Huttig Building Products, Inc.

Thank you, operator and good morning everyone. We would first like to apologize for the delay.

There have been some technical difficulties with the line and we appreciate your patience. So thank you, and welcome to Huttig's First Quarter 2020 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 first quarter 2020 operating and financial results and provide commentary on our aggressive efforts to combat the effects of the COVID-19 pandemic.

Following the 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 Huttig disclaims any obligation to update information discussed on this call as a result of developments that occur afterward. Also, to the extent you're listening to this call on replay, information could have already changed.

Additional information about factors that could potentially impact 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.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 under Financials.

And now it is my pleasure to turn the call over to Jon for opening remarks.

Thank you, Phil. Good morning and thank you for joining our first quarter 2020 earnings call.

During the call, we will discuss our first quarter performance as well as our COVID-19 readiness and response plan. I will begin by providing an overview of our quarterly results and COVID-19 plan.

Bob and Phil will discuss our first quarter results. And I will close the call with a more detailed status of our COVID-19 plan.

Even though we experienced some level of disruption as a result of the pandemic towards the end of the first quarter, our operating results were significantly better across every key financial metric as compared to the prior year quarter. On a stand-alone basis, the first quarter of 2020 marked the first full quarter that our results began to reflect the positive impact we planned and anticipated since embarking on our accelerated growth strategy.

Unfortunately, as our results were just beginning to reflect the impact of our efforts and strategy, our world like virtually every other company on the planet changed. The unprecedented magnitude of the Corona virus pandemic forced us to shift resources away from the continued execution of our growth strategy to focus on the development and implementation of our COVID-19 readiness and response plan.

While we believe we were ahead of the curve in developing, executing and consistently updating our plan, the pandemic has had a devastating effect on the economy, which has resulted in unparalleled levels of U.S. unemployment.

Furthermore, there is no certainty or consensus regarding the duration and impact of the pandemic will continue to have on the U.S. economy, especially in the event the virus resurges at some point in the future.

Based on all of the information available to us today, we anticipate the pandemic will negatively affect our performance in the second quarter and possibly throughout the second half of 2020. As such, we have taken aggressive actions to mitigate its potential effect on our business.

Later in the call, I will address the key components of our plan as well as the actions we have taken to date. Now I will turn the call over to Bob to discuss our first quarter performance.

Thank you, Jon and good morning everyone. I will provide an update on our operational and sales initiatives and discuss specific factors that affected our first quarter performance.

Bill will then discuss our overall financial performance for the quarter. In the first quarter, we saw a continuance of the positive trends we discussed during our year-end call just 9 weeks ago.

Through our focus on more profitable, non-commoditized sales, we delivered higher year-over-year sales as well as higher gross margins. At the same time, operating expenses were in line with our expectations.

Our sales increased $5.6 million or 2.8% in the first quarter of 2020. This is a result of the increased levels of construction activity, which began in the second half of 2019, coupled with the continued momentum from our strategic sales initiatives.

In addition to our national growth strategy, we have established branch level sales initiatives based on local market opportunities. Our sales growth in strategic categories are generally at higher margins, and our efforts to shift product mix toward non-commoditized products are generating the desired results.

This, plus the continued focus on our pricing strategy, enabled us to increase gross margins by 120 basis points over the prior year to 20.1% in the first quarter. Some highlights related to our strategic sales initiatives include: a 21% growth in fastener warehouse sales with a corresponding margin increase of 360 basis points.

Secondly, a significant portion of the sales and margin growth has come from additional market share gains as we convert more core and other customer segments to our [indiscernible] program. Third, a 11.5% sales growth in prefinished stores, which is the key value-add service proposition for our customers.

Fourth, our deck, rail and trim sales out of warehouse increased by 38.4% with margin growth of 42.9% compared to Q1 of 2019; and fifth, our overall [indiscernible] warehouse sales increased 7.3% while direct sales, which are generally less profitable based on sales mix, declined 10.3%. These are just some of the highlights related to our strategic initiatives.

Though they demonstrate that our plan is gaining traction, we expect that like the rest of our business, the pandemic will have a significant impact as we move to the remainder of 2020. From an operating expense perspective, we lowered our expense ratio by 90 basis points as compared to the first quarter of 2019 from 20.1% to 19.2%.

The improved leverage was driven in part by some of the cost-reduction actions we took in the fourth quarter of 2019. Additionally, as stated on previous calls, we adjusted and right-sized our inventory by location, which required a higher-than-normal number of inventory transfers between locations, resulting in higher personnel and logistics costs.

These transfers were largely completed by the end of 2019. From a working capital perspective, in anticipation of lower sales demand, we have continued to right-size our inventory levels, rationalize product lines and focus our resources on our strategic product initiatives.

As we move through the balance of the year, we will continue this focus on emphasis based on the changing environment. We will also continue to achieve margin improvement through our pricing strategies and focus on strategic value-add programs like our fastener, pre-hung and prefinished exterior door business.

Now I'll turn the call over to Phil to discuss our financial performance.

Thank you, Bob. First quarter 2020 net sales were $203 million, which was $5.6 million or 2.8% higher than the first quarter of 2019.

Increased levels of construction activity plus momentum from our strategic initiatives helps stem the declining sales environment we saw in the second half of 2019. Gross margin was 20.1% of net sales during the first quarter of 2020 compared to 18.9% in the first quarter of 2019.

The increase in margins is consistent with the observations and trends we discussed on our fourth quarter call as we continue to focus on higher-margin sales opportunities. Operating expenses decreased $600,000 or 1.5% to $39 million, representing 19.2% of net sales in the first quarter of 2020 compared to $39.6 million or 20.1% of net sales in the first quarter of 2019.

Personnel expenses declined $1.2 million primarily related to lower contract labor and medical expenses, while non-personnel expenses increased $600,000 largely due to higher insurance claims. We conducted a review of our goodwill and recorded a $9.5 million noncash impairment charge.

The impairment charge was largely driven by the sustained decline in our market capitalization coupled with the COVID-19 environment. Our operating loss in the first quarter was $7.6 million.

Adjusted for the goodwill impairment charge, we had operating income of $1.9 million compared to an operating loss of $2.2 million a year ago. Adjusted EBITDA was $3.5 million during the first quarter of 2020 as compared to a negative $300,000 for the first quarter of 2019.

Next, I will address our balance sheet and liquidity. We had total debt of $149.9 million at March 31, 2020, compared to $145.3 million a year ago.

The increase is primarily due to higher working capital levels as compared to a year ago, largely driven by higher accounts receivable from increased sales. Cash used in continuing operating activities was $14.4 million in the first quarter of 2020 compared to cash use of $5.6 million in the first quarter of 2019.

Due to the seasonality of our business, we typically build working capital in the first quarter. Total available liquidity was $55.4 million as of March 31, 2020, as compared to $53 million at March 31, 2019.

From an overall liquidity perspective, given the anticipated decline in market demand, we have been proactive in communications with our senior lending partners as well as business partners throughout the supply chain. We believe it is in the best interest of supply chain partners to work together through this difficult environment.

We have taken precautionary measures across various cash management touch points, including capital spending, expense reductions, credit policies and other areas to address the full spectrum of levers available to us. Now I will turn the call over to Jon for closing comments.

Thank you, Phil. I am very proud of the work the entire organization did in 2019 that directly led to the results we achieved in the first quarter.

Our first quarter performance was in line with our expectations as well as the trends we discussed on our last call. While we do not -- while we did not experience pandemic-related disruption to the business until very late in the first quarter, in mid-February, we recognized the potential threat that COVID-19 posed to the business and made a sharp and immediate pivot to develop a readiness and response plan.

We completed and implemented the first version of our COVID-19 plan on February 29 and have consistently updated and modified the plan as more information became available and as the business environment continue to change. The primary goals of the plan have been and continue to be: to create a work environment that protects the health and well-being of our associates, to support the country's efforts to control the spread of the virus and to protect the interests of all Huttig stakeholders by ensuring we have ample liquidity to manage through the crisis.

The primary components of our plan are: associate safety, health and welfare; the pursuit of all potential benefits of the CARES Act applicable to Huttig; aggressive cash management; and operational, restructuring and expense reduction. Since February 29, we have consistently updated our associate safety, health and welfare plan based on COVID-19 employee safety guidance from the Centers for Disease Control, Department of Labor and Occupational Safety and Health Administration.

We developed and implemented procedures designed to keep our associates safe, including, but not limited to, facility cleanliness and sanitation, staggered work hours, workstation distancing, required temperature checks prior to entering any location and required the use of personal protection equipment. In addition, on March 20 we successfully completed our work-from-home program across the entire organization for every position that could work from home.

While only certain aspects of the CARES Act are applicable to Huttig, we are taking full advantage of those provisions, including the payroll tax deferral and the employee retention tax credit programs. The goal of our cash management plan is to eliminate or defer as long as possible all short-term uses of cash.

On March 23, we requested that all of our suppliers temporarily hold all open warehouse purchase orders that had not yet shipped. After a comprehensive analysis of our inventory levels and anticipated demand, we worked closely with our suppliers and successfully reduced our open purchase orders by nearly $36 million, eliminating a meaningful amount of our projected second quarter cash use.

Simultaneously, we began collaboratively working with our suppliers, landlords and other key business partners to explore opportunities to adjust or mitigate our short-term use of cash. On March 30, we implemented the first components of our cost-reduction management plan by indefinitely suspending the company 401(k) match, all 2020 budgeted merit increases, all company-related travel and all non-safe-related capital expenditures.

On April 20, we instituted additional components of the plan, including, but not limited to, workforce adjustments, temporary wage reductions ranging from 5% to 20% and the elimination of all non-personnel expenses that were not essential to maintaining short-term operating capabilities. All of these actions were implemented in the months of March and April, and therefore, our results will not reflect the full benefit of these actions until May.

As stated earlier, the speed at which the environment continues to change and the level of uncertainty that continues to exist regarding the future impact of pandemic will have on the U.S. economy considerably inhibits our ability to predict or forecast our future operating performance.

While we do not provide guidance, we estimate the cumulative effect of our cost-reduction actions will result in an estimated decline in operating expenses of $8.5 million to $10 million over the second and third quarters as compared to the first quarter expense structure. In addition, while we are aggressively executing every aspect of our COVID-19 plan, we expect that the rapidly changing environment and the continued lack of clarity to what the future holds will certainly challenge us in the second quarter and possibly for the balance of the year.

The disruption that pandemic has had on our lives as well as derailing the momentum, progress and results we achieved in the first quarter is disappointing. But we are not discouraged or dissuaded.

In fact, this challenge has galvanized the resolve of our entire management team. As the environment continues to change, we are committed to maintaining our [indiscernible] management of every controllable aspect of the business to preserve liquidity.

I cannot be more pleased with the manner that all of our associates have pulled together to steer the company through this crisis and I'm very proud of our entire organization. Operator, we will now take questions.

Your stock operated under the minimum allowed amount on the NASDAQ for 31 days. Two questions, did you receive a potential delisting notice?

And if you were delisted, could you please comment on how that might negatively impact the company?

Well, we did receive the notice and we filed an 8-K related to the notice for with which there's further information with regard to the time line to comply which was extended based upon the COVID-19 environment by NASDAQ and the SEC. So I would refer you to the 8-K which has all of the information that I think that you might be looking for.

Thank you.

Thank you, operator. Nationally and globally, the challenges we face today are unprecedented, unpredictable and fraught with risk.

The future of our economy and the related impact it has on our industry and our company remain uncertain. I believe that people generally react in one of two ways when facing a challenge of this magnitude.

They are either paralyzed by fear or step up, lean in and embrace the challenge. Over the course of my career and certainly over the course of the last 90 days, I have been witnessed to and affected by both.

As a stakeholder in Huttig, I can assure you that our management team and the entire organization has embraced this challenge and is doing everything possible to protect your interest in our company. I want to thank all of our associates for quickly adapting to a rapidly changing environment as well as the fortitude and urgency they continue to demonstrate in making difficult decisions during these unprecedented times.

I also want to thank our customers for continuing to place their trust in us to care for their business. And I especially want to thank our supply partners and other key business partners that are collaboratively working through these challenging times with us together as true partners.

Finally, I thank you for your ownership in our company and your participation in our call today and we look forward to speaking with you again when we report our second quarter results.