Q2 2020 Huttig Building Products Inc Earnings Call
This will be in listen only mode until the end of the call when the company well have a question answer session.
<unk> answer session. We ask that you. Please limit your questions to one question and one follow up question.
I would now like to turn the call over to Mr., Philip <unk>, Vice President and Chief Financial Officer. Please go ahead Sir.
Thank you and welcome to <unk> second quarter 2020 earnings call.
With me this morning, as John Bravely, President and Chief Executive Officer, and Bob You're Young Executive Vice President and Chief operating officer. During the call today, we will discuss our second quarter 2020, operating and financial results and provide commentary on our continued efforts to combat the effects of the cold at 19 pandemic.
Following their prepared remarks, the operator, we'll open up a line for questions.
We 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 bundles currently anticipated and public disclaims any obligation to update information discussed on this call because of developments that occur after learning.
In addition to the extent you are 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 in 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 again on the company's website at www Dot Dot com.
This call is being webcast live and is being recorded.
Ask a question it'll be included in our life transmission in any future use of the recording.
Can we play to call on the Investor Relations page of the website under financials.
Not as my pleasure to turn the call over to John for opening remarks.
Thank you Phil Good morning, and thank you for joining our second quarter 2020 earnings call.
After my initial I love any commentary on our quarterly results, Bob and Phil will discuss our second quarter operating and financial results in greater detail after which we will open the call for the Q and a session.
I want to begin by expressing my gratitude to all of our associates for the personal sacrifices they continue to make to solidify the future of our company store all public stakeholders.
The business environment during the quarter was volatile in challenging.
All of our associates have risen to the challenge demonstrating a level commitment to the organization and our customers that's far exceeded my expectations.
Our second quarter results are a testament to the genuine care and fortitude up our associates and I sincerely grateful to them for their continued dedication during a period of unprecedented volatility and uncertainty.
We began developing our cold 19 readiness and response plan in late February.
Finalized the initial version of the plan in early April, which we discussed in detail during our first quarter earnings call.
Based on the information that was available at the time, we developed a comprehensive plan and financial model for the second and third quarter 2020.
But the plan and financial model drove the actions we executed in the month of March and April.
We acted quickly aggressively and decisively to adjust our cost structure and work getting working capital levels across the entire organization to mitigate anticipated precipitous decline in sales related to the goal, but 19 pandemic.
Our actions focused on rightsizing personnel levels, reducing overall personnel cost spending all non essential discretionary spend.
Including planned capital expenditures and reducing our inventory levels.
Our second quarter operating results were significantly better across every key metric than our initial internal cobot Nike financial model and also reflect marked improvements over the prior year quarter in terms of net operating results working capital and liquidity.
In light of the serious pandemic related channels to the U.S. economy.
That we continue to suffer as well as all of the pandemic related challenges we have faith.
We're generally pleased with our second quarter performance and will be necessary adjustments as the environment continues to evolve.
I'll now turn the call over to bomb to discuss our second quarter operating performance.
Thank you John Good morning, everyone I will provide an update on our operational sales initiatives and discuss specific factors that affected our second quarter performance Bill will then discuss our overall pronounce your performance.
Sure.
From an operational perspective, we're very proud of our associates the way they responded in a very challenging environment.
As John stated these are unprecedented challenges faced throughout our entire organization from both a professional as well to the personal perspective.
Turning to our operating results our sales decreased $26.5 million were 12.1% in the second quarter of 2020.
After nearly 3% increase the net sales in the first quarter second quarter decline was caused primarily by changes in the operating environment created by the pandemic.
The impact on our sales was further pronounced as certain key suppliers experienced pandemic related supply chain disruptions.
The challenging environment slowed momentum from our strategic sales initiatives that we get achieved growth in certain key product categories.
As discussed in our most recent earnings call. In addition to our National brand 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 our efforts to shift product mix toward non commoditized products are generating the overall desired results.
Total gross margins were down 10 basis points in the second quarter as compared to last year. This reflects a shift in sales mix, including a higher proportional level of direct sales.
Shifting sales mix was in part driven by supply chain disruptions in certain product categories.
On a year to date basis, our gross margins have increased 60 basis points to 20.2%.
Some highlights related to our strategic sales initiatives include an 18% growth in fashion their warehouse sales with a corresponding margin increase of nearly 540 basis points.
Secondly, a significant portion of faster sales and margin growth has come from additional market share gains as we convert more core in targeted customer segments tour package now in school program.
Third sales increased finished stores, which is a key value add service proposition for our customers was negatively impacted in the second quarter due to market conditions created by the pandemic. However, the majority of customers and Mark said reopened demand has rebounded nicely in our order files.
[noise] are growing.
And fourth decade railing trim sales out of warehouse were up slightly despite the challenging environment with a margin growth a 20 basis points as compared to second quarter 2019.
These are just some of the highlights related to our strategic growth initiatives.
While we continue to focus on her 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 2020.
As previously announced we recorded a 1.5 million dollar restructuring charge in the second quarter related to the closure of our Columbus, Ohio location and the consolidation of our Selkirk, New York and doing some Connecticut facilities.
The Selkirk operations small only so building materials and the majority of the trading areas service myself or was also surface by Newington millwork products.
We anticipate minimal revenue loss and the consolidation provides the opportunity to leverage the larger fixed cost structure and newington, while eliminating redundant working capital.
Taken together, while we expect some level of lost revenues. We expect these actions will have a favorable impact on our operating results.
From an operating expense perspective, you for the four mentioned restructuring charge, we lowered our expense ratio by 70 basis points as compared to the second quarter 2019 from 18.8% 18.1%.
The improved leverage it's driven by cost reduction actions, we took beginning in the fourth quarter 2019.
Old with the actions taken as part of our Cobot 19 readiness and responds planned.
From a trend perspective April represented 50% of our total quarterly sales decline and the sales rebounded and they were necessary you recall personnel to ensure we continued to meet our customer service requirements.
From a working capital perspective, we reduced inventory levels $38.8 million for 26.3% in the second quarter.
While we still have work to do we could not be more pleased with the efforts of our field staff in driving and managing this process.
We believe we finished the quarter at a total inventory level that is relatively in line with where it needs to be the surface our current level sales.
Going forward, we will continue to adjust or inventory levels as demand dictates and will consistently focused on improving our turns.
Now I'll turn the call over to Farrell to discuss our financial performance. Thank you Bob.
As anticipated the coated Nike pandemic negatively affected our sales however, I called it 19 readiness and response plan growing overall improvement in our operating results relative to our initial pandemic forecasts and relative to prior year actual results across certain key financial metrics.
Second quarter 2020 sales were 192 million, which was 26.5 million or 12.1% lower than the second quarter 2019.
Right and sales was caused by the market impact brought by the pandemic plus some level supply chain disruption as certain suppliers.
The first six months of 2020 net sales were 395 million, which is 20.9 million or 5% more than 2019, our year to date sales performance reflects the pre pandemic growth we experienced in the first quarter.
Gross margin was 20.2% of net sales during the second quarter 2020, compared to 20.3% in the second quarter of 2019.
The change in margin is primarily related to sales mix as a higher proportion of our current net sales were from lower margin categories and from direct sales.
As Bob stated portion of the mix shifts is related to supply chain disruption in certain key product categories.
The impact on the mix change was mitigated by growth and higher margins in certain.
Strategic categories.
Through the first six months of 2020 gross margins were 20.2% net sales compared to 19.6% a year ago, reflecting the impact from our focus on higher margin sales opportunities.
As Bob stated, we recognized a 1.5 million dollar restructuring charge in the second quarter related to branch closure and consolidation activities.
We expect these activities, we substantially completed by the end of our third quarter.
Operating expenses exclusive of the $1.5 million restructuring charge.
Decreased 6.3 million or 15.4% 34.7 million, representing 18.1% of net sales in the second quarter 2020, compared to 41 million or 18.8% of net sales in the second quarter of 2019.
Personnel expenses declined 4.7 million, primarily related actions taken related to our coated 19 readiness and response plan, including workforce reductions wage reductions and suspension of contributions under our employer sponsored benefit plan as well as lower medical claims costs.
Non personnel expenses decreased 1.6 million as travel and other discretionary stainless curtailed and we recognize more fuel costs.
Year to date operating expenses exclusive on the aforementioned 1.5 billion restructuring charge were 73.7 million compared to 80.6 million in 2019.
Personnel costs decreased 6.2 million, primarily as result of expense reductions actions taken to response and pandemic, including workforce reductions weight reductions ansys suspension of contributions to our employer sponsored benefit plan as well as lower medical claims not personnel costs decreased $700000 as travel and other discretionary.
We spend was curtailed in the second quarter, and we recognize lower fuel costs.
Lower expenses were partially offset by higher workers' compensation and other insurance costs.
As a percentage of net sales again, excluding 1.59 restructuring charge our year to date operating expense ratio was 18.7% in 2020 compared to 19.4% in 2019.
We conducted a review of our goodwill and recorded a 9.5 million noncash impairment charge into first quarter of 2020.
Impairment was largely driven by the sustained decline in our market capitalization, coupled with the cobot 19 environment.
Operating income in the second quarter was 2.5 million adjusted for 1.5 million restructuring charge. We had operating income of 4 million compared to operating income of 3.3 million a year ago.
For the six months ended June 30, our operating loss was 5.1 million.
Adjusted for the 1.5 million restructuring charge and 9.5 million noncash goodwill impairment charge. Your to date operating income was 5.9 million compared to 1.1 million in 2019.
As a result of lower debt levels and favorable interest rates, our interest expense declined 50% year over year basis in the second quarter from 1.8 million to 900000.
One year to date basis interest expense was 2.2 million compared to 3.5 million a year ago.
We recorded and 11.8 million noncash tax charge in the second quarter 2019 related to an increase in our deferred tax asset valuation allowance.
The reserve increase was required based on under applying criteria under us GAAP most of our net deferred tax asset is comprised of federal tax loss carry forwards, which will not begin to expire until 2030.
The deferred tax valuation allowance will be assessed each reporting period and the amount of our deferred okay and thats considered realizable could be adjusted in future periods based on our financial performance.
Net operating loss carry forwards remain available to offset future taxable income.
As a result of the foregoing reported net income of $1.6 million in the second quarter 2020, compared to a net loss of 10.3 million a year ago.
Adjusted for the 1.5 million restructuring charge in 2020, and 11.8 million tax charge in 2019 net income was 3.1 million and 1.5 million in 2020 in 2019, respectively year.
Year to date, we incurred a net loss of 7.3 million as compared to a net loss at 13.5 million in 2019 adjusted for the 9.5 91 goodwill impairment charge and the 1.5 million restructuring charge in 2020.
Adjusting for the 11.8 million tax charge in 2019 year to date net income was 3.7 million in 2020 compared to a net loss of 1.7 million a year ago.
Adjusted EBITDA was 5.7 million during the second quarter of 2020, as compared to $5.1 million and the second quarter of 2019.
For the six month ended June Thirtyth.
Adjusted EBITDA was 9.2 million compared to 4.7 billion a year ago.
Turning to the balance sheet, we had total debt of 127.3 million at June Thirtyth 2020, compared to 160.3 billion a year ago.
The decrease in debt as 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 24.7 million in the second quarter of 2020 compared to cash use of 14.4 million in the second quarter of 2019.
Given the seasonality of our business, we typically build working capital in the second quarter, which further highlights key achievements of our field organization.
On a year to date basis cash provided by continuing operating activities was 10.3 million in 2020 compared to cash used of 19.8 million in 2019.
From an overall liquidity perspective total available liquidity was 56 million at June 32020, as compared to 39.6 million at June 32009.
An increase of 16.4 million.
Given the uncertainty in the market created by the pandemic, we continue to keep an open dialogue with our senior lenders and other business partners throughout the supply chain.
We believe it isn't the best interest of the supply chain partners to work together through this difficult environment will continue to take precautionary measures across various cash management touch points, including capital spending expense control credit policies and other areas to address the full spectrum of levers available to us.
Now I will turn the call there John for closing comments.
Yes.
Thank you Phil.
During our last call we detail major components of our Kogan 19 readiness Henry spots player.
If the successful execution of that plan combined with the commitment and fortitude of our dedicated associates resulted in our second.
Solid second quarter performance.
In the second quarter on a year over year basis.
Achieved meaningful improvements in virtually every aspect of our operating results.
We increased our adjusted EBITDA by 600000 dollar increase our liquidity by 16.4 million.
Newstar inventory by 38.8 million reduced our senior indebtedness by 32.2 million.
And improved our cash flows from operation activities by 38.9 million.
During the quarter after a precipitous decline in new residential construction in April.
Residential construction market began to rebound in May continued its momentum in June and generally did not experience level will decline in market activity as many other industries.
Total new residential construction start estimates for April 2020, or more than 27% lower than April 29 team and were nearly 19% below March 20 Twond.
May Twentytwenty total start estimates were more than 21% below may 2019.
And were more than 9% higher than April 2020.
June 2020 total start estimates were 2.5% below June 2019.
Where nearly 21% above may have twentytwenty.
For the quarter total estimated starts were approximately 17.1% below the prior year quarter.
While a potential coincidence.
The company's began implementing work from home programs in March and throughout the second quarter of Twentytwenty.
The residential repair remodel segment generally experienced strong growth.
Especially in the home Center segment.
The general sentiment in the residential construction market today is fairly optimistic.
Based on the challenges, we face as a country to protect the health of the nation and repair the national economy.
We anticipate that we will continue to experience significant volatility and uncertainty throughout the balance of twentytwenty and well into 2021.
Well the U.S. national employment rate improved during the second quarter from 14.7% in April to 13.3% in may to 11.1% in June.
Recent data indicates that asked the virus Spike in June July.
Improving unemployment trends could stall in.
In addition, other macroeconomic indicators such as the historical decline in GDP during the quarter of 9.5%.
Hey, potential spiked and renter evictions and homeowner foreclosures.
General uncertainty on the level and duration of continued government stimulus.
As well as all of the other variables that impact the residential construction market lead us to believe that the near term future will continue to be somewhat volatile.
While we're generally pleased with our second quarter results. Our view is that we won the first battle of what is going to be a long war and by no stretching imagination are we declaring victory.
We will continue to utilize all of the macroeconomic and industry data available to us as we adjust our plan.
But our primary focus will remain on aggressively managing every controllable aspect of the business, while simultaneously continuing to implement our key strategic initiatives.
Managing through the crisis to date.
Successfully established a solid foundation that positions us to be fluid and aggressive and executing and amending our plan as circumstances warrant.
Equally important we achieved efficiencies in several key areas of the operations that we expect to be sustainable and have proven to each other that we can achieve our goals when we pull together as a team.
I cannot be more pleased with the manner that all of our associates have pulled together to still steer the company through this crisis and I'm very proud of our entire organization.
Operator, we will now take questions.
Ladies and gentlemen, as a reminder, if you have a question or comment at this time. Please press Star then one all your telephone keypad.
Yes, please limit yourself to one question and one follow up question.
Again, if you have a question or comment at this time. Please press Star then one on your telephone keypad.
Our first question or comment comes from the line of Alan Weber from real body Advisors. Your line is open.
Good morning, how are you John.
I'm good Alan Thank you.
Can you talk about specifically about the supply chain disruptions on no works I just would actually took place.
Are they behind you and I guess the other general question is can you talk more about July trends.
Yes.
Yes, So let me let me take the first part of the question Alan and then.
Bob.
Happily jump in but I would say early in the early in the crisis.
Starting certainly and.
Very late March and into the first part of April as all companies I believe we're developing.
There.
Sponsored plans to Colgate.
There were a variety of factors I think that came into play including.
Potential plant shutdowns.
Particularly across our our major network suppliers.
That disrupted.
Our ability to continue to produce in oneq.
At least then current leak.
In addition to that.
One of our major suppliers.
And on various allocation.
I do think the amount of product that we could purchase by 40%.
As compare to prior year.
Purchases.
So that had a very limiting impact in effect on the product that was available to us my understanding is that that.
That that limitation is still in place today.
So we are.
Continued to struggle to in some cases.
Get as much of the product that we need and it certainly has had an impact on on our second quarter sales.
Bob do you have anything to yeah, I would just Alan I would just say that you know demand.
Demand never really stopped and where we had states that took very aggressive actions early on Pennsylvania, New York, Connecticut.
Capital certainly had a had an impact on revenues.
During that period of time, but the demand is still there and still they're very very strong manner.
You know labor comes into play here in a very in a very large way not only from cases of covidien plants, but.
Getting people back to work.
I think everybody in at least in our sector and our segment does the a multi industry is struggling with finding people who are.
Willing.
That would probably be a fair statement willing to work.
The jobs are out there we have job job openings, but trying to find labor is difficult for us as it is for our suppliers. So there's a downstream effect there is an upstream effect and.
And really closely to two factors as demand and labor as far as.
And the impact of obviously of the code.
I can.
But I would describe.
And Alan This is Phil you had asked about sales trends and.
Nor are we don't comment on it.
Activity, but we did see a positive sales trend after precipitous drop in April as we moved into May and June.
And when we saw the levels of stabilization taking place.
And we've seen that.
Stabilization continue as we move into the third quarter.
Okay and then my next question was can you just talk a little update on how to grip in terms of.
Conversions away that stands today.
I don't have.
My fingertips, Andy data it as far as conversions go al I can't I can comment also on that Bob I think that one of the things we saw some positive.
Movement and conversions, but.
In this environment.
We're travel restrictions and whatnot.
Ahead of mitigating effect as Bob discussed on the call on conversion activity.
That's something we typically disclose.
Right, but I think what's what's more important is the fact that we are continuing to grow that segment of our business.
In spite of our salespeople not being on the road.
And the fact that we are continuing to do conversions, even in this environment, albeit not at the levels that we would like them to be mainly related to be environment.
That segment of our business that strategic category for US continues to grow day. After day. So we are seeing market share growth and we're also seeing margin growth along with it.
Okay. Thank you.
Thank you our next question or comment comes from the line Oh, Scott Laura Your line is open.
Yes, good morning, gentlemen.
Last week, I've seen 11 million shares.
Great.
Huttig.
And that's almost half or flow.
Can you shed some color on that please.
Good morning, Scott Yes. This is this is Phil.
While we have we are well aware of the unusual activity and trading activity in our stock over the course of the last week.
We really can't provide any color on it we don't really we cannot comment on the.
Underlying activity.
Something we are aware of and.
Our our monitoring.
Well.
When you see a stock undervalued like we or maybe see the start go from $1.50 to $3.
Now sitting at like 160.
I would think you ought to look into that.
Yeah, we have we have Scott we were again, we are monitoring it and and are well aware of.
The activity and the pricing.
Thank you. Our next question or comment comes from a line are Dr. Christian cost from Comsol. Your line is open.
Yeah, that's messages for for John.
Can you give us a little input as to kind of the rightsizing of your personnel levels versus your branch level sales incentive.
And you guys have really executed on operating margins in operating expenses, but it looks like your sales trajectory is still pretty.
Poor so would love to.
I have some understanding if you put the right incentives in place, but yet you're still pulling down people.
Okay.
I'm not.
[noise] I'm not quite.
I'm not quite sure I fully understand the question.
Well you made the comment that you're right sizing personnel levels that means you're you're cutting people.
But I also in the same breath would like to understand your your branch level sales incentives. So how do you stimulate sales you've you've executed on operating margins and and operating expenses, but it's pretty apparent that your sales correct trajectory is.
It's still pretty poor or lagging.
So how do you incentivize your associates and gets your topline improving.
So let's say so so thanks for clarifying the question I.
I will shortly that I would tell you that are.
Are you in general our.
Compensation for sales associates, whether they be.
Outside.
General territory.
Oh, it's ours or specialists or in many cases even.
Our inside sales reps are national account.
Directors.
Our all heavily variable.
Comp incentivized.
So the compensation structure in general leaned towards.
Variable compensation versus fixed, particularly as it relates to our.
Outside sales associates.
So the comp structure I believe.
Having been a very early in my career straight Commission outside sales Rep. If we have the.
Right type of people in those positions.
The cost structure.
Should reward them for.
Hello.
Of our revenue line.
That said a.
In my opinion and more key component of our sales trends.
Our two fold first really is the fundamental change that we are.
Working to achieve in.
Restructuring, our product offering and focusing on.
Strategic product categories that offer.
Significant upside.
Long term opportunity from a growth perspective, because we do not possess a significant share.
In several of those.
Categories that we've made investments in.
And to be Frank that has been.
A little slower.
To execute than originally planned or anticipate.
But as Bob pointed out we are making progress and in some cases significant progress being those categories that we that we are.
Our has made investments.
The second is that while we are in have invested in our working through comprehensive sales planning comprehensive sales planning a management process working to roll those strategic categories.
We are also simultaneously.
Still in the process of rationalizing.
Lower margin more commoditized product categories, which in some cases is off setting.
The revenue growth that we are achieving in the categories that we are focused on growing not only in the short term, but over the course of the long term.
So there is that.
There is an offset there and categories that we are and continued to work our way out of.
That.
That we deem in the.
Intermediate to long term.
Our just not part of our go forward portfolio, because they are not products that lend themselves to.
Value added services.
And do not provide the opportunity for us to really bring value from our perspective to our.
Customer segment.
Okay.
Huh.
Just a follow up John.
Thank you for that that's actually very helpful.
Of the ER.
Strategic product categories that you talked about is the major supplier that you're on allocation the 40% reduction.
Is that one of those categories.
It is I will tell you. It is certainly one of the categories.
Across.
A across.
I would say that.
The majority of our [noise].
Locations, where we are in the pre hanging.
Our business.
So we break our strategic category down.
By company wide strategic categories, and then also at the branch level.
Where we have ranch strategic categories.
And that supplier certainly a key strategic category for us across the majority of our door shops.
Sure.
Great. Thank you so much for your input.
Thank you for joining the call. Thanks.
Again, ladies and gentlemen, if you ever question or comment at this time. Please press Star then one on your telephone keypad.
I'm showing no under our horses in the sheer I'd like to turn the conference back over to Mr. bravely for any closing comments.
Thank you operator.
Nationally and globally. The challenges we continue to face today are unprecedented unpredictable and fraught with risk the future of our economy.
As it related impact it has had on our industry our company.
Remains highly uncertain.
In a matter of months.
Over 19 global pandemic has affected virtually every aspect of our lives.
It has changed the way we live way, we communicate the way we interact with each other and the way we conduct business.
As a stakeholder in Kotick I can assure you that our management team and the entire organization are not dissuaded or discouraged by the uncertainty our operating challenges we face related to the virus and we remain committed to doing everything possible to consistently increase.
The value of your investment in our company.
In closing I'd like to thank all of our associates for their sacrifice dedication and hard work without them our results would not have been possible.
I want to thank our customers for continuing to placing their trust in us to care for their business I, especially want to thank our business partners that we continue to collaborate with as we mutually navigate through these challenging times.
Finally, I. Thank you for your ownership in our company and for your participation in our call today, and we look forward to speaking with you again, when we report our third quarter results.
Ladies and gentlemen, thank you for participating in today's conference. This concludes the program you may now disconnect everyone have a wonderful day spacing.
[music].