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spk00: Good morning and welcome to the Huttig Building Products Third Quarter 2020 Earnings Call. Participants will be in a listen-only mode until the end of the call when the company will have a question and answer session. Please limit questions to one question and one follow-up question. I would now like to turn the call over to Philip Kite, Vice President and Chief Financial Officer. Please go ahead, Scott.
spk03: Thank you, Operator. Thank you and welcome to HUD's third quarter 2020 earnings call. With me this morning is John Bravely, President and Chief Executive Officer, and Bob Furio, 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 will open up the lines 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 anticipated, and HUDDG disclaims any obligation to update information discussed on this call because of developments that occur afterward. 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 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.hudig.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 under financials. Now it is my pleasure to turn the call over to John for opening remarks. Thank you, Phil.
spk02: Good morning and thank you for joining our third quarter 2020 earnings call. 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 a Q&A session. I want to start by expressing my sincere gratitude to all HUDUC 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 the 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 posed to the business and the successful development and implementation of our comprehensive COVID-19 readiness and response plan in late February have 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 a 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 Mill Road Capital LLC a private investment firm and current HUDDIC shareholder. On August 6, 2020, the company received an unsolicited non-binding expression of interest from Mill Road to acquire all of the outstanding common stock of the company for $2.75 per share. On October 14, the company received a second unsolicited non-binding expression of interest from Mill Road to acquire all of the outstanding common stock of the company for $4 per share, subject to certain contingencies. While HUDDIC was not proactively marketing the company for sale at the time it received Mill Road's proposals, HUDDIC's board of directors has always and will continue to direct the company in a manner that it believes will maximize value for all shareholders. To that end, the board is reviewing Mill Road's proposal and as it has always done, will determine the course of action it believes is in the best interest of all shareholders. The company has previously communicated and reiterates 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 plan 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 as 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.
spk01: 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 the market stabilized 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% of prior year levels. 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, New York facility into our Newington, Connecticut branch. In addition to the impact on our sales, margins were negatively impacted as we depleted and liquidated inventories, including in some cases at below normal margins. Though we generally review and rationalize product offerings on a regular basis, we formally 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 moved through this process, our sales were negatively impacted as we no longer replenished or promoted these items as part of our regular product offerings. Margins were also negatively impacted as we moved 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 current levels of demand. Based on discussions with our supply partners, we believe this disruption will be temporary. In some cases, our suppliers are in the process of adding additional capacity. However, we expect some level of supply chain disruption to continue over the next several quarters. And four, we continue to experience labor shortages in certain markets in which we operate. These shortages have resulted in longer lead times on our higher margin value-add production orders, creating a negative impact on sales. 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 additional personnel as demand for these products continues to be high, resulting in extended lead times. We estimate restructuring and product rationalization activities impacted third quarter sales by approximately $9 to $10 million, or about 5% on a year-over-year basis. Additionally, We estimate that these activities negatively affected gross margins by approximately 40 to 50 basis points. It is 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, though we continue to achieve growth in certain key product categories. 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, and we expect our efforts to shift product mix toward non-commoditized products will drive the overall desired results. Some third quarter highlights related to our strategic sales initiatives include, one, 60% growth in fastener 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 core and targeted growth customer segments to our package nail and screw program. Sales gains have allowed us to successfully reduce and right-size inventory levels in this fast-growing category. Four, sales in pre-finished stores, which is a key value-add service proposition for our customers, was negatively impacted in the third quarter by continued labor shortages and extended lead times. This is an important area of focus as we address the underlying issues with our lead times. And fifth, Deck, rail, and trim sales were up nearly 18% despite the challenging environment. This is one of our key strategic categories experiencing supply chain disruption and is 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 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 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, and Newington, Connecticut facilities. From the sales and operations perspective, restructuring activities were substantially completed in the third quarter, that 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 move 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 by 240 basis points from 19.2% to 16.8%. The improved leverage was driven by the cost reduction actions we took beginning the fourth quarter of 2019, coupled with the actions taken as part of our COVID-19 readiness and response plan. We believe many of the cost reduction actions taken are sustainable at current volume levels though some incremental add-back is 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 have adjusted to operating our business in a much leaner fashion after full implementation of our COVID-19 readiness and response plan. To illustrate, Our inventory levels are down $35 million compared to a year ago, while volume levels have improved to those approaching prior year sales. Going forward, we will continue to manage and adjust our inventories as demand dictates, and we will consistently focus on improving our terms. We will also tightly manage any necessary adjustments to inventory levels once the supply chain disruption is cleared. Now, I will turn the call over to Phil to discuss our financial performance.
spk03: Thank you, Bob. As anticipated, the COVID-19 pandemic, along with other factors discussed on this call, have 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% lower than the third quarter of 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, net sales were 607.7 million, which is 23.9 million, or 3.8% lower than 2019. The pandemic most affected our second quarter sales with some trailing impact as we moved through the third quarter. As Bob stated earlier, our sales were impacted by restructuring and product rationalization activities, supply chain disruption across several key suppliers, and by 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 for certain key strategic initiatives. Gross margin was 20.1% of net sales during the third quarter of 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 customers for value-add millwork sales as well as supply chain disruption. 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 wound down operations at two locations and sold through inventory at suboptimal margins. The impact from these factors was mitigated somewhat by growth and higher margins in certain strategic categories. Through the first nine months of 2020, those 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. We substantially completed the closure by the end of the third quarter, Operating expenses were 5.6 million or 13.5% to 35.8 million representing 16.8% of net sales in the third quarter 2020 compared to 41.4 million or 19.2% of net sales in the third quarter of 2019. Personnel expenses declined 3 million primarily related to actions taken related to our COVID-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 $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 aforementioned $1.5 million restructuring charge and $9.5 million goodwill write-off in the first quarter were 109.5 million compared to 122 million in 2019. 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 to our employer-sponsored benefit plan, as well as the lower medical claims. Non-personnel costs decreased 3.6 million, As travel and other discretionary spend was curtailed in the third quarter, and we recognized lower fuel costs. The lower expenses were partially offset by higher workers' compensation and other insurance costs. As a percentage of net 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. The impairment was largely driven by the sustained decline in our market capitalization coupled with the COVID-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 30th, 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 in 2019. To restrict working capital management and improve operating results, we were able to continue to significantly reduce debt levels. Pursuant to 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 800,000. 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 a 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 million in 2019. Adjusted for the $9.5 million dual impairment charge and the $1.5 million restructuring charge in 2020, and adjusting for the $11.8 million tax charge in 2019, year-to-date net income was $9.8 million in 2020 compared to a net loss of $100,000 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 million a year ago. Turning to the balance sheet, we had total debt of $101.6 million at September 30, 2020 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, compared to cash provided at $9.6 million in the third quarter of 2019. Due to 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 compared to cash used of $10.2 million in 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 30, 2020, as compared to 46.5 million at September 30, 2019, 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 of 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 will continue to manage our balance sheet and operations in a prudent manner to maximize returns. Now I will turn the call over to John for closing comments.
spk02: 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 COVID-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 a more profitable, more scalable future. I would not be the leader or person that I strive to be if I did not acknowledge that many of the decisions we made to mitigate the threat posed to the business by the virus 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 vain. 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 are at the best level we've achieved in several years. Going forward, we will use the improvements made in our cost structure as the new baseline. And once all wages and benefits are fully restored, all future expense additions will continue to be scrutinized and narrowly focused to support our service proposition. We will continue to focus on strategic product category share growth, as our strategic categories possess the greatest market growth potential, the most meaningful opportunity to continue to differentiate HUDUC in the channel, and the most expedient way to continue to improve our growth profit. We will complete our product line rationalization initiative 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, accretive acquisitions, and potentially share repurchase programs. Lastly, and most importantly, we will continue to invest in our associates, working towards creating a high-performing, accountable culture with the most empowered and engaged associates. Operator, we will now take questions.
spk00: As a reminder, ladies and gentlemen, to ask a question, you will need to press star 1 on your telephone. Again, the star 1 on your telephone keypad. To withdraw your question, please press the found key. Please stand by while we compile the Q&A roster. Once again, ladies and gentlemen, if you have a question, please press star 1 at space 5.
spk02: Operator, as 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 HUDUC and all of our stakeholders is very bright. I cannot 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 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 next year when we report our fourth quarter and 2020 full year results.
spk00: Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.
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