Q3 2019 Earnings Call

<unk> building products third quarter 2019 earnings call participants will be any listen only mode until the end of the call. When the company will have a question and answer session to ask a question sorry that session you'll need to press star one on your telephone also we ask that you. Please limit yourself to one question and one follow up.

You may get back into the Q as time allows as a reminder takes program is being recorded I would now like to turn the call over to built.

Vice President and Chief Financial Officer. Please go ahead Sir.

Thank you and welcome to politics third quarter 2019 earnings call with me. This morning, as John Bravely, President and Chief Executive Officer, Bob periodically to Vice President and Chief operating officer. During the call today, we will discuss our third quarter financial results and provide commentary and other aspects of our business.

Following our prepared remarks, the operator, we'll 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 may include forward looking statements.

Actual results could differ materially from most currently anticipated, Kentucky cutting disclaims any obligation to update information discussed on this call as a result of developments that occur after work.

Also to the extent you're listening to this calling and replay information could have already changed additional information about factors that could potentially impact. The financial results is included the earnings release issued yesterday.

Our filings with the FCC.

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 all the company's website at www Dot Huttig dotcom.

Today's call is being webcast live and is being recorded did you ask the question. It will be included in our life transmission and in any future use of the reporting you can replay the call on the Investor Relations page of the website under press releases now it's my pleasure to turn the call over to Bob.

Thank you Phil Good morning, Thank you for joining our third quarter 2019 earnings call.

I will provide an update on our operational performance, Phil will discuss our third quarter and year to date financial results.

Although the housing market has shown some recent left total residential housing starts remain lower compared the first nine months of 2018.

What are the largest market drivers, it's single family starts which were down nearly 2% than the first nine months of 2019 as compared to 2018.

Additionally, the temporary disruption caused by our ERP system upgrade which was completed in the second quarter has dissipated and is now behind us.

However, as expected and as discussed in our last call. There was some residual impact as we move to 34.

Perhaps the largest impacting the disruption was in our millwork production business has reported within our network sales category.

This is due to the nature and complexity of the quoting order entry in underlying production processes.

Sales in this category were down 5.2 million in third quarter as compared to a year ago.

Oh, we cannot determine the exact dollar impact attributable to the system disruption. We do believe it had a meaningful impact in the context third quarter millwork sales decline.

Alright team has worked hard to know addressing the underlying issues. So that we can now returned to a more normalized process.

During the quarter sales of what products are down 4.6 million as compared to a year ago.

10.4 million on a year to date basis.

The decline is largely due to market volatility in multifamily and commercial projects in the markets, we serve as well as the impact from commodity pricing across certain products within the country within the category and our continued de emphasis of lower margin highly commoditized product categories.

[noise] there've been a number of positive trends in our business, which further report reinforces our focus across our strategic growth product categories. For example, you are beginning to experience higher margin trends across the majority of our hundred group business, particularly in the fastener category, while also folks.

As seen on increasing sales out of Waterhouse.

We have made a concerted effort to focus our sales growth on higher margin products, which is reflected in our shipping margins across these ones. It is also indicative of the sales declined on lower margin more commoditized product products that are subject to more competitive pricing environment.

Sales to our traditional core customer base remain a strong focus point for us.

We view this channels a significant growth opportunity as it ties in nicely with our strategic initiatives.

The results from our initiatives have taken root and are showing progress has an illustrative example, in the third quarter sales of package fasteners to pro lumber dealers were up approximately 79% an underlying margins grew approximately 590 basis points as compared to the same.

Period, a year ago.

These trends are in line with our overall fastener market strategy based on our long term projected sales mix in this category.

From a working capital perspective, what progress has been made we still have much work to do.

Our overall inventory levels are down $11 million or 70% from a year ago.

Great fastener inventories are down approximately 9% beginning the year.

However, we continue to have a significant amount of fastener inventory from the initial inventory build over the last two years we.

We have been and continue to analyze and rebalance our fastener inventory.

Selectively fulfilling replenishment replenishment requirements through internal transfers, while placing strict controls on product procurement.

While this process has added labor and transportation cost to our operating expense structure. We expect to have the majority of work completed by the end of 2019.

We carried a full breadth and depth fasted products across our branch network to support future sales growth.

As we continue to execute our sales plan and gain share across all customer segments, we will continue to reduce and right size our fastener inventories.

Working capital and more specifically inventory management remains a top priority.

Now I'd like to turn the call over to sell to discuss our financial performance. Thank you Bob third quarter 2019, net sales for 215.7 million, which is 6.3 million or 2.8% lower than a third quarter 2018.

Through the first nine months of 2019 net sales were 631.6 million, which is 11.8 million or 1.8% lower than 2018.

As Bob mentioned, our sales performance is indicative of the headwinds we have faced in 2019.

Gross margins were 20.7% of net sales during the third quarter 2019, compared to 20.1% a year ago.

The increase generally reflects our focus on higher margin sales opportunities and related changes in sales mix, including the higher margin trends in the third quarter to Bob previously discussed.

Through the first nine months of 2019 gross margins were 20% of net sales compared to 19.9% a year ago.

Operating expenses were 41.4 million during the third quarter of 2019 compared to 41.1 billion a year ago.

Personnel costs decreased 300000, as lower compensation and contract labor costs are partially offset by higher medical expenses.

Non personnel costs increased 600000 for the quarter, primarily due to maintenance cost and depreciation including software depreciation from our recent ERP system upgrade.

There are decreases in operating expenses were offset by higher facility costs, including those from our expansion efforts as a percentage of sales operating expenses increased to 19.2% and the third quarter of 2019 compared to 18.5% in the prior year period.

Year to date operating expenses for 122 million compared to 123.2 million in 2018.

Personnel costs decreased 700000, as lower wages and variable compensation costs were offset by a significant increase in medical costs, which were $1.6 million higher in 2018, driven by higher medical claims non personnel costs decreased 500000, and the first nine months of 2019 Prime.

Really due to nonrecurring litigation settlement costs of approximately 3.4 million in 2018, which were largely offset by increases in facility costs, including increases from our expansion efforts depreciation and amortization, including cost from recent software upgrade and higher maintenance costs.

As a percentage of sales operating expenses were 19.3% in 2019 compared to 90.1% in 2018.

Adjusted for nonrecurring litigation settlement costs operating expenses were 18.6% of sales in 2018.

Operating income was 3.3 million in the third quarter of 2019 as compared to 3.5 billion a year ago.

First nine months ended September Thirtyth operating profit was 4.4 million and 5.1 million in 2019 in 2018, respectively.

We recorded an 11.8 million dollar noncash tax charge in the second quarter 2019 related to an increase not a deferred tax asset valuation allowance. The increase was required based on applying the criteria under us GAAP most of our net deferred tax asset is comprised of federal tax loss carry forwards, which will now.

Began to expire until 2030, the deferred tax valuation allowance will be assess each reporting period and the amount of our net deferred tax assets considered realizable could be adjusted in the future periods based on our financial performance. The net operating loss carryforwards remain available to offset future taxable income.

As a result of the foregoing we reported net income of 1.6 million during the third quarter 2019, as compared to net income of 1.2 million in the third quarter 2018.

Year to date after noncash tax charge in 2019, we incurred a net loss of 11.9 billion, that's compared to net income of 900000 in 2018.

Adjusted EBITDA was 5.3 million during the third quarter 2019, as compared to 5.5 million for the third quarter of 2018.

Adjusted EBITDA was 10.1 billion to the first nine months of 2019 as compared to 14.3 million a year ago.

2018, adjusted EBITDA reflects an add back a 3.4 million primarily for the nonrecurring litigation settlement costs.

With regard to our operating leverage we ended the third quarter of 2019 with total debt of 153.5 million compared to 168.3 billion a year ago, a decline of 14.8 million.

Under our senior credit facility declined 15.8 million.

163.6 million a year ago to 147.8 million.

During the quarter, we repaid 6.8 million against our senior credit facility.

We generated approximately 9.5 million and cash from operating activities in the third quarter 2019, compared to 13.0 million in the prior year period.

For the nine month period, our cash usage from operating activities declined by 46.6 million as compared to 2018.

57.1 million to 10.5 million.

Lower level of cash utilization for the current year, primarily due to improved working capital management.

Marine sharply focused on recognizing debt reduction opportunities through improved working capital management and the cash provided from operations now I would turn the call over to John for closing comments.

Thank you Phil.

During our last call I stated that our two biggest challenges where margin erosion and expense management.

As discussed earlier on this call we are making progress in growing warehouse sales of our strategic product categories, while deemphasizing lower margin commodity categories. As a result, we're beginning to see the positive impact our progress as having as we increased our gross margins in the quarter by 60 basis point.

Thanks to 20.7% over the prior year quarter.

Going forward, we will continue to focus on profitable growth through increasing share of our strategic product categories across our core and targeted growth customer segments.

While we are making progress and beginning to see the positive results in increasing our margins we have not made meaningful progress in leveraging the expense structure.

Regardless of the negative impact that market volatility.

De emphasis of lower margin more commoditized products and the ERP upgrade has had on our 2019 sales performance. We are not executing our growth strategy at a faster pace to effectively leverage the investments we have made to support the strategy.

Illustrate Italy, using third quarter 2019 results as compared to the same period in 2018 and 26 can.

We have prioritized the expense categories across personnel and non personnel costs that have increased at a much faster rate than sales over the past several years.

Even though the business and structure has changed significantly and although this illustration is based on one quarter is generally representative of the increase in our expense structure.

In addition, we consistently utilized 2016 results as the comparative benchmark as it was the launch point for our strategic growth initiatives and underlying investments.

Total personnel costs are down 300000 in 2019 as compared to 2018, but have increased 3.3 million as compared to the same period in 2016.

The largest driver of the increase in salaries, which are virtually flat with 2018.

But have increased 2.1 million over the same period in 2016.

Total non personnel costs have increased 600000 as compared to 28 team.

4.3 million as compared to 26 team.

The largest increase in non personnel expense.

In contract whole expense, which is down $40000 to 2018 and up $840000 2016.

The increase is primarily driven by the internal rebalancing and transferring a fastener inventory.

But the majority of that process will conclude by the end of 2019, and we anticipate that we will experience a meaningful reduction in contract all expenses in 2020.

The second largest increases in building rent expense.

We expanded our cycle, Maine, and Davenport, Florida locations to accommodate the expansion of our pre finish operations.

And have added warehouse space to accommodate the national expansion of Huttig rent products.

Some of the additional space to accommodate the hottest grip expansion is on short term leases and we anticipate exiting much of this temporary space in 2020.

Building rent in the third quarter of 2019 was up $280000 as compared to 2018 and $730000 as compared to the same period in 2016.

Even though we have faced challenges in the execution of our plan and our financial results have been slower to materialize than planned.

We know our growth strategy is viable and we're committed to taking the necessary actions to align the cost structure with our projected revenue in a manner that does not inhibit our ability to continue to grow our strategic product categories.

This is a delicate balance as we need to ensure that we have the appropriate structure and resources to execute our plan.

Operator, we will now take questions.

So certainly once again, ladies and gentlemen, if you have a question at this time. Please press Star then one on your Touchtone telephone. If your question has been answered and you'd like to move yourself from the Q. Please press the pound key also as a reminder, please limit yourself to one question. One follow up you can get back into queue. As time allows our first question comes the line of Alan Weber from.

Advisors your question please.

Good morning.

Can we talk about growing can you talk about the exact announcement that you made recently what that means that the company and also.

I think in previous calls you more specific about a high degree of roll out can you just talked about kind of where that is and in general terms. What your expectations are for next year.

Yes, so I.

I will I'll take the I'll take the first question.

In Asia and Bob If you don't mind, maybe you can handle the second question on.

So with regard to exact we have.

Had a very strong relationship with a six cents.

Executive purchased Kemper Tech we had a.

15 year relationship with timber tech and very strong relationship and Fortunately went to protect was purchased by AIDS equity were able to continue that relationship going back to 2014 or 2015, we were successful in picking up the age that product line across most of the geography.

That we had at the time, where we are authorized a cell tumor tech.

We have.

Obviously continued to build and grow.

The relationship with NASDAQ as a key strategic supply partner to hike.

Asia underwent some changes in distribution in the western part of the country towards the I would say end of Q2, maybe beginning of Q3 and as a result of those changes.

We were successful in picking up distribution rights for all age that products in the Pacific Northwest.

It represents a significant growth opportunity for us in 2020 as a second is arguably the most.

Recognizing preferred brand.

Composite for in products and certainly high and.

Composite deck and rail products.

So.

As we move forward there are opportunities for us to continue to grow our relationship with a exact but we're very pleased that they saw us as a key partner to help them execute their growth plans certainly in the Pacific northwest as we head into 2020.

So as it relates to how did grip on.

I think the best way to stated is pretty much the follow up from some of my comments.

We knew that this is going to be a long term play in our intent was never to be in the commodity part of the business. While there is a portion of that that we do have to participate in.

Our focus has always been on selling programs programs with packets, nielsen's fruits and getting that shelf space and.

We knew that that was going to take some time to get.

Meaningful market share, but we knew it was long term play as well that opportunity continue grow market market share is out there for us and we have focused we are taking a specific focus this year on getting those programs in place we're walking into the selling season once again.

Having dealers willing to convert their stores through the winter months and our focus is exactly there to deemphasize commodity products sell profitable programs.

And in terms of is there any like data points me you talked about revenue being up what the revenues are there or what the number of new customers are.

Bops deferring to me so too.

Answer that question Alan I would just tell you that.

We are making.

Probably more solid progress.

Penetrating.

Our historical core customer segment pro lumber dealers.

Then we did certainly in 2018 and I think that is represented in some of the illustrative examples that Bob provided earlier in the call.

There is still ample opportunity for us to continue to grow in that segment.

I would tell you that we've also done I think an admirable job of growing particularly in the.

Roofing wholesale customer segment.

But to be Frank.

Across drywall houses farm and ranch supply houses concrete supply general construction supply houses, we have probably not executed to the degree that we had originally planned and that is contributing to the fact that we still have a.

Significant amount of excess faster inventory today, because we are fully.

Inventory across the entire category from a breadth and depth perspective to service all.

Customer segments.

So we have work to do across some of the targeted growth customer segments.

There is lots of opportunity to continue to penetrate pro lumber dealers as well as looking supply houses across all of the geography that we service.

Thank you and this does conclude the question and answer session of today's program I'd like to hand, the program back to John for I believe for any further remarks.

Thank you operator.

I'd like to thank all of the hottest associates for the dedication and hard work they put forth on behalf of our stakeholders.

I also want to thank our customers of supply partners for the trust they placed in US every day to care for their business.

Finally, I. Thank you for your interest in ownership in the company is for your participation in our call today.

Look forward to speaking with you again in February one way to report our 2019 annual results.

Thank you, ladies and gentlemen for your participation in today's conference. This does conclude the program you may now disconnect good day.