that to increase towards the trend, of course you’ll see the trend.

[Jon Vrabely:]

Yeah, so Robert, my name is Jon Vrabely and I’ll answer the questions with regards to growth above market first. So when we speak about growth above market, it is really specifically related to housing activity growth as the majority of the products that we sell are gears towards residential construction both in single family, to some extent multi-family and also into the Repair/Remodel segment. So the foundation that we are laying today through our organic growth strategy, we believe will absolutely provide us the ability based on the markets that we are pursuing and the segments that we are pursuing that through this fundamental change process we are laying the foundation to achieve growth above the residential construction market growth that we would see for many years to come. With regards to housing start data, it has been a very unusual recovery in historical terms from our perspective, because the downturn that we experienced was also unlike any other downturn in recent history. So the recovery has been less robust than I think most industry prognosticators would predict. I certainly believe that borrowing any kind of unpredicted, whether it be global or even significant hits to the U.S. based economy, that there is still very tight supply today of single family homes. I do believe that there are still legs in this recovery over the course of the next several years, but as we have seen even through this point in the recovery, it has been incredibly choppy headwinds that we are facing from an industry today that I believe leads to the kind of choppiness and unpredictability of the recovery.

[Robert Maltbie:]

Thank you.

[Jon Vrabely:]

Thank you, Robert.

[Operator:]

Thank you. [Operator Instructions] Our next question comes from Alan Weber of Robotti & Company. Your line is now open.

[Alan Weber:]

Hi, good morning there.

[Jon Vrabely:]

Good morning, Alan.

[Alan Weber:]

Hi. So John can you talk about, so when do you expect to be – when do you expect the Huttig-Grip to kind of you know actually start to generate real revenue for the company and is it really – I’m guessing how far into ’18, what do you kind of – how do you see it today?

[Jon Vrabely:]

So that is to be frank the $64 million question, and the – you know what we have learned in this process is that it has taken us longer to truly get all of the pieces, the required pieces of that puzzle in place Alan. It has not certainly in any way, shape or form dissuade our belief in the opportunity and what we can actually accomplish through the initiative from a growth perspective. The challenge I would say has been really ensuring that the program that we will launch is more than just a me-too type of offering. There are very few players in the industry that can offer on a national basis the full plethora of construction fasteners to the Repair/Remodel and to the new residential construction segment. So we are working as diligently and as hard as possible to make this happen and to begin to execute the sales plan stage of this initiative as rapidly as possible. But we will not go out until we are absolutely certain that we are in a position to service our customers business above their expected levels. So to your question, we have spoken in the past about needing to generate a level of incremental revenue to cover the fixed or the invested cost structure around the initiative. We have talked previously that we had planned that by the fourth quarter of 2017 that we thought we would be in a position to actually begin to accomplish that on a quarterly basis. At this point, as I said in my prepared comments, I believe we are probably three to six months behind that schedule. Part of it Alan is the fact that you know based on where we are in the – really heading into the non-seasonal part of the industry, so I would suspect that certainly within the next 60 days we will be in a position to begin to transition into the full blown execution of the sales planning process.

[Alan Weber:]

Okay, great. So that’s good. And then on the BenBilt acquisition, can you just kind of explain what’s taking place there?

[Jon Vrabely:]

Yes, the acquisition has gone very smoothly. The integration of the acquisition has gone smoothly and I will tell you that through the third quarter of 2017 they are actually slightly ahead of the initial projections that we made from a contribution perspective to the overall business.

[Alan Weber:]

Okay. Alright, great, thank you very much.

[Jon Vrabely:]

You’re welcome. Thank you, Alan.

[Operator:]

Thank you. And we do have a follow-up question from Robert Maltbie of Singular Research. Your line is now open.

[Robert Maltbie:]

Hi, I’m trying to ask just a couple of follow-ups, relating to the fasteners market and that opportunity, could you speak to your competition and what products are competitive advantages? Secondly, your quarter was significantly above housing starts. Maybe what’s driven that and then just a little bit of I guess relation cover on the ongoing regular expenses.

[Jon Vrabely:]

Yeah, so I’ll speak really at a high level around the construction fastener markets. You know the construction fastener market in the U.S. is estimated to be in the $2.5 billion. You know there are my plethoras of competitors simply locally that you know that we compete with today in the construction fastener arena. There are a couple of national wholesale distributors that also kind of service that market on a national level and we believe that there is certainly ample opportunity for an additional competitor in the arena and based on our long standing customer relationships in the pro-lumber dealer and pro-specialty dealer arenas and with our relationships in the national home centers that there is an opportunity for us to grow our business in all of those segments. So, you know how are we differentiating ourselves? We are differentiating ourselves with a variety of features and benefits around our program and in addition to that it is really about leveraging our relationships with our existing customers to further penetrate their business and allow them the opportunity to continue to leverage their purchases with us, so we do bring the opportunity for our customer base to reduce transaction costs through putting more products on a purchase order and having less receiving and less payables to process, and so we believe there is a real value proposition there.

[Operator:]

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

[Chris Colvin:]

Hey Jon and Oscar, thanks for the thorough kind of update on the business. One thing I may have missed, I don’t think you touched on is, do you foresee any kind of benefits from the hurricanes, specifically the ones in Florida given you have a few facilities down there?

[Jon Vrabely:]

Yeah, we think – as I mentioned we think we’ll see some uptick in activity through the first half of next year and typically what we see is an immediate pop in the level of activity, but then you really look for interims payment to work their way through the system and I think you know generally speaking just given that lag, the bulk of that will probably come in 2018.

[Chris Colvin:]

Okay, that’s helpful. And then the last question is, despite what seems like a little bit of delays is your getting everything set up for the Huttig-Grip. Do you still expect this to be called a kind of $12 million to $25 million EBIT opportunity, which you know in the high end doubles what your EBIT was last year. Do you still expect that and then from a timing perspective, given the delay is it something you still think you could achieve by call it 2020 or what does the timing look like and what’s the opportunity set?

[Oscar Martinez:]

Yeah Chris great, great question and I will tell you that certainly from my perspective the market is there and we believe that those numbers are absolutely realistic in that timeframe that you have described. The process that we’ve gone through in 2017 in truly laying this foundation to transform our company certainly goes beyond Huttig-Grip and there are as I mentioned a multitude of moving pieces and we are managing all of those pieces simultaneously. Nothing has changed with regards to the intermediate term outlook. So the issue is getting through this kind of foundation laying process in the most effective way, to ensure that we can actually handle the business and that process is just taking you know a little bit longer than what we had anticipated. But while it may delay the actual start and the actual launch, nothing has changed with regards to what we believe all of these strategic organic growth opportunities present.

[Chris Colvin:]

That’s helpful and I guess actually one follow up to that is, is there any way to quantify the potential I guess operating profits from the Florida line and the New England line if your able to get to your capacity, door line credit.

[Jon Vrabely:]

Your know the best way to see it, this is part of the R&R initiative and within the products that we sell in the R&R initiatives, pre finished doors are on the upper end of the margin that they generate and then given the efficiency to scale those lines will produce, it’s definitely more meaningful. Actually you know we don’t break it out in detail within the category, so you’ll see it adding to the margins and you’ll see it adding to the overall contribution of metal work. What I can tell you is that its directionally in the way we want to go for the rest of the business, which is to look for opportunities to expand the mix of products to include a higher and higher percentage of high value add and therefore higher margin products into our P&L.

[Chris Colvin:]

Got it. Okay, well thanks. Thank you.

[Operator:]

Thank you. And ladies and gentlemen, this does conclude our question-and-answer session. I would now like to turn the call back over to Jon Vrabely, President and Chief Executive Officer for any further remarks.

[Jon Vrabely:]

Thank you. In closing I again 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, and finally, I 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 a few months to report final year 2017 results. Thank you.

[Operator:]

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