Q4 2019 Earnings Call

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Good morning, and welcome to the Huttig building products fourth quarter 2019 earnings call participants will be in listen only mode until the end of the call. When the company had a question and answer session.

Well my questions to one question and one follow up question I would now like to turn the call over to fill up <unk>, Vice President and Chief Financial Officer. Please go ahead sorry.

Thank you and welcome to clinics fourth quarter 2019 earnings call.

With me this morning, as John <unk>, President and Chief Executive Officer.

Furious executive Vice President and Chief operating Officer.

During the call today, we will discuss our fourth quarter and full year 2019, operating and financial results and provide commentary on our progress in executing our strategic growth initiatives.

Following the prepared remarks.

No the lines for questions.

Let me take a moment to remind you get today's discussion reflects management's views as of today.

These forward looking statements.

Actual results could differ materially from those anticipated disclaims any obligation to update information discussed on this call as a result to develop Korea afterward.

Also to the extent you're listening to this call on replay.

Summation couldn't have already changed additional information about factors that could potentially impact. The financial results is included in the earnings release that Youve yesterday and in our filings with the FCC.

During this call certain non-GAAP measures will be discussed a description of any non-GAAP adjustments. The reconciliation to the most comparable GAAP measures can be found in the earnings release issued yesterday and on the company's website at Www <unk>.

<unk> Dot com.

Today's call is being webcast livens be recorded.

Yes. Good question you will be included in our life transmission in any future use up the recording.

A replay the call on Investor Relations page.

The website under financials now, it's my pleasure to turn the call over to Bob.

Thank you Phil Good morning, Thank you for joining our fourth quarter and year end 2019 earnings call.

I will provide an update on our operational sales initiatives and discuss specific factors that affected our fourth quarter full year performance.

Phil will then discuss our overall financial performance for the quarter in fiscal year.

Well, we're not please.

Performance in 2019, there were a number of factors that impacted our results, but I will discuss in more detail, including significant trends. The clearly indicate our performance is turning the corner.

Our sales declined 47.6, knowing what 3.3% in 2019.

Full year 2019 sales decline was due to a combination of factors, including market softness in the first half a year temporary disruption from our ERP system upgrade commodity pricing and marketing, which is not what products category and the impact from our de emphasis commoditize products.

Sales.

Well the market show modest signs of recovery in the second half the year.

It was primarily concentrated in the fourth quarter. It was heavier in the multifamily stagnant well we have less exposure.

The disruption from our ERP system upgrade is behind us and we have seen signs approaching stabilization and the wood products category.

Sales in the fourth quarter of 2019 were down 15.8 million were 7.8% as compared to the prior year quarter.

Precipitous decline quarterly sales was primarily related to higher than normal sales mix of commodity fasteners in the fourth quarter of 2018.

As well as our efforts to rationalize high commodity.

Certain categories, and a 20% decline in wood product category sales.

And it your perspective, the average gross profit <unk> total sales declined 15.8 million in the quarter was 13.9%.

Compared to our total gross profit this quarter of 19.7%.

As we began to see some level of traction our sales initiatives in 2019, our margins increased 60 basis points and 30 basis points in the third and fourth quarters, respectively as compared to a 30 basis point decline in the first six months of a year.

In addition, the fourth quarter increase of 30 basis points was negatively impacted by 20 basis points. That's a result of liquidating inventory on a portion of the rationalize categories.

Well, we're seeing signs of you're achieving the sales mix and margin improvement. We are working towards our primary challenge continues to be we simply have not executed our sales strategy within that timeframe. We had originally anticipated.

We can and will do better to expedite our strategy as we continue to build off the momentum from customer wins.

Taking a number of steps to put ourselves in a better positioned to expedite our growth, including realigning our sales structure for certain strategic product launch.

From an expense perspective, although our expenses were down 600001 point 9 billion for the quarter in your respectively. We were unable to lever our fixed cost structure due to our lower sales volumes.

Fourth quarter, we initiated cost reduction actions across personnel and certain nonpersonnel expenses recorded a severance charge of $800000 in the fourth quarter.

We also had a number of inefficiencies onetime transfer cost in our branch network.

<unk> byproduct transfer requirements.

Other operational necessities to rightsize, our inventories on a location basis.

These inefficiencies dissipated in the fourth quarter, and we expect them to further dissipate as we move forward.

In summary, while we are not pleased with our financial performance. Our associates have worked very hard to meet the Pulitzer wells challenges over the last three years.

We are optimistic that are focused on profitable sales along with cost control actions will chief financial success for our organization.

Now I'd like to turn the call over to fill the discuss our financial performance. Thank you Bob.

Fourth quarter 2019, net sales were 180.4 million, which was 15.8 million or 8.1% lower than the fourth quarter 2018.

For the year 2019, net sales were 812 million, which was 27.6 million or 3.3% lower than 2018.

As Bob mentioned, we have made a concerted effort to shift focus toward profitable sales categories, which in the short term negatively impacted our sales force.

Gross margin was 19.7% of net sales during the fourth quarter of 2019 compared to 91% in the fourth quarter of 2018.

For the year 2019, gross margin was 20% of net sales compared to 19.8% a year ago.

The increase in that gross margin percentage was more pronounced in the second half of your coinciding with our focused mix shift.

Operating expenses decreased $600000 will only 4% to 43.6 billion, representing 24.2% enough sales in the fourth quarter of 2019 compared to 44.2 million or 22.5% of net sales in the fourth quarter of 2018.

The decrease in operating expenses was primarily attributable to lower non personnel costs. That's personnel costs were flat with 2018.

Fourth quarter 2019 personnel costs included 800000 dollar severance charge related to cost reduction actions.

Non personnel costs declined primarily due to lower discretionary spend including advertising promotion the travel costs.

These declines were partially offset by an increase in insurance charges.

For the year.

Operating expenses decreased 1.9 million or 1.1% to 165.6 million, representing 20.4% of data sales.

2019, compared to 167.5 million or 90.9% enough sales in 2018.

Personnel expenses decreased $700000 in 2019, as lower wages variable compensation the contract labor costs were partially offset by the aforementioned 800000 dollar severance charge and a significant increase the medical claims which were $1.5 million higher than in 2018.

Non personnel expenses decreased 1.2 million in 2019.

Early due to nonrecurring litigation settlement cost of approximately 3.3 million in 2018, offset impart by increases in equipment facility costs higher insurance costs, depreciation and amortization cutting costs from our recent software upgrade.

Excluding costs related to settled litigation in 2018 operating expenses would have been approximately 90.5% themselves.

Net loss from continuing operations was 9.4 million during the fourth quarter of 2019 as compared to 6.9 million in fourth quarter of 2018.

Putting year, we generated net loss from continuing operations of 21.3 million.

6 million in 2019 in 2018, respectively.

Loss from continuing operations in 2019 includes a 12.7 million dollar noncash charge related to an increase in our deferred tax valuation allowance.

Adjusted EBITDA was a negative 4.99 during the fourth quarter of 2019 as compared to negative 4.1 million for the fourth quarter of 2018 [laughter] full year. Adjusted EBITDA was 5.2 million and 10.2 million in 2019 of 2018, respectively.

We recognized a net loss from discontinued operations with 40 $400000 into fourth quarter of 2018.

As losses related to a chart a change in estimate.

Okay with the remediation formally on property in Montana.

Next I will discuss our balance sheet and liquidity.

We had total debt at 136.8 million at December 31st 2019, compared to 138.99 a year ago.

Cash provided by continuing operating activities was 6.6 million in fiscal 2019 compared to cash used up to 26.4 million in fiscal 2018.

Total available liquidity was 33.7 billion as of December 31st 2019, as compared to 32.3 million at December 31st 2018.

Pay down bank debt by approximately 16.7 million in the fourth quarter of 2019, bringing the outstanding balance under revolving credit facility.

131.3 million, that's compared to 132.3 million a year ago.

Liquidity levels very with the seasonality of our business are generally lower at the ended the year due to more collateral levels, coupled with lower operating results.

Now I will turn it over to John for closing comments.

Thank you Phil.

Entering 2019, the entire organization was very positive as it was our first full year that all of the investments we made in the national expansion of our pre finished door service capabilities and how to great products were 100% operational since embarking on our strategy.

Our 29 team sales and gross profit plan was focused and straightforward with three primary goals.

The first continue to grow our share of our companywide five strategic product categories.

Our companywide strategic categories are the categories that we have made investments in over the past several years and the most valued to the supply chain.

Our generally our highest gross margin categories and provide the greatest opportunity for future profitable growth.

Even though some of these categories are new to Huttig on a national level <unk>.

They represented approximately 46% of our total sales in 29 team.

Up from approximately 42% entering 2017.

The continued growth of these categories will result in higher gross margins, while simultaneously, allowing us to leverage our cost structure.

Second is continuing to grow our full program how to equip fastener customer conversions.

As a result of not having the complete lineup package fasteners until mid 2018.

Our 2018 sales mix was heavily weighted towards more price sensitive transactional sales versus our 29 keen focus of full program sales.

Heading into 2019 with the full product line in inventory available to sell we were able to focus on selling the entire category and a more balanced and normalized manner and intentionally walked away from some level of transactional sales, including direct sales that we capture in htwo.

He 18.

Well I subtle once it's skewed our total year over year sales comparisons.

2019, we tripled the number of coal dealers that we have fully converted to the Arctic grip fastener program and our only scratching the surface of the total opportunity.

As a result of the revenue mix shift that we achieved in 2019, our total gross profit in the category increased by nearly 300 basis points.

We continue to grow our customer conversions the sales mix shift will continue to increase our gross profit in the category.

Third rationalize our product lines deemphasizing or in some cases fully eliminating low margin quite sensitive I'd be commoditized products, where we do not add value.

Heading into 2019, we began the process of identifying and deemphasizing non strategic non value add highly commoditized products across all of our categories.

Collectively this effort in conjunction with the sales mix shift in sales decline of wood products accounted for virtually 100% of the total revenue declined 29 team.

During the first several months of 29 team as planned we were achieving year over year sales growth in building products and no work categories.

The positive momentum we were experiencing stalled upon the goal widen implementation of our ERP upgrade in late spring.

Over the course of the next several months the market softened.

And combined with the challenges of the ERP upgrade and our de emphasis of more commoditized products, we began to experience year over year sales declines in virtually all product categories.

As discussed previously with the progress we are making through our focus shift towards higher margin product categories and through our product rationalization plans in the second half of 2019, we began to realize the increase in gross margins that we had anticipated.

Moving forward through our focused efforts. We also expect to recognize continued volume growth in these categories.

As we move into 20 Twond, we continued to see the signs that our strategy is working.

Without providing specific guidance the sales decline we experienced in the fourth quarter has dissipated and we've seen an increase in sales volume as compared to sales volume in 2020 as compared to 2019 through the first two months of the year.

At the same time, we're also seeing an improvement in our shipping profit percentage early in 2020.

As we continue to build on past and future customer wins, we expect that the underlying momentum. We are seeing will grow and provide sustainable returns that will position caught it to be more diverse and profitable company.

In closing I strongly believe in our company our strategy and our people.

As we continue to make progress and fully implementing in executing our plan. We are seeing tangible underlying trends that this strategy will deliver the results we are working to achieve.

Operator, we will now take questions.

Ladies and gentlemen to ask a question you want me to press Star one on your telephone to withdraw your question press. The pound key please limit questions to one question and one follow up please standby well, we compile the Q and a roster.

And our first question comes from Scott Laura Please.

Please proceed with your question.

Hi, John are you today.

Morning.

Hi.

No. That's the superbowl stock is call it today, it's $1.20 cents.

Or cells or 800 million, a year and all north to SAP is $32 million.

What is going to do to turn it around specific.

Well, specifically as we laid out.

It's moments ago, we are working to continue to roll our sales in our five key strategic companywide categories.

We believe that the continued growth in those categories as well assist us in changing the margin profile the company, while allowing us to leverage our topic structure.

We are also and have also taken actions to actually bringing the cost structure down.

In 2020 is related to 29 team.

And I will tell you Scott that based off of a 2019 results.

We believe that through these efforts we will begin to make.

A significant improvement and the performance of the company, both operationally and financially in 2020.

[laughter] the follow up gone Oh is Cedric alternative merger and acquire.

Never think of that.

Well being a public company Scott you know the board as always.

But gated to listen to any potential.

Interested parties.

Obviously.

That is there it's not something that you know that we discuss or or disclose but I will tell you that board takes their fiduciary responsibility very seriously and if there weren't opportunity.

I can't tell you that they certainly what evaluated bearing in mind, the best interest of the shareholders.

Very good I mean, you happy to legal responsibility, John and we've heard the same song and dance.

We four years or I think it's time the board and you hired an investment adviser.

Thank you.

Ask a question you will need a press star one.

And our next question comes from James Winchester with <unk>. Please proceed with your question.

Yes, good morning.

I caught part of the a charge the expensive downsizing or rightsizing infrastructure sales infrastructure in the fourth quarter could you just.

Review, what I'm expenses were related to.

Reducing the cost the cost structure in the fourth quarter.

Including the 800 K of compensation cost.

And what you would anticipate the cost.

Benefit a would be from that action and.

2020, thank you.

Good morning, Jim the 800000 dollar severance charge was related to some personnel cost reduction.

That we initiated into fourth quarter on a go forward basis.

We would expect that those reductions will.

Generate savings in excess of a million dollars. In addition to some other cost reduction actions that we've taken including reducing.

The the disruption that we had enough branches.

By virtue and Bob alluded to this by virtue of some of the inventory transportation costs that we incurred and not only 2019 between 18 as well.

Okay and.

Do you have any sense of.

Whether there will be a benefit or at least a reduced expense associated with the completion of the ERP implementation.

For 22, so I think that there.

Hi, This is Bob I I think that there certainly will be some benefit it provides us some flexibility that we did not have then our old system, where customers are actually able to go into our go away program be able to price the doors for their customers enter their orders into our system expedite that entire process.

I think it a lot from a process standpoint, it's really read a lot of efficiency.

Eliminates mistake for 'em orders that are having to be read he did expedites Ah things for our customers is available for them and will be available to them 24, seven so I think that that's a very a very strong benefit that we that we have today that we didnt have previously.

Thank you.

And I'm not showing any further questions at this time I'll now turn the call to John freely for any further remarks.

Thank you operator.

I would like to thank all the Arctic associates for their dedication and hard work great put forth on behalf of our stakeholders I also want to thank our customers and supply partner for the trust. They place enough every day to care for their business. Thus.

Finally, I. Thank you for your interest in ownership and the company and for your participation in our call. Today, we look forward to speaking with you again next month, when we report our first quarter results.

Ladies and gentlemen, this concludes todays conference. Thank you for participating you may now disconnect.

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