Huttig Building Products, Inc.
Q4 2016 Earnings Call Transcript

Published: 2 Mar 2017

[Operator:]

Ladies and gentlemen, thank you for standing by and welcome to Huttig Building Products Fourth Quarter 2016 Earnings Call. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, today’s conference is being recorded. I would now like to turn the conference over to your host Mr. Oscar Martinez, Chief Financial Officer. Please go ahead.

[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 fourth quarter and the full year of 2016. We'll also update you on our outlook and growth expectations for the coming years. Following our prepared remarks, we will open the call for questions. As a reminder, you can get in the Q&A 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 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 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 as well as in 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 our call. I'm incredibly proud of our performance in 2016. We generated record gross margins, record operating margins and record EBITDA margins since 1999, the year I joined Huttig. For the full-year 2016 as compared to 2015, we achieved sales growth of 8% to nearly $714 million, gross margin improvement of 100 basis points to 21.1%, operating profit improvement of 57% to $22.7 million and adjusted EBITDA improvement of 50% to 28.3%. In 2016, we generated the most EBITDA since 2005, a year in which housing starts exceeded 2 million and our revenue was nearly $1.1 billion. In 2016, we were very successful in leveraging our incremental revenue and gross margins while continuing to make significant investments in growth. We measure our operating leverage by dividing the change in operating income by the change in revenue. For 2016, our operating leverage was 15%, which exceeds our historical normalized range of between 7% and 13%. Single family new construction housing starts increased 9% in 2016 and total housing starts increased 5% to just under 1.2 million units as compared to just over 1.1 million in 2015. While we are encouraged by the continued moderate growth in the new housing construction segment, the market remains approximately 20% below the 30-year historical average of approximately 1.5 million new stars and I continue to believe that first-time home buyers have yet to enter the market in a meaningful way. 2016 was very important in pivotal year for Huttig as it was the first full-year of implementing and executing our accelerate growth and financial performance strategic plan. The strategy focuses on investing in profitable growth through accretive acquisitions and investment in organic growth initiatives. In April 2016, we closed the acquisition of BenBilt Building Systems, our first acquisition since 2005. I am happy to report that their contribution to our business has been better than expected and I appreciate the contribution all of the BenBilt associates made to Huttig in 2016. We continue to evaluate accretive opportunities and especially opportunities where we can replicate the success we've experienced with BenBilt. We also made significant investments in our organic growth strategy in 2016. As we look to 2017, the primary goal of this strategy continues to be to accelerate profitable growth through targeted investments in four key areas

[Oscar Martinez:]

Thank you, Jon. During the fourth quarter, we increased our net sales by 6% compared to the fourth quarter of last year to $164.4 million while achieving gross margins of 21.7%. For the full-year, we increased sales 8% over 2015 and improved our margins 100 basis points to 21.2%, the highest gross margin attained since we've been a publicly traded company. The improvement was primarily driven by the continued execution of our profitable growth strategy and the addition of BenBilt. Suffice it to say this is the seventh quarter in a row in which we’ve had gross margins greater than 20%. Because of the service proposition that we bring to our customers and to our suppliers and because our local branches serve as a trusted partner in a complex supply chain, we believe that this performance is sustainable. Our focus for 2017 is to continue investing in growth opportunities and to do so in a more significant way that still reflects the conservative approach required to operate in a cyclical industry. At the end of the day, we believe that investing in growth degenerates cash flow in excess of our cost of capital is the recipe for continued success. It's these excess returns that have allowed us to expand our operating leverage and invest in our growth to continue improving our margins. Operating expenses of $33.8 million or 21% of net sales for the quarter, compared to 20% in the fourth quarter 2015. The increase of $3.3 million was primarily driven by higher personnel costs both from the addition of BenBilt as well as the expense associated with hiring the executive team that is leading the national expansion of our HuttiGrip line of fasteners and building products. For the year, we held operating expenses in check at 18% of sales down slightly from 2015. During the fourth quarter, we generated net income from continuing operations of $1.2 million and adjusted EBITDA of $3.4 million. For the year-ended December 31, our net income from continuing operations was $20.5 million and adjusted EBITDA was $28.3 million for an adjusted EBITDA margin of 4%. As Jon noted, it's the highest level adjusted EBITDA we have generated since 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 business model resulting from our strategic initiatives. Turning to the balance sheet, we ended the year with total available liquidity of $76.8 million, up from $68.1 million at the end of 2015 while investing more than $21 million in our growth through our acquisition of BenBilt and our capital expenditures in 2016. Working capital was 14.2% of quarterly sales compared to 12.4% in the prior year period. Given the seasonality in our business, our working capital needs cause our debt to increase during the summer season. The use of cash is again reversed in the fourth quarter allowing us to lower debt levels at the end from the summer months of 2016. We ended 2016 with total debt to cap net of cash of 44% compared to 48% at December 31, 2015. Our sole financial covenant is a fixed charge coverage ratio and we’re comfortable that we have ample room to comply with this covenant. Although, our total debt level has increased slightly from last year, the growth of our cash flow has led to a dramatic improvement in our leverage. As of December 31, we had leverage of 2 times debt to trailing 12 months EBITDA of $28.3 million compared to leverage of 2.6 times as of December 31, 2015. Looking forward to 2017, I anticipate that we will invest additional working capital and that operating expenses will continue to increase as we expand our repair/remodel and HuttiGrip initiatives, especially in the first half of this year, but we expect big things from our investments. We believe that repair/remodel will allow us to continue improving our margins. And as John said, with the right execution in the mid-term horizon, meaning, the next 24 months to 36 months, we believe that HuttiGrip can capture 7% to 10% of the available fastener market of $2.5 billion. Given the fact that we already have a national distribution footprint, we think this growth layers in quite nicely on top of that footprint and allows us to achieve operating leverage consistent with historical levels. As we evaluate investment decisions for other organic opportunities beyond HuttiGrip as well as acquisitions, we measure the expected return on capital and will only invest in projects that exceed our risk-adjusted internal hurdle rate. We believe this discipline will ensure that our investment decisions will drive annualized returns necessary to support our future growth and profitability. As you could tell from our remarks, 2016 was busy and productive year and we're not done growing. Jon and I look forward to providing further updates on our growth initiatives and we appreciate your continued interest in our company. You may have seen our announcement that we'll percent at the Sidoti Convention on March 29 in New York City. For those of you who are planning to attend, we look forward to seeing you there. If you cannot participate but would still like to meet with us, we welcome the opportunity to arrange a call or meeting with you at another time. For now, I will ask our operator to open the line for questions. Certainly. [Operator Instructions] At this time, our first question comes from the line of John Rolfe with Argon Capital. Please go ahead.

[John Rolfe:]

Hi, guys, nice job. A couple of questions for you. First, there was some reference in the press release to a new product line that had driven some sales. Could you give a little bit more detail on that?

[Jon Vrabely:]

Good morning, Jon. It’s good to have you on the call and hear from your again. Yes, that was primarily a product line that we added in New England, it was at the end of 2015 and it is a prefinished feeder siting construction product line that we were successful in securing the – in negotiating and securing the exclusive distribution rights for all of our New England trading area.

[John Rolfe:]

Okay, great. And, so, I guess, you talked a bit in the beginning of the call, you mentioned that you had sort of a 15% incremental margin this year, which was above your historical 7% to 13% range. That in conjunction with the fact that you had some declines, I don’t have the press releases in front of me, but in, I think, some of the sort of commodity lumber components, I've heard from some other distributors as well that there was some price competition in some of the commodity oriented sort of pieces of their business. It seems like you guys have at some level sacrificed volume in order to maintain and even increase margin, which I think is great. You said you're going to be making some investments in the current year into the fastener business, I mean, can you give just sort of broadly some thoughts or guidance, I mean, should we expect that those investments in the fastener business will likely kind of keep margins flat into 2017 or should we expect the investments are going to maybe because some slight deterioration of margins, I mean, how should we be thinking about sort of what the coming year is going to look from a margin standpoint?

[Jon Vrabely:]

It's a great question and I will answer it as best as possible. In our existing kind of legacy business that should not be impacted by our growth or growth plan around the expansion of the HuttiGrip private label fastener and building products initiative. We believe that the strategy that we've employed over the past several years really should not be impacted in those legacy product lines and we will continue in 2017 and beyond to kind of work those margin enhancement initiatives for lack of a better term. With regards to the HuttiGrip expansion, it's just very difficult to say at this point, John, what those margins might look like, it is a – it’s really a very complex initiative that we are rolling out in phases. And we are still very much in the planning and kind of implementation and execution of that plan process.

[Oscar Martinez:]

I might just add as well that from a broad perspective, we’re obviously looking at portfolio of products right, so whether it's a new line of siting like you asked about or a new initiative to expand a current product, we're really looking for a variety of factors, but we're willing to take a lower margin on a product from a top line perspective meaning from a revenue perspective if that product requires less handling and we can drive more efficiency through it, right, so if it adds efficiencies from an operating perspective. So what you're seeing is a continuous mix of products that we are adding, but we simply recognizing that we have a limited bandwidth, limited number of labor hours, limited amount of space in our warehouses in our distribution fleet and so we are trying to make the best decisions of what product mix decay to drive the best result for the business. And John as you pointed out already, the results what we are seeing so far continue to be executed, which is improving the growth in the margins, but not taking just growth for the sake of growth, right. What you are not going to see is us adding a $100 million of the sales that are adding no margin to our business. We're trying to do this in a disciplined way.

[John Rolfe:]

Okay, great. Look, again, congratulations, you guys have done a great job. My only suggestion, which I'm sure you guys would do even without my suggestion would be just as you move forward through 2017, it would be helpful I think from a shareholders’ perspective if you guys on a quarterly basis sort of continue to carve out for us what some of those investment costs are so that we sort of know what – how much of the margin is sort of go into those growth efforts versus what’s coming out of the legacy business. But, again, thank you and I appreciate you taking the questions.

[Jon Vrabely:]

Sure. Thanks, John.

[Operator:]

[Operator Instructions] And it appears we have no further questions from the phone.

[Jon Vrabely:]

Okay, thank you. This is Jon Vrabely. I am very proud of our financial performance and the strong progress we've made in implementing and executing our accelerate growth and financial performance strategy in 2016. Looking forward, I'm confident that we will continue to successfully implement and execute our strategic plan. In addition, I continue to believe that over the intermediate term, there is sustainable growth in the residential single family new construction and repair/remodel market segments. As a result of all of these factors, the future is very bright for Huttig and this is an incredibly exciting time to be associated with our company. In closing, I would like 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 placed in us every day to care for their business. Lastly, I would like to thank you for your interest and ownership in our company and your participation in our call today. We look forward to speaking with you when we report first quarter results in April. Thank you.

[Operator:]

And that does conclude your conference for today. Thank you for your participation and for using AT&T Executive Teleconference Service. You may disconnect your line.