Huttig Building Products, Inc. (NASDAQ:HBP) Q3 2020 Earnings Conference Call October 30, 2020 11:50 AM ET
Philip Keipp – Vice President and Chief Financial Officer
Jon Vrabely – President and Chief Executive Officer
Robert Furio – Executive Vice President and Chief Operating Officer
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[00:00:08] Good morning and welcome to the building products third quarter Twenty twenty earnings call participants will be in listen only mode until the end of the call when the company will have a question and answer session. Please limit questions to one question and one follow up question. I would now like to turn the call over to Philip Keipp vice president and Chief Financial Officer, please.
[00:00:35] Thank you, operator. Thank you. And welcome to today’s third quarter Twenty twenty earnings call.
[00:00:41] With me this morning is John Bravely, President and Chief Executive Officer Bob Furio, Executive Vice President and Chief Operating Officer. During the call today, we will discuss our third quarter twenty twenty operating and financial results and provide commentary on our continued efforts to combat the effects of the coated nineteen pandemic. Following our prepared remarks, the operator will open up the lines for questions. Let me take a moment to remind you that today’s discussion reflects management’s views as of today and may include forward looking statements. Actual results could differ materially from those anticipated. And Hutting disclaims any obligation to update information discussed on this call because of developments that occur afterward. In addition to the extent of listening to this call on replay, information could have already changed additional information about factors that could potentially affect our financial results included in the earnings release issued yesterday and in our filings with the S.E.C.. During this call, certain non-GAAP financial measures will be discussed, a description of any non-GAAP adjustments and reconciliation to the most comfortable gap measures can be found in the earnings release issued yesterday and on the company’s website at www.youtube.com today’s call is being webcast live and is being recorded. If you ask the question, it will be included in our live transmission and in any future use of the recording. You can replay the call on the investor relations page of the website under financials. Now it is my pleasure to turn the call over to John for opening remarks.
[00:02:20] Thank you, Bill. Good morning and thank you for joining our third quarter twenty twenty earnings call. After my initial comments, Bob and Phil will discuss our third quarter operating and financial results, after which we will open the call up for a Q&A session. I want to start by expressing my sincere gratitude to all tech associates for the individual contributions they have made towards the success of our company. Their hard work and dedication have resulted in our ability to continue to achieve strong financial results, as demonstrated by our increased profitability, solid working capital management and liquidity levels we have not achieved in several years as compared to the prior year quarter. Operating profit more than doubled to six point nine million. Cash generated from operations nearly tripled to twenty five point four million, and debt was reduced by nearly fifty two million. As difficult and challenging as a pandemic has been on all of our lives, managing the company in a rapidly changing business environment has been equally challenging. Our early recognition of the threat, the pandemic posed to the business and the successful development implementation of our comprehensive covid-19 Readiness and response plan in late February has served us well. We adapted to the difficult environment, making the tough decisions and adjustments to the operating structure that directly contributed to our improved financial performance in the quarter, while simultaneously establishing the foundation for a more profitable future. In closing, I want to speak briefly about the current status of the unsolicited, non-binding letters of interest the company received from Mill Road Capital, LLC, a private investment firm and current shareholder.
[00:04:21] On August six, Twenty twenty, the company received an unsolicited, non-binding expression of interest from Middle Road to acquire all of the outstanding common stock of the company for two dollars and seventy five cents per share. On October 14, the company received a second unsolicited, non-binding expression of interest from middle road to acquire all of the outstanding common stock of the company for four dollars per share, subject to certain contingencies. While Hunwick was not proactively marketing the company for sale at the time it received M. wrote proposals on its board of directors has always and will continue to direct the company in a manner that it believes will maximize value for all shareholders. To that end, the board is reviewing the proposal and as it has always done, will determine the course of action it believes is in the best interest of all shareholders. The company has previously communicated and reiterates today its commitment to communicate future developments in accordance with its ongoing disclosure requirements. In the meantime, the board and management continue to focus on executing our business plans to continue to improve our financial performance and increase shareholder value. We will not be able to provide additional information or address questions related to this matter during our call, as it remains under review by our board of directors, I will now turn the call over to Bob to discuss our third quarter operating performance.
[00:06:01] Thank you, John. Good morning, everyone. I will provide an update on our operational and sales initiatives and discuss specific factors that affected our third quarter performance.
[00:06:11] Will will then discuss our overall financial performance for the quarter.
[00:06:17] Turning to our operating results as the markets stabilize with higher levels of demand. Our sales run rate increased in the third quarter as compared to the second quarter after a twelve point one percent decrease in net sales in the second quarter. Third quarter sales close to within one point four percent a prior year levels. As John stated, third quarter sales were impacted by one recent. Current activities, including the closure of a facility in Columbus, Ohio, and the consolidation of our Silcott New York facility into our Newington, Connecticut branch, in addition to the impact on our sales, margins were negatively impacted as we depleted and liquidated inventories, including in some cases at below normal margins, too, though we generally review and rationalize product offerings on a regular basis. We formally expanded the process across all of our distribution centers in the third quarter. This is consistent with our objective of focusing on higher margin non commodities product categories as we move through this process. Our sales were negatively impacted as we no longer replenished or promoted these items as part of our regular product offering margins were also negatively impacted as we move product at below normal margins in some cases and began to aggressively liquidate the inventory. Three. We have several key product categories that continue to be impacted by supply chain disruption, limiting our ability to procure product consistent with customers with current levels of demand, based on discussions with our supply partners. We believe this disruption will be temporary in some cases our suppliers in the process of adding additional capacity. However, we expect some level of supply chain disruption to continue over the next several quarters.
[00:08:10] And four, we continue to experience labor shortages in certain markets in which we operate. The shortages have resulted in longer lead times on our higher margin volume. Production orders created a negative impact on sales. Decline in value added over sales, coupled with increases in other product categories, have also had a negative impact on our overall gross margins. However, we are aggressively recruiting additional personnel and demand for these products continues to be high, resulting in extended lead times. We estimate restructuring and product rationalization activities impacted third quarter sales by approximately nine to 10 million dollars, or about five percent on a year over year basis. Additionally, we estimate these activities negatively affect the gross margins by approximately 40 to 50 basis points. It is difficult to quantify the impact of supply chain disruption, labor shortages and the longer lead times on our results. The challenging environment, slow momentum for certain aspects of our strategic sales initiatives that we continue to achieve growth in certain key product categories, as discussed in our most recent earnings call, in addition to our national growth strategy, we’ve established branch level sales initiatives based on local market opportunities. These initiatives are designed to generate profitable sales growth while addressing the needs of our locally based customers. Our sales and strategic categories are generally at higher margins as compared to other categories that we expect. Our efforts to ship product mix for non commodities products will drive the overall desired results. Some third quarter highlights related to our strategic sales initiatives include one 60 percent growth in fashion warehouse sales, despite restrictions and supply shortages created by the pandemic.
[00:10:11] Secondly, a significant portion of the fast food sales increase has come from additional market share gains as we convert more poor and targeted growth customer segments to our Package Malmesbury program. Three sales gains have allowed us to successfully reduce and right sized inventory levels in this fast growing Category four sales increase in the stores, which is a key value add service proposition for our customers, was negatively impacted the third quarter by continued labor shortages and extended lead times. This is an important area of focus as we address the underlying issues with our lead times. And fifth deck rail and shrimp sales were up nearly 18 percent despite the challenges environment. This is one of our key strategic categories experience and supply chain disruption, the category with continued high levels of demand in the markets that we serve. These are just some of the highlights related to our strategic growth initiatives while we continue to focus on our strategic product categories and are gaining more traction every day. We expect that, like the rest of our business, the pandemic will continue to have a mitigating impact as we move to the remainder of twenty, twenty and into twenty twenty one. As previously announced, we recorded at one point five dollars million restructuring charge in the second quarter related to the closure of our Columbus, Ohio location and the consolidation of our Silcott, New York and Connecticut facilities. From sales and operations perspective, restructuring activities were substantially completed in the third quarter, so we have some additional work to do to completely empty and exit the facilities.
[00:11:58] We would like to thank all of our associates who worked hard to successfully execute this project and move forward to closure without any significant issues. We expect all activities to be substantially completed by the end of the year. But from an operating expense perspective, we lowered our expenses by five point six dollars million in the third quarter, reducing our expense ratio by two hundred forty basis points from nineteen point two percent to sixteen point eight percent. The improved leverage was driven by the cost reduction actions we took beginning in the fourth quarter of twenty nineteen, coupled with the actions taken as part of our covid-19 Readiness and response plan. We believe many of the cost reduction actions taken are sustainable volume levels, though some incremental add back is expected with regard to eventual full restoration of wage and benefit reductions from a working capital perspective. We are extremely pleased with our performance, which has contributed to significant incremental liquidity. We’ve adjusted to operating our business in a much leaner fashion after full implementation of our covid-19 Readiness and Response Plan to illustrate, our inventory levels are down thirty five million dollars compared to a year ago, while volume levels have improved to those approaching prior year sales. Going forward, we will continue to manage and adjust our inventories as demand dictates that we will consistently focus on improving our turns. We will also tightly manage any necessary adjustments to inventory levels once the supply chain disruption is cleared. Now, I will turn the call over to Phil to discuss our financial performance.
[00:13:47] Thank you, Bob. As anticipated, the covid-19 pandemic, along with other factors discussed on this call, negatively affected our sales. However, our covid-19 Readiness and response plan helped drive an overall improvement in our operating results relative to our initial pandemic forecasts and relative to prior year results across virtually every key financial metric. Third quarter Twenty twenty net sales for two hundred twelve point seven million, which was three million or one point four percent lower in the third quarter of twenty nineteen. Sales momentum picked up in the third quarter compared to the 12 percent year over year decline reported in the second quarter. Through the first nine months of Twenty twenty, net sales were six hundred seven point seven million, which is twenty three point nine million or three point eight percent lower than two thousand nineteen. The pandemic most affected our second quarter sales, but some trailing impact as we move through third quarter. As I’ve stated earlier, our sales were impacted by restructuring and product rationalization activity, supply chain disruption across several key suppliers and by labor shortages, which have lengthened lead times to our customers. On a year to day basis, these factors were mitigated by pre pandemic sales growth in the first quarter, as well as sales momentum for certain key strategic initiatives. Gross margin was twenty point one percent of net sales during the third quarter Twenty twenty, compared to twenty point seven percent in the third quarter of twenty nineteen.
[00:15:23] The change in margin was due in part to sales mix as a higher proportion of our net sales, but from lower margin product categories, the proportional change in mix can be tied to longer lead times for our customers for value and network sales, as well as supply chain disruption. Margins were also impacted by expansion of our Product Rationalization project as we drew down inventories for affected products at lower than normal margins. And finally, branch closures negatively impacted margins as we wound down operations at two locations and sold through inventory at suboptimal margins. The impact from these factors was mitigated somewhat by growth and higher margins in certain strategic categories through the first nine months of twenty twenty gross margins for twenty point one percent of net sales, compared to 20 percent a year ago. Many of the same factors impacted our year to date margins, but were mitigated by pre pandemic margin performance, plus the impact from our focus on higher margin sales opportunities. We recognize that one point five million dollar restructuring charge in the second quarter related to branch closure and consolidation activities, we’ve substantially completed the closure by the end of the third quarter.
[00:16:36] Operating expenses were five point six million or thirteen point five percent to thirty five point eight million, representing sixteen point eight percent of net sales in the third quarter Twenty twenty compared to forty one point four million, or nineteen point two percent of net sales in the third quarter of twenty nineteen. Personnel expenses declined three million, primarily related to actions taken related to our covid-19 readiness and response plan, including workforce reductions, wage reductions and suspension of contributions under our employer sponsored benefit plan, as well as war medical claims, costs, not personnel expenses, decreased two point six million as travel and other discretionary spend was curtailed. And we recognized lower fuel costs year to date. Operating expenses exclusive of the one aforementioned one point five million restructuring charge and nine point five million will write off in the first quarter, with one hundred nine point five million compared to one hundred and twenty two million and two thousand nineteen personnel costs decreased eight point nine million, primarily as a result of expense reduction actions taken in response to the pandemic, including workforce reductions, wage reductions and suspension of contributions from employer sponsored benefit plan, as well as the lower medical claims. Non personnel costs decreased three point six million as travel and other discretionary spend was curtailed in the third quarter and we recognize lower fuel costs.
[00:18:06] The lower expenses were partially offset by higher workers compensation, other insurance costs as a percentage of net sales, again excluding the one point five million restructuring charge and nine point five million good write off our year to date, operating expense ratio is eighteen percent and Twenty twenty compared to nineteen point three percent. In twenty nineteen. We conducted a review of our goodwill and recorded a nine point five million non-cash impairment charge in the first quarter of Twenty twenty impairment was largely driven by the sustained decline in our market capitalization. Coupled with the covid-19 environment, operating income in the third quarter was six point nine million, compared to three point three million a year ago. For the first nine months ended September 30th, our operating income was one point eight million, adjusted forty one point five million restructuring charge and nine point five million non-cash goodwill impairment charge. Year-to-date operating income was twelve point eight million, compared to four point four million in twenty nineteen. Through strict working capital management and improved operating results, we were able to continue to significantly reduce debt levels pursuant to the terms of our senior credit facility.
[00:19:19] We also achieved lower interest rates based on improved liquidity levels. As a result, our interest expense declined over 50 percent on a year over year basis in the third quarter from one point seven million to eight hundred thousand on a year to date basis interest expense was three million, compared to 5.2 million a year ago. As a result of the foregoing, the reported net income of six point one million in the third quarter of Twenty twenty, that’s compared to net income of one point six million a year ago, year to date, we incurred a net loss of one point two million as compared to a net loss of eleven point nine million in twenty nineteen. Adjusted for the nine point five million Beslow impairment charge and the one point five million restructuring charge in Twenty twenty and adjusting for the eleven point eight million dollar tax charge in two thousand nineteen year to date, net income was nine point eight million and Twenty twenty compared to a net loss of one hundred thousand. A year ago. We generated adjusted EBITDA of eight point five million during the third quarter of Twenty twenty as compared to five point three million in the third quarter of twenty nineteen.
[00:20:32] For the nine months ended, September 30 adjusted, the Dow was seventeen point seven million, compared to ten point one million a year ago.
[00:20:42] Turning to the balance sheet, we had total debt of one hundred one point six million at September 30 Twenty twenty compared to one hundred fifty three point five million a year ago. As previously stated, the decrease in debt is primarily due to improved operating results and lower working capital levels as compared to a year ago, largely driven by lower inventories. Cash provided by continuing operating activities was twenty five point four million in the third quarter of Twenty twenty compared to cash provided in nine point six million in the third quarter of 2013. Given the seasonality of our business, we typically build working capital in the second and third quarters, which further highlights the achievements of our field organization on a year to day basis, cash provided by continuing operating activities was thirty five point seven million in Twenty twenty, compared to cash used of ten point two million to two thousand nineteen, representing a forty five point nine dollars million improvement in underlying cash flows. From the overall liquidity perspective, total available liquidity was sixty nine point eight million at September 30 and Twenty twenty as compared to forty six point five million September thirty two thousand nineteen, an increase of twenty three point three million. We have not achieved this level of liquidity since early in 2017. While we have navigated high sales levels of uncertainty over the last two quarters and the business environment has somewhat stabilized, however, a level of uncertainty remains from the pandemic and to a degree, from the political environment. We will continue to manage our balance sheet and operations in a prudent manner to maximize returns. Now, I will turn the call over to John for closing comments.
[00:22:32] Thank you, Bill. Regardless of our personal views on the social, political and financial impact of the pandemic, I would like to believe that we could all agree that the human toll is the most devastating effect of covid-19. I previously communicated that the pandemic was the catalyst for many of the actions we took that contributed to our financial performance improvement in the quarter and ultimately resulted in establishing the foundation for a more profitable, more scalable future.
[00:23:06] I would not be the leader or person that I strive to be if I did not acknowledge that many of the decisions we made to mitigate the threat posed to the business by the virus negatively affected people’s lives.
[00:23:21] To that end, we will not allow the lives we affected or the personal sacrifices our associates have made on behalf of our organization. To be in vain.
[00:23:32] In the third quarter on a year over year basis, we continue to achieve meaningful improvements in virtually every aspect of our operating results, our expense ratio, profitability and liquidity position are at the best levels achieved in several years.
[00:23:49] Going forward, we will use the improvements made in our cost structure as a new baseline. And once all wages and benefits are fully restored, all future expense additions will continue to be scrutinized and narrowly focused to support our service proposition. We will continue to focus on strategic product category share growth as our strategic categories possess the greatest market growth potential, the most meaningful opportunity to continue to differentiate Hornik in the channel and the most expedient way to continue to improve our gross profit. We will complete our product line rationalization initiative in the next two quarters, eliminating lower margin, more commodity’s categories while creating more focus and capacity to grow our strategic categories while minimizing the need for incremental investment in our cost structure. We will use the incremental liquidity we have created through working capital improvements and positive cash generated from operations to consistently evaluate, prioritize and pursue opportunities that we believe will increase the value of the company, including, but not limited to organic growth initiatives, accretive acquisitions and potentially share repurchase programs. Lastly, and most importantly, we will continue to invest in our associates working towards creating a high performing, accountable culture with the most empowered and engaged associates. Operator, we will now take questions.
[00:25:39] As a reminder, ladies and gentlemen, to ask the question, you will need to press star one on your telephone again, the star one on your telephone keypad to withdraw your question. Please press the donkey. Please stand by while we compile the Q&A roster. Once again, ladies and gentlemen, if you have a question, please, press star one at this by.
[00:26:17] Operator is there appears not to be any questions I will proceed with closing comments. Looking forward, combining the improvements we have made in the business with the current robust activity and future projections for the new residential construction market, the future for Hunwick and all of our stakeholders is very bright. I can not be more proud of our associates and I want to thank them again for their hard work, fortitude and dedication to providing exemplary service to our customers. I also want to thank our customers and supply partners for continuing to place their trust in us to care for their business. Finally, I thank you for your ownership and interest in our company and for your participation in our call today. We look forward to speaking with you again next year when we report our fourth quarter and Twenty twenty full year results.
[00:27:18] Ladies and gentlemen, this concludes today’s conference call. Thank you for your participation, you may now disconnect.