Griffon Corporation (GFF) Q1 2019 Earnings Report, Transcript and Summary

Greetings, and welcome to the Griffon Corporation First Quarter 2019 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Brian Harris, Chief Financial Officer. Thank you. You may begin.

Thank you, Michelle. Good morning, everyone. With me on the call is Ron Kramer, our Chairman and Chief Executive Officer. Our call is being recorded and will be available for playback, the details of which are in our press release issued earlier today. As in the past, our comments will include forward-looking statements about the company's performance based on our views of the businesses and the environments in which they operate. Such statements are subject to inherent risks and uncertainties that can change as the world changes. Please see the cautionary statements in today's press release and in our various Securities and Exchange Commission filings. Finally, some of today's remarks will adjust for those items that affect comparability between reporting periods. These items are explained in our non-GAAP reconciliations included in our press release. Now I'll turn the call over to Ron.

Thanks. Good morning. We're off to an excellent start to fiscal 2019, with double-digit growth in sales and EBITDA driven by solid underlying demand coupled with the benefits of our portfolio reshaping initiatives. First quarter 2019 revenue increased 17% to $511 million, and our segment adjusted EBITDA from continuing operations increased 30% to $57 million compared to the prior year. Higher revenue was driven by growth across our Home & Building Products segment, both organically and through acquisitions. Our improved profitability reflects the steady progress we have made with operational efficiency improvements and the integration of ClosetMaid and CornellCookson. In addition, we've mitigated higher input costs by realizing product pricing increases with our customers and continue to make progress. With respect to our capital allocation strategy, we have been disciplined about directing capital to maximize shareholder value, including making growth investments in our operating businesses, supporting our dividend, opportunistically repurchasing shares, and strategic M&A. Those of you who followed Griffon know that we have been enthusiastic about our June 2018 acquisition of CornellCookson, which is the North America leader in rolling steel and grille products. This business is proving to be an advantageous addition to Clopay through providing topnotch commercial rolling steel products to be offered alongside our commercial sectional doors, along with adding hundreds of professional dealers to our network. CornellCookson continues to see strong demand for its products, and has more than a dozen new products in its pipeline, which are expected to be ready for full-scale production within the next two years. Today, we're announcing an exciting strategic investment at Clopay Building Products which will enable us to meet increased customer demand for our core products as well as support our launch of a wave of new commercial products resulting from our CornellCookson acquisition. To support these activities and sustain product demand, we have launched a $14 million investment in facilities infrastructure and equipment at the CornellCookson location, in Mountain Top, Pennsylvania, which serves the Eastern half of North America. This expansion project includes a 90,000-square-foot expansion to the existing 184,000 square foot facility, along with the addition of state-of-the-art manufacturing equipment. Through this expansion the CornellCookson Mountain Top location will improve its manufacturing efficiency, its shipping operations, as well as increased manufacturing capacity to support full-rate production of new products when they're ready to launch. We have high confidence in our management team's track record, led by Steve Lynch at Clopay, and they've executed on and delivered outstanding results related to strategic capital initiatives in the past, and we have no doubt they're going to do it in this project. The outlook across all of our businesses is positive, which will allow us to reduce our net debt to EBITDA leverage from its current 5.4 times to 3.5 times over the next few years as we execute our strategic plan. Finally, during the quarter, we repurchased 29,300 shares of common stock for a total of $300,000 at $9.91 per share, which still leaves us $58 million remaining under our existing Board authorizations. We'll continue to return cash to our shareholders through our dividend policy. As we announced earlier today, our Board authorized a $0.0725 per share dividend payable on March 21, 2019 to shareholders of record on February 21. This marked the 34th consecutive quarterly dividend paid to shareholders, and it has grown at an annualized compound rate of 20% since 2012. Let me spend a few minutes and go through each of the segments before I give it to Brian to go through the financials in a bit more detail. Start with Home & Building Products, first quarter revenue increased 19% to $440 million, driven both by the contributions from recent acquisitions and organic growth paced by favorable mix, pricing, and increased volume, partially offset by lower sales resulting from adverse weather conditions in Australia and Canada, and a reduction in storage and organizational sales due to timing. Segment adjusted EBITDA increased 31% to $52 million driven by higher revenue and the related drivers of its growth, partially offset by increased input costs and tariffs. We continue to see strong demand for our products across the segment, and to realize benefits from the diversity of our products and markets served. Turning to Telephonics, our Defense Electronics business, fiscal first quarter revenue increased $71 million compared to the prior year of $66 million, segment adjusted EBITDA from continuing operations increased to $4.8 million from $4.2 million in the prior year. Backlog at the end of December was $367 million. During the quarter, Telephonics received two contracts of note. First was for maritime surveillance radars for the U.S. Navy, MH-60 Romeo helicopters, second contract is a replacement upgrade for NASA's existing Airport Surveillance Radar-8, secondary surveillance radar at its Wallops Island flight Center. These awards underscore the scope of our product offerings as well as the range of government entities, which we can provide value-added systems and services. Overall, we're confident in the outlook in our defense electronics business. We have a healthy pipeline of U.S. and international opportunities, we're seeing increased activity in quotes and bidding, which supports our expectation that Telephonics will return to growth in 2020 and beyond. It's an excellent business. We're really excited about its future. Brian, why don't you take them through the financials a little more?

Thanks, Ron. Beginning with a brief recap of our consolidated performance in the first quarter, revenue of $511 million increased 17%, and gross profit increased 18% to $143 million, both in comparison to the prior year quarter, with the increase driven by a combination of organic growth and contributions from acquisitions Gross margin increased 40 basis points to 28% compared to the prior year quarter. First quarter selling, general and administrative expenses, excluding items that affect comparability were $114 million up 11% from the prior year, primarily due to acquisitions. As a percentage of sales, SG&A was lower by 110 basis points year-over-year to 22.3%. First quarter GAAP 2019 income from continuing operations was $8.8 million or $0.21 per share compared to the prior year period of $22.8 million or $0.53 per share. Excluding items that affect comparability from both periods, current quarter adjusted income from continuing operations was $9.2 million or $0.22 per share compared to the prior year period of $2.4 million or $0.06 per share. Our effective tax rate excluding items that affect comparability for the quarter was 34%. Capital spending was $8.4 million compared to $10.8 million in the prior year quarter. Including the strategic capital investment in the CornellCookson mountaintop facility that Ron mentioned, we now expect fiscal 2019 capital spending to be approximately $55 million, up $5 million from our previous CapEx target of $50 million. We expect that spending related to the Mountain Top project will be $10 million in fiscal 2019, partially offset by a reduction of $5 million in other CapEx. Depreciation and amortization totaled $15.1 million for the first quarter. As of December 31, 2018, we had $82 million in cash and total debt outstanding of $1.15 billion resulting in a net debt position of $1.07 billion. We had approximately $275 million available for borrowing under our revolving credit facility subject to certain loan covenants. Corporate and unallocated expenses, excluding depreciation were $11.3 million in the first quarter. Our annual guidance for FY'19 given during our November earnings call remains unchanged at $230 million plus of EBITDA and $2.2 billion in revenue. We expect free cash flow to exceed net income for the year. Now I'll turn the call back over to Ron.

I'm very pleased with our performance in the first quarter of fiscal 2019. Griffon is well-positioned to generate significant cash flow and continue to increase margin through the consolidation of our 2018 acquisitions and continued efficiency initiatives, which will all drive long-term shareholder value. We think the company is doing very well, and we're really excited about where we're going. Operator, we'll take any questions.

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] One moment please while we poll for questions. Our first question comes from the line of Bob Labick with CJS Securities. Please proceed with your question.

Good morning, congratulations on a nice start to the year.

Thanks, Bob.

Good morning.

I just wanted to start -- so, the biggest delta versus our expectations on the positive side was the margins in Home and Building Products, and so I was hoping you could kind of talk us through in a little more detail the drivers of the margin expansion year-over-year, particularly as we thought. Maybe the acquisitions were going to come in a little bit lower and then you were going to get the synergies and then grow over the next two years in margin. So, talk to us about synergies, where you see the margins and the drivers there, please?

Sure. So first, the drivers were mostly mix and volume generated from our lawn and garden AMES business and our Clopay residential garage door business. Our acquisitions are performing well. Their margins are, for the CornellCookson business, in line with our expectations. With our ClosetMaid business starting to exceed the original 8% margin that we would put out there, but still in line with our expectations. All those businesses are on track over the next several years to get to our 12%-plus that we've indicated in the past. So in short, it's really a mix and volume story that drove the result.

Okay, terrific. And I know you've done a lot of work with your customers, and I guess suppliers and stuff as it relates to higher raw materials and tariff impacts. Can you just give us an update as to where that stands, if you think there's future headwind or if you've gotten it kind of all taken care of or where you stand on the tariff impact expected?

Look, we have done an excellent job of mitigating input costs. Over the last several years there have been three factors that have affected manufacturing in our company and in our view in the economy; higher input costs, higher freight costs, and higher labor costs. We have a really good management team that is adept at dealing with market conditions. This is just one more example of our ability to deal with whatever gets thrown at us. So we've dealt with whatever tariff impact is out there, we'll continue to deal with it. We're excited about where these businesses are headed.

Okay, great. If I could sneak one last one in. Just as it relates to the increased investment in CornellCookson, can you talk about the market opportunity there, and I guess how long the project should take and before you start getting some revenues from that project.

Sure. So, we'll start to see the benefits of the project, which will complete towards the end of calendar '19, so we'll start to see those benefits come through in the second-half of '20 as we ramp up. So, this is investment in space for both current products and capacity needs, and our new products. And this project will give us the space for those items as well as give us additional space to allow us to operate at a much more efficient rate.

And I'll add to that. Strategically, we bought CornellCookson because of what we saw as the opportunity in the commercial door business. We have proven over how we repositioned and built Clopay in the residential side during the depths of the downturn, and now enjoy the benefits of it. We see the commercial business as being a natural adjunct to our residential business. We see CornellCookson as being able to improve its profitability. We look at building these businesses long-term, and we're very excited that by making these investments we'll be able to grow both revenues, free cash flow over a long period of time. This is a really good business that fits unbelievable well with what we already own, and we think the combined company is going to be even more valuable in the future.

Super. Thank you so much.

Thank you. Our next question comes from the line of Alvaro Lacayo with Gabelli. Please proceed with your question.

Good morning.

Good morning.

A question on organic growth in Home & Building Products, just if you could sort of provide more detail on the drivers of organic growth. And then maybe in the context of a little bit of the macro volatility we've been seeing, maybe some thoughts on what the drivers will be going forward, if they're the same or if anything changes?

So, I guess the organic growth is about 5% for the quarter.

That's correct.

So, the broader comment is we see our ability to both gain market share, our ability to run the business as being beneficial. And while the negative sentiment around housing is out there, there's still very much a functioning economy, and there's still a housing market. We are positioned around the repair and remodel market, and with a very small exposure throughout all our Home and Building Products businesses to new home construction. So, consumer spending is really what drives people spending money around their house, and our products and our businesses continue to do well. So while we clearly see the headlines, we see no evidence in our businesses that these trends are going to mitigate or slow down this year.

And just the detail around volume versus price mix on that 5% organic number?

We don't break that out in specifics, they both contributed to the growth, mix slightly more than volume.

Okay, thank you.

Thank you. Our next question comes from the line of Tim Wojs with Baird. Please proceed with your question.

Hey, guys, good morning. Nice start to the year.

Thank you.

Thanks. Good morning.

ClosetMaid, you made some comments in the press release that there were some delays there, and just as you've kind of gotten the business…

No, we didn't…

I thought you said there were some storage delays in the -- reduced storage and organizational volume due to the timing of orders.

Yes, it's just -- it's actually year-over-year, so we actually knew that timing, we expected that timing of orders to be delayed a little into -- not even delayed, just to be in the second quarter versus the first. So, it's just a matter of working with our customers and seeing that ahead of us.

Okay, so you guys -- there was nothing in there, it was just kind of normal course of business, okay.

Yes.

And then if you think about the facility, the CornellCookson facility, any way to think about the payback on that facility or what type of margin contribution we could see over kind of a multiyear period, so just the efficiencies, and I think that's what you talked about?

Sure. So, this will help us contribute to getting to our 12%-plus that we've been talking about. These products, the new products, will be at margins better than the base business. And yes, the efficiencies will be there which will help us improve the margin as well. And keep us on track in that quest to 12%.

Okay. And then if you look at just maybe price and mix, and then you look at just inflation costs and the tariffs, would you say that price and mix was able to offset the tariff and inflation benefits in the quarter. It looks like it did; I just want to confirm that.

I think it's obvious.

Yes, that's right.

Okay. And then on Telephonics, could you just walk through what the accounting adjustment was that impacted backlog?

Sure. So, we've adopted revenue recognition guidance. In certain products now you recognize the revenue when they're shipped. And in the past they would be -- sorry, cost-to-cost, so you recognize them over time. So in the quarter, we had a $4 million-plus revenue benefit and a $1 million-plus EBITDA benefit from that. Over the course of the year we expect that to be immaterial, meaning it'll wave up and down as the year goes, and be immaterial for the year in total.

Okay. So, does that have to do with like the commitment to inventory type accounting that's going through aerospace?

I'm not familiar with that term, frankly, so I'll say no.

Okay. I'll talk to you about it later. Okay, sounds good. And then maybe just the last question, you talked about mix, I think, at Clopay a little bit. How do you see mix an AMES and in the storage business trending over the last 12 to 18 months?

We have been able to improve our mix with innovations in our products and in our placements with our customers.

We haven't owned the business for 18 months.

Well, ClosetMaid, we've had that a full year now.

We're at the beginning of what we expect to be the improvement in ClosetMaid. And it is meeting and exceeding all of our internal expectations. Very excited about what it's going to be able to do for us, being part of AMES, in terms of efficiency, in terms of being able to have a broad range of products with branded consumer benefits. This is a really good acquisition that we see our ability to improve the business that we bought and integrate it in with the business that we already owned, be able to take the products into new geographies, Australia, Canada, and the U.K. that are all our home markets. Stay tuned.

And I will just add, in our Clopay business we continue to see improvements in our mix.

.: Marius Morar Hi, this is Marius Morar for Nishu.

Hello. Marius Morar Hi. Can you hear me? This is…

Yes. Could you hear us? Marius Morar Yes. Quick question, given that steel and aluminum have come down a bit in the last two months, has your input cost outlook for full-year '19 changed?

We give guidance once a year. Marius Morar Okay. And my second question, could you give us maybe an update on the procurement synergies and plant rationalization? Are you still in the planning phase or have you moved to the implementation based on those?

I think our investment into the CornellCookson facility shows you that we are in the implementation stage. Marius Morar All right, thank you.

Thank you. Our next question comes from the line of Andrew Casella with Deutsche Bank. Please proceed with your question.

Hey, guys. Thank you for taking the question…

Hi, Andrew.

- and a nice quarter.

Thank you.

I guess first just can you just take us through again just the cadence of kind of when we think about the guidance you provided, and I think in the last quarter I think the indication was that first-half will be little bit weaker than the second-half just as we think about kind of the growth throughout the year, but could you revisit that has changed at all, I mean obviously I think you exceeded expectations, so just how you're thinking about that run rate coming out of the first quarter? A –Brian Harris: Sure. So, generally we will see Q1 and Q2 being our lower quarters and the third and fourth quarter being our higher quarters. So we were off to a good start. We have really no change through the remainder of the year.

Okay, great. And then final question from me, just as you -- as we kind of sit here, obviously you have a 2022 maturity, just any thoughts on strategies around potentially terming that out? Thanks.

Run the business, build up cash flow.

Okay.

Thank you. Our next question comes from the line of Michael Rehaut with JPMorgan. Please proceed with your question. Elad Hillman Hi, this is Elad Hillman on for Michael Rehaut. So, one of the things I wanted to just kind of look at a real closer is given the increased margin this quarter in Home and Building Products, which is really encouraging, but at the same time you sort of maintained your full-year margin target, so how should I be thinking about the cadence of margin realization throughout the rest of the year? And could this potentially represent some upside to your full-year guidance? Thanks.

So, we really give guidance once a year and we haven't changed it, we are early in the year.

And we have always said that we believe the earnings power of our businesses are going to play out over time, we really like the acquisitions that we made, we are early in getting both ClosetMaid and Cornell integrated into the rest of our Home & Building products segment. We feel really good about where we are heading, but we are building this company and have over a long period of time building shareholder value, we don't get distracted by year-to-year guidance.

Thank you. We have reached the end of our question-and-answer session. I would like to turn the call back over to Mr. Kramer for any closing remarks.

Thank you, all. We look forward to reporting our second quarter in May. So, thank you and good-bye.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.