Q4 2021 Huttig Building Products Inc Earnings Call
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Good morning, and welcome to the Heartache building Products' fourth quarter 2021 earnings call participants.
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I'd now like to turn the call over to Phillip type, Vice President and Chief Financial Officer. Please.
Please go ahead Sir.
Thank you and welcome to <unk> fourth quarter 2021 earnings call with me. This morning is John briefly President and Chief Executive Officer, and Bob <unk> Executive Vice President and Chief operating officer. During the call today, we will discuss our fourth quarter and full year 2021 operating highlights and financial results.
We will also provide commentary on the current business environment, including the continued progress we have made across various facets of 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's views as of today and may include forward looking statements actual results could differ materially from those currently anticipated and honey disclaims any obligation to update the information discussed on this call because of the.
Shipments that occur after work.
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 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 also be discussed a description of any non-GAAP adjustments and reconciliation to the most comparable GAAP measures can be found in the earnings release issued yesterday and on the company's website at www 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 Web page of the website now finish my pleasure to turn the call over to John for opening remarks.
Thank you Phil.
Good morning, and thank you for joining our fourth quarter 2021 earnings call. We are extremely pleased with our fourth quarter and full year performance and record results the.
The continued execution of our business plan and the dedication of our associates to serve our customers have largely contributed to our success and sustainably transforming our business and financial model.
In the fourth quarter and for the full year, we achieved record financial performance across virtually every key facet of the business, including sales gross margins operating leverage profitability and liquidity.
From a market perspective total new residential housing starts were up approximately five 1% from the fourth quarter of 2020 and up 15, 6% for the year totaling approximately $1 6 million.
Continued growth in demand for residential building products and elevated pricing environment and our focus on growing our strategic product categories resulted in sales growth of 24, 8% in the quarter and 18, 4% for the year.
Our strong sales and gross margin growth in 2021, combined with our ability to continue to leverage our cost structure, resulting in full year adjusted EBITDA of $55 1 million or five 9% of sales as compared to $20 1 million or two 5% of net sales in 2002.
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Like many other businesses, we are operating in a highly inflationary pricing environment, which has had an impact on our gross margins and cost structure, including labor costs.
Through our sales mix shift focusing on growing strategic product categories at a faster rate than all other product categories and effective pricing management, we increased our gross margins from 21% in 2020 to 22, 2% in 2021.
The improvement in our gross margin is more remarkable considering the unprecedented $18 3 million dollar LIFO charge, we incurred in 2021.
To our knowledge, none of our public company peers use the LIFO method to value their inventories.
As such on a comparative basis, the LIFO charge, we incurred in 2021 and reduced our gross margins operating profit and adjusted EBITDA by $18 $3 million.
Provide some perspective, the LIFO charge in 2020 was $2 4 million.
And over the prior 10 year period, the LIFO charge averaged one 3 million per year.
Considering the extraordinary LIFO charge in 2021 and based on extensive internal analysis, we generally believe that our reported 2021 financial performance is sustainable.
While there are continued macroeconomic risks the underlying fundamentals of the housing market remains strong with 2022 total housing starts estimated to be slightly higher than 2021 total starts of $1 6 million.
The sustainable improvements we've achieved in the business combined with the strong underlying fundamentals of the housing market supports our positive view of the future.
In closing I want to reiterate the board of directors commitment to disclose developments related to its strategic review process as appropriate or required.
As such we will not be able to provide additional information or address questions related to this matter during our call.
I will now turn the call over to Bob to discuss our operating performance. Thank you John and good morning, everyone. I will provide an update on our operational and sales initiatives and discuss specific factors that affected our operating performance in 2021.
Phil will then discuss our financial performance.
Well, we're pleased with our sales performance in the fourth quarter and for the full year of 2021, our total growth opportunity continues to be hampered by product availability and continued labor shortages.
However, as we have moved into 2022, you have gained more clarity around the supply chain issues. We have had four major strategic categories impacted by supply issues to varying degrees throughout parts of 2020, continuing through 2021 and into 2022.
Product availability continues to slowly improve we are beginning to develop a more normalized trend in two of the four categories composite decking and railing trim and interior doors.
We remain on allocation with a third category exterior doors and do not have a definitive timeline for normalization.
We continue to work closely with our supplier to service our customers as effectively as possible.
The fourth category fasteners continues to grow at an accelerated levels. Despite the continued challenges with ocean freight carriers.
I've got a grip fasteners are a cornerstone of our growth strategy and we continue to meaningfully expand our sheer and multiple customer segments. We can.
To aggressively manage their procurement process to help ensure adequate product availability. However, we like other companies remain hampered by the lack of available ocean container availability and continued port congestion.
While we believe the challenging challenges will begin to ease as the Corona virus threat diminishes and the global economy Normalizes, we currently.
We anticipate that we and many of our other suppliers will be dealing with this challenge well into 2022.
Rubber industry like many other industries strong demand coupled with product constraints tight labor markets and inconsistent Ocean carrier availability have all contributed to significant price inflation.
However, we do not have the same level of exposure to short term commodity price fluctuations as some other companies in our industry.
Our business is not highly commoditized, which limits our future exposure to price erosion.
While we anticipate additional price increases in 2022 do you believe they will be more moderate than closer to historical normalized levels.
Sales of our national strategic categories grew 18% and accounted for 48% of our total growth in 2021.
Combined with sales of our local strategic categories. Those identified on a local market basis total strategic category sales grew 21% and accounted for 94% of our total sales growth for the year.
As a percent of total sales national or local strategic categories represented approximately 82% of our total sales in 2021 does.
This planned intentional mix shift has resulted in our ability to successfully replace sales of lower margin non strategic products with increased sales of strategic categories.
In 2021, our gross margin our national strategic categories was 670 basis points higher than all other product categories.
Moreover, the increased profitability, we realized was achieved without incurring meaningful incremental operating costs.
She illustrate in 2021 national strategic categories represented 48% sales and 56% of shipping margins.
Composite deck rail in trim sales increased nearly 14% in 2021.
In mid 2021, we secured a new <unk> grip fastener stocking program when we completed that conversion in the fourth quarter.
This new sustainable business contributed to our strong fastener growth in the quarter of 70% as compared to prior year quarter and for the full year sales of hardwood fasteners led all strategic category growth with a year over year increase of 44%.
But we are pleased with our growth in the strategic building products categories fabricators exterior door sales continue to be severely impacted by supply chain disruption.
Despite these challenges we grew our interior and exterior pre hung door sales by 13% and our prefinished exterior door sales by 17% in 2021.
In addition to achieving national strategic category sales growth and meaningful category mix shift. We also grew our shipping margins in our strategic product categories, including all door fabrication by 330 basis points in 2021, including an increase of over 490 basis points in the fourth.
Quarter.
Our focus will continue to center around our strategic product or product category sales pricing management, which remains critical in this environment and improving our operations to drive operational efficiency, allowing us to continue to lever our cost structure to provide a high level of service to our customers.
The changes we have made to our business model over the last seven several years are driving our strong results and we believe we have more runway ahead. There continues to be a significant opportunity across our initiatives, we intend to harvest that opportunity to drive continued meaningful improvement across our business now I will turn the call over to.
Phil will discuss our financial performance.
Thank you Bob net sales were $234 million in the fourth quarter of 2021, which were $45 8 million or 24, 8% higher than a year or so.
The increase was attributable to a number of factors, including our continued strong residential construction market along with an inflationary pricing environment elevated by demand driven pricing and higher input costs, such as labor and materials, which are reflective of the challenges the supply chain and labor markets have experienced throughout much of 2021.
Sales growth in the fourth quarter was higher as compared to previous quarters. In 2021 is it also reflected the aggregate effect of intermittent price increases which occurred throughout the year.
Millwork sales increased 27, 7% to $112 8 million in the fourth quarter compared to $88 3 million in the fourth quarter of 2020, although impacted by restructuring activities completed in 2020 and by ongoing supply chain disruption and labor shortages.
<unk> sales benefited from improved market pricing builds.
Building product sales increased 21, 1% in the fourth quarter to $100 4 million compared to $82 9 million in 2020.
Building product sales increased due to continued strong demand for certain product lines within the category included including certain strategic product lines, such as Honey girls fasteners.
Offset by supply chain disruption and product rationalization activities related to our focus on higher margin non commoditized products.
Wood products sales increased 28, 4% in the fourth quarter to $17 2 million compared to $13 4 million in the fourth quarter of 2021.
Wood product sales benefited from higher market prices on a year over year basis.
Gross margin was $50 2 million in the fourth quarter of.
2021, compared to $37 1 million in 2020.
As a percentage of net sales gross margin was 21, 8% in the fourth quarter 2021 compared to 21% in 2020.
The increase in gross margin percentage reflects the favorable impact from our focus on higher margin sales opportunities as well as effective pricing management and an inflationary cost environment.
We also benefited from increased purchasing incentives in 2021.
As stated in our earnings release, we use the last in first out or LIFO inventory valuation method to value inventories.
Many peer companies in our industry value industries value inventories using the firsthand first out or FIFO inventory valuation method.
In the fourth quarter of 2021, the LIFO valuation method resulted in gross margins that were $7 $3 million lower than as the final valuation method had been applied.
This represents 320 basis points of net sales, which would have otherwise been accretive to our gross margin percentage.
In the year ago comparable period, the LIFO method reduced gross margins by $1 1 million, representing 60 basis points of net sales.
For perspective over the previous 10 years on an annual basis for LIFO method resulted in an average reduction in gross margins of approximately 20 basis points of <unk>.
Net sales as compared to the FIFO method.
The significant impact in 2021 as compared to historical levels reflects the elevated inflationary pricing environment, along with higher inventory levels in 2021 to support increased sales demand.
The increase in 2021 inventory levels was amplified by the significant reduction of inventories made at the onset of the pandemic in 2020 as part of our Covid response plan.
Operating expenses increased $4 million or 11, 1% to $40 1 million, representing 17, 4% of net sales in the fourth quarter of 2021.
Compared to $36 1 million or 19, 6% of net sales in 2020.
Personnel costs increased $4 4 million, primarily due to increased variable incentive compensation driven by improved operating results and wage increases and a tight labor market.
Non personnel costs decreased 400000, primarily from the one time benefit of about $2 1 million class action settlement received during the fourth quarter related to interior door pricing.
This benefit was offset by higher contract hauling field supplies and travel costs.
Net interest expense was 500000 in the fourth quarter of 2020 to 600000 in the fourth quarter of 2020, the lower interest expense in the fourth quarter of 2021 reflects both lower average debt outstanding and moderately lower interest rates.
Income taxes were $2 2 million in the fourth quarter of 2021 and 100000 in the fourth quarter of 2020.
As a result of the foregoing factors, we reported net income from continuing operations of $7 4 million in the fourth quarter of 2021 compared to net income of 300000 in 2020.
Adjusted EBITDA was $9 7 million for the fourth quarter of 2021 compared to $2 4 million for the fourth quarter of 2020, the LIFO inventory valuation method reduced adjusted EBITDA by $7 3 million and $1 1 million in the fourth quarters of 2021 and 2020, respectively.
Compared with the operating results would have been using the FIFO method.
Turning to the full year net.
Net sales were $937 $8 million in 2021, an increase of $145 5 million or approximately 18, 4% compared to $792 3 million in 2020.
Net sales in 2020 were significantly affected by the onset of the pandemic.
Our 2021 sales growth, although moderated by restructuring activities announced in the second quarter of 2020 and by product rationalization activities was driven by an improved versus actual construction market, a favorable pricing environment, including elevated levels of inflation and by growth in certain strategic product categories.
For the year Millwork sales increased 15, 5% to $412 2 million.
Building product sales increased 18, 2% to $447 9 million.
In wood products sales increased 38% to $77 7 million.
Gross margin increased $48 6 million or 35% to $208 million in 2021 as compared to $159 4 million in 2020.
Gross margin as a percentage of net sales increased to 22, 2% in 2021 compared to 21% in 2020.
Gross margins were favorably impacted by our continued focus on non commoditized higher margin strategic product lines as well as effective pricing management in an inflationary environment.
We also benefited from increased purchasing incentives into 2021 for the full year 2021. The LIFO method resulted in gross margins that were $18 3 million lower than at the FIFO method had been used.
This had the effect of reducing our gross margin percentage by 195 basis points.
Into 2020, the LIFO method reduced gross margins by $2 4 million or 30 basis points of net sales.
Significant impacts in 2021 as compared to historical levels discussed earlier reflects the elevated price inflation, along with higher inventory levels in 2021 as compared to 2020.
Operating expenses increased $10 2 million or 7% to $155 8 million, representing 16, 6% of net sales in 2021.
Compared to $145 6 million or 18, 4% of net sales in 2020.
Personnel expenses increased $10 4 million, reflecting increased variable incentive compensation driven by improved operating results and wage increases.
These increases were partially offset by lower medical costs, and a $105 million cares act employee retention tax credits.
Non personnel expenses decreased 200002 thousand 21, primarily benefiting from the aforementioned $2 1 million class action settlement as well as improved bad debt provision offset by higher fuel insurance and tax costs overall.
Overall, our cost structure versus levered against higher sales volume.
Operating income in 2020 includes a restructuring charge of $1 5 million and a goodwill impairment charge of $9 5 million. There were no charges recorded for these items in 2021.
Net interest expense was $2 5 million in 2021 compared to $3 6 million in 2020 to lower interest rates in 2020, the lower interest expense in 2021 reflected both lower average outstanding borrowings and lower interest rates.
We recognized income tax expense from continuing operations of $2 2 million for the year ended December 31, 2021 compared to income tax expense of 100000 for the year ended December 31 2020.
Income tax in 2021 reflects reflects the utilization of $41 $4 million of federal tax loss carryforwards.
As a result of the foregoing factors, we reported net income from continuing operations of $49 1 million in 2021 as compared to a net loss of $900000 in 2020.
Adjusted EBITDA was $55 1 million in 2021, and $20 1 million in 2020.
A LIFO inventory valuation method reduced adjusted EBITDA by $18 3 million, a $2 4 million for the year 2021, and 2020, respectively compared to what the operating results would have been using the FIFO method.
Turning to the balance sheet, we had total debt of $71 4 million at December 31, 2021, compared to $94 1 million a year ago, a reduction of $22 $7 million, we continued to delever our balance sheet through cash flows generated from operations.
As we turn to the first quarter based on performance to date, we continued to see solid business momentum with a favorable market outlook.
This concludes our prepared remarks, operator, we will now take questions.
Thank you.
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Our first question comes from.
Alan Webber.
<unk> capital your line is open.
Oh, hi, good morning.
Hey, good morning, Alan Hi.
Hi, John excellent results.
So can you talk about kind of how do you grab.
Where you are kind of supply chain and how you think about.
No.
Flat with.
With flat pricing market share gains and like that potentially.
So.
On the first part of your question regarding supply chain like everybody else. It is.
In this segment of the business.
The challenge with the availability first and foremost and second with cost one of the compounding factors that has really come into play in the fourth quarter as the port congestion not just getting ships into the port, but being able to get containers out of the port and then getting containers back in so it's been very difficult for him availability.
On the ship as well as getting those containers in and out of the porch once they clear customs.
Can you can you help me on the second part of your question I didn't quite understand your second the second part.
Just kind of on the hydro grip kind of where you are today and kind of how you think about it over the next few years in terms of you know.
April to gain market share profitability, whatever you can talk really talk about.
Sure.
Obviously, you've been around a long time now and so far.
Follow this very closely it was a struggle on the onset that we knew this was going to be.
Our long term profitable.
In Denver for us to grow sales and devotional by the company.
I believe that we are still in the very early stages of this endeavor of this initiative and the profitability is certainly there I believe that there'll be some level of reduction.
Form a pricing environment, but as we gain more share on the packaged nail and screw portion of the business that business comes with generally speaking with the significantly higher margin. So long term outlook I would expect our margins to remain where they are from that.
Increase.
Going forward again this is a long road.
And our long term growth opportunity for us from both a sales standpoint, as well as a market share standpoint, so we have a long runway in front of us and.
And we expect this.
This initiative to continue to expand and grow year after year, John I don't know, if theres anything that you'd like to share.
I would just like to say that.
Number one I agree with everything that Bob said number two.
To put it in perspective.
With our 40% growth for the year.
In 2021 as compared to 2020.
We are still just scratching the surface.
Potential of this category.
Within our core customer segment.
One of our core customer segments pro lumber dealers, we continue to grow our business in that very important segment.
We are.
Okay.
Even with the success that we've had.
We worked our railed in 2020 and in 2021.
A large part in actually converting new customers because of Covid.
So that activity has just started to recently picked back up and I would tell you. Alan you asked a question about what's the future look like for that category.
All of the all of the investment in all of the hard work.
Is behind us so it literally is green pastures ahead.
Okay and then my last question.
Can you talk also kind of long term.
Wood products how are you.
Think about gross margins.
From where you are today, because we have some kind of.
Unusual events offsetting just how you think about gross margins long term.
Yes, so with the.
I think with the impact that the LIFO reserve had in 2021 of $18 3 million and that representing nearly almost 200 basis point reduction.
In total adjusted gross margins for the company.
With the work that we've done to really understand pricing from our suppliers as well as what we believe will stick versus what could have downside risk.
Because they are more highly commoditized products, we are very comfortable al on that and believe that our 2021 margins are sustainable.
And depending on what happens with.
The global supply chain and global economy.
Once that kind of gets normalized we don't anticipate erosion in the majority of our product categories. So we believe we believe where we are.
Today is fully sustainable and there's actually potential upside.
Okay.
And I guess the last part is on on.
Okay.
SG&A how much do you expect that to have to increase or what do you see a continuing ability to kind of leverage that SG&A.
I think based on where we are today.
Our SG&A is probably as good as its ever been from a ratio perspective.
And.
We are very cautious about adding costs back into the system.
And we don't foresee.
Any need to significantly increase our base cost structure going forward.
Obviously it is dependent on continued growth.
And if we.
We continue to grow at the rate that we grew in 2021, I think youll see the dollars go up but we should be able to continue to leverage.
The current operating structure and our current cost structure, certainly moving forward and al in all of the all of the.
Actions that we took in 2020.
As a result of the.
The pandemic were fully restored.
Throughout 2021 and are reflected in those results.
And we've highlighted if there was anything that would have been unusual within our operating expenses such as the class action settlement. So we feel good about our operating expense structure today.
We've made necessary wage adjustments, which a lot of companies are battling with.
So we think that will continue to be able to lever our existing structure.
Great well, thank you very much and great results.
Thank you al.
Thank you.
As a reminder to ask a question you would need to press star one on your telephone to withdraw your question. Please press the pound key.
I show. Our next question comes from the line of Irma <unk> from please proceed with your question.
Hello, Hey, I've actually had a fairly new to <unk>.
My name is arm on them.
Not with any company, but I guess I just had a question about the lumber volatility lumber prices have been extremely volatile lately.
How does that affect HUD take how does that affect our work.
Yes, so obviously in our in our prepared statements we've talked about the growth of wood products on a year over year basis being in.
In the upper 20% growth.
I think 2008 to 28, 5%.
The majority of that if not all of it.
Hmm.
Our modest is price related.
So if.
If you look at.
Total watch sales as a percent of our total sales over the course of the past several years, including 2021.
That percentage is actually slightly down.
Even with the price volatility and particularly the price escalation that occurred in wood products in the second half of 2020 and certainly through the first half of 2021 wood prices have.
Have have come down a little bit, but they are still significantly above say the 10 year historical average prior to <unk>.
Prior to the pandemic.
So a lot of them.
Where we are in wood products today, and where we are profitable in wood products. We will continue to remain in wood products, but strategically it is not a category that we are investing in it is not a category that we are looking to expand and in fact as we continue to execute.
Our strategic category growth.
Our strategy.
I think wood products will continue to become smaller and smaller percentage of our total sales over time.
Awesome well I appreciate it.
Thank you very much.
Thank you.
Thank you I'm showing no further questions in the queue at this time I'd like to turn the call back to Mr. John Variably for closing remarks. Please go ahead.
Thank you Chris over the past several years, we have successfully navigated through a multitude of challenges while simultaneously achieving meaningful improvements in the business that is driving the sustainable change in our financial model.
The gains we've made in the execution of our sales growth margin expansion and expense management initiatives all contributed to our record financial performance in 2021.
That said our performance would not be possible without the commitment and dedication of our entire team of associates.
I am very proud of the entire organization as our collective efforts have created a very bright future for our company and our stakeholders.
I want to thank them again for their hard work and fortitude and dedication to providing exemplary service to our customers.
I want to thank our customers 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 for your participation in our call today, we look forward to speaking with you again, when we report our first quarter results.
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