Huttig Building Products, Inc. (HBP) on Q4 2021 Results - Earnings Call Transcript
Operator: Good morning, and welcome to the Huttig Building Products Fourth Quarter 2021 Earnings Call. . Please be advised, that today's conference is being recorded. I would now like to turn the call over to Philip Keipp, Vice President and Chief Financial Officer. Please go ahead, sir.
Philip Keipp: Thank you and welcome to Huttig's fourth quarter 2021 earnings call. With me this morning is Jon Vrabely, President and Chief Executive Officer; and Bob Furio, 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 anticipated and Huttig 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 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 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.huttig.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. Now it is my pleasure to turn the call over to Jon for opening remarks.
Jon Vrabely: 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 fourth year performance and record results. The continued execution of our business plan and the dedication of our associates to serve our customers have largely contributed to our success in 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 5.1% 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, an 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 resulted in full year adjusted EBITDA of $55.1 million or 5.9% of sales as compared to $20.1 million or 2.5% of net sales in 2020. 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 20.1% in 2020 to 22.2% in 2021. The improvement in our gross margins is more remarkable considering the unprecedented $18.3 million LIFO charge we incurred in 2021. To our knowledge, none of our public company peers used the LIFO method to value their inventories. As such on a comparative basis, the LIFO charge we incurred in 2021 reduced our gross margin's operating profit and adjusted EBITDA by $18.3 million. To provide some perspective, the LIFO charge in 2020 was $2.4 million and over the prior 10 year period, the LIFO charge averaged $1.3 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 remain 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 director's commitment to disclose developments related to its strategic review process as appropriate or required. And 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.
Robert Furio: Thank you, Jon. Good morning, everyone. I'll 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. While we're pleased with our sales performance in the fourth quarter and for the full year 2021, our total growth opportunity continued to be hampered by product availability and continued labor shortages. However, as we have moved into 2022, we 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 than two of the four categories, composite deck rail and trim and interior doors. We remain on allocation with the third category, exterior doors and do not have a definitive timeline for normalization. Though, we continue to work closely with our supplier to service our customers as effectively as possible. The fourth category, fastener, continues to grow to accelerated levels despite the continued challenges with those in freight carriers. Huttig Grip fasteners are a cornerstone of our growth strategy and we continue to meaningfully expand our share in multiple customer segments. We continue 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 congestion. While we believe the challenges will begin to ease as the coronavirus threat diminishes and the global economy normalizes, we currently anticipate that we and many of our other suppliers will be dealing with this challenge well into 2022. Throughout our 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 if 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, we believe they will be more moderate and 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 local strategic categories represented approximately 82% of our total sales in 2021. This planned intentional mix shift has resulted in our ability to successfully replace sales of lower margin nonstrategic products with increased sales of strategic categories. In 2021, our gross margin on 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. To illustrate, in 2021 national strategic categories represented 48% sales and 56% of shipping margins. Composite deck rail and trim sales increased nearly 14% in 2021. In mid-2021, we secured a new Huttig-Grip fastener stocking program, and 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 Huttig-Grip fastener, 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. Fabricated 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% in 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 outdoor 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 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 and provide a high level of service to our customer. The changes we have made to our business model over the last seven to 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, and we intend to harvest that opportunity to drive continued meaningful improvement across our business. Now I'll turn the call over to Phil to discuss our financial performance.
Philip Keipp: Thank you, Bob. Net sales were $230.4 million in the fourth quarter of 2021, which were $45.8 million or 24.8% higher than a year ago. The increase was attributable to a number of factors including a 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 that 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, as 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 structuring activities completed in 2020 and by ongoing supply chain disruption and labor shortages, Millwork sales benefited from improved market pricing. Building product sales increased 21.1% in the fourth quarter to $100.4 million compared to $82.9 million in 2020. Building product increased due to continued strong demand for certain product lines within the category including certain strategic product lines, such as Huttig grip fasteners and it was offset by supply chain disruption and product rationalization activities related to our focus on higher margin non-commoditized products. Wood product sales increased 28.4% in the fourth quarter to $17.2 million compared to $13.4 million in the fourth quarter of 2020. 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 20.1% 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 in an inflationary cost environment. We all also benefited from increased purchasing incentives in 2021. As stated in our earnings release, we used 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 first in 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 if the FIFO valuation method had been applied. This represents 320 basis points of net sales, which would've otherwise been accretive to our gross margin percentage. In a 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, the LIFO method resulted in an average auction and gross margins of approximately 20 basis points of 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 in a tight labor market. Non-personnel costs decreased $400,000 primarily from the one-time benefit of a $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 $500,000 in the fourth quarter of 2021, compared to $600,000 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 $100,000 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 $300,000 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 to what operating of results would have been using the FIFO method. Turning to the full year, 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 residential 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%, $412.2 million, building product sales increased 18.2% to $447.9 million and wood product sales increased 38% to $77.7 million. Gross margin increased $48.6 million or 30.5% to $208 million in 2021 as compared to $159.4 million in 2020. Gross margin as a percent of net sales increased to 22.2% in 2021, compared to 20.1% 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 and inflationary environment. We also benefited from increased purchasing incentives into 2021. For the full year 2021, the LIFO method result in gross margins that were $18.3 million lower than a FIFO method had been used. This had the effect of reducing our gross margin percentage by 195 basis points and 2020, the LIFO method reduced gross margins by $2.4 million or 30 basis points of net sales. The significant impact 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 to $10.4 million reflecting increased favourable incentive compensation, driven by improved operating results and wage increases. These increases were partially offset by lower medical costs and a $1.5 million Cares Act employee retention tax credit. Non-personnel expenses decreased $200,000 in 2021, primarily benefiting from the upper mentioned $2.1 million class action settlement, as well as improved bad debt provision offset by higher fuel insurance and tax costs. Overall, our cost structure was 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. The 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 $100,000 for the ended December 31, 2020. Income tax in 2021 reflects the utilization of $41.4 million of federal tax loss carry forwards. As a result of the foregoing factors, we reported net income from continuing operations of $49.1 million in 2001, as compared to a net loss of $900,000 in 2020. Adjusted EBITDA was $55.1 million in 2021 and $20.1 million in 2020. The LIFO inventory valuation method reduced adjusted EBITDA by $18.3 million and $2.4 million for the years 2021 in 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 de-lever our balance sheet through cash flows generated from operations. As we turn to the first quarter, based on performance to date, we've continued to see solid business momentum with a favorable market outlook. This concludes our prepared remarks. Operator will not take questions.
Operator: Our first question comes from Alan Weber of JB Capital. Your line is open.
Alan Weber: Hi, Jon. Excellent results. Thanks. So can you talk about kind of Huttig grip, where you are kind of supply chain, how you think about in a flat -- with flat pricing market share gains and like that potentially.
Jon Vrabely: On the first part of your question is regarding supply chain. It's like everybody else that is in the segment of the business. It's a challenge with availability first and foremost and second with cost. One of the compounding factors that has really come into play in the fourth quarter is 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 from availability on the ship, as well as getting those containers in and out of the ports once they clear customs. Can you can you help me on the second part of your question? I didn't quite understand your second part.
Alan Weber: Just kind of, on the Huttig grip kind of where you are today and kind of how you think about it over the next few years in terms of able to gain market share profitability or whatever you can talk really talk about.
Jon Vrabely: Sure. Obviously you've been around it a long time, Alex, so you you've followed us very closely. It was a struggle on the onset and we knew that this was going to be a long term profitable endeavor for us to grow sales and diversify the company. I believe that we are still in the very early stage of this endeavor of this initiative and the profitability is certainly there. I believe that there'll be some level of reduction from a pricing environment, but as we gain more share on the packaged mail and screw portion of the business, that business comes with the generally speaking with significantly higher margin. So long term outlook, I would expect our margins to remain where they are, if not increase going forward. Again, this is a long road and a 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 we expect this initiative to continue to expand and grow year after year. Jon, I don't know if there's anything that you'd like to share.
Jon Vrabely: 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 on the potential of this category. Within our core customer segment -- in one of our core customer segments of pro lumber dealers. We continue to grow our business in that very important segment, but we are even with the success that we've had, we were derailed in 2020 and in 2021 in a large park in actually converting new customers because of COVID. So that activity has just started to recently pick back up. And I would tell you, Alan when you asked a question about what's the future look like for that category, all of the investment and all of the hard work is behind us. So it literally is green pastures ahead.
Alan Weber: Okay. And then my last question, can you talk also kind of long term ex-wood products, how 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.
Jon Vrabely: Yeah. 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 growth 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 out on that and believe that our 2021 margins are sustainable and depending on what happens with the global supply chain and global economy and once that kind of gets normalized, we don't anticipate erosion in the majority of our product categories. So we believe where we are today is fully sustainable and there's actually potential upside.
Alan Weber: Okay. And I guess the last part is on the SG&A how much do you expect that to have to increase, or do you see a continuing ability to kind of leverage that SG&A?
Jon Vrabely: I think based on where we are today, it's our SG&A is probably as good as it's 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 continue to grow at the rate that we grew in 2021, I think you'll see the dollars go up, but we should be able to continue to leverage the current operating structure and current cost structure certainly moving forward.
Philip Keipp: And Alan, all of the cost actions that we took in 2020 as a result of the pandemic were fully restored throughout 2021 and are reflected in those results. And we've highlighted that there was anything that would've 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 we'll continue to be able to lever our existing structure.
Alan Weber: Great. Well, thank you very much and great results.
Operator: Our next question comes from the line of . Please proceed with your question.
UnidentifiedAnalyst: Hello. Hey, Actually I'm fairly new to how to -- my name is Arman . I'm a 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 Huttig? How does that affect our work?
Jon Vrabely: Yeah, so obviously in our prepared statements, we talked about the growth of wood products on a year over year basis being in the upper 20% growth. I think 28.5%. The majority of that if not all of it Arman is price related. So if you look at total wood 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 escalations that occurred in wood products in the second half of 2020, and certainly through the first half of 2021. Wood prices have come down a little bit, but they are still significantly above say the 10 year historical average prior to the pandemic. So, 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's not a category that we are looking to expand. And in fact, as we continue to execute, our strategic category growth strategy, I think wood products will continue to become a smaller and smaller percentage of our total sales over time.
UnidentifiedAnalyst: Awesome. Well, I appreciate it. Thank you very much.
Operator: Thank you. I'm showing no further questions in the queue at this time. I'd like to turn the call back to Mr. Jon Vrabely for closing remarks. Please go ahead.
Jon Vrabely: 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. But 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, 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, when we report our first quarter results.
Operator: This concludes today's conference call. Thank you for participating. You may now disconnect and have a pleasant day.
