Q3 2020 Huttig Building Products Inc Earnings Call

Ladies and gentlemen, this is the operator today's conference is scheduled to begin momentarily.

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Once again this is the operator todays conference is scheduled to begin momentarily. Please continue to standby.

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Good morning, and welcome to the home <unk> building products.

Core 2020 earnings call participants will be in listen only mode to Adobe and all the cool when the company will have a question and answer session. Please limit questions to one.

What you and one follow up.

I would now like to turn the call over to <unk>, Vice President and Chief Financial Officer. Please go ahead.

Thank you operator thank.

Thank you and welcome to <unk> third quarter 2020 earnings call with me. This morning is John Bray.

Officer, Bob Carey Executive Vice President and Chief operating officer during the call today, we will discuss our third quarter 2020, operating and financial results and provide commentary on our continued efforts to combat the effects of the COVID-19 pandemic.

Following our prepared remarks, the operator, we'll open up the lines for questions.

Let me take a moment to remind you that today's discussion reflect management's views as of today may include forward looking statements.

Actual results could differ materially from those anticipated and hotting disclaims any obligation to update information discussed on this call because of developments that occur after work.

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 our financial results is included in the earnings release issued yesterday and in our filings with the FCC.

During this call certain non-GAAP financial measures will be discussed I.

A description of any non-GAAP adjustments and reconciliations to the most comparable GAAP measures can be found in the earnings release issued yesterday and on the company's website at Www Dot <unk> Dot com.

Today's call is being webcast live and is being recorded.

If you ask a question it will be included in our life transmission and in any future use of the recording.

You can replay the call on the Investor Relations page of the website on <unk> financials now, it's my pleasure to turn the call over to John for opening remarks.

Thank you Bill good morning, and thank you for joining our third quarter 2020, <unk> earnings call after.

After my initial comments, Bob and Phil will discuss our third quarter operating and financial results after which we will open the call up for Q and a session.

I want to start by expressing my sincere gratitude to all public associates for the individual contributions they have made towards the success of our company.

Their hard work and dedication have resulted in our ability to continue to achieve strong financial results as demonstrated by our increased profitability solid working capital management and liquidity levels, we have not achieved in several years.

As compared to the prior year quarter operating profit more than doubled to 6.9 million cash generated from operations nearly tripled to 25.4 million and debt was reduced by nearly 52 million.

As difficult and challenging as a pad pandemic has been on all of our lives managing the company through the rapidly changing business environment has been equally challenging.

Our early recognition of the threat the pandemic pose to the business and the successful development and implementation of our comprehensive COVID-19 readiness and respond to plan in late February that's served us well.

We adapted to the difficult environment, making the tough decisions and adjustments to the operating structure that directly contributed to our improved financial performance in the quarter, while simultaneously, establishing the foundation for more profitable future.

In closing I want to speak briefly about the current status of the unsolicited non binding letters of interest the company received from Middle Road capital LLC, a private investment firm and current Arctic shareholder.

On August six 2020, the company received an unsolicited non binding expression of interest from no to acquire all of the outstanding common stock of the company for $2.75 per share.

On October 14th the company received a second unsolicited non binding expression of interest from male role to acquire all of the outstanding common stock of the company for $4 per share subject to certain contingencies.

Wow, how did it was not proactively marketing the company for sale at the time it received no gold proposals.

Our next board of Directors has always and will continue to direct the company in a manner that Italy, which will maximize value for all shareholders.

To that end the board is reviewing Milwaukee proposal.

And as it has always done well determine the course of action. It believe it's in the best interest of all shareholders.

The company has previously communicated and reiterate today its commitment to communicate future developments in accordance with its ongoing disclosure requirements.

In the meantime, the board and management continue to focus on executing our business plans to continue to improve our financial performance and increase shareholder value.

We will not be able to provide additional information or address questions related to this matter. During our call is it remains under review by our board of directors.

I will now turn the call over to Bob to discuss our third quarter operating performance. Thank you John Good morning, everyone. I will provide an update on our operational and sales initiatives and discuss specific factors that affected our third quarter performance. Phil will then discuss our overall financial performance for the quarter.

Turning to our operating results as if the market stabilizes with higher levels of demand our sales run rate increased in the third quarter as compared to the second quarter.

After a 12.1% decrease in net sales in the second quarter third quarter sales closed to within 1.4% prior year levels there.

As John stated third quarter sales were impacted by one restructuring activities, including the closure of our facility in Columbus, Ohio, and the consolidation of our Selkirk in New York facility into our Newton, Connecticut branch.

In addition to the impact on our sales margins were negatively impacted as we depleted liquidated inventories, including in some cases at below normal margins.

Two.

Though we generally review and rationalized product offerings on a regular basis, we form we expanded the process across all of our distribution centers in the third quarter. This is consistent with our objective of focusing on higher margin non commoditized product categories.

As we move through this process our sales were negatively impacted as we no longer replenished or promoting these items as part of our regular product offerings.

Margins were also negatively impacted as we move product at below normal margins in some cases and began to aggressively liquidate the inventory.

Three we have several key product categories that continue to be impacted by supply chain disruption limiting our ability to procure product consistent with <unk> with current levels of demand.

Based on discussions with our supply partners. We believe this disruption will be temporary in some cases, our suppliers in the process of adding additional capacity. However, we expect some level of supply chain disruption to continue over the next several quarters.

And for US we continue to experience labor shortages in certain markets in which we operate.

The shortages have resulted in longer lead times on our higher margin value added production orders created a negative impact on sales you.

The decline in value add millwork sales coupled with increases in other product categories have also had a negative impact on our overall gross margins. However, we are aggressively recruiting an additional personnel as demand for these products continues to be high resulting in an extended lead times.

We estimate restructuring and product rationalization activities impacted third quarter sales by approximately $9 million to $10 million or about 5% on a year over year basis.

Additionally, we estimate these activities negatively affected gross margins by approximately 40 to 50 basis points.

It's difficult to quantify the impact of supply chain disruption labor shortages and the longer lead times on our results.

The challenging environment slowed momentum for certain aspects of our strategic sales initiatives that we continue to achieve growth in certain key product categories ask.

As discussed in our most recent earnings call. In addition to our National growth strategy. We've established branch level sales initiatives based on local market opportunities.

These initiatives are designed to generate profitable sales growth, while addressing the needs of our locally based customers our sales and strategic categories are generally at higher margins as compared to other categories. So we just expect our efforts to shift product mix toward non commoditized products will drive the overall desired results.

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Some third quarter highlights related to our strategic sales initiatives include one six.

60% growth in fashion to warehouse sales, despite restrictions and supply shortages created by the pandemic.

Secondly, a significant portion of the fastener sales increase has come from additional market share gains as we convert more poor in targeted growth customer segments to our package now in school program.

Three sales gains and allowed us to successfully reduce and rightsize inventory levels in this fast growing category.

For sales and pretend to stores, which is a key value add service proposition for our customers has negatively impacted the third quarter, but continued labor shortages and extended lead times.

This is an important area of focus as we address the underlying issues with their lead times.

And fifth debt.

Dec rail and trim sales were up nearly 18% despite the challenging environment.

This is one of our key strategic categories experiencing supply chain disruption, there's a category with continued high levels of demand in the markets that we serve.

These are just some of the highlights related to our strategic growth initiatives. While we continue to focus on our strategic product categories and are getting more traction everyday we expect that like the rest of our business. The pandemic, we'll continue to have a mitigating impact as we move through the remainder of 2020 and into 2021.

As previously announced we recorded a $1.5 million restructuring charge in the second quarter related to the closure of our Columbus, Ohio location and the consolidation of our Selkirk, New York Newington, Connecticut facilities.

On the sales and operations perspective restructuring activities were substantially completed in the third quarter. So we have some additional work to do to completely empty and exit the facilities.

We would like to thank all of our associates, who worked hard to successfully execute this project and moving forward to closure without any significant issues.

We expect all activities to be substantially complete by the end of the year.

From an operating expense perspective, we lowered our expenses by $5.6 million in the third quarter.

Reducing our expense ratio like 240 basis points from 19.2% to 16.8%.

The improved leverage was driven by the cost reduction actions, we took to begin in the fourth quarter of 2019, coupled with the actions taken as part of our COVID-19 readiness in response plan.

We believe many of the cost reduction actions taken are sustainable at current volume levels, though some incremental add back as expected with regard to eventual full restoration of wage and benefit reductions.

From a working capital perspective, we are extremely pleased with our performance, which has contributed to significant incremental liquidity.

We've adjusted to operating our business in a much leaner fashion after full implementation of our COVID-19 readiness in response plan.

We illustrate our inventory levels are down $35 million compared to a year ago, while volume levels and have improved did those approaching prior year sales.

Going forward, we will.

Continued to manage and adjust their inventories as demand dictates and we will consistently focus on improving our turns.

We will also tightly manage any necessary adjustments inventory levels once the supply chain disruption is clear.

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

Thank you Bob as anticipated the COVID-19 pandemic along with other factors discussed on this call negatively affected our sales.

However, our COVID-19 readiness and response plan helped drive an overall improvement in our operating results relative to our initial pandemic forecasts and relative to prior year results across virtually every key financial metric.

Third quarter 2020, net sales were 212.7 million, which was $3 million or 1.4% in the third quarter 2019.

Sales momentum picked up in the third quarter compared to the 12% year over year decline reported in the second quarter.

Through the first nine months of 2020.

Sales were 607.7 million.

Which is 23.9 million or 3.8% lower than 2019.

The pandemic most affected our second quarter sales.

Some trailing impact as we move to the third quarter.

As Bob stated earlier, our sales were impacted by restructuring and product rationalization activities.

Supply chain disruption across several key suppliers, but.

About labor shortages, which have lengthened lead times to our customers.

On a year to date basis. These factors were mitigated by pre pandemic sales growth in the first quarter as well as sales momentum across certain key strategic initiatives.

Gross margin was 20.1% of net sales during the third quarter 2020, compared to 20.7% in the third quarter of 2019.

The change in margin was due in part to sales mix as a higher proportion of our net sales were from lower margin product categories. The proportional change in mix can be tied to longer lead times for our customer for value add millwork sales as well as supply chain disruption margins.

Margins were also impacted by expansion of our product rationalization project as we drew down inventories for effective products at lower than normal margins and finally branch closures negatively impacted margins as we wind down operations at two locations and sold through inventory and sub optimal margins.

Impact from these factors was mitigated somewhat by growth and higher margins in certain strategic categories.

During the first nine months of 2020 gross margins were 20.1% of net sales compared to 20% a year ago.

Many of the same factors impacted our year to date margins, but were mitigated by pre pandemic margin performance plus the impact from our focus on higher margin sales opportunities.

We recognized a $1.5 million restructuring charge in the second quarter related to branch closure and consolidation activities. He.

We substantially completed the closure by the end of the third quarter.

Operating expenses were 5.6 million or 13.5%.

235.8 million, representing 16.8% of net sales in the third quarter 2020, compared to $41.4 million or 90.2% of net sales in the third quarter of 2019.

Personnel expenses declined 3 million primarily related to actions taken related to October 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.

Not personal expenses decreased $2.6 million as travel and other discretionary spend was curtailed and we recognized lower fuel costs.

Year to date.

Operating expenses exclusive of the one after mentioned 1.5 million restructuring charge.

And 9.5 million goodwill write off in the first quarter were 109.5 million compared to 122.002 million 19 first.

Personnel costs decreased 8.9 million, primarily as a result of expense reduction actions taken in response to the pandemic, including workforce reductions wage reductions and suspension of contributions from fair sponsored benefit plan as well as the lower medical claims not.

Non personnel costs decreased 3.6 million as travel and other discretionary spend was curtailed in the third quarter never recognize lower fuel costs.

The lower expenses were partially offset by higher workers' compensation and other insurance costs.

As a percentage from that sales again, excluding the 1.5 million restructuring charge and 9.5 million goodwill write off our year to date operating expense ratio was 18% in 2020 compared to 19.3% in 2019.

We conducted a review of our goodwill and recorded a 9.5 million non cash impairment charge in the first quarter of 2020.

Paramount was largely driven by the sustained decline in our market capitalization, coupled with the cold at 19 environment.

Operating income in the third quarter was $6.9 million compared to 3.3 million a year ago.

For the first nine months ended September Thirtyth our.

Our operating income was 1.8 million.

Adjusted for the 1.5 million restructuring charge and 9.5 million non cash goodwill impairment charge year to date operating income was $12.8 million compared to 4.4 million and 2019.

Through strict working capital management and improved operating results, we were able to continue to significantly reduce debt levels.

Pursuant to the terms of our senior credit facility. We also achieved lower interest rates based on improved liquidity levels. As a result, our interest expense declined over 50% on a year over year basis in the third quarter from 1.7 million to 800000.

On a year to date basis interest expense was 3 million compared to 5.2 million a year ago.

As a result of the foregoing we reported net income of $6.1 million in the third quarter of 2020 as compared to net income of 1.6 million a year ago.

Year to date, we incurred a net loss of 1.2 million as compared to a net loss of 11.9 billion in 2019.

Adjusted for the $9.5 million goodwill impairment charge and the 1.5 million restructuring charge in 2020 and adjusting for the 11.8 million dollar tax charge in 2019 year to date net income was 9.8 million in 2020.

Care to a net loss of 100000 a year ago.

We generated adjusted EBITDA of 8.5 million during the third quarter of 2020 as compared to 5.3 million in the third quarter of 2019.

For the nine months ended September 30, adjusted EBITDA was 17.7 million compared to 10.1 billion a year ago.

Turning to the balance sheet, we had total debt of 101.6 million at September 32020, compared to $153.5 million a year ago.

As previously stated the decrease in debt is primarily due to improved operating results and lower working capital levels as compared to a year ago, largely driven by lower inventories.

Cash provided by continuing operating activities was 25.4 million in the third quarter of 2020 compare.

Compared to cash provided of 9.6 million in the third quarter of 2019.

Given the seasonality of our business, we typically build working capital in the second and third quarters, which further highlights the achievements of our field organization.

On a year to date basis cash provided by continuing operating activities was 35.7 million in 2020 compare.

Compared to cash used of 10.2 million to 2019, representing a $45.9 million improvement in underlying cash flows.

From an overall liquidity perspective.

Total available liquidity was 69.8 million at September Thirtyth 2020, as compared to 46.5 million at September 32019, an increase of 23.3 million.

We have not achieved this level of liquidity since early in 2017.

While we have navigated high sales levels.

By self uncertainty over the last two quarters and the business environment has somewhat stabilized.

However, a level of uncertainty remains from the pandemic and to a degree from the political environment. We.

We will continue to manage our balance sheet and operations in a prudent manner to maximize returns [noise].

Now I will turn the call over to John for closing comments.

Thank you Phil.

Regardless of our personal views on the social political and financial impact of the pandemic.

I would like to believe that we could all agree that the human toll is the most devastating effect of cold at 19.

I previously communicated that the pandemic was the catalyst for many of the actions. We took that contributed to our financial performance improvement in the quarter and ultimately resulted in establishing the foundation for our more profitable more scalable future.

I would not be the leader or person that I tried to be if I did not acknowledge that many of the decisions. We made to mitigate the threat posed to the business by the Vivus net.

Negatively affected People's lives.

To that end, we will not allow the lives we affected or the personal sacrifices our associates have made on behalf of our organization.

To be in thing.

In the third quarter on a year over year basis, we continue to achieve meaningful improvements in virtually every aspect of our operating results our expense ratio profitability and liquidity position at the best level achieved in several years.

Going forward, we will use the improvements made in our cost structure, it's a new baseline.

And once all wages and benefits are fully restored.

Future expense additions will continue to be scrutinized inherently focus to support our service proposition.

We will continue to focus on strategic product category share growth.

Our strategic categories possess the greatest market growth potential the most meaningful opportunity to continue to differentiate hotter in the channel.

And the most expedient way to continue to improve our gross profit.

We will complete our product line rationalization initiatives in the next two quarters, eliminating lower margin more commoditized categories, while creating more focus and capacity to grow our strategic categories, while minimizing the need for incremental investment in our cost structure.

We will use the incremental liquidity, we have created through working capital improvements and positive cash generated from operations to consistently evaluate prioritize and pursue opportunities that we believe will increase the value of the company.

Including but not limited to organic growth initiatives across.

Accretive acquisitions.

And potentially share repurchase programs.

Lastly, and most importantly, we will continue to invest in our associates worked.

Working towards creating a high performing accountable culture, that's been most in power and engaged associates.

Operator, we will now take questions.

As a reminder, ladies and gentlemen to ask the question you'll need to press star one on your telephone again star one on your telephone keypad to withdraw your question. Please press the donkey. Please standby, while we compile the key in a roster.

Once again, ladies and gentlemen, if you have a question. Please press star one at this time.

Operator is there appears not to be any questions.

I will proceed with closing comments.

Looking forward combining the improvements we have made in the business with the current robust activity and future projections for the new residential construction market the future for Huttig and all of our stakeholders is very bright.

I could not be more proud of our associates and I want to thank them again for their hard work fortitude and dedication to providing exemplary service to our customers.

I also want to thank our customers and supply partners for continuing to place their trust in us to care for their business.

Finally, I think you for your ownership interest in our company and for your participation in our call today.

We look forward to speaking with you again next year, when we report our fourth quarter and 2020 full year results.

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

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