Huttig Building Products, Inc.
Q4 2015 Earnings Call Transcript

Published: 26 Feb 2016

[Operator:]

Ladies and gentlemen, thank you for standing by. Good morning and welcome to the Huttig Building Products Fourth Quarter 2015 Conference Call. Our Speakers today will be Jon Vrabely, Huttig’s President and Chief Executive Officer, Rebecca Kujawa, the General Counsel and Don Hake, Corporate Controller and Treasurer. It is my pleasure to introduce Miss Kujawa. Please go ahead.

[Rebecca Kujawa:]

Hello, the following discussion and the responses to your questions reflect management views as of today, February 26, 2016 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 could occur afterwards. Additional information about factors that could potential impact our financial results are included in the earnings release issued yesterday and the Form 10-K filed with the SEC this morning. These filings should be reviewed for a discussion of forward-looking statements and the risk factors based by our business. During this call we will discuss certain non-GAAP financial measures. We believe the non-GAAP information provides investors with a more complete understanding of how they have underlined operating results. A description of any non-GAAP adjustments are reconciliation to the most comparable GAAP measures can be found in the earnings release issued yesterday. Other filings with the SEC accessible through our investor relations website contain additional disclosures regarding these non-GAAP measures including reconciliations of these measures to the most comparable GAAP measures. It is my pleasure to introduce Mr. Jon Vrabely, Huttig’s President and CEO.

[Jon Vrabely:]

Thank you, Rebecca. Good morning and thank you for joining Huttig’s fourth quarter and year end 2015 Investor Call. On the call this morning we will review our 2015 fourth quarter and year end results. We will then discuss our outlook and plans for 2016 and will respond to questions during the Q&A session at the end of this call. 2015 has been an exciting and successful year for Huttig. For the year we grew revenues 6% to $660 million and increased gross margins by 50 basis points to 20.2%. We reduced SG&A expenses as a percent of sales by 20 basis points to 18.1% while continuing to make significant investments in our people, technology platform, rolling stock and owned facilities. Operating income increased by nearly 75% to $14.5 in 2015 compared to $8.3 million in 2014. Excluding unusual charges, we completed our 19th consecutive quarter of year-over-year improved financial performance. For the year, we increased adjusted EBITDA 48% to $18.9 million from $12.8 million in 2014. We increased cash flow from operations to $17.1 million from $3.8 million and reduced our revolving bank debt by nearly $15 million. At December 31, 2015 bank debt was $46 million and our committed borrowing availability under our lending agreement increased to $68 million. The combination of lower debt levels and lower interest rates led to a nearly 10% reduction in interest expense for the year. At the end of the third quarter 2015 we reversed our federal and state NOL carry forward valuation allowance resulting in a tax benefit for the year of $17.2 million versus a zero tax expense or benefit in 2014. The company currently has over 15 million in federal NOL tax carry forward benefits which will significantly reduce future cash tax payments. As a result of our solid operating performance and the reversal of our NOL carry forward allowance net income from continuing operations increased to $29.4 million in 2015 versus $5.8 million in 2014. I’d like to introduce Don Hake, Corporate Controller and Treasurer to discuss the 2015 fourth quarter income statement and the December 31st balance sheet. [Technical Difficulty]

[Don Hake:]

….increased 7% to $155 million compared to $145 million. Gross margin was $32 million or 20.6% of sales versus $29 million or 19.8% of sales and we experienced margin increases across all product lines. In the fourth quarter of 2015, operating expenses were $31 million up from $21 million up from $29 million and as a percent of sales were 19.6% in both the periods. We increased operating profit to $1.5 million in the fourth quarter of 2015 compared to $200,000 in the prior year period. Net interest expense was $600,000 in both quarters. Net income from continuing operations for the quarter was $700,000 or $0.03 per share in 2015 compared to a net loss of $400,000 or a loss of $0.02 per share in 2014. For the fourth quarter of 2015 versus 2014 as a percentage of total revenue, millwork sales increased to 53% from 52%, special building sales increased to 38% from 36% and sales of wood products decreased 29% from 12% respectively. Millwork sales increased as a result of higher levels of construction activity and our continued focus on share growth and the repair remodelled segment. Building product sales benefited from higher levels of construction activity and are continued growth of higher valued products such as composite decking and railing systems. The decrease in total sales of wood products was directly attributable to lower sales of commodity wood products. Sales of our engineered wood products which is a focus value added product category for us grew 7% in the fourth quarter of 2015 compared to 2014. Turning to the balance sheet. We continue to manage working capital and achieved solid results in 2015. Working capital as a percentage annualized fourth quarter sales was 1 2.4% as of December 31, 2015 compared to 13.2% in the prior year period. Inventory at December 31, 2015 was $64 million, a decrease of $3 million or 4% from a year ago. Inventory turns were 7.3 versus 6.8 a year ago. Day’s sales outstanding increased to 33.1 days compared to 30.7 days last year. This increase was primarily a result of higher sales in the fourth quarter of 2013 compared to 2014. Trade accounts receivable at $56 million were up 14% from a year ago. Trade accounts payable $44 million versus $39 million at the end of 2014. Cash provided by continuing operations increased $18 million as compared to $14 million in the fourth quarter of 2014. Total debt to total capitalization net of cash was 48% as compared to 72% at December 31, 2014. We continue to strengthen the balance sheet in 2015 and we increased our borrowing availability to $68 million under our revolving credit facility. I now will turn the call back to Jon Vrabely, our President and CEO.

[Jon Vrabely:]

Thank you, Don. As the housing market has improved over the past several years, we have primarily focused on leveraging incremental revenue to maximise earnings while significantly investing in our people, systems and assets. We have reduced debt increased borrowing capacity, deleveraged the balance sheet reducing debt to total capitalization to 48% and excluding unusual charges just completed our 19th consecutive quarter of year-over-year improved financial performance. Between 2012 and 2014, total housing starts increased from approximately 780,000 units to 1 million and in 2015 increased by approximately 100,000 starts to a total of $1.1 million. While the market has consistently grown between 2012 and 2015 and is projected to grow in 2016 we continue to operate in a market environment that is nearly 25% below the 30 year historical average of more than $1.4 million total housing starts. In addition, throughout the entire downturn and subsequent recovery, multifamily housing starts have become a larger percentage of total starts and have generally growth at a faster rate than single family starts. For a multitude of reasons, we believe this trend indicates that first time single family home buyers have yet to enter the market in a meaningful way. We also believe that overtime they will enter the market and as they do they will fuel consistent, sustainable future growth opportunities for Huttig. As a result of our strong financial performance and the continued growth of the housing market we are very well positioned to continue to execute our strategy to accelerate growth and financial performance. We are fortunate to have a plethora of available capital sources to fund our growth including a $160 million asset based lending agreement with $68 million of borrowing capacity as of December 31, 2015. A $40 million Accordion option under our current agreement approximately $25 million common and $5 million preferred authorized but not issued shares that can be used directly for acquisitions or as a source of capital. Approximately $35 million of excess book value owned real estate and access to a multitude of public and private debt instruments. The strength of our balance sheet, banking relationships and additional sources of capital provide the foundation of the acquisition growth component of our comprehensive growth strategy. We are actively pursuing accretive acquisitions that additionally achieve at least one of the following criteria. Market consolidation, core product and/or core segment expansion, geographic expansion or business diversification. Our comprehensive growth strategy also focuses organically on profitable segment penetration, the expansion of profitable value and service capabilities and product line additions that require value and services or scale. This is an exciting time to be in our industry and in a especially exciting time for Huttig as we continue to execute our accelerated growth and financial performance strategy. In my 10 years as President and CEO, and as I approach my 17th year of employment with Huttig, I truly believe the future for our company is as bright as it has ever been during my entire tenure. I thank you for your interest in our company and your participation in our quarterly [ph]. Tony we will now take questions and then I will return for some closing comments.

[Operator:]

Thank you. The floor is now open for questions. [Operator Instructions] We have our first question coming from John Rolfe with Argon Capital. Please go ahead

[John Rolfe:]

Hi, good morning guys.

[Jon Vrabely:]

Good morning.

[John Rolfe:]

First off I guess I’d like to commend you for having this call. I think its certainly an important first step in terms of getting your story out there and you know focusing, focus on the business and her prospects. You know notwithstanding the fact that the stock is up a bit today on what was you now a very strong fourth quarter. You know on virtually every metric the company still trades in a pretty material discount to where most of your competitors do out there in the public markets. And I was just hoping you could maybe provide a little bit of the commentary in terms of how management and the board is thinking about this undervaluation and what in particular you think might help close this gap overtime going forward given the recent very strong performance for the business.

[Jon Vrabely:]

Well good morning for attending the call. Obviously there -- we certainly have a challenge with regards to the liquidity of our shares. And first of all the board and senior leadership team is well aware of the fact that we trade to the peer group at a discount. So certainly heading into 2016 it is a top priority for us to significantly ramp up our investor relations strategy and our investor relation activity. We really started in 2015 and attended two different micro cap institutional investor conferences. We will be attending at least two additional investor conferences microcap emerging growth market investor conferences in 2016. So we are -- I would say the best thing that we are -- communications our external communications. You know this is the first investor call that we have had in several years. We will be obviously continuing these on a quarterly basis as we go forward. So the -- I would say the overall plan is continue to increase communications, continue to be out in front of potential investors, but most importantly we believe that the best way to increase the value is to truly execute our accelerated growth and accelerated financial performance improvement plan. And I would tell you I feel very good about where we are today in that process and so it’s a combination really of those three efforts. Okay, I think that that makes sense and you know I guess I would just make one comment. I do think certainly at some level the liquidity and the shares is a hurdle for some institutional investors, but you know as we’ve spoken about in the past, I would given over the stock trade today, I would certainly you know comment that I would be very very judicious about using stock as a currency for any sort of M&A activity. You know the liquidity is a bit of a double edge sword while it does provide some headwinds, you know once the market becomes more aware of the performance I think you know it become a bit of a virtuous circle liquidity, the price will improve on their own and I would again just say, please be careful about using the stock as a currency on any sort of M&A activity. And you know in that regard, you mentioned some of the qualitative factors you guys are looking for on the M&A front. I would say on the quantitative side, you know I know you guys have been pretty disciplined in terms of assessing value and looking for the right opportunities. Can you talk a bit about quantitatively what you are seeing out there in terms of multiples, I mean, has the primary impediment on the M&A front to-date been getting the sellers to be realistic about price? Are you finding things that are qualitatively appropriate, but you’re having trouble reaching agreement on what the fair value or fair purchase value is? Just a little more color on the M&A sort of pipeline and what you guys are seeing there would be helpful? Thank you.

[Jon Vrabely:]

Sure. So, we are continuing to build our pipeline. We are speaking to variety of companies on a very consistent basis. And I think any organization that is actively engaged in and trying to execute acquisitions runs into the same types of challenges that we are running into, which is from a strategy perspective does it really fit. Does help us accomplish, one or several strategy criteria and then of course lastly it’s got to make sense from a financial perspective. I would say in general we’ve seen more activity over the course of the last six months than certainly over the prior several years. So, I think as organizations get healthier from a financial perspective, we are starting to see more activity, but I won’t necessarily say that the multiple or the valuation range John as any more of a hurdle today than it ever has been kind of historically and trying to negotiate primarily with entrepreneurs and really in many cases family-owned companies. And so, no bigger of a challenge today than I would say it has been historically.

[John Rolfe:]

Okay, great. Thanks. And could you just repeat for me what you said you thought the excess value of your real estate was?

[Don Hake:]

35 million to 40 million.

[John Rolfe:]

That’s 35 million to 40 million in excess of what it’s valued.

[Don Hake:]

It’s on our book.

[John Rolfe:]

Okay, great. Thanks very much guys.

[Jon Vrabely:]

John, thank you. Thanks for participating in the call.

[John Rolfe:]

Okay. Thank you.

[Operator:]

Thank you. The next question in queue will come from [Indiscernible]. Please go ahead.

[Unidentified Analyst:]

Yes. Hi, everyone. Greetings from Germany. Thanks for having.

[Jon Vrabely:]

Chris, we’re really glad that you could join the call.

[Unidentified Analyst:]

Yes. Thanks. Great results for 2015, congrats on that.

[Jon Vrabely:]

Thank you.

[Unidentified Analyst:]

So have two quick questions, one was following up on what John’s said regarding the on valuation. I was thinking if you were considering share buybacks as a way to lock some of that undervaluation. And secondly, regarding operational leverage, I just remember talking, I think it was two years ago where you were in terms of utilization of the network. And I’m just wondering how much incremental revenue can you handled before having two bump-up in CapEx. If you could answer those two would be very great? Thanks.

[Jon Vrabely:]

Sure. So first on the stock buyback, we certainly have considered and always consider based on the valuation at the time a stock repurchase. Actually under our current ABL we have the ability to actually purchase stock back on an annual basis up to a certain threshold before we would ever need to even solicit approval from our vendors. So, while first we consistently look at it and we’ve actually even done a variety of financial analysis around stock repurchase programs. We just believe today that there’s a – that just really a better use of that capital and that is really to fuel and accelerate our growth. So we did repurchase a million shares of stock right at the end of 2012. We bought those shares back at a fairly sizeable discount to the market and I think that has been a worthwhile repurchase in that event. And if the opportunity presents itself we are certainly amenable and open to looking at it. And the board and again senior leadership is consistently looking at the total valuation of the organization and what can we do to increase the valuation of the organization and stock repurchase is consistently on the table. Moving to your second question around capacity, certainly during the downturn, we really were spending CapEx in truly a manner that I would say was absolutely necessary. So, we really paired back our CapEx spend between 2007, 2008 and 2012. we started in 2013, first [ph] 2013, 2014, 2015 and we’ll continue in 2016 to increase our CapEx spend, so its not as if as we move forward that you will see CapEx spend increase significantly kind of a year-over-year compared to 2015 with one exception and that is really as we continue to identify and invest in CapEx required to fuel our growth. And it’s not really just the day-to-day growth. We have capacity in the system today from an organic growth perspective to continue our kind of current mid single-digit growth trajectory. And I would say we have that capacity for the foreseeable future. But as we embark and have embarked on this accelerated growth strategy specifically around acquisitions, additional product line, additions and really a strategy around continuing to further penetrate the repair remodel segment. We will be increasing CapEx around those initiatives.

[Unidentified Analyst:]

Do you have maybe like number I could think of like 3 million to 4 million or 5 million or what do you expect the yearly expenses?

[Jon Vrabely:]

Yes. It really just depends – we’re embarking on and continuing to embark on the building out our technology platform particularly around our customer interface technology. So, I think historically you kind of put me on the spot but…

[Unidentified Analyst:]

I apologize for that.

[Jon Vrabely:]

Yes. I think to be frank, it would probably best for me to just maybe gives you a range that over the next several years you could potentially see us increase CapEx by $2 million to maybe $5 million and that could be actually on an annual basis depending on what stage of implementation with regards to our IT platform expansion as well as our repair remodel segment penetration expansion and then of course layering in addition product lines that we would believe to be accretive in year one.

[Unidentified Analyst:]

Thanks a lot.

[Jon Vrabely:]

Chris, thank you and we certainly appreciate your ownership in the organization, sir.

[Unidentified Analyst:]

You bet. Take care.

[Operator:]

Thank you. Our next question in queue will come from Richard Lubman [ph] Private Investor. Please go ahead.

[Unidentified Analyst:]

Good afternoon, folks. Much better churn than what I remember from five years ago for certain. Through the downturn how do you close the number of the distribution centers? Now you activity expanding as was alluded to in the prior call question. You churns have also increased. How much more business can you take? Because housing starts are still not back to normal. Could you take maybe 30% more business without a material increase in your CapEx?

[Jon Vrabely:]

I think if we were just going to grow the business organically as it looks today, I don’t know if that number is 30%, 20%, but it is certainly I believe achievable and we could continue to from all practical purpose focus on really maximizing the profitability on every incremental revenue dollar and not make investment in accelerated growth, but the way we look at it, Richard is really a couple of ways, right. We’ve got the organic business as it looks today. And we are focused on maximizing our revenue around the core products and core market segments that we serve organically today.

[Unidentified Analyst:]

How competitive is the market now today?

[Jon Vrabely:]

Well, I think the market is as competitive today as it has ever been but I won’t say it is significantly less or significantly more competitive really than it has ever been.

[Unidentified Analyst:]

Fair enough.

[Jon Vrabely:]

So, nothing from that perspective has really changed dramatically or significantly.

[Unidentified Analyst:]

Okay. Now, you obviously you put your cash flows carried forward on your balance sheet. Do you have the senses to how long would take to exhaust cash flows carried forward?

[Jon Vrabely:]

From a timing perspective no, from an income perspective yes and I’m sure Don knows that number in his sleep, so….

[Don Hake:]

We have about $55 million of NOLs, starter NOLs and then state NOL is a goal associated with that. So long as it will take us to generate $55 million going forward that would be the amount of time it will take us to do that to utilize. So the next $55 million is basically [Indiscernible]

[Unidentified Analyst:]

Okay. Just keep in minds that you don’t want to change you NOLs by issuing at too stock?

[Jon Vrabely:]

Yes. We run that calculation…

[Don Hake:]

Well, under 10% right now. So we’re in pretty good shape there.

[Unidentified Analyst:]

What’s the tone of business going into 2016?

[Jon Vrabely:]

I’m sorry, the tone of the business.

[Unidentified Analyst:]

Yes.

[Jon Vrabely:]

So, I think we are – I think the market will continue to grow in 2016. Obviously, there are global what I would call our global economic concerns that even though they really do not directly impact Huttig, they certainly impact the housing market. I would say in general the tone is and remains to be cautiously optimistic is really truly the best way that I can describe it. I think the fourth quarter of 2015 was the first fourth quarter that we were profitable in a very long time. I believe that there will be and I’m really – I’m going to talk about 2016 but really even over the course of the next several years is that there will potentially ebbs and flows, but I current believe that the trajectory going forward in 2016 and for the next several years is certainly in an upward trend. The prognosticators, the “industry expert’s prognosticators” have been wrong and continue to be wrong certainly through 2015 for more than a decade. And what we’ve seen is through the downturn they were wrong and the high side everybody you know nobody saw that the market would fall as steep and as rapidly as it did. And once it started to rebound all of the industry prognosticators have basically overshot their projections on warehousing starts would be from 2012 through 2015. Prognostications for 2016 are significantly higher than really where I would anticipate them to be, but it is still grow and the good news is that it’s really measured and it’s consistent. So, we are able because it is consistent and measured growth to really focus on maximizing our leverage that incremental revenue while we continue reinvest in the business.

[Unidentified Analyst:]

Fair enough. Well, maybe we’ll get a surprise with the numbers the where they are, I mean, I know from friends who have been looking rent for just to own that the prices of rental units have increased tremendously and that has to be a [Indiscernible] than the sales of the housing market somewhere along the line, God forbid.

[Jon Vrabely:]

Well, many people thought that the multiple-family segment would really peak out in 2013 and it has not. It has continue to grow beyond 2013, in 2014, it continue grow, in 2015 rental capacity is as lows as it been in a very long time. Rental rates are as high as they’ve been in a very long time to the point that I made in the call earlier that the single family first time home buyer has really yet to enter the market. And there are still some headwinds financing, while interest rates are credibly low, the bar has been very significant qualification, people I think particularly younger people between 21 and 35, the dynamics of their lives have change. I don’t think that they really want to be tied into a home. They are pursuing their careers. But eventually I do believe that they will become first time home buyers, which to me really means that this run [ph] as we continue to move forward is sustainable and I think it’s sustainable for a multiple of years to come as we go forward through 2016.

[Unidentified Analyst:]

Fair enough. One last question or comment, it has been alluded to earlier. There has been an increase in M&A activity in the building products industry and that’s necessary to have some of rollup activity of what it is a very fragmented market. Now, you’ve indicated that you would do acquisitions. It’s hard to accelerate your stock and the prices that they are at though obviously. Would you entertain being required?

[Jon Vrabely:]

Well, I think as a public company, we always have a fiduciary responsibility and board believes it as well that we always have a fiduciary responsibility to evaluate any potential offer to acquire Huttig. We’ll tell you that based on where we are today and certainly the way that we manage the organization through the downturn, the way that we have manage the organization as we’ve come out of the downturn and what we believe is really a very bright future for the company. You always have to weigh that and kind of the risk associated with implementing and executing your strategic plan against the value that might be offered at any time to purchase the company. So, being public we haven’t take our fiduciary responsibility to our shareholders very seriously and always would consider any offer that came in.

[Unidentified Analyst:]

Well, that’s it for me. But one final comment that I know how difficult the business was over the last five years and you were able turn it to where it is today is definitely you’ve done hell of a good job.

[Jon Vrabely:]

Thank you very much. Appreciate that. And that is really a testament to the senior leadership team and to be frank all of the employees in the organization pull together and dedicated themselves to ensuring that not only did we survive but that we positioned ourselves for the future.

[Unidentified Analyst:]

Thank you very much.

[Jon Vrabely:]

Thank you for the comment.

[Operator:]

Thank you. Our next question in queue will come from Rick Neville [ph], Private Investor. Please go ahead.

[Unidentified Analyst:]

Jon, its Rick Neville, once again I’d like to also thank you for your excellent performance by you and your team. At last year’s annual meeting you mentioned that it has been difficult to find acquisitions that are accretive and that you would only consider acquisitions that are accretive and I totally agree with that sentiment. Part of my questions have already been pre-empted by Fritz Houser [ph] because I was going to ask you about the share repurchase opportunistically as an excellent was to use some of your cash. The only other thing that I can think of is that what management and I think you answer this already, what management consider in the future having small dividends to attract investor interest?

[Jon Vrabely:]

Obviously that is really I would say senior leadership team and board decision, but at the end of the day it is really truly a board decision.

[Unidentified Analyst:]

Okay.

[Jon Vrabely:]

From my perspective I concur with the board today that because activity has really begun to increase at the wholesale distribution level in the channel, in the supply channel. For many years we saw consolidation and a flow [ph] of acquisition activity which really started at the manufacturing level of the channel.

[Unidentified Analyst:]

Understand.

[Jon Vrabely:]

Right. And I would say the consolidation that really took place at the wholesale distribution level as well as the pro-dealer level of the channel was really through attrition. Now, last year we saw two significant acquisitions at the pro-dealer level of the channel and it really has only been recently where things have started to shake lose at the wholesale level of the channel. So, we are really in the first stage of the infancy stage of starting to see more and more opportunities and more organizations that are least interested in exploring transactions, so I think that is really why the board and the senior leadership team believe that it is best at least currently to continue to keep our sources of available capital to really fund and pursue accelerated growth. And I think that that strategy not only potentially applies to any type of stock repurchase but also to any type of dividend payment.

[Unidentified Analyst:]

Okay. Thanks.

[Jon Vrabely:]

You’re welcome.

[Unidentified Analyst:]

Thank you very much. That was excellent.

[Jon Vrabely:]

Thank you.

[Operator:]

Thank you. Our next question in queue will come from Alan Webber [ph] with Rabadi [ph] and Company. Please go ahead.

[Unidentified Analyst:]

Hey, good morning Jon.

[Jon Vrabely:]

Hey, good morning, Alan. How are you?

[Unidentified Analyst:]

Okay. Good. So, question, regarding market share what do you think your best estimate in terms of whether you gain market share or not in both the kind of remodeling and new housing starts?

[Jon Vrabely:]

Alan, that is an age-old question and to be frank is incredibly difficult for us to answer because in many cases once we sell a product to a pro-dealer, whether it’s a pro-dealer that even primarily focuses either on new construction single family or multi-family or in the repair remodel segment we really have an incredibly difficult time determining where that product ultimately ends up. Now there are few exceptions to that which generally it’s a fairly safe assumption that anything that we would sell to a national retailer is probably going into the repair remodel segment. Then as we get into segmenting other customers and start to look at what we would call specialty dealers that tend to focus on really the exterior envelope of the house, it is still incredibly difficult to determine whether they are dealing with new home contractors or builders or whether they are dealing with repair remodel contractors. So, in general I would tell you and its not a very good measurement, because there is not a good measurement for us today to really answer that question’s specifically is we look at our revenue mix kind of by segment is best we can estimate it and then we look at our growth in total and it is really about the only metric that we can come up with to try to answer question. I would tell that today and throughout 2015 and throughout 2014 primarily additions, we believe in total we own our share. But it’s strictly and solely a belief Alan, I have not data that I can point to, empirical data that I can point you that I can tell you we have absolutely grown our share and here’s the numbers that I can point to prove it to you.

[Unidentified Analyst:]

Okay. I guess my other question was since you look at a certain number of acquisitions, when you look at maybe there’s been some businesses that are similar to yours but smaller. What do you think you bring to the party and making in acquisition more than just you know if you could buy that along “multiple”?

[Jon Vrabely:]

What do we think we could bring to the acquisition?

[Unidentified Analyst:]

In other words if you look at some of the smaller distributors you’re looking at their financials, how they match up to what you have today and how and why you think you can improve their operations?

[Jon Vrabely:]

Yes. So, certainly there are always potential synergies from our back office perspective. There are potential synergies from geographical coverage perspective depending on where that acquisition might be. There are potential synergies from purchasing and inventory management perspective. There is access to capital that we may have that organization may not have to really continue to grow. So, I think there is a lot of reasons why potential sellers might be interested as speaking to Huttig, but its not just from my perspective Alan, a one way street, I mean, I think that there are – I think there’s as many reasons as to why Huttig would be interested in really growing through acquisition and targeting specific companies, because I never profess to have all the answers and there is I think equally as many things that we can learn from successful owners of independent business that we’ve then could potentially take throughout our entire organization as well. So I do believe it is a really is a mutually beneficial type of opportunity.

[Unidentified Analyst:]

Okay. Great. Well, just two things. One is again, thanks for the job you’ve done and the whole team has done for shareholders. And the other question is, if you look at like and say the fourth quarter, just what impact financially if any that the lower oil prices and wood prices have?

[Jon Vrabely:]

Yes. So lower wood prices, you know the only way that lower wood prices really impacted us was the fact that our commodity wood product sales fell and they fell really on a quarter-over-quarter basis fairly significantly. And so, but it didn’t really impact us because our wood product sales has a percentage of total revenue is so small. And to be frank we sell commodity wood products in just a handful of location, so we tend to sell them because we got a core competent around managing those commodity categories in those locations, but it is not a core competence or a strategic growth area for the organization as a whole. So, commodity wood prices had really very little impact on the fourth quarter. Oil prices and subsequently the impact that oil prices had on gas prices certainly had an impact not only in the fourth quarter but throughout 2015. I would tell you that, while it had a positive impact on results, there is always as many kind of offsetting expenses that may run in the opposite directions. So, as an example for whatever reason in 2015, while we experienced a benefit from lower fuel prices, medical expense and just a general cost of medical insurance for our employees increased. And we are adding employees. So that costs increased significantly in ’14. So, I would say in general, while we benefited from lower oil prices, there is always things on a year-over-year basis that flow through the income statement that are kind of one-offs that either you get a benefit from or that cost you in that year. Other than the NOL reversal at the -- NOL valuation reversal at the end of the third quarter, 2015 was really a fairly clean kind of consistent from an operating perspective, financial performance. I think we did a really nice job of leveraging the organization in ’15. So it helped. Fuel prices helped, but by no stretch of the imagination was it anything that I would say really no pun intended but fuelled our financial improvement on a year-over-year basis.

[Unidentified Analyst:]

Okay. Great. Thanks a lot and thanks for the job. Thank you.

[Jon Vrabely:]

Thank you, Alan.

[Operator:]

Thanks. Your next question in queue will come from Jim Barrett with C.L. King & Associates. Please go ahead.

[Jim Barrett:]

Good morning, everyone.

[Jon Vrabely:]

Good morning, Jim.

[Jim Barrett:]

John, could you talk about labor shortages among homebuilders and contractors? Has that increased the demand for value-added services such as pre-hanging and pre-finishing of doors?

[Jon Vrabely:]

Yeah. I would say to be honest, Jim, not really and that’s because the pre-hanging of doors has been something that has been -- let's just say this has been a really, really long time since builders, whether at the new home construction level or even any kind of significant repair remodel contractor ever kind of put a door together on a job site. So those value-add services, particularly around pre-hanging have not been impacted at all by the either real or perceived labor shortage amongst builders. We will tell you that no mater whose number you believe, unemployment is pretty low today and I can tell you from our own perspective it is more difficult than more costly to find qualified employees. But it doesn’t really impact the services that we provide.

[Jim Barrett:]

Okay. Good. And then can you also secondly discuss the likely impact if any, of any price increases by your vendors such as the door manufacturers? And then on the other side of that coin, are you experiencing any price deflation by any vendors? I’m thinking, steel for example has come down quite a bit.

[Jon Vrabely:]

Yeah. Unfortunately, particularly in the commodity arena, manufacturers are generally quick to increase pricing on commodity products in a rising price environment and slow to come off pricing on commodity products in a price declining environment. With the exception, I would say of commodity wood products. So when you look at steel because we are not a heavy provider of rebar or even when you look at our fastener business, or connector business or steel door business, which really collectively those three categories are fairly significant. Prices generally don’t change significantly based on the raw commodity price of steel.

[Jim Barrett:]

Well. That’s very helpful. Thank you very much.

[Jon Vrabely:]

You are welcome.

[Operator:]

Thank you. Our next question in queue that will come from Tom Spiro with Spiro Capital. Please go ahead.

[Tom Spiro:]

Tom Spiro, Spiro Capital. Good morning.

[Jon Vrabely:]

Hi, Tom.

[Tom Spiro:]

Hi, Jon. Jon, you mentioned in your comments earlier that over the last couple of years you’ve seen some consolidation at the level of the manufacturers and last year there were a couple of big deals in the pro-dealer side of the business. I was curious, Jon, as the manufacturers grow and as some of your customers get bigger, is it easier for them to work around you? Are there particular product lines that they can begin to transact directly and cut you out of the picture?

[Jon Vrabely:]

Yeah. Tom, it’s a great question. And I have to tell you that when I came into Huttig almost 17 years ago, one of the biggest concerns that I had about moving into wholesale building products distribution was how long can this last. Because on the surface, it just didn’t seem to make a lot of sense that there would need to be two-step distribution. Here we are 15 years later and I don’t think wholesale distributes anywhere. Customers have and will consistently, as they should try to find the most easy and effective way to get product from the manufacturing plant to the job site. It’s the rule of capitalism. It’s really what we are all striving to do in the channel, is take costs out on a consistent basis and get the product as efficiently and effectively as possible from the plant to the job site or to the consumer. So, we do our best to insulate ourselves from that threat as much as possible and to be frank, we don’t necessarily view it in a way that we fight it, we embrace it. We embrace the fact that we are all in the channel have responsibility from an efficiency perspective. I don’t think it’s the customers that are getting better, the pro-dealers as they continue to get bigger I should say. They are already buying everything that they can buy on a direct basis. So what we have to do as a value-add specialty building products wholesale distributor is continue to seek out ways to add incremental value-add services to our offering and continue to ensure that we are seeking out products that requires scale that we can bring value to that our customers either don’t possess the scale, the interest or the desire to handle on a direct basis, even if they could because the products are complex, bulky, require special handling. The amount of inventory that’s required to carry is really too great for them to handle on a direct basis and I think it truly is one of the things that Huttig excels at and that is truly a core confidence for us. We consistently review our product offerings and Tom, to be frank, we consistently pair products out of our product offering that in all honesty, we just can’t figure out a way to bring value to. So, I think it is always been an evolving and changing and dynamic environment. I do not see that changing. I think that will continue in the future and we will just have to ensure that we are focused on carrying products that we can bring value to either through specific value-add services or that our customers just are not interested in handling or cannot handle kind of on a direct basis.

[Tom Spiro:]

Thanks, Jon. That was helpful. I just had a question or two about the Montana environmental case.

[Jon Vrabely:]

Sure.

[Tom Spiro:]

As I understand it, you’ve booked a reserve this year or you increased your reserve this year by about $8 million. What would you estimate your cash outlay for the project will be this year?

[Jon Vrabely:]

Sure. And just if you don’t mind, actually we took the accrual up in ’15 to about $8.1 million or $8.2 million. But we didn’t -- we increased it by about $3.5 million to $4 million from the initial reserve that we bumped in the first quarter of 2014. So, we feel good based on the information [Technical Difficulty] to be fine and ensure that thing. But I would say in our previous disclosures, while we feel good about where the accrual is today, as we really get into managing the project and cleaning up the property. I would say there is -- as equally likelihood that we could be over accrued as there is, that we could be under accrued. And it’s only as we really get into remediating the property and getting new information that we will really be able to determine that and we will adjust the accrual as we go forward based on new information that may become available. What are we going to spend in 2016? Hard to say, because we have just embarked on, kind of starting at the end of last year and as we move into the first quarter of 2016, we’ve just embarked on the initial stages of the remediation plan to kind of ball parking it. That’s really all that it would be, if we could spend maybe one to three million bucks in 2016. But don’t know it. It depends in a great deal on how quickly we can get very specific work plans approved by Montana DEQ, how quickly we can actually get the work started. So it’s just a little too early in the process yet, Tom, for me to have a good feel for that question.

[Tom Spiro:]

And you have asked your insurance companies to assume responsibility and so far they have rejected the claim?

[Jon Vrabely:]

Rebecca, you want to answer that?

[Rebecca Kujawa:]

We’ve been in the process of against insurers seeking insurance. So far yes, I mean that’s they are fighting lawsuits.

[Tom Spiro:]

I see. And as I understand it, the Crane is claiming that it’s our responsibility to indemnify Crane and we are claiming that we have that Crane has some responsibility to us. I guess I don’t understand that last point. What responsibility we believe Crane has to us?

[Rebecca Kujawa:]

Under the distribution agreement, there is allocation of insurer’s insurance rights. So, it’s just the distribution agreement that was executed at the time of the spin-off in 1999 and then the dealer remediation involves contamination that occurred over several years prior to the spin-off and actually prior to 1990. So it involved insurance during the time period that Crane owned Huttig.

[Tom Spiro:]

I see. But thanks very much and good luck.

[Jon Vrabely:]

Hey. You’re welcome, Tom. Hopefully, we will see you at the end of March.

[Tom Spiro:]

That would be nice.

[Jon Vrabely:]

Yeah.

[Operator:]

Thank you. Ladies and gentlemen, that does conclude the Q&A session of the Huttig Building Products Investor Call. I will now turn the call over to Mr. Vrabely for closing comments.

[Jon Vrabely:]

Tony, thank you very much. Before beginning my closing remarks, I’d like to make you aware that we will be presenting at the Sidoti Emerging Growth Conference on March 31st at the Marriott Marquis in New York City. In addition to presenting, we will be available for one-on-one investor meeting throughout the day on March 31st. I’m very proud of our performance as a team and company in 2015. We’ve demonstrated our ability to drive profitable growth, consistently increase our gross margins, leverage and control our expense structure and significantly increase profitability and earnings. We have a wide array of readily available capital sources, a growing market and an aggressive comprehensive growth strategy that we are currently executing. Our financial performance has positioned us to capitalize under current market growth opportunities and those opportunities make this an incredibly exciting time to be a stake holder in Huttig. Our success is attributed to the hard work and dedication of our people. I would like to take a moment to thank all of the Huttig associates for their commitment to the organization, to our customers and to being the best service provider of every product we sell in every market we served. I am truly humbled [Technical difficulty] and our share for their belief and ownership in our company. Lastly, I would especially like to thank our customers for the trust they place in us and our organization to care for their business. Thank you for taking the time to participate in this call and we look forward to speaking with you again in April when we report our first quarter 2016 results. Good bye.

[Operator:]

Thank you very much. And ladies and gentlemen this conference will be available for replay after 12