Huttig Building Products, Inc. (HBP) CEO Jon Vrabely on Q4 2020 Results - Earnings Call Transcript

Huttig Building Products, Inc. (HBP) Q4 2020 Earnings Conference Call March 2, 2021 11:00 AM ET

Company Representatives

Jon Vrabely - President, Chief Executive Officer
Philip Keipp - Vice President, Chief Financial Officer
Bob Furio - Executive Vice President, Chief Operating Officer

Conference Call Participants

Operator

Good morning, and welcome to the Huttig Building Products Fourth Quarter 2020 Earnings Call. Participants will be in a listen-only mode until the end of the call when the company will have a question-and-answer session. [Operator Instructions]. Please be advised that today’s conference is being recorded.

I would now like to turn the conference over to Philip Keipp, Vice President, and Chief Financial Officer. Sir, you may begin.

Philip Keipp

Thank you, and welcome to Huttig’s fourth quarter 2020 earnings call. With me this morning is Jon Vrabely, President, and Chief Executive Officer; and Bob Furio, Executive Vice President, and Chief Operating Officer.

During the call today we will discuss our fourth quarter and full year 2020 operating highlights and financial results. We will also provide commentary on the current business environment, including the impact from the pandemic and the progress we have made across a number of facets of our business in 2020. Following our prepared remarks the operator will open up the line for questions.

Let me take a moment to remind you that today's discussion reflects management's views as of today and may occur forward-looking statements. Actual results could differ materially from those anticipated, and Huttig disclaims any obligation to update information discussed on this call, because of developments that occur afterwards.

In addition, to the extent you're listening to this call on replay, information could have already changed. Additional information about factors that could potentially affect the financial results that’s included in the earnings release issued yesterday and in our filings with the SEC.

During this call certain non-GAAP financial measures will be discussed. 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 the company's website at www.huttig.com.

Today's call is being webcast live and is being recorded. If you ask a 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 Relation page of our website.

Now, it is my pleasure to turn the call over to John for opening remarks.

Jon Vrabely

Thank you, Phil. Good morning and thank you for joining our fourth quarter and full year 2020 earnings call. After my initial comments, I will turn the call over to Bob and Phil to discuss operating highlights and our financial performance, after which I will share final remarks before opening the call for questions.

Moving into 2020, we are confident that the disruption from the implementation of our growth strategy was behind us, and that we would generate meaningful financial improvement throughout the course of the year. Then in mid-February, while still generally viewed in the U.S. as nothing more than a common flu like virus, we recognize that COVID-19 would likely pose a significant threat to the U.S. economy and ultimately to our business.

While we continue to execute our 2020 business plan, the senior management team immediately began developing a comprehensive COVID-19 readiness and response plan. By the end of February we implemented the initial priorities of the first version of that plan across the entire organization.

Over the course of the next 30 days we developed financial models and contingency plans to mitigate the risk of the pandemic and began executing the most critical and highest prioritized components of our plan. While the pandemic had no impact on the business until late March, our first quarter results were solid with year-over-year sales growth and a significant improvement in profitability.

By the end of the quarter, it was clear that are COVID-19 plan would dominate the activities of the entire organization for the balance of and potentially beyond 2020. Our actions were early and aggressive and by the time we began to experience a precipitous decline in sales in April, we were well into executing every aspect of our plan.

By the end of the second quarter, the housing market began to recover and combined with the results of our earlier actions, our Q2 financial performance and liquidity had markedly improved over 2019, setting the stage for what would become a solid year for our organization.

During the third quarter, while the housing market continued to improve and many of our competitors benefited from rapidly escalating commodity wood prices, we were hindered by extensive supply chain challenges and a tight labor market. Simultaneously we accelerated the branch restructuring activities announced in Q2 and began executing a broad product line rationalization project across the entire organization.

Despite the headwinds that began late in the first quarter, and to a large extent continue through today, we built strong sustainable momentum through the second half of the year, which helped drive our improved financial performance. The early recognition and aggressive actions taken to mitigate the spread of the pandemic, along with the dedication and fortitude of our associates, directly resulted in the significant improvement in our financial performance and liquidity position that we achieved in 2020.

I am very proud of the entire organization for all of the operating and financial improvements we generated in the year. Of all of the improvements we generated in 2020, I am especially proud of the results we generated in successfully resetting our cost structure and working capital requirements, which established the foundation for a more profitable future.

I will now turn the call over to Bob to discuss our operating highlights, including our strategic initiatives.

Bob Furio

Thank you, John. Good morning everyone. I will provide an update on our operational and sales initiatives, discuss specific factors that affected our fourth quarter operating performance. Phil will then discuss our fourth quarter and full year financial performance.

Despite the ongoing challenges and fluidity created by the pandemic, we were able to achieve efficiencies in our operating platform that will serve us well into the future. While we took early and aggressive actions to reset our cost structure and working capital requirements, we progressively and conservatively added resources necessary to support the increased sales momentum as the market stabilized in the second half of the year.

While successfully managing through the challenging business environment in 2020, we simultaneously developed, executed and completed several restructuring and product rationalization projects. Based on sales trends and our current operating position, we believe that outside of normal seasonal or variable adjustments that our cost structure and working capital levels should generally support our 2021 sales projections.

Turning to our operating results, as the market stabilized late in the second quarter and grew in the second half of the year, our sales trends followed culminating a 2.3% year-over-year reported sales increase in the fourth quarter. Full year sales were up 2.4% compared to 2019 levels.

2020 sales were impacted by a number of headwinds, including one, the pandemic. Over the past year the pandemic has devastated the global economy. While the U.S. economy has generally fared better than most, the second quarter decline in GDP was the single, largest quarterly decline in more than 60 years. This is an indicator as to the degree of business disruption and uncertainty created in the early stages of the pandemic. Our second quarter sales were 12.1% lower than the prior year period, which offset our first quarter growth and affected our full year sales performance.

Two, restructuring activities. Beginning late in the first quarter and running through the end of the third quarter, we were engaged in several corporate and field restructuring activities that affected our sales in the second half of 2020.

Third, product line rationalization. This is a consistent practice we’re having, however we developed and executed a more aggressive, company-wide process during the second half of the year to create capacity and increase focus in our growing strategic product categories.

Our strategic categories are generally more complex and generate higher margins as compared to certain other products we sell. Through the broader rationalization process, our sales were negatively impacted as we no longer replenished or promoted these items as part of our regular offering. Margins were also negatively impacted as we moved product at the low normal margins in some cases and began to aggressively liquidate the inventory.

Fourth, supply chain disruption. We have several key product categories that continue to be impacted by supply chain disruption, limiting our ability to procure product consistent with levels of demand. Based on discussions with our supply partners, we believe this disruption is temporary. In some cases our suppliers are in the process of adding additional capacity; however, we expect some level of supply chain disruption to continue through the first half of 2021 and potentially longer.

And fifth, labor shortages. We continue to experience labor shortages in certain markets where we operate. These shortages have resulted in longer lead times in our higher margin, value add production orders, creating a negative impact on sales and overall margins. We continue to aggressively recruit additional personnel as ongoing demand for these products remains high. We estimate restructuring and product rationalization activities impacted fourth quarter sales by approximately $11 million or approximately 6% of prior year sales.

On a full year basis, we estimate these projects affected sales by approximately $27 million or approximately 3% of prior year sales. It is difficult to quantify the impact of supply chain disruption, labor shortages and longer lead times on our results though we expect the impact of revenues were similar, if not larger than the aforementioned impact of restructuring and product rationalization activities.

With regard to our strategic initiatives, even though the pandemic environment slowed momentum in some cases, we were able to achieve continued growth in certain key strategic 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, and we expect our efforts to ship product mix toward non-commoditized products will drive the overall desired results. Some highlights related several of our strategic initiatives include, Huttig-Grip Fasteners. Warehouse Fasteners sales grew 44% in the fourth quarter and 32% for the full year. This growth was achieved despite restrictions and supply shortages created by the pandemic.

A significant portion of the fastener sales increase has come from additional market share gains as we convert more core and targeted growth customer segments to our Huttig-Grip Package Nail and Screw program. Sales gains have allowed us to successfully reduce and right size inventory levels in this fast growing category.

Secondly, pre-finished doors. Sales in pre-finished doors which is the key value add service proposition for our customers was negatively impacted by continued labor shortages and extended lead times. Despite the underlying challenges, fourth quarter revenues increased over 2% compared to prior year, while due to the headwinds described earlier, full year sales were down approximately 3%. This is an important area of focus as we work to address underlying issues with our lead times.

And third, deck rail interim sales were up nearly 26% in the fourth quarter and up 13% for the full-year despite the challenging environment. This is one of our key strategic categories experiencing supply chain disruption and as a category with continued high levels of demand in the markets we serve. These are just some of the highlights related to our strategic growth initiatives.

From a working capital perspective, we are extremely pleased with our performance, which combined with improved operating results has contributed to significant incremental liquidity. We have adjusted to operating our business in a much leaner fashion, after right sizing our inventory levels at the outset of the pandemic.

For perspective, our inventory levels are down $33.7 million or 24% compared to a year ago, while volume levels have improved to exceed prior year sales. Going forward we will continue to manage and adjust our inventory as demand dictates and continue to focus on improving our terms.

Now, I will turn the call over to Phil to discuss our financial performance.

Philip Keipp

Thank you, Bob. As anticipated, the COVID-19 pandemic along with other factors discussed on this call, have negatively affect our sales. However, through early and aggressive actions taken at the outset of the pandemic we were able to drive an overall improvement in our operating results and liquidity relative to the prior year across virtually every key financial metric.

Fourth quarter 2020 sales were at $184.6 million which is $4.2 million or 2.3% higher than the fourth quarter of 2019. Adjusted for the impact of restructuring and product rationalization activities, we estimate the sales increase was 8.3%. For the full year of 2020, net sales were $792.3 million, which is $19.7 million or a 2.4% lower in 2019. Adjusted for restructuring and product rationalization activities, we estimate sales increased approximately 1.1% as compared to 2019.

The pandemic most affected our second quarter sales, which were down 12.1%, with some trailing impact as we move through the second half of the year. As Bob stated earlier, our sales were also affected by supply chain disruption across several key suppliers and by labor shortages, which lengthened lead time to our customers. The impact from supply disruption and labor shortages is difficult to quantify, but will be added to the 2020 adjusted growth. As we look to 2021, our year-over-year sales run-rate were higher in January; however, its severe weather throughout much of the country did impact us in February.

Gross margin was 20.1% of net sales during the fourth quarter of 2020 compared to 19.7% in the fourth quarter of 2019. The improved gross margin percentage reflects the favorable impact from our focus in higher margin sales opportunities, including from our strategic sales initiatives.

For example, sales from our fastener program comprised a higher percentage of our overall sales in 2020 as compared to a year ago, and generated higher margins than in 2019. These gains were partially offset by the sales product mix as higher margin value add categories were more significantly affected by supply chain disruption and labor shortages.

Gross margins were also impacted by restructuring and product rationalization activities as we reduced inventories at less than normal margins. These projects were completed in the second half of 2020 and are expected to improve our overall margin performance as we move forward.

For the year, 2020 gross margins were 20.1% of net sales compared to 20% a year ago. Maybe [ph] the same factors previously discussed impacted our year-to-date margins but were mitigated by pre-pandemic margin performance, including a 120 basis point improvement in the first quarter of 2020, and by the impact from our focus on higher margin sales opportunities.

Operating expenses decreased $7.5 million or 17.2% to $36.1 million, representing 19.6% of net sales in the fourth quarter of 2020, compared to $43.6 million or 24.2% of net sales in the fourth quarter of 2019.

Personnel expenses declined $2.7 million, primarily due to the reset of our cost structure, which was accelerated by our COVID-19 readiness and response plan, including workforce reductions, wage reduction, and suspension and contributions under our employers sponsored benefit plan. Substantially all the wage reductions were restored in the fourth quarter. Higher incentive compensation, driven by improved operating results offset some of the benefits recognized from our reset cost structure.

Non-personnel costs decreased $4.8 million, as advertising and promotion, travel and other discretionary spend was curtailed and we recognized overall [ph] cost as we rationalized space and equipment needs. Insurance contract haul and fuel costs were all lower during the period.

Year-to-date operating expenses exclusive of the $1.5 million restructuring charge recorded in the second quarter and the $9.5 million goodwill charge reported in the first quarter decreased $20 million from $165.6 million in 2019 to $145.6 million in 2020.

Personnel cost decreased $11.6 million, primarily from the aforementioned expense reduction action commenced in the second quarter, as well as lower medical claims costs. Non-personal expenses decreased $8.4 million in 2020, primarily due to the curtailment of discretionary spend, as well as other factors consistent with our fourth quarter expense decline.

As a percentage of net sales, excluding the $1.5 million restructuring charge, $9.5 million goodwill charge, our year-to-date operating expense ratio is 18.4% in 2020, compared to 20.4% in 2019. Operating income in the fourth quarter was $1 million compared from an operating loss of $8 million a year ago.

For the 12 months ended December 31 our operating income was $2.8 million. Adjusted for the $1.5 million restructuring charge and $9.5 million goodwill impairment charge, year-to-date operating income was $13.8 million compared to an operating loss of $3.6 million in 2019.

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, we also achieved lower interest rates based on improved liquidity levels. As a result our interest expense declined over 50% on a year-over-year basis in the fourth quarter from $1.4 million to $600,000.

On a year to date basis, interest charges were $3.6 million compared to $6.6 million from a year ago. As a result of the foregoing, we reported net income of $300,000 in the fourth quarter of 2020 as compared to a net loss of $9.4 million a year ago.

Year-to-date we incurred a net loss of $900,000, as compared to a net loss of $21.3 million in 2019. Adjusted for the $9.5 million goodwill impairment charge and the $1.5 million restructuring charge in 2020 and adjusting for the $11.8 million tax charge in 2019 to increase our valuation allowance, year-to-date net income was $10.1 million in 2020 compared to a net loss of $9.5 million a year ago.

We generated adjusted EBITDA of $2.4 million during the fourth quarter of 2020, that’s compared to an EBITDA loss of $4.9 million in the fourth quarter of 2019. For the 12 months ended December 31, adjusted EBITDA was $20.1 million compared to $5.2 million a year ago.

Turning to the balance sheet, we had total debt of $94.1 million at December 31, 2020 compared to $136.8 million a year ago, a reduction of $42.7 million. 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 $7.1 million in the fourth quarter of 2020, compared to cash provided of $16.8 million in the fourth quarter of 2019. Given the year-over-year aggressive actions to reduce working capital levels, more cash flow benefit was recognized in the second and third quarters as compared to last year. On a year-to-date basis cash provided by continuing activities was $42.8 million in 2020, compared to $6.6 million in 2019, representing a $36.2 million improvement in underlying cash flows.

From the overall liquidity perspective, total available liquidity was $59.3 million at December 31, 2020 as compared to $33.7 million a year ago, an increase of $25.6 million. This represents the highest year in liquidity level since 2016.

2020 was a pivotal year for Huttig. Despite the challenges, we generated significantly improved operating results while strengthening our balance sheet and liquidity position, and believe we are well positioned to take advantage of our momentum as we turn to 2021.

Now, I’ll return the call to John for closing comments.

Jon Vrabely

Thank you, Phil. As difficult and challenging as the pandemic has been on all of our lives, managing the company through the rapidly changing business environment has been equally challenging. In light of the threat and challenges COVID-19 posted to business, its focused, motivated and galvanized the entire management team to plan and execute the actions that provided the best opportunity to achieve our pre-COVID goals for the year.

Throughout the second quarter, as we consistently reassess the market and analyze our performance under our response plan, it became clear that many of the actions we took in March and into the second quarter would drive sustainable benefits capable of supporting moderate levels of future growth, while strengthening our balance sheet.

By the end of the second quarter, the majority of the actions we executed as part of our readiness and response plans late in the first quarter and early in the second quarter, were reflected in our income statement and balance sheet results. In addition, the housing market outperformed our original projections in the second quarter and appeared to be trending towards activity levels that would exceed 2019.

Entering the third quarter, we were confident that the results of our actions to-date were sustainable and our efforts shifted from executing the COVID-19 plan to constant monitoring of our performance and control. The results of our two date actions, combined with the better than expected housing market activity created the opportunity and capacity to refocus on executing our strategic product category sales growth plan.

For many reasons our strategic product category growth plan is a cornerstone of our entire strategy. Our strategic product categories are complex and require scale and value-add fabrication services. They possess the greatest market growth potential, the most meaningful opportunity to differentiate Huttig in the channel, and the most expedient way to expand our margins.

Despite supply chain challenges and labor shortages that negatively impacted all three of our strategic categories and hampered our ability to grow in the second half of the year, on a same store basis, in total we grew sales and expanded margins of our strategic categories in 2020. For the full year our strategic product categories accounted for slightly more than 48% of our total revenue and generated nearly 55% of our total shipping margin. In 2019 our strategic categories accounted for slightly more than 45% of total revenue and nearly 52% of total shipping margin.

In 2021 we will continue to closely monitor and adjust to the rapidly changing environment and will continue to execute our strategy. Our operating priorities are to continue to focus on our service levels and total customer experience, growing our strategic product categories and expanding our margins and working towards creating a high performing accountable culture with the most empowered and engaged associates.

Operator, we will now take questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions]

Jon Vrabely

Operator, as there appears to be no questions, we will proceed with my closing comments.

Operator

Thank you. There are no questions in the queue.

Jon Vrabely

In the fourth quarter and for the full year, on a year-over-year basis we successfully achieved meaningful improvements in virtually every aspect of our operating results. Our expense ratio, profitability and liquidity position are at the best levels in several years. Looking forward, combining the continued momentum from our strategic initiatives, improvements we have made in the business as a cautiously optimistic, near term housing market projections, the future for Huttig and all of our shareholders is bright.

I cannot 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 in about 60 days when we report our first quarter results.

Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.