Huttig Building Products, Inc.
Q2 2016 Earnings Call Transcript

Published: 7 Aug 2016

[Operator:]

Ladies and gentlemen, thank you for standing by and welcome to Huttig Building Products Second Quarter 2016 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. I'd now like to turn the conference over to your host, Vice President and Chief Financial Officer, Oscar Martinez. Please go ahead.

[Oscar Martinez:]

Thank you, and welcome everyone to Huttig Building products second quarter 2016 earnings call. With me this morning, is Jon Vrabely, President and Chief Executive Officer. Today we will discuss our operating and financial results for the second quarter of 2016 and will update you on our ongoing strategic initiatives. Following our prepared remarks we will open the call for questions. As a reminder, you can get into the Q&A queue starting now by pressing Star-One on your telephone keypad. And let's be forward, we'd appreciate if you could limit yourself to one primary question and follow-up question. As always, please continue to reach out to us if you like to set up a separate meeting. In addition, I'm happy to let you know that we plan to participate in the CL King Investor Conference in New York City on September 13. We'd be happy to schedule one-on-one meeting with you during that time. 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 any information discussed in this call as a result of developments that could 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 potential 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 and on our website. And now, it is my pleasure to turn the call over to Mr. Jon Vrabely, Huttig's President and CEO.

[Jon Vrabely:]

Thank you, Oscar. Good morning and thank you for joining our call. The results we announced yesterday mark the 21st consecutive quarter in which our results improved over the prior year's quarter. We continue to strive to be the best service provider of every product we sell in every market we serve. Our focus on that goal in the continued execution of our accelerated growth strategy has resulted in our ability to outperform the market. In the first six months of 2016 our net sales increased by 10.6% and during that same period our operating profit increased 98.5%. During the second quarter we grew net sales by 13% to $197.9 million and increased gross margins by 100 basis points to 21.3%. We maintained tight control of our operating expenses which were 16.3% of net sales. Our operating income was $10 million compared to $6 million in the prior year quarter. Finally, our adjusted EBITDA was $11.5 million which represents an increase of nearly 70% versus last year's quarter. I am proud of our performance in the quarter and the first half of 2016. Our performance and results over the past several years and to more specifically, in 2016, are directly attributed to the successful execution of our strategic plan and the hard work and dedication of our people. I want to thank all of the Huttig associates for their continued commitment to the organization, their contribution to our success, and their tireless devotion to our customers. Going forward, we remain focused on executing our strategies and investing in our platform to perpetuate our future performance and results. The continued execution of our strategic plan combined with a growing market is shaping what I believe is going to be a very bright future for Huttig. An article written by Jeffrey Sparshott that was published in The Wall Street Journal just last week details that housing formation is growing, which drives the need for new housing starts and that first time single-family home buyers have yet to enter the market in a meaningful way. I believe that during this cycle first time home buyers will enter the market and as they do, it will continue to fuel consistent sustainable future growth opportunities for Huttig. We continue to execute our strategy to accelerate our growth and financial performance. Our comprehensive growth strategy focuses organically on profitable segment penetration, expansion of profitable value-added service capabilities, and product line additions that require value-added services and/or scale. Our strategy also focuses on growth through accretive acquisitions. During the second quarter we completed the acquisition and integration of BenBilt Building Systems, a leading wholesale distributor and door fabricator that has served the mid-Atlantic region for 15 years. We are already experiencing benefits of the acquisition by leveraging BenBilt's brand to grow in the mid-Atlantic region as well as incorporating their fabrication expertise in other Huttig locations. We continue to evaluate additional acquisition opportunities with a disciplined approach that compares our expected returns from acquisitions with organic growth opportunities. From a risk-adjusted perspective, we believe we can derive solid returns from our investment in people, capital, and technology, and we believe these investments will support our growth and profitability going forward. At this point, I'd like to turn the call back over to Oscar to discuss the income statement and balance sheet.

[Oscar Martinez:]

Thank you, Jon. As you heard John say, we increased net sales by 13% compared to the second quarter of last year to $197.9 million while achieving growth margins of 21.3%. This is the fifth quarter in a row in which we had gross margins greater than 20%. The improvement was primarily driven by the addition of BenBilt and by our operational initiatives stemming from our expansion of the value-add capabilities in the repair-remodel construction segment. We also benefited from a shift in product mix by increasing our focus on mill work which is our highest margin capability while reducing our emphasis on lower margin products. Operating expenses of $32.2 million or 16.3% of net sales compared to 17.1% last year, even though on an absolute basis operating expenses increased $2.2 million, primarily driven by higher personnel costs resulting from new hires including BenBilt and offset by lower fuel costs. The result of this performance was net income of $10.4 million and adjusted EBITDA of $11.5 million. Turning to the balance sheet, we ended the quarter with total available liquidity of $74.7 million compared to $61.6 million at the same time last year. Working capital as a percent of quarterly sales was 13.3% compared to 13.5% in the prior year period. Our cash cycle defined as net base of receivables, inventory and payables was 50 days, down from 54 days last year. Total debt-to-capitalization net of cash was 54% as compared to 48% at December 31, 2015. Our sole financial covenant is the fixed charge coverage ratio and we're comfortable that we have ample room to comply with this covenants. We believe that our capital structure is appropriate to support our continued expansion. As of June 30, we have leverage of 2.9 times debt to trailing 12 months EBITDA $26.1 million. Recall that given the seasonality in our business, our working capital needs cost our debt to increase during the summer season. This use of cash typically reverses in the fourth quarter requiring lower debt levels to fund working capital in the winter months. This capital structure allowed Huttig to survive the downturn in the industry. It allowed us to repurchase 1 million shares during that downturn and most recently, it allowed us to acquire BenBilt. As we evaluate investment decisions for organic opportunities and for acquisitions, we measure the expected return-on-capital to select only those projects that exceed our risk-adjusted internal hurdle rates. We believe this discipline will ensure that our investment decisions will drive annualized returns necessary to support our growth and profitability going forward. At this time, I'll turn it back to the operator take questions and then we'll bring it back to Jon Vrabely for some closing remarks. Amy?

[Operator:]

[Operator Instructions] Our first question is from Jody Mauer with Koch [ph] Asset Management. Please go ahead.

[Unidentified Analyst:]

This is Don Coe joining with Jody here, and I've got one question that has several characteristics. And that is -- I'm trying to go through your source of uses; how much did you pay for BenBilt and how much goodwill did you put on the balance sheet rose the total revenue of BenBilt? And when do you see that as a creative to earnings, you're going to pay for this or it would accretive in a year or so? And my other follow-up question -- so I've got them all in one. When will you be through your tax loss carry forwards -- you're doing a brilliant job of earning nice money, will you be through it in '16 or we have some for '17 where you won't pay any income tax?

[Jon Vrabely:]

This is John Vrabely. I will attempt to answer the first question with regards to BenBilt. We have not disclosed, and to be frank, do not plan on disclosing the purchase price of BenBilt. And at this point we have yet to disclose, and to be frank, do not plan on disclosing their annual revenues as we do not disclose revenues on a branch by branch basis. I will tell you that based on the purchase price that we paid as well as BenBilt's financial performance, we believe that the acquisition will be accretive in year one.

[Unidentified Analyst:]

Beautiful. And I think I can find the cost in the source and used with fund somewhere.

[Oscar Martinez:]

I'm sure as you look through the financial statements once we file our Q, you can probably see some detail there.

[Unidentified Analyst:]

Good. And the tax issue?

[Oscar Martinez:]

On the tax issue, it's tough to say exactly right but based on our projections, I'd be giddy if we could burn through that tax NOL in 2016 but I think '17 is probably more realistic and maybe even stretching into '18, just depends on how this housing market continues.

[Unidentified Analyst:]

I mean from my best judgment you've got at least six quarters forward of usage maybe or five quarters?

[Oscar Martinez:]

At the at the end of Q2 we had approximately $35.5 million of NOLs still available for future use.

[Unidentified Analyst:]

Excellent, thank you. Nice job guys, you're doing a nice job.

[Oscar Martinez:]

Thank you very much sir.

[Operator:]

Our next question is from John Ralph [ph] of Aryan Capital. Please go ahead.

[Unidentified Analyst:]

Hey guys, good morning. Could you give a little bit more detail on the charge for discontinued operations and in particular, or the coverage issues with the insurers now fully resolved, as well as the new indemnification agreement with Crane. I guess what I'm trying to understand is sort of what went into that charge -- what some of the components of that were and barring going forward an increase the expected cleanup costs are all the charges at this point, now fully behind you, it's fully reserved for.

[Jon Vrabely:]

Good morning, John, it's good to hear from you. So this is Jon Vrabely and I'm going to just make a couple of comments and then actually turn it over to Oscar to clean up the answer but -- in general, I would tell you that things regarding the environmental issue in Missoula [ph] are actually going well, we have started the clean-up process based on all of the information that we have available to us today. I believe that I'm very comfortable with the accrual that was finalized and set up as of September 30, 2015. As you know, sometimes you just don't know what's there until you've really get into cleaning up. So I'd be remiss if I didn't say that we could be under accrued or we could be over accrued but based on all of the information that we have today, I'm comfortable that we are accrued to what we believe it will cost us to run the property.

[Oscar Martinez:]

This is basically just to add some numbers to what Jon said, our best estimate right now is as of June 30 we estimate the total cost remaining to implement the final remedial action work plan to be $7.7 million, that was roughly -- I guess $8 million at year end, so that shows you some of the progress we've made. With regards to the insurance proceeds, we did settle out with the insurance companies and related parties, and so what you'll see when you look at the detailed financial disclosure and then the footnote; you'll see that we recorded a $4.4 million after-tax income from the discontinued operations pertaining to this matter, and that's primarily as a result of the payments we received from settlement agreements with the insurers, as well as from Crane & Company. It includes -- the total income from discontinued operations includes a loss of $400,000 for the first six months of 2015, so for competitive purposes you will see that there but as far as the insurance proceeds, I think we're fully accrued and we feel we're in a good position.

[Unidentified Analyst:]

Okay, great, got. And my second question, you mentioned that there are other potential acquisition opportunities in the pipeline and that you always compare the returns available from those to returns available from organic growth opportunities. Could you maybe give a little bit a qualitative color -- I mean when you talk about organic growth opportunities what sorts of things with those involved? I mean are you talking about bringing on new product lines or other initiatives and then what sort of -- again, qualitatively investments might be required for those sorts of organic opportunities or you're simply talking about new greenfield openings of new branches?

[Jon Vrabely:]

Great question John. Our organic growth strategy really focuses on segment what I would call really segment penetration. And when we talk about segment penetration, really we are referring to segments within the construction industry that we feel provides growth opportunities for us to obviously continue to grow our revenue but growing in a way that also really maximizes our gross profit opportunities, and takes advantage of really our value-add service proposition in no-work fabrication. So in order to really expand on and implement and execute that strategy, it does require some level of investment in capital, may be higher capacity door pre-finishing capabilities, higher capacity door production equipment, potentially additional rolling stock as we grow additional sales people, both on the inside and outside sales force. So as we as we look at the segments that are available where we believe there are growth opportunities, we are consistently measuring -- planning and measuring and quantifying what we believe those opportunities are against the investment that it will take for us to execute that growth strategy. And as we are looking at those types of organic opportunities we are also simultaneously pursuing additional acquisitions and as we get down the road potentially with an acquisition we began to really look at -- can it be accretive in year one because that is certainly one of our internal hurdles that we establish. And is it the best deployment of capital to pull the trigger on that acquisition or make additional or further investments in the organic strategy.

[Oscar Martinez:]

And the net result is simple, if we find acquisitions that return capital of our hurdle rates and certainly above our cost of capital then we'll keep moving the ball forward and that individual acquisition or that individual organic project continues to add capital and return capital on an annualized basis. So it's pretty simple strategy but we're trying to be disciplined in the way we carry it out.

[Unidentified Analyst:]

Okay, great. Thanks very much guys, appreciate it. Keep up the good work.

[Oscar Martinez:]

Thank you, John.

[Operator:]

[Operator Instructions] And there are no further questions at this time.

[Jon Vrabely:]

Thank you. In closing, I again want to thank all of the Huttig associates for their contribution 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. Lastly, and importantly, I thank you for your interest and ownership in our company and your participation in our call today. We look forward to speaking to you when we report third quarter results in October.

[Operator:]

Ladies and gentlemen, this conference will be available for replay after 12 P.M. Central Time. You may access the replay by dialing 800-475-6701 and entering the access code 398804, international participants would dial 320-365-3844. Those numbers again are 800-475-6701 and 320-365-3844 with an access code of 398804. That does conclude your conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.