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spk00: Good morning and welcome to the HUDG Building Products First Quarter 2021 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. I would now like to hand the call over to Caleb Cape, Vice President and Chief Financial Officer. Please go ahead, sir.
spk02: Thank you and welcome to HUDG's First Quarter 2021 Earnings Call. With me this morning is John Vrably. President and Chief Executive Officer, and Bob Perio, Executive Vice President and Chief Operating Officer. During the call today, we will discuss our first quarter of 2021 operating highlights and financial results. We'll also provide commentary on the current business environment, including the impact on the pandemic and the continued progress we have made across a number of facets of our business. 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 HUDDG disclaims any obligation to update information discussed on this call because of developments that occur afterward. 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 the 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 adjustments 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 any future use of the recording. You can replay the call on the investor relations page of our website. Now, it is my pleasure to turn the call over to John for opening remarks.
spk01: Thank you, Phil. Good morning, and thank you for joining our first quarter 2021 earnings call. It has been just over 60 days since we reported our fourth quarter and full year 2020 results, so our call today will primarily focus on first quarter financial results. Before I turn the call over to Bob and Phil, I will provide some initial comments on our first quarter performance and the market. We meaningfully improved every key financial metric in the first quarter as compared to 2020. Sales of our company-wide strategic product categories grew approximately 14% and 17% on a same-store sales basis. Gross margins increased 120 basis points to 21.3%. Our expense ratio decreased 200 basis points to 17.2%. Operating income margin increased 320 basis points to 4.1%. and our adjusted EBITDA margin increased 320 basis points to 4.9%. Aided by strong demand in the residential construction market, along with a disciplined approach to pricing and expense management, we generated record first quarter results since first being publicly traded in 1999. For the quarter, total housing starts grew approximately 10% to 360,000 units. The negative impact that COVID-19 has had on the residential construction market pales in comparison to many other industries. That said, the pandemic has thrown the global supply chain into unchartered waters, creating severe shortages of products across a multitude of industries, including the U.S. residential construction market. Organizations that rely on the supply of products that require global ocean freight services face greater supply chain challenges than organizations that primarily source products in North America. Understanding an organization's product offerings and the level of supply-related challenges in today's environment are important for perspective of top-line results. And I'll turn the call over to Bob to discuss our operating highlights and initiatives. Thank you, John. Good morning, everyone.
spk03: I will provide an update on our operational and sales initiatives and discuss specific factors that affected our first quarter operating performance. Phil will then discuss our first quarter financial performance. We remain focused on growing our strategic product categories, pricing management, which is critical in this environment, and improving our operations to reduce variances and create capacity to continue to leverage our leaner cost structure. Sales of our strategic categories grew 14% and accounted for 107% of our total growth for the quarter. We have frequently discussed the importance of our strategic product categories as well as our plan to rationalize lower margin non-strategic categories. During the quarter, sales of our non-strategic categories declined nearly 12%, in part due to product rationalization. As a percent of total sales, company strategic categories grew from approximately 45% to 49%, and non-strategic categories declined from nearly 22% to 18% on a year-over-year basis. 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 whose average shipping margin is 510 basis points higher without incurring meaningful incremental operating costs. Considering restructuring and rationalized product sales in 2020, same-store sales were nearly $8 million higher than our reported sales growth, increasing our total same-store adjusted sales growth to 10% on a year-over-year basis. Our strategic building products categories significantly outperform millwork categories in the quarter. Historically, the first quarter is our strongest quarter for direct sales, particularly in composite deck rail and trim products, and we grew our direct business in the quarter. In addition, the fastening market has been especially strong as supply has tightened due to the lack of ocean freight capacity. Lastly, for the past three quarters, we, like many other companies and many other industries, have not been successful in filling open-scale labor positions, and it stunted our ability to grow beyond supply shortages. For the quarter, composite deck rail and trim sales increased over 29 percent. Hooded grip fastener sales increased over 40 percent, and pre-finished exterior doors increased 5 percent. While we are pleased with our growth in strategic building product categories, we are disappointed with our fabricated door sales, and we are currently taking actions to improve our performance in this critical product category. In addition to achieving strategic category sales growth and meaningful category mix-ship, we also grew our shipping margins in both the building products and door categories. While we are generally pleased with our sales performance in the quarter, our total growth opportunity remains meaningfully hampered by product to labor shortages. Because the majority of the products we sell require ocean freight services, and because we do not focus on commodity wood products that are primarily manufactured in North America, we are experiencing extended lead times in our purchase allocation with the majority of our largest suppliers. To date, we have successfully managed these challenges, ensuring that we maintain adequate inventory to meet the needs of our committed customers and are selectively pursuing profitable growth with new customers. While we do not anticipate a demand gap to grow in the near term, we also do not anticipate it narrowing and suspect it will remain relatively unchanged for the balance of this year. The amount of time required to manage a rapidly changing price environment has increased exponentially. That said, we have done a good job in managing and implementing price changes And as a result, our shipping margins contributed 50 basis points of the 120 basis point improvement we achieved and a gross profit during the quarter. Operational improvement initiatives contributed another 30 basis points of the improvement, primarily through better management of operating variances. Despite challenges, many of the initiatives that we have been working so hard to achieve are simultaneously crossing the tipping point from trending well to making a noticeable contribution to our improved performance. Now I will turn the call over to Phil to discuss our financial performance.
spk02: Thank you, Bob. We are pleased with our first quarter financial performance, which has yielded solid results across virtually every key financial metric. As we are not a commodity-driven sales organization, our top-line performance has not benefited by some of the strong tailwinds realized by some of our competition in today's market. Rather, we face strong supply chain headwinds, as discussed, earlier on the call. First quarter 2021 net sales were 214.7 million, which was 11.7 million or 5.8% higher than the first quarter of 2020. Adjusted for the impact on restructuring and product rationalization activities totaling 7.9 million, we estimate the total sales increase was 10%. The impact from the supply chain disruption and labor shortages is difficult to quantify but would be additive to the 2020 adjusted growth. Across our national strategic categories, our largest sales growth was in the fastener and composite deck rail and trim categories. As we move into the second quarter, demand levels remain strong with favorable sales trends to date. Gross margin was 45.7 million in the first quarter of 2021 compared to 40.9 million in the first quarter of 2020. As a percentage of sales, gross margin was 21.3% in the first quarter of 2021 compared to 20.1% in the first quarter of 2020. The improved gross margin percentage reflects the favorable impact from our focus on higher margin sales opportunities, including our strategic sales categories as these lines represent a higher percentage of our overall sales as compared to a year ago. For example, Sales from our fastener program comprised a higher percentage of our overall sales in the first quarter of 2021 as compared to a year ago and generated significantly higher margins in 2021 as compared to 2020. Margins were also favorably impacted by operational improvements of variance management and lower provisions for excess inventories as we continued to manage stock levels. The increase in our gross margin percentage is more pronounced considering we had a disproportionate increase and direct sales in the first quarter of 2021 as compared to 2020. These sales are at lower margins when compared to warehouse shipments. Operating expenses decreased $2.1 million to $36.9 million in the first quarter of 2021 compared to $39 million in the first quarter of 2020. Personnel costs decreased $600,000, or 2.7%, reflecting workforce and other adjustments made to our cost structure. These cost reductions were partially offset by higher incentive compensation driven by improved operating results. Non-personnel costs decreased 1.5 million or 8.9%. Operationally, first quarter discretionary spending such as travel and advertising was curtailed due in part to the pandemic. Additionally, our bad debt provision improved in the first quarter of 2021 as pandemic-related disruption began to subside. Higher insurance costs for property and vehicles partially offset the reduction in operating costs. Overall, the cost structure was levered against higher sales volume. As a percentage of net sales, operating expenses were 17.2% in the first quarter of 2021 compared to 19.2% in the first quarter of 2020. Operating income in the first quarter was 8.8 million compared to an operating loss of 7.6 million a year ago. adjusted for the 9.5 million goodwill impairment charge in 2020. First quarter 2020 operating income was 1.9 million. Through strict working capital management and improved operating results, we were able to significantly reduce debt levels on a year-over-year basis. Pursuant to terms of our senior credit facility, we also achieved lower interest rates based on improved liquidity levels. As a result, Our first quarter interest expense declined $600,000 from $1.3 million in 2020 to $700,000 in 2021. As a result of the foregoing factors, we reported a net income of $8.1 million in the first quarter compared to a net loss of $8.9 million a year ago. Adjusted for the $9.5 million goodwill impairment charge in 2020, adjusted net income was $600,000. We generated adjusted EBITDA of 10.5 million during the first quarter of 2021, triple the 3.5 million reported in the first quarter of 2020. Turning to the balance sheet, we had total debt of 115.2 million at March 31, 2021, compared to 149.9 million a year ago, a reduction of 34.7 million. As previously stated, The decrease in debt is primarily due to improved operating results and lower inventory levels as compared to a year ago. From an overall liquidity perspective, total available liquidity increased $30 million to $85.4 million at March 31, 2021 as compared to $55.4 million a year ago. We are pleased with our first quarter financial performance and remain optimistic as we move through 2021 as our initiatives continue to take hold and bring a meaningful impact to our results. Operator, we will now take questions.
spk00: Thank you. To ask a question, you will need to press star 1 on your telephone. Again, that is star, then the number 1 on your telephone keypad. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster.
spk01: Peter, as it appears that there are no questions in the queue, I am going to proceed. Go ahead, please. Our focus on driving profitable sales growth of our strategic product categories improved variance management, and disciplined management of the expense structure contributed to record first quarter operating results as a public company. We have been successful in making sustainable improvements in the execution of our sales growth and margin expansion initiatives. These improvements have resulted in our ability to leverage higher sales volumes of our highest margin product categories across an improved expense structure. When the strategy and plan works, new levels of financial performance can be achieved. And when the highest margin categories also possess the greatest opportunity for future growth, new levels of financial performance can be achieved for many years into the future. Our performance will not be possible without the commitment and dedication of our entire team of associates. I am 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 the entire team 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 to you again when we report our second quarter results. I'm going to say that concludes my comments.
spk00: Thank you, speakers. This concludes today's conference call. Thank you for participating. You may now disconnect.
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