Huttig Building Products, Inc.
Q3 2016 Earnings Call Transcript

Published: 30 Oct 2016

[Operator:]

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

[Oscar Martinez:]

Thank you, and welcome everyone to Huttig Building products third quarter 2016 earnings call. With me this morning is Jon Vrabely, President and Chief Executive Officer. Today, we'll discuss our operating and financial results for the third quarter of 2016, and we'll update you on our ongoing strategic initiatives. Following our prepared remarks, we will open the call for questions. And as a reminder, you can get in the queue starting now by pressing Star One on your telephone keypad. As always, please continue to reach out to us if you like to set up a separate meeting. 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 on 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 potentially impact our financial results is included in the earnings release issued yesterday and on 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 Web site. And now, it's my pleasure to turn the call over to Mr. Jon Vrabely. Jon?

[Jon Vrabely:]

Thank you, Oscar. Good morning everyone, and thank you for joining our call. I am very pleased with the results we announced yesterday. Our results for the quarter and on a year-to-date basis are a direct result of our continued success in implementing and executing our strategic plan. Our focus on accelerating profitable growth to fuel improved financial performance has directly led to a sales increase of 9% and an operating profit increase of 60.8% in the first nine months of 2016. During the quarter, we grew net sales by 6.1% to $192.8 million, and increased gross margins by 100 basis points to 21.5%, as compared to the prior year quarter. We maintained tight control of our operating expenses, which were 17.4% of net sales. Our operating income was $7.8 million compared to $6.4 million in the prior year quarter. Finally, our adjusted EBITDA was $9.2 million, which represents an increase of 21.1% versus last year's quarter. Through the first nine months of 2016, we have generated more EBITDA than in the full-year of 2015. Our results in the quarter are more meaningful in light of the sluggish growth in the Residential New Construction Home segment. Single family new construction housing starts increased 2%, and total housing starts actually decreased 2%, as compared to the third quarter of 2015. In addition, we have consistently increased our strong financial performance trend as we continue to make significant investments in executing our strategic plan. Going forward, we remain focused on executing our strategies in investing in our business platform to perpetuate our future performance and results. Our growth strategy includes comprehensive organic initiatives and acquisitions. We are investing in organic growth initiatives to expand our product lines and further penetrate the residential Repair/Remodel segment, which we believe will drive meaningful improvement to our bottom line and will further insulate our business from potential volatility in the New Home Construction segment. Although we have no current acquisitions to announce, we are actively looking for accretive opportunities that can replicate the success we've experienced with BenBilt. The acquisition we completed in April of this year. I am happy to report that their contribution to our business has been better than expected. In addition, we continue to invest in people, capital and technology to lay the foundation to support future growth and profitability. Specifically, I am proud to announce that we are investing in a new set of safety campaign to do everything possible to ensure the safety of all Huttig associates. We believe this focus will not only demonstrate our care and commitment to keeping our people safe at work, but we'll also improve the engagement level of our associates across the entire organization. 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, while I am proud of our execution of the strategic plan and related financial performance, I am most proud of our associates. Whatever level of success we have achieved or will achieve in the future is a direct result of the dedication of our associates. In closing, I want to thank all of our associates for their genuine care of our Company that they demonstrate everyday through their dedication to being the best service provider of every product we sell in every market we serve. 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 Jon say we increased net sales by 6.1% compared to the third quarter of last year to $192.8 million, while achieving gross margins of 21.5%. This is the sixth quarter in a row in which we've had gross margins of greater than 20%. The improvement was primarily driven by the continued execution of our profitable growth strategy and addition of BenBilt. The concept is simple, we focus on product categories in which we can add the most value while optimizing the utilization of our discretion and logistics network to maximize our return on investment. Operating expenses were $33.6 million and there are 17.4% of net sales compared to 17% of last year. The increase of $2.8 million was primarily driven by higher personnel costs, resulting from new hires, including BenBilt and the full reinstatement of the 401(k) match across the Company, which will partially offset by lower fuel costs. The result of this performance was net income of $4.7 million and adjusted EBITDA of $9.2 million resulting in an adjusted EBITDA margin of 4.8% for the third quarter. For the nine months ended September 30, our net income was $16.5 million and adjusted EBITDA was $24.9 million for an adjusted EBITDA margin of 4.5%, not only those are nine months adjusted EBITDA performance of $24.9 million exceed the amount generated in all of 2015. It's also the highest level of adjusted EBITDA we've achieved this full-year 2005 results, when new residential housing starts exceeded $2 million. I highlight this because it emphasizes the fundamental changes we have effectively made to our financial model through the successful execution of our strategic plan. Turning to the balance sheet, we ended the quarter with total available liquidity of $84.3 million, compared to $71.2 million at the same time last year. Working capital as a percent, quarterly sales was 13.7% compared of 12.8% in the prior year period. Our cash cycle defined as net base of receivables, inventory and payables was 52 days, down from 51 days last year. Total debt-to-capitalization net of cash was 49% 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 covenant and our total debt levels was essentially flat the last year, the growth of our cash flow has led to a dramatic improvement in our leverage. As of September 30, we had leverage of 2.9 times debt to trailing 12 months adjusted EBITDA of $27.7 million, compared leverage of 3.9 times as of September 30, 2015. We believe that our capital structure is appropriate to support our continued expansion. Recall that given the seasonality in our business, our working capital needs cost our debt to increase during the summer season and 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. Janice, we'll take the call back to you for questions please.

[Operator:]

[Operator Instructions] And our first question comes from John Rolfe with Argon Capital. Please go ahead.

[John Rolfe:]

Hey guys, its John from Argon. Few questions for you; first, I was wondering if you could give any color with respect to -- in the current quarter whether there has been any impact from tropical storm or hurricane Matthew, either on the negative side with respect to temporary facility closings, or on the positive side if you've seen any boost in demand from any of your Southeast facilities as a result of rebuilding efforts?

[Jon Vrabely:]

Yes, hi, good morning, John. Thanks for joining this call. This is Jon Vrabely. So, as a result of the storm, specifically we did actually incur branch closures in our Florida locations as well as our Mississippi and Carolina locations. The closures were not for extended periods of time, but generally ranging from one day to maybe two-and-a-half days particularly for the Florida locations. So I would say certainly had a slight impact on the quarter, but nothing significant. As for potential opportunities as a result of the damage associated with the hurricane, it's difficult to assess at this point, certainly no impact on Q3, and with regards to the product that we focus on, if there is damage, that will cause for replacement product based on the products we sell, John, it's probably going to be within the next 90 to 180 days that we would see that impact, but to be frank again, at least [ph] based on the reports that I have around the damage associated with the storm, I would say it's not something that would significantly move the needle for us.

[John Rolfe:]

Okay, okay. Secondly, notwithstanding the pullback that your stock has had over the last few months along with sort of everybody else in the building products, supply the value chain. The stocks had done pretty well over the last 12 months certainly. And that said, when I look at you versus just about every other public comp or every other public company that it's in the building supply value chain, you guys still traded probably a one to two term multiple discount on an EBITDA basis and anywhere from sort of three to six term multiple discount on an earnings basis. So just wondering whether you have any thoughts about that? Why you think that is, and if there is any way that you can address it or think that you feel like you can and should be doing differently in that regard?

[Jon Vrabely:]

John, I guess the one thing I definitely say is we don't have any research analysts covering us, right? I think that's a difficult industry for companies of our size or different sector because the profit motive is definitely not there for creating activity, and I think we've seen some of the research activity [ph] and pulling back that research cover. So we're left to manage the investor expectations for future growth on our own, right? We're trying to do our best in terms of communicating and maintaining active value over [ph] investor for participating in investor conferences. We're starting to be more proactive in reaching out to investors, and you'll see us coming around to do non-deal road shows over time, which we think will also help. So I think the name of the game for us is just to get the story out and to execute, right, but if you look at our growth in cash flows in our growth and margins, all the way back for the last five years year-on-year,there's improvement and we think that keeps going, right. So from our perspective, we hope that the investor universe notices that and that the multiple to select the future growth expectations, but the main strategy for us really is not so much of getting a bigger loud horn for announcing the stock, but it's just to continue executing on the business and those are stick with us then get the benefit, right.

[John Rolfe:]

Okay. Okay, yes and look I think you're right I mean ultimately I think you guys will be valued more appropriately. You keep doing what you're doing and I would certainly encourage you as you alluded to continue getting out there proactively and then putting your story in front of people because I think – yes, I think part of it is just a knowledge issue, a lot of folks because you don't have anybody upon the table on the sales side or a lot of folks don't really know about trading volumes or anemic, which keeps you out of funds of a certain size certainly, but I would -- yes, encourage you to keep what you're doing. Last very, very quick question, just when you guys think about the business I mean you've mentioned both single family and total starts at the beginning of a call and count performance versus those. Do you think starts I mean is that sort of the best proxy for the industry or is it sort of a combination of starts and completion? How do you think about which of those is more appropriate metric or is it some combination of the two?

[Jon Vrabely:]

Yes, that's actually a great and complex question simultaneously. It really depends of largely, I think on the individual company and they're dependent on the revenue mix associated with each segment within -- new construction. Specifically to your question, we focus on starts, not necessarily permanent and not necessarily completion. I think the issue around starts in general at least directionally provides us with the best possible measure while certainly not perfect. It is directionally correct to help us really assess internally John whether we are kind of growing at market, above market or potentially below market. So we tend to focus on housing starts and then specifically break that down even further into various new housing starts segments, which would really be residential single family residential multi and also manufactured housing.

[John Rolfe:]

Okay. Okay, and I think in conversations or comments you believe before I mean you guys are have a much heavier exposure to the single family, is that now correct?

[Jon Vrabely:]

It is certainly as best we can tell and it is not an exact science, but it is certainly as best we can tell responsible for probably up to half of our current revenue mix and repair remodel is growing at a much faster rate. When we tap our revenue to single family starts, specifically we believe that we are actually at market or maybe even gaining a slight share of the product that we sell into the single family starts segment, but we can really measure and track the fact that we are growing in the repair remodel segment at a much faster rate than what we believe the total are in our segment is growing. And then beyond single family and repair/remodel, the rest of the New Construction segment in manufacture and housing, multi-family, as well as other segments and building products in general whether it be OEM industrial, they makes up such a relatively small part of our total revenue. It's really a single family and even more importantly the initiatives we have around are that we believe will drive our future growth.

[John Rolfe:]

Okay, great. Thanks very much guys. I appreciate it.

[Jon Vrabely:]

John, thank you. Appreciate your interest and thanks for being a consistent follower of the Company and participating in the calls, take care.

[Operator:]

Our next question comes from the line of Hans Fredrikson with Oak Summit Capital. Please go ahead.

[Hans Fredrikson:]

Thank you, and thank you for hosting this call. I know you've been doing that for a couple of quarters and in terms of following up on John's questions. I think that's certainly one thing that's helpful for everybody to get more information about the company. I had a couple of questions one was in terms of some of the strategic initiatives. You talked about in addition to acquisitions. There are a couple of the things you all are working on. Can you just drill in a little bit further in terms of some of the specific things you're doing, particularly in that maybe repairing remodel segment of the business?

[Jon Vrabely:]

Absolutely, so around R&R we believe that we are the largest fabricator, interior and exterior doors to the pro-builders segment in the country. We also believe that we are the largest broad-based millwork distributor in the country and the only distributor that actually sells a full plus of a value-add millwork products, door fabrication, door pre-finishing really specialty building products. So we have in our building products basket, a variety of products that are really primarily sold through the repair/remodel segment, as well as our pre-hung and pre-finish door capabilities and really a national scale. So we are focused on increasing our penetration of the R&R segment across four key customer segments and it's really the pro-lumber dealer, what we define as the pro-specialty dealer, the National Home Center retailer and most recently have really started to focus on what we define as the local specialty retailer. So we're adding resources from a sales and marketing perspective, marketing collateral, feet on the street, incremental capabilities around more value-add services in pre-finishing of initiating of doors as well as obviously the fabrication and preventing doors to further penetrate that segment timing in the plethora of building products that we sell that are also primarily sold through those for customer segments that we've identified.

[Hans Fredrikson:]

Great, thank you. That's very helpful. Do you care to comment a little bit about 2017, I don't know if that's too early, but how are things shaping up for you kind of hearing from customers out there and what would you – based on what we know today, what kind of a year do you think you all will have in 2017?

[Jon Vrabely:]

Well, it's actually another great question. Hans and we are smack in the middle right now of actually finalizing our operating business plans for 2017 quantifying all of the investments that we will continue to make into the business working through what we believe we will be able to achieve in growth. From those investments, the incremental OpEx associated with making those investments and ultimately finalizing our 2017 budget, which will be presented to our Board of Directors in early December. With regards to the market, what's interesting is that going all the way back to a kind of 2006, 2007 and even through the initial kind of growth and recoveries change and we prognosticator around housing has virtually been wrong. And the rapid decline in the downturn, everybody missed, thinking that market would not fall as rapidly or as far as it's been, and on the recovery, everyone has overestimated the kind of level of growth that would be anticipated in maybe the next one to three years. We have always gathered a plectra of data around what the industry prognosticators think will happen and to be frank we apply what we believe will happen and what we feel will happen in the market and we utilize that information to really help us determine what level if any of that market grow based on our revenue mix that we should be able to attain or achieve in the upcoming year. So kind of a complicated back around, in general we have been more right then the industry prognosticators and as an example just in 2016, our budget was really built around and estimated new residential construction start level of 1.2 million new starts. I saw data as recently as yesterday that basically said we think we will finish around 1.16 to maybe 1.18 million new housing starts in total for 2016. The average of all of the prognosticators that we looked at which there were probably 20 different sources that we reviewed in 2015 and as we were established in our 2016 operating plans and budgets, the average was north of 1.3 million new housing starts. So what's going to happen in 2017? We're gathering all of that industry prognostication data, which includes meaning at some of our key top suppliers and kind of what they are thinking. But in general, I personally believe that if we finish in that kind of 1.15 to maybe 1.18 range, this is called 1.2. We finished in that 1.2 million total start range in 2015. I think we will be at maybe 1.3 in 2017. I don't have all of the industry prognostication data yet wrapped up or rolled up for 2017, but kind of -- based on my knowledge that that's where I kind of think 2017 to starts may come in.

[Hans Fredrikson:]

Okay, and if we come in this year at 1.2 or slightly shy of 1.2. Is that up -- what high single-digits were obviously from 2015?

[Jon Vrabely:]

Yes, 2015 finish right about 1.12.

[Hans Fredrikson:]

Okay.

[Jon Vrabely:]

So kind of mid single-digit total growth, what's interesting is that more recently, what we've seen is that there's been a bit of a shift in particularly in the third quarter and almost directly as a result of September, where multifamily starts in the month of September, truly plummeted. Third quarter single family starts as we mentioned in the call were up 2% compared to prior year, so very sluggish growth on a year-over-year basis in single family. And in fact single family -- actually total housing starts were down Q3 verses Q3 of 2015 and total starts were down in Q3 of 2016 versus Q2 of 2016 by approximately 6%. So I'm not concerned about that kind of level of volatility in Q3. I think there are a lot of explainable reasons as to why things may have slowed down to snail's pace in Q3 of 2016. I still believe that there is a longer-term market growth that we will experience in this cycle. I just believe that it's going to take a longer period of time to get there and the growth rate is not going to be as high as everyone has kind of project it. And I think we've been more right during that process than wrong and I think it is truly helped us in planning our business and ultimately executing against that plan particularly around balancing the reinvestment in the business and pursing and laying the fundamental groundwork to continue to perpetuate our future growth and future financial performance, and I think that we have incredibly successful in kind of balancing all of those potential competing needs with continuing to be what I believe is better than average financial performance and financial growth in financial performance compared to our peers.

[Hans Fredrikson:]

Okay. Thank you for that very detailed answer. That's very helpful and I like that theme of kind of a slow and steady recovery, so let's hope that continues. If I could ask just one more question, but it does had two parts, in terms of risks, I guess first of all on that 1.3 million number that was there about and then for U-Haul specifically, what do you think cause of the main risks that you see out there where maybe both the industry and U-Haul specifically might coming short of you kind of forecasted business for next year?

[Jon Vrabely:]

Sure. So it's certainly there are risks honestly that are just totally outside of the run of our control -- at a very high level anything kind of on a global economic basis that that might happen. First I would say that we feel as if we can mitigate are really just maybe less growth than what we anticipate particularly in the new construction arena and part of the strategy around further penetration in the repair/remodel segment, really helps us mitigate that potential volatility in the new construction arena, whether it would be single or multi. So that's one of the reasons why R&R segment penetration strategy and initiative is so important to us because it does help mitigate our exposure from a revenue perspective to new construction. But I would say that today we feel that we have a very solid operating plan that in a numbers itself just organically and from an operational perspective within the organization and we've demonstrated I think over the course of the past several years that we have been able to execute our strategic plan. I think just having that ability and that confidence will help us mitigate risk, particularly around any slowdown in a new construction arena and that truly is where we see the biggest risk is what happens if the market doesn't materialize, right and there is lots of reasons why the market may not materialize, but I still believe there is a pretty high level of pent-up demand. The first time home buyer, as he yet to enter the market, in any meaningful way and I still believe that that will happen during this cycle.

[Oscar Martinez:]

Last thing I'd add, Hans, we are essentially a working capital enabler for both our vendors and our customers, right. And so if that housing start number turns out to be materially different than we expected, up or down and we don't get the working capital right at the very local level. We rely on the market stoutness and insights of our local branch managers and our local operations across the country to be able to maintain this level of profitability in this level of growth, right. And without their insights or if we get those numbers wrong, then we may not be in the right position from having been in the right level of inventories to be continue delivering in the product on a timely basis with quality deliveries like we're doing now.

[Hans Fredrikson:]

Great, very, very helpful, thank you. Good luck, guys.

[Jon Vrabely:]

Thank you.

[Oscar Martinez:]

Thanks, Hans.

[Operator:]

[Operator Instructions] And our next question comes from the line of Jim Barrett with C.L. King & Associates. Please go ahead.

[Jim Barrett:]

Good morning Jon and Oscar.

[Jon Vrabely:]

Good morning, Jim.

[Jim Barrett:]

Jon, can you talk about your suppliers as you look into 2017, are you seeing inflation and any pricing letters and if so, how pervasive is it and how do you generally manage that sort of process?

[Jon Vrabely:]

Yes, that's a good question. I think in general because we really have not seen any significant level notification to this point on price increases. I think the commodity market that you don't particularly have seen in the products that we sell have been relatively stable throughout 2016. So no significant volatility from that perspective, because we are not in primarily commodity wood products in significant way and I think there's been some level of kind of volatility around those prices obviously over the course of the past several years. But it in general, I would say that because inflation has been so low. We're not seeing a monumental a massive shift from our supply base and trying to get significant increases. Our approach is to be frank that we do our best to certainly at a minimum path and increase is that we would receive directly on to and pass those through to our customer base, so at a very high level. If we can get some level of price increase from the manufacturers and are successful and passing that through within region is welcomed by Huttig.

[Jim Barrett:]

Understood. Within millwork are there any categories that stood out is growing significantly faster than the 10% growth you reported excluding BenBilt, and any of that grew significantly less, so they all tend to grow at about the same rate?

[Oscar Martinez:]

Yes, good question. I would say that in general we have grown our exterior door category organically, probably at a faster rate than other product categories as a result of the further penetration in the Repair/Remodel segment where the majority of the doors that we sell into that segment are fabricated pre-hung exterior doors and pre-finished doors. And our total millwork category sales increased by about 10%, building products sales increased by about 2% in 2016 that's sort of the quarter -- for the quarter. So we are definitely growing the millwork category faster, but a significant chunk of that is as a result of the BenBilt acquisition where virtually 100% of their revenue stream is in the exterior door category.

[Jim Barrett:]

I see. Thank you very much. That was helpful and good luck in the fourth quarter.

[Jon Vrabely:]

Jim, thank you very much. Appreciate your interest.

[Jim Barrett:]

Yes.

[Operator:]

There are no further questions. I will now turn the conference over to Jon Vrabely, President and CEO for closing remarks.

[Jon Vrabely:]

Thank you, Janice. In closing, I would especially like to again thank all of the Huttig associates for their dedication to our Company and the massive contributions they continue to make to our success. I also would like to thank our customers and supply partners for the trust they place in us every day to care for their business. And lastly, 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 with you again when we report a fourth quarter results and full-year results early next year. Thank you very much.

[Operator:]

Ladies and gentlemen, this conference will be available for replay after 12 pm today through November 3, 2016 at midnight. You may access the AT&T teleconference replay system at anytime by dialing 1-800-475-6701 and entering access code 404443. International participants dial 320-365-3844. Again those numbers again are 1-800-475-6701 and 320-365-3844, access code, 404443. That does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference service. You may now disconnect.