Huttig Building Products, Inc. (HBP) CEO Jon Vrabely on Q2 2021 Results - Earnings Call Transcript

Huttig Building Products, Inc. (NASDAQ:HBP) Q2 2021 Earnings Conference Call July 29, 2021 11:00 AM ET

Company Participants

Philip Keipp - VP and CFO

Jon Vrabely - President and CEO

Bob Furio - EVP and COO

Conference Call Participants

Josh Chan - Robert W. Baird & Co.

Operator

Good morning, and welcome to the Huttig Building Products Second Quarter 2021 Earnings Call. [Operator Instructions] I would now like to hand the call over to Philip Keipp, Vice President and Chief Financial Officer. Please go ahead, sir.

Philip Keipp

Thank you, and welcome to Huttig's First Quarter 2021 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 second quarter of 2021 operating highlights and financial results. We will also provide commentary on the current business environment, including the impact of the pandemic and the continued progress we have made across our operations.

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 include forward-looking statements. Actual results could differ materially from those currently anticipated, and Huttig disclaims any obligation to update information discussed on this call 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 is 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 adjustments 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 any future use of the recording. You can replay the call on the Investor Relations page of our website.

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

Jon Vrabely

Thank you, Phil. Good morning, and thank you for joining our second quarter 2021 earnings call. We are very pleased with the continued progress we made in the quarter and in the first half of the year in steering the company through a challenging environment.

We are excited to see the positive of that to show that all the work we have done over the past several years to transform product into a more diversified company that possesses significant, sustainable market roles that materialize in our financial performance, as we deliver our second consecutive quarter of record net earnings as reported since becoming a public company in 1999.

The balance of my opening comments today will primarily focus on the new residential construction market. I am focusing on the market because it has created a unique operating environment that in some ways has contributed to our growth and improved financial performance while on other way, significantly impaired our ability to meet current demand levels. I will explain in detail the data and trend analysis that shaped our current view of a new residential construction market.

We believe the general state of the market today remains strong. We also believe that buying any meaningful macro-economic disruptions, in the underlying housing fundamentals are solid and will continue to support strong demand in the near to intermediate term. In the 48 years between 1959, the first year of the U.S. census bureau tracked new residential starts and 2007 total new starts never fell below 1 million in any given year, an average 1.5 million new housing starts per year.

Total starts fell below 1 million for the first time in 2008 and remained below 1 million starts for the next 6 consecutive years, averaging 750,000 total starts per year. So it's crossing the 1 million mark again in 2014. Total starts have grown every year by an average annual growth rate of nearly 6% to a total of 1.4 million in 2020, while market activity increased between 2014 and 2020 installed briefly in the second half of 2018 and the first half of 2019, before resuming its growth trend in the second half of 2019 and first quarter of 2020.

Cumulatively, on a year-over-year basis for the three quarters immediately proceeding the pandemic, total starts grew by nearly 15% in the second quarter of 2020, the uncertainty of the pandemic led to a decline in total that starts with nearly 15% as compared to the second quarter of 2019. The biggest decline occurred in April, after which the market rebounded rapidly in May and June, such that June, 2020 starts actually increased 3% over 2019.

Start remain strong throughout the second half of 2020, growing nearly 20% over the second half of 2019 finishing the year with 1.4 million starts the highest level since 2006. Strong demand continued into 2021 with 25% roll through June and 786,000 starts also the highest level since 2006.

While the pandemic initially created tremendous economic concern, pausing construction activity in April and May of 2020, we believe the combined effect of years of pent-up demand, low inventory and price of the market prior to COVID-19 relegated the first global pandemic and more than a century to a mere 60 day hiccup in residential construction activity. While pandemic related factors continued to affect the market, we believe the pandemic itself has not softened to the underlying fundamentals of the residential construction market.

Over the trailing 12 month period, between June, 2021, total housing starts grew approximately 18% to 1.5 million units, while 18% growth is robust, it is in-line with the 15% growth and it starts in the three quarters immediately person being the pandemic. The strong growth in starts, prior to the pandemic indicated that some level of the pent-up demand that had been building over the past decade was finally materializing in the market.

And it appears that the pandemic may have been a catalyst in unlocking even more of the historical pent-up demand. During our second quarter call a year ago and then every call since, we have discussed the pandemic related challenges affecting the business environment.

Unfortunately, the most meaningful challenges we identified and began experiencing a year ago have not subsided and in many cases have continued to escalate. We believe the primary challenge today is that the gap between available supply and demand has reached its maximum elasticity and the ability to increase supply in a meaningful way in the current environment is unlikely. The gap has grown over the past year because of the inconsistency of the global supply chain and the lack of available qualified labor.

As strong demand depleted the limited supply of home inventories, prices escalated rapidly and material and labor shortages camper homebuilder efforts to keep up with the increased level of demand, we believe the combination of all of these factors over the course of the past year has meaningfully contributed to a current market imbalance that is beginning to show signs of levelling.

While the levelling of market momentum might normally cost concern in the current environment, it is necessary to begin to narrow the gap between demand and available supply. Over the course of the past couple of months, the market has begun to show signs that it is recalibrating. Consumers that entered the market over the course of the past 6 to 12 months quickly learnt that their choices were very limited and the extremely competitive environment in some markets resulted in unreasonable and unsustainable price levels, causing many potential home buyers to head back to the side-lines.

Simultaneously as rising construction costs showed no signs of the easing, some builders announced plans to monitoring sales efforts, until the market further stabilizes. While we have very limited exposure to commodity price fluctuations, pricing in the lumber market illustrates the volatility and disruption that can occur when the gap between demand and available supply reaches its maximum elasticity.

While this example might appear to be extreme, bear in mind that lumber generally tends to be the highest cost component in the construction of a new home. To provide some historical context, in the 10 years between 2010 and early 2020, the random length lumber price composite index increased a total of $72 or 28% from $250 to $322. While there were friendly fluctuations throughout the 10 year period, the price appreciation trend was generally consistent. And the only time the index cross the $500 mark was in the first half of 2018, for a total of about 90 days.

In the 13 months between April, 2020 and May, 2021, the composite price index increased by more than $1,300 or 420% from $322 to an astonishing total of $1,670. Over the course of the past 60 days that composite index declined by more than $1,100 or 65% to $567. The majority of building materials in precinct price over the past year, but I'm not aware of any product or category of products that experienced and level of volunteer -- volatility from merely close to lumber.

While the near-term residential construction market will likely remain somewhat challenged. We believe the underlying fundamentals of the market remains very strong and that we are well positioned to continue our profitable growth.

Now I'll turn the call over to Bob to discuss our operating highlights initiatives.

Bob Furio

Thank you, John. Good morning, everyone. I will provide an update on our operational and sales initiatives and discuss specific factors that affected our second quarter operating limits. Phil we'll then discuss our second quarter financial performance. Business environment we are operating in today, is represented by strong demand, but also with limited supply across a number of key products we sell.

We are not unique in this regard. The supply issues are prevalent in many industries across the country. This has created an inflationary aspect across most products affecting the residential construction market and has had a positive impact in our sales growth. So it was not as pronounced as many other companies that are in our industry based on our respected product offerings.

Product availability constraints has had a meaningful mitigating the impact on our volume, especially across certain national strategic categories. Looking forward, based on market conditions today, which are somewhat fluid, we believe supply challenges could extend into 2022 for some products. And the pricing will moderate and normalize across certain key products with some level of additional price increases possible through the first quarter of next year.

Whether we currently believe that pricing declines, if any, would be moderate with most of the clients being the modern related or targeted nature to individual product categories or markets, we remain focused on growing our national strategic product categories, disciplined pricing management and operational efficiency, which are critical factors in this environment.

Turning to second quarter highlights sales of our national strategic categories, which was the most impacted category hit with supply chain disruption, route 21% and accounted for 37% of our total growth for the quarter. We have previously discussed the importance of our strategic product categories, as well as our plan to rationalize lower margin, non-strategic categories.

This plan intentional mix shift as resulted in our ability to successfully replace sales of lower margin non-strategic products with increased sales of strategic categories whose average shipping margin for the quarter is 320 basis points higher as compared to non-strategic categories without incurring meaningful, incremental, fixed operating costs. To illustrate while national strategic categories represented 47% of our sales in the quarter, they generated 54% of our shipping profit.

Considering a restructuring and rationalized product sales in 2020, second quarter, same store sales growth was 33% on a year-over-year basis. Our Huttig group passionate program is the largest growth category of all of our national strategic initiatives. Adjusted for 2020 restructuring activities, our fastener sales increased 59% in the second quarter and increased 50% on year-to-date basis.

Our sales would have been more robust, but not for international shipping constraints, which affected product availability and for other issues related to the pandemic. So the quarter, adjusted for restructuring activity shipping margins in this category increased 930 basis points with the a 709 basis points increase on a year-to-date basis. While there may be potential for moderation of margins with these products to the supply chain opens up, we remain optimistic about the future growth potential this high margin category brings.

Looking at other strategic categories adjusted for 2020 restructuring the product rationalization activities, composite deck rail and trim products increased 18% for the quarter and 23% year-to-date. Exterior doors grew by 15.3% for the quarter and 9.4% on a year-to-date basis. Exterior door sales were the most significantly impacted category by supply chain disruption as compared to other categories. So demand and the category remains robust resulting in large open order files.

In addition to achieving strong strategic category sales grow and meaningful category mix shift, we also grew our aggregate shipping margins in these strategic categories by nearly 380 basis points for the quarter and 240 basis points on a year-to-date basis. In closing, we continue to operate in a rapidly changing business environment, where a number of different variables such as supply constraints, as well as market and pricing dynamics come into play. We will continue to manage these variables while making operational efficiency and focusing on what we see as significant opportunities within our growth plan.

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

Philip Keipp

Thank you. Bob. The business, once again delivered solid results across virtually every key financial metric while generating record second quarter net earnings. Second quarter of 2021 net sales were $247.4 million, which was $55.4 million or 28.9% higher than the second quarter of 2020. The impact from supply chain disruption and labor shortages is difficult to quantify, but would be additive to our 2021 growth. For the first six months of 2021, our net sales were $462.1 million, which was $67.1 million or 17% higher in 2020.

Our sales growth was driven by strong residential construction, a favorable pricing environment, if I grew up in certain strategic product categories. Across our national strategic categories, our largest growth was in the fastener, pre-finished door and deck rail and trim categories. Adjusted for restructuring activities announced in the second quarter of 2020 and for the product rationalization activities, our adjusted sales growth was 33.2% and 21.4% in the second quarter and year-to-date periods respectively.

As we move into the third quarter demand level remains strong with favorable sales trends to date, well against tougher comps as compared to the secondquarter, which is our easiest year-over-year comp quarter. Third quarter sales run rates could moderate somewhat based on the seasonality of certain direct business. However, this impact could be mitigated or offset by supply chain and supply chain offerings and gross margin was $55.3 million in the second quarter of 2021 compared to $38.7 million in the second quarter of 2020.

As a percentage of sales gross margin was 22.4% in the second quarter of 2021, compared to 20.2% a year ago, the first 6 months gross margins were $101 million compared to $79.6 million in 2020. As a percentage of sales year-to-date gross margins were 21.9% compared to 20.2% a year ago. Improved gross margin percentage reflects the variable impact from our focus and progress made on higher margin, strategic sales opportunities as strategic line for present a higher percentage of our overall sales as compared to a year ago.

For example, sales from our fastener program comprised a higher percentage of our overall sales in 2021 as compared to a year ago and generate significant and a higher margins in 2021, compared to 2020. Margins were also impacted by a favorable pricing environment and by operational improvements over inventory management resulting in lower provisions for excess inventory, as we continue to tightly manage stock levels.

The increase in our gross margin percentage is more pronounced, considering we get a disproportionate increase in direct sales in 2021 as compared to 2020, both in the second quarter and on a year-to-date basis. These sales are generally at lower margins as compared to warehouse shipments. Operating expenses increased $4.8 million to $39.5 million in the second quarter of 2021, compared to $34.7 million exclusive of the $1.5 million restructuring charge in the second quarter of 2020.

Personnel costs increased $4.4 million or 22.4% reflecting increased incentive compensation from improved operating results, wage increases and reinstatement of compensation reductions implemented in 2020. These increases were partially offset by lower medical costs. Non-personnel costs increased $400,000 or 2.6%. The increase was primarily driven by higher fuel and insurance costs, which were substantially offset by an improved bad debt provision in the second quarter of 2021 as pandemic-related disruption continued to subside.

Overall, our cost structure was effectively leveraged against higher sales volume. As a percentage of net sales and operating expenses were 16% and the second quarter of 2021 compared to 18.1% a year ago, after adjustment for the $1.5 million restructuring charge in 2020. For the first six months ended June 30th, operating expenses increased $2.7 million to $76.4 million compared to $73.7 million in the first six months of 2020, which excludes a goodwill impairment charge of $9.5 million taken in the first quarter of 2020.

And the implementation mentioned $1.5 million restructuring charge personnel costs increased $3.8 million or 9%. They increase variable incentive compensation from improve operating results, wage increases and reinstatement compensation reductions implemented in the second quarter of 2020, as part of the pandemic actions. These increases were partially offset by lower medical claims.

Non-personnel costs decreased $1.1 million or 3.4%. Expense reductions on discretionary spending items along with an improved bad debt provision offset increases from higher fuel and insurance costs. Overall, our cost structure was levered against higher sales volume. As percentage of net sales operating expenses were 16.5% in the first six months of 2021, compared to 18.7% a year ago, adjusted for the goodwill impairment and restructuring charges.

Operating income in the second quarter was $15.8 million compared to $2.5 million a year ago. Adjusted for the $1.5 million restructuring charge in 2020 second, quarter of 2020 operating income was $4 million. For the six months ended June 30, operating income was $24.6 million compared to an operating loss of $5.1 million a year ago. Adjusted for the $1.5 million restructuring charge $9.5 million non-cash goodwill impairment charge 2020 year-to-date operating income was a $5.9 million.

To restrict working capital management and improved operating results, we continue to significantly reduced debt levels on year-over-year basis. Pursuant the terms of our senior credit facility, we also achieved favorable interest rates based on improved liquidity levels. As a result, our second quarter interest expense declined 33% from $900,000 in 2020 to $600,000 to 2021.

On a year-to-date basis, Interest expense declined 41% from $2.2 million in 2020 to $1.3 million in 2021. As a result of the foregoing, we reported net income of $14.9 million in the second quarter of 2021 compared to $1.6 million a year ago. Adjusted for the $1.5 million restructuring charge in 2020, adjusted net income was $3.1 million.

On a year-to-date basis, net income was $23 million in 2021 compared to an adjusted net income of $3.7 million a year ago, which excludes the $9.5 million goodwill impairment charge and the $1.5 million restructuring charge. Regenerated adjusted EBITDA of $17.4 million during the second quarter of 2021, compared to $5.7 million in the second quarter of 2020 for the 6 months ended June 30, adjusted EBITDA was $27.9 million compared to $9.2 million a year ago.

Turning to the balance sheet, we get total debt of $99.3 million that June 30th, 2021 compared to $127.3 million a year ago, a reduction of $28 million. The decrease in debt is primarily due to strong operating results, improved working capital management. Total available liquidity was $100.7 million at June 30th, 2021 compared to the $56 million a year ago, representing an increase of nearly $45 million. This concludes our prepared remarks on our second quarter financial performance.

Looking forward, we remain optimistic for the balance of the year based on strong residential construction, favorable pricing environment and the continued progress and profit contribution from our strategic categories.

Operator, we will now take questions.

Question-and-Answer Session

Operator

[Operator Instructions] and your first question comes from the line of Josh Chan with Baird.

Josh Chan

Hi, good morning, John, Bob and Phil. Thanks for taking my questions and congrats on a strong quarter. I guess my first question I wanted to ask about is sort of supply chain on, on the Millwork side of things you mentioned that -- that's one of the more challenge areas, so just maybe some more color on how the availability has trended through the quarter and what you're seeing into, into July with, with the supply chain side of things?

Bob Furio

Sure. So this is Bob we've been on allocation for the past few months and that's been a little bit choppy, but we have been getting a consistent supply of material. We are in constant communication with our, with our vendor and talking about the plans and the changes that they've been implementing, which had a positive impact to date. So we expect that to continue, to improve. But they are also faced with support with the raw material supply challenges as well.

It's a global issue, so remains a challenge for everybody, but we are expecting things to slowly improve as we move forward here. John, I don't know if there's any color that you would want to provide?

Jon Vrabely

I think you, I think you've covered it.

Josh Chan

Okay, that's helpful. Thank you. And I guess my follow-up is it's on labor. How, how were you seeing labor availability at your facilities and how confident are you that you can find the labor that you need to, to serve the, the expected demand into, into the second half?

Bob Furio

Yeah. So this is Bob again. To be very Frank, John touched on it in his opening comments about things and challenges that we faced a year ago that are still prevalent today. Labor is certainly one of them. When you look at the amount of available workforce that's out there today if you scratch your head, try to understand why, and there's all kinds of reasons, political included as to potentially why that may be.

But if there is a major challenge with finding and keeping labor in our employment, it's not isolated to Huttig. Every industry is, is facing the same issues. So it is a challenge, but we have we have addressed it in a number of ways, including wages and incentives to bring people on and to retain them. But for the near future our expectation is we will be faced with the same challenges that we've been faced that we've been facing over the last 12.

Josh Chan

That's great. Yeah. Thanks for your time. And I will come back in the second half

Operator

Again [Operator Instructions] Okay. At this time there are no further questions.

Jon Vrabely

Thank you, waiting. In closing the market, we operate in today. Every number of unique variables create an unusual environment with many challenges. The confluence of the variables have gone in grid and detracted from our operating results, quantifying the impact of these variables to be highly subjective.

However, in general, we believe the opportunities ahead outweigh the benefits derived from the market families, once supply chain challenges are resolved and market dynamics normalise. While managing through this environment, we successfully reduced our expense pressure in right side of our inventory levels to efficiently support our operations for establishing the solid foundation for future growth.

At the same time, liquidity improved to $100.7 million, providing ample room for future investments in the business. Looking forward we will continue to focus on executing our plan, while anticipating and preparing for changes in the environment. Our performance in the second quarter and over the course of the past 18 months is the result of the commitment and dedication of our entire team of associates.

I am so very proud of the entire organization as our collective efforts have positioned our company well for continued success. I want to thank our entire team 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 people to place their trust in us, to care for their business.

Finally, I thank you for your ownership and interest in our company and your participation in our call today. But before speaking with you again, when quarter results,

Operator

Thanks everyone for joining today's conference call. You may now disconnect.