Q2 2021 Huttig Building Products Inc Earnings Call
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Yeah.
Good morning, and welcome to the Headache building products second quarter 2021 earnings call participants.
<unk> listen only mode until the end of the call. When the company will have a question and answer session to ask a question at that time. Please press star followed by the number 1 on your telephone keypad keypad. Please limit questions to 1 question and 1 follow up question I would now like to turn the call over to Philip Kite, Vice President and Chief financial.
There will be no. Sir please go ahead Sir.
Thank you and welcome to products second quarter 2021 earnings call with me. This morning is Jon <unk>, President and Chief Executive Officer, and Bob <unk> Executive Vice President and Chief operating officer during the call today, we will discuss our second quarter of 2020.
1 operating highlights and financial results.
I'll provide commentary on the current business environment, including the impact from the pandemic and the continued progress we have made across our operations.
Following our prepared remarks, the operator will open up the line for questions. Let me take a moment to remind you that today's discussion reflects management.
As of today and May include forward looking statements actual results could differ materially from those anticipated and how big disclaims any obligation to update information discussed on this call because of developments that occur afterward.
To the extent you are listening to this call on replay information could have.
Have you 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 SEC.
During this call certain non-GAAP financial measures will be discussed a description of any non-GAAP adjustments and reconciliation to the most comparable GAAP measures can be found in the.
Have already release issued yesterday and on the company's website at Www Dot dot.
Dot com.
Today's call is being webcast live and is being recorded if you ask a question. It will be included in our live transmission and in any future use of the recording you can replay the call on the Investor Relations page of the website.
The earnings now it is my pleasure to turn the call over to Jon for opening remarks.
Thank you Phil.
Morning, and thank you for joining our second quarter 2021 earnings call.
We are very pleased with the continued progress we made in this quarter and in the first half of the year and steering the company through a challenging environment.
Excited to see the positive effects of all of the work we've done over the past several years to transform products into a more diversified company that possesses significant sustainable above market growth opportunities materialize in our financial performance as we deliver our second consecutive quarter of.
Record net earnings as reported since becoming a public company and $19.99.
The balance of my opening comments today will primarily focus on the new residential construction market.
I am focusing on the market because it has created a unique operating environment that in some ways has contributed.
We are to our growth and improved financial performance, while in other range significantly impaired our ability to meet current demand levels.
I will explain in detail the data and trend analysis that shaped our current view of the new residential construction market.
We believe the.
General state of the market today remains strong.
So believe that barring any meaningful macroeconomic disruptions the underlying housing fundamentals are solid and we will continue to support strong demand in the near to intermediate term.
And the 48 years between 1959.
The first year of the U S census Bureau attract new residential starts in 2007.
Total non starts never fell below $1 million in any given year and averaged 1.5.
New housing starts per year.
Total starts fell below $1 million for the first time in 2000.
And remained below 1 million starts for the next 6 consecutive years.
Average, Inc..750000 total starts per year.
Just crossing the 1 million Mark again in 2014 total starts have grown every year by an average annual growth rate of nearly.
6% to a total of $1.4 million in 2020.
While market activity increased between 2014 and 2020 installs briefly in the second half from 2018, and the first half of 2019 before resuming its growth trend in the second half of 2000.
In 19, and first quarter of 2020.
Cumulatively on a year over year basis for the 3 quarters immediately preceding the pandemic total starts grew by nearly 15%.
In the second quarter of 2020, the uncertainty of the pandemic led to a decline in total.
So with nearly 15% as compared to the second quarter of 2019.
The biggest decline occurred in April after which the market rebounded rapidly in May and June such debt June 2020 starts actually increased 3% over 2019.
Starts remained strong throughout the second half of 2020 growing nearly 20% over the second half of 2019, finishing the year with 1.4 million starts the highest level since 2006.
Strong demand continued into 2021 with 25%.
With the roll through June.
786000 starts also the highest level since 2006.
While the pandemic initially created tremendous economic concern pausing construction activity in April and May of 2020.
We believe the combined effect.
Years of pent up demand low inventories and price of the market prior to COVID-19 relegated to first global pandemic in more than a century to a near 60 day hiccup in residential construction activity.
While pandemic related factors continue to affect.
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Over the trailing 12 month period between June 2021.
Total housing starts grew approximately 18% to 1.
5 million units.
While 18% growth is robust it is in line with the 15% growth in starts in the 3 quarters immediately preceding the pandemic the.
The strong growth in start prior to the pandemic indicated that some level of pent up demand that had been.
Building over the past decade, with finally materializing in the market.
And it appears that the pandemic may have been a catalyst in unlocking even more of the historical pent up demand.
During our second quarter call a year ago and in every call since we have discussed the pandemic.
Weighted challenges affecting the business environment.
Unfortunately, the most meaningful challenges, we identified and began experiencing a year ago have not subsided and in many cases have continued to escalate.
We believe the primary challenge today is that the GAAP between.
Imagery with global supply and demand is reached its maximum elasticity and the ability to increase supply in a meaningful way in the current environment is unlikely.
The GAAP has grown over the past year because of the inconsistency of the global supply chain and the lack of.
Available qualified labor.
As strong demand depleted a limited supply of home inventories prices escalated rapidly.
And material and labor shortages hamper homebuilder efforts to keep up with the increased level of demand.
We believe the combination of all of these facts.
Doctors over the course of the past year has meaningfully contributed to a current market imbalance that is beginning to show signs of leveling.
While the leveling of market momentum might normally cause concern in the current environment. It is necessary to begin to narrow the gap between demand.
Demand and available supply.
Over the course of the past couple of months the market has begun to show signs that is recalibrating.
Consumers that entered the market over the course of the past 6 to 12 months quickly learned that their choices were very limited.
The extremely competitive environment in some markets resulted in unreasonable and unsustainable price levels, causing many potential homebuyers to head back to the sidelines.
Simultaneously as rising construction costs showed no signs of easing some builders announced plans to moderate.
Growing sales efforts until the market further stabilizes.
While we have very limited exposure to commodity price fluctuations.
Pricing in the lumber market illustrates the volatility and disruption that can occur when the gap between demand and available supply reaches its.
It's a long elasticity.
While this example might appear to be extreme bear in mind that lumber generally tends to be the highest cost component and the construction of a new home.
To provide some historical context, and the 10 years from 2000.2010 in early 2020.
The rash.
It's Matt lengths lumber price composite index increased a total of $72 or 28%.
From $250 to $322.
While there are certainly fluctuations throughout the 10 year period.
Price appreciation trends with generally consistent.
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And the only time the index crossed the 500 dollar mark within the first half of 2018.
For a total of about 90 day.
In the 13 months between April 2020, and May 2021, the composite price index.
Increased by more than $1300, 420% from $322.2 an astonishing total of $1670.
Over the course of the past 60 days the composite index declined by more.
More than $1100 or 65% to $567.
The majority of building materials increased in price over the past year, but I'm not aware of any product or category of products that experienced a level of volunteer.
Volatility from multi close to lumber.
While the near term residential construction construction market will likely remain somewhat choppy.
We believe the underlying fundamentals of the market remains very strong and that we are well positioned to continue.
Tier of profitable growth.
I will now turn the call over to Bob to discuss our operating highlights and initiatives. Thank you Jon Good morning, everyone. I will provide an update on our operational and sales initiatives and discuss specific factors that affected our second quarter operating performance.
<unk> will then discuss our second quarter.
Financial performance.
The business environment. We are operating in today is represented by strong demand, but also with limited supply across a number of key products we sell.
We are not unique in this regard the supply issues are prevalent in many industries across the country.
This was created and inflation.
<unk> every aspect across most products affecting the residential construction market and has had a positive impact on our sales growth, but it was not as pronounced as many other companies that are in our industry based on our respective product offerings.
Product availability constraints has had a meaningful mitigating the impact on our volume.
It's really across certain national strategic categories.
Looking forward based on market conditions today, which are somewhat fluid, we believe supply challenges could extend into 2022 for some products and that pricing will moderate and normalize across certain key products with some level of additional.
This increase was possible through the first quarter of next year.
Further we currently believe that price declines if any would be moderate with most of the quantities being commodity related or targeted in nature to individual product categories or markets. We remain focused on growing our national.
Price Egypt product categories.
Disciplined pricing management and operational efficiency, which are critical factors in this environment.
Turning to second quarter highlights and sales of our national strategic categories, which was the most impacted category hit with supply chain disruption grew 21.
And those returns and accounted for 37% of our total growth for the quarter.
We have previously discussed the importance of our strategic product categories as well as our plan to rationalize lower margin non strategic categories.
Planned intentional mix shift has resulted in our ability to successfully replace sales.
Per solar margin non strategic products with increased sales of strategic categories, whose average shipping margin for the quarter is 320 basis points higher as compared to non strategic categories without incurring meaningful incremental fixed operating costs.
To illustrate.
While national strategic categories represented 47 per cent of our sales in the quarter, they generated 54% of our shipping profit.
Considering a restructuring and rationalized product sales in 2022nd quarter same store sales growth was 33% on a year over year basis.
Our <unk> grip fastener program is the largest growth category of all of our national strategic initiatives adjusted for 2020 restructuring activities. Our fastener sales increased 59% from them in the second quarter and increased 50% on a year to date basis.
Our sales would have been more robust.
But not for international shipping constraints, which affected product availability and for other issues related to the pandemic.
For the quarter adjusted for restructuring activity shipping margins in this category increased 930 basis points with a 100.
790 basis point increase.
On a year to date basis.
While there may be potential for moderation of margins with these products from the supply chain opens up we remain optimistic about the future growth potential of this high margin category brands.
Looking at other strategic categories, adjusted for 2020 restructuring and product rationalization.
Activities composite deck rail and trim products increased 18% for the quarter and 23% year to date ex.
Styria doors grew by 15, 3% per the quarter and 9.4% on a year to date basis.
Exterior door sales were the most significantly impacted category by supply.
Apply chain disruption as compared to other categories, though demand in the category remains robust, resulting in large open order files.
In addition to achieving strong strategic category sales growth and meaningful category mix share. We also grew our aggregate shipping margins in these strategic categories.
By nearly 380 basis points for the quarter and 240 basis points from year to date basis.
In closing we continue to operate in a rapidly changing business environment, where a number of different variables such as supply constraints as well as market and pricing dynamics come into play.
We will continue.
Continue to manage through these variables, while maintaining operational efficiency and focusing on what we see as significant opportunities within our growth plan.
Now I will turn the call over to Phil to discuss our financial performance.
Thank you Bob.
The business once again delivered solid results across virtually every key.
Metric, while generating record second quarter net earnings.
Second quarter 2021, net sales were $247.4 million, which was $55.4 million or 28, 9% higher than the second quarter of 2020.
The impact from supply chain disruption and labor shortages, it's difficult to quantify.
So it will be additive to our 2021 growth.
Through the first 6 months of 2021, our net sales were $462.1 million, which was $67.1 million or 17% higher in 2020.
Sales growth was driven by strong residential construction, a favorable pricing environment and by growth in certain strategic.
Financial product categories across our national strategic categories, our largest growth was in the fastener prefinished store and debt grayling trend categories.
Adjusted for restructuring activities announced in the second quarter of 2020 and for the product rationalization activities. Our adjusted sales growth was 33.
Strategic <unk> and 21, 4% in the second quarter and year to date periods respectively.
Yeah.
As we move into the third quarter demand levels remained strong with favorable sales trends to date, though against tougher comps as compared to the second quarter, which is our easiest year over year comp quarter.
Third quarter sales.
2 <unk> could moderate somewhat based on the seasonality of certain direct business. However, this impact could be mitigated or offset by supply chain and supply chain from strength loosen.
Gross margin was $55.3 million in the second quarter of 2021 compared to $38.7 million in the second quarter of 2020.
Run rate as a percentage of sales gross margin was 22, 4% in the second quarter of 2021 compared to 22% a year ago.
For the first 6 months gross margins were $101 million compared to $79.6 million in 2020.
As a percentage of sales year to date gross margins were 20.
21, 9% compared to 22% a year ago.
The improved gross margin percentage reflects the variable impact from our focus and progress made on higher margin strategic sales opportunities at strategic lines represent a higher percentage of our overall sales as compared to a year ago for.
For example.
But from our fastener program comprised a higher percentage of our overall sales in 2021 as compared to a year ago and generate significantly higher margins from 2021 compared to 2020.
Margins were also impacted by a favorable pricing environment and by operational improvements over inventory management, resulting in lower provisions for excess.
<unk> inventory as we continue to tightly manage from stock levels.
The increase in our gross margin percentage was more pronounced considering we had a disproportionate increase in direct sales in 2021 as compared to 2020, both in the second quarter and on a year to date basis. These.
These sales are generally at lower margins as compared to.
Warehouse shipments.
Operating expenses increased $4.8 million to $39.5 million in the second quarter of 2021 compared to $34.7 million exclusive of the $1.5 million restructuring charge in the second quarter of 2020.
Personnel costs increased $4.4 million.
R 22, 4%, reflecting increased incentive compensation from improved operating results.
Increases in reinstatement of compensation reductions implemented in 2020.
These increases were partially offset by lower medical costs.
Non personnel costs increased $400000 are too.
6%.
The increase was primarily driven by higher fuel and insurance costs, which were substantially offset by an improved bad debt provision in the second quarter of 2021 as pandemic related disruption continued to subside.
Overall, our cost structure was effectively levered against higher sales volume as a percentage of net sales.
Operating expenses were 16% in the second quarter of 2021 compared to 18, 1% a year ago after adjustment for the $1.5 million restructuring charge in 2020.
Yes.
For the first 6 months ended June 30th operating expenses increased $2.7 million to 76.
$6.4 million compared to $73.7 million in the first 6 months of 2020, which excludes equivalent an impairment charge of $9.5 million taken in the first quarter of 2020, and the aforementioned $1.5 million restructuring charge.
Personnel costs increased $3.8 million or 9% reflecting increased variable.
Incentive compensation from improved operating results wage increases and reinstatement of compensation reductions implemented in the second quarter of 2020 as part of the pandemic actions.
These increases were partially offset by lower medical claims.
Non personnel costs decreased $1.1 million or 3.4.
Right.
Expense reductions on discretionary spending items, along with an improved bad debt provision offset increases from higher fuel and insurance costs.
Overall, our cost structure was levered against higher sales volume.
As a percentage of net sales operating expenses were 16, 5% in the first 6 months.
For 2021, compared to 18, 7% a year ago adjusted for the goodwill impairment and restructuring charges.
Operating income in the second quarter was $15.8 million compared to $2.5 million a year ago.
<unk> per $1.5 million restructuring charge in 2022nd quarter of 2020.
Months of fee income was $4 million.
For the 6 months ended June 30, operating income was $24.6 million compared to an operating loss of $5.1 million a year ago.
Adjusted for the $1.5 million restructuring charge $9.5 million noncash goodwill impairment charge 2020 year to date operating income.
<unk> was $5.9 million.
Through strict working capital management and improved operating results, we continued to significantly reduce debt levels on a year over year basis.
Pursuant the terms of our senior credit facility. We also achieved favorable interest rates based on improved liquidity levels as a result.
Operating second quarter interest expense declined 33% from 900000.
In 2020 to 600000 from 2021.
On a year to date basis interest expense declined 41% from $2.2 million in 2020 to $1.3 million in 2021.
As a result of the foregoing we reported net income of $14.9 million in the second quarter of 2021 compared to $1.6 million a year ago.
Adjusted for the $1.5 million restructuring charge in 2020, adjusted net income was $3.1 million.
On a year to date basis net income.
From was $23 million in 2021 compared to an adjusted net income of $3.7 million, a year ago, which excludes the $9.5 million goodwill impairment charge and a $1.5 million restructuring charge.
We generated adjusted EBITDA of $17.4 million during the second quarter of 2021 compared.
$5.7 million in the second quarter of 2020.
For the 6 months ended June 30, adjusted EBITDA was $27.9 million compared to $9.2 million a year ago.
Turning to the balance sheet, we had total debt of $99.3 million at June 32021.
Compared to $127.3 million a year ago, a reduction of $28 million.
A decrease in debt is primarily due to strong operating results improved working capital management.
Total available liquidity was $107 million at June 32021, compared to 56.
<unk> <unk>, a year ago, representing an increase of nearly $45 million.
This concludes our prepared remarks on our second quarter financial performance.
Looking forward, we remain optimistic for the balance of the year based on strong residential construction favorable pricing environment and our continued progress.
Progress in profit contribution from our strategic categories.
Operator, we will now take questions.
So ask a question. Please press Star then the number 1 on your telephone keypad. Please limit questions to 1 question and 1 follow up question.
And your first question comes.
From the line of Josh Chan with Baird.
Hi, Good morning, John Bob and Phil Thanks for taking my questions and congrats on a strong quarter.
Thank you.
I guess my first question I wanted to ask about sort of supply chain on the millwork side of things you mentioned that.
1 of the more challenged areas. So just maybe.
Some more color on how the availability has trended through the quarter and what youre seeing into into July with the supply chain side of things.
Sure. So this is Bob we've been on allocation for the past few months and.
That's been a little bit choppy.
We have been getting a consistent supply of material we are in constant communication with our with our vendor and.
Talking about the plans and the changes that they've been implementing which will have a positive impact to date. So we expect that to continue to improve.
But.
They are also faced with support with the raw material supply challenges as well.
It's a global issue so.
It remains a challenge for everybody, but we are expecting things to slowly improve as we move forward here, Jon I don't know if theres any color that you would want to provide.
Thank you.
I think you covered it.
Okay.
That's helpful. Thank you and I guess my follow up is on labor.
How are you seeing labor availability at your facilities and how confident are you that you can find the labor that you need to serve the expected demand into the second.
Can have.
Yes. So this is Bob again.
To be very freight Jon touched on it in his opening comments about the challenges that we faced a year ago that are still prevalent today.
Labor is certainly 1 of them when you look at the.
The amount of available workforce.
That's out there today.
You scratch your head and try to understand why and Theres all kinds of reasons political included as to potentially why that may be but.
If there is a major challenge with finding and keeping.
Les.
Labor.
In our employment is not isolated to headache.
Free industry is facing the same issues. So it is a challenge, but we have we have addressed it in a number of ways, including wages.
Incentives to bring people.
<unk> and to retain them.
But for the near future.
Our expectation is we will be faced with the same challenges that we've been faced that we've been facing over the last 12 months.
That's great. Thanks for your time and good luck in the second half.
Thank you.
Again to ask a question press star 1.
Okay. At this time there are no further questions.
Questions.
Thank you Whitney.
In closing the market, we operating today have a number of unique variables creates an unusual environment with many challenges.
A confluence of these variables here, David and detracted from our operating results.
Yeah.
Quantifying the impact of these variables can be highly subjective. However in general we believe the opportunities ahead outweighed the benefits derived from the market anomaly once supply chain challenges are resolved.
And market dynamics normalize.
While managing through.
Through this environment, we successfully reduced our expense structure and right size, our inventory levels to efficiently support our operations, while establishing a solid foundation for future growth at the same time from our liquidity improved to $107 million, providing ample room for future investments.
Resolve business.
Looking forward, we will continue to focus on executing our plan.
While anticipating and preparing for changes in the environment.
Our performance in the second quarter and over the course of the past 18 months is the result of the commitment and dedication of our entire team of associates.
Sure.
And so very proud of the entire organization and their collective efforts have positioned our company well for continued success.
I want to thank our entire team for their hard work and dedication to providing exemplary service to our customers.
I also want to thank our customers.
<unk> and supply partners for continuing to place their trust in us to care for their business.
Finally, I. Thank you for your ownership and interest in our company and your participation in our call today.
We look forward to speaking with you again, when we reported.
Third quarter results.
Thank you.
Joining today's conference call you may now disconnect.
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