Griffon Corporation (GFF) Q2 2020 Earnings Report, Transcript and Summary

Greetings and welcome to Griffon Corporation’s Second Quarter 2020 Earnings Conference Call. At this time all participants are in a listen-only mode. [Operator Instructions] As a reminder, this conference is being recorded. It is now pleasure to introduce your host, Mr. Brian Harris, Chief Financial Officer. Please go ahead.

Thank you. Good afternoon, 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 Griffon’s 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 and good afternoon everyone. Let me start by saying, I hope that all of you and your families are safe and healthy. Griffon entered this unprecedented COVID-19 pandemic from a position of strength on an operational and a competitive basis. Our positive momentum, along with enhanced liquidity and a strengthened balance sheet, enable us to manage the near-term effects of the current environment, while continuing to make the necessary investments in our business to execute our strategic growth plan and drive long-term shareholder value. Our top priority has been and will continue to be ensuring the health and safety of our employees and our customers. Since early March, we've been proactively implementing health and safety measures across our global workforce. As local and national authorities have circulated additional guidelines for employee health and safety, we've incorporated those as well. As almost all of our facilities have been open and remain operational, our additional safety measures include: increasing the cleaning frequency and enhancing the sanitation of all of our facilities, restricting external visitor access to our facilities, adjusting production schedules and hours of operation to promote distancing between employees and the workplace, implementing work from home programs wherever possible, and canceling all air travel and unnecessary work travel. These are samplings of the broad actions we've taken across all of our businesses to protect our workers, while maintaining critical operations. In mid-March, we also began an appreciation award program to hourly U.S. employees on the front lines working at our manufacturing and distribution sites, as recognition of the difficulties they've been facing. This situation has put a tremendous strain on our entire workforce, but they've done an exceptional job keeping our operations running, while simultaneously keeping everyone safe. We owe them our gratitude, not just for doing an outstanding job, but also for supporting operations that are critical to our country. Let's go through some of the specific businesses. In Consumer and Professional products and Home and Building products all of our U.S., Canadian and Australian facilities are operational. This includes all AMES, ClosetMaid, Clopay and CornellCookson facilities. Each of these businesses provide critical products supporting national infrastructure. To the extent practical, we are permitting our employees in these segments to work remotely. As I mentioned before, all of our manufacturing and distribution facilities have implemented strict protocols to ensure employee health and safety while at the workplace. In the United Kingdom in accordance with UK government directives in late March, our AMES UK facilities, are not operating at this time and employees have been directed to stay home until what we expect to be a re-opening the end of June. In Mexico, our ClosetMaid manufacturing facility closed earlier in April at the direction of Mexican authorities. This facility supports ClosetMaid sales principally in the U.S. and Canada and is expected to resume operations imminently. Telephonics, our defense electronics business, continues to operate at all of its sites, as it provides critical manufacturing and services, supporting the U.S. military and its operations are essential for maintaining our national security. Let me go through an update on the second quarter performance, starting with Consumer and Professional Products. We saw a steady demand through the entire quarter for seasonal lawn and garden products, tools and storage and organizational solutions at major retailers and home centers across North America and in Australia. The UK was impacted by the March COVID related shutdown. In Home and Building Products strong demand for sectional residential and commercial doors continued through the end of the quarter. We also saw increasing demand for rolling steel products in the quarter. At Telephonics, the long anticipated Lockheed Martin MH-60R FMS program with India was signed. Telephonics received an initial $5 million booking in March, which is the first part of the $50 million in total bookings expected from this production contract. We expect the balance of this contract to be booked in this fiscal year. Across all of our segments, our suppliers have largely been able to support us and we've not experienced any meaningful supply chain issues to date. Currently, we have sufficient components and material on hand to sustain our operations without major interruptions. Let's talk about our balance sheet. While the COVID-19 pandemic clearly has eclipsed our typical business update, I want to call out attention to some of the recent developments. In January 2020 we expanded the capacity and extended the term of our revolving credit facility to 2025. We increased the revolver by $50 million to $400 million and have an additional $100 million of availability through its accordion feature. On our last call on January 30th, we discussed our intent to refinance the portion of our 2022 bonds. Shortly thereafter, on February 4th, we completed a private placement refinancing $850 million of our $1 billion of 5.25% bonds due in 2022 with 5.75% notes due in 2028. Substantially all of these bonds were exchanged for registered bonds on April 22nd. We're pleased by the success and the timing of a bond offering and revolver expansion, and with how these actions position us for the future. These transactions enhance our liquidity and extend our maturities, reinforcing our balance sheet to weather the unpredictable conditions we're operating in today. Lastly, we expect to continue our dividend program. We understand how important our dividend is to shareholders and it reflects the resilience of our business even in difficult times. To that end, earlier today our Board authorized a $0.075 per share dividend payable on June 18th 2020 to shareholders of record on May 21st 2020. This marks the 35th consecutive quarterly dividend to shareholders, which has grown at an annualized compound rate of 17% since we initiated it in 2012. Let me turn it over to Brian for a closer look at the results. Brian?

Thank you, Ron. I'll start by highlighting our second quarter consolidated performance compared to our prior quarter results. Revenue increased 3% to $566 million and adjusted EBITDA increased 13% to $48 million. Gross profit for the quarter was $152 million, which includes $1.4 million of charges related to the AMES strategic initiative. Excluding this charge, gross profit was $153 million, increasing 12% with gross margin increasing 210 basis points. Second quarter selling, general and administrative expenses of $126 million, including $4.7 million of charges related to the AMES strategic initiative and acquisition costs related to Apta and M&A activity postponed at the end of Q2. Excluding these charges, SG&A expenses were $122 million, increasing 9%. As a percentage of sales, SG&A adjusting for the charges increased 120 basis points to 21.5% due to consulting, and COVID related expenses and compensation. Second quarter GAAP 2020 net income was $900,000 or $0.02 per share compared to the prior year period of $6.5 million or $0.15 per share. Excluding items that affect comparability from both periods, current quarter adjusted net income was $10 million or $0.23 per share compared to the prior year of $6.4 million or $0.15 per share, an increase of 53% on a per share basis. Our effective tax rate, excluding items that affect comparability for the quarter, was 35.9% and for the year to date period it was 34.4%. Capital spending was $9 million in the second quarter, in line with prior year. Depreciation and amortization for the quarter was $16 million. Regarding our segments, Consumer and Professional Products second quarter revenue decreased 4% to $275 million, driven by decreased volume due to prior year new product load-ins and the current quarter impact of COVID-19 on the UK, as well as an unfavorable foreign exchange impact of 1%. This is partially offset by favorable mix and pricing and the incremental contribution from the Apta acquisition of 2%. Adjusted EBITDA was $25 million, decreasing 13% due to reduce sales and tariffs, partially offset by contribution from Apta. The quarter EBITDA also had a 1% unfavorable foreign exchange impact. Adjusted EBITDA margin was 9.1% compared to 9.9% in the prior year quarter. The AMES strategic initiative continues on plan and we expect to exit the Belle Vernon, PA and Falls City, Nebraska, facilities by the end of fiscal year. Home and Building Products second quarter revenue increased 12% to $210 million, driven by increased volume and favorable mix and pricing. Adjusted EBITDA increased 52% to $31 million, driven by increased revenue and improved operational efficiencies. Adjusted EBITDA margin was 14.6% in the current quarter compared to 10.8% in the prior year quarter. Defense Electronics first quarter revenue was $82 million compared to the prior period of $75 million, primarily due to increased volumes. Adjusted EBITDA during the period is $4.2 million compared to the prior quarter of $4.9 million, impacted by mix and timing of bid and proposal costs. Backlog at March 31, 2020 was $332 million. Corporate and unallocated expenses, excluding depreciation were $11.9 million in the second quarter. Regarding our balance sheet and liquidity, as of March 31, 2020 we had $69 million in cash and total debt outstanding of $1.23 billion, resulting in a net debt position of $1.16 billion and a net debt to EBITDA leverage of 5.1 times as defined in our debt covenants. Further, we expect benefits from the CARES Act and other legislations to provide $10 million plus cash inflow to fiscal 2020 and $5 plus million to fiscal ‘21. We have ample liquidity to manage through the COVID-19 pandemic. As previously mentioned, we refinanced our 850 of $1 billion 5.25% bonds through ‘22. The maturity of the new bonds is 2028, with a coupon of 5.75%, adding approximately $2.5 million of interest expense for this fiscal year. Also during the quarter Griffon extended its revolving credit facility to 2025 and increased the maximum borrowing amount by $50 million to $400 million, with $195 million available at March 31st 2020. In addition, the facility has a $100 million accordion feature. Also note that as Griffon entered the month of April, its seasonal cash generation period started which typically continues through the end of fiscal year. Griffon's first six months of the year were strong with our trailing 12-month adjusted EBITDA before unallocated expenses up $17 million to $263 million, as compared to fiscal 2019 of $246 million. Regarding Q3, we expect the vast majority of our facilities to remain operational, as our production and distribution is considered essential. We have ample liquidity and anticipate strong free cash flow in the second half of the fiscal year. This, along with the extended maturities of our debt, all serves to support our business, as we navigate through near-term challenges. Notwithstanding, there are several factors that are evolving and are unpredictable at this time. These factors include depth and duration of global COVID-19 related business interruptions, its ultimate impact on economic conditions and the cost associated with enhanced safety, modified production measures and appreciation awards. We normally give guidance once a year and do not update that guidance during the year, but these are not normal times. The uncertainty resulting from COVID-19 makes it extremely difficult to provide guidance and as a result, we have decided to suspend our 2020 guidance. As you can see from our results, we are making good progress on achieving our guidance of at least $250 million of adjusted EBITDA before unallocated expenses, and we're indeed ahead of that plan. Our long-term deleveraging strategy and goal of 3.5 times net debt to EBITDA remains unchanged. Let me give you some commentary regarding what we have observed across our businesses over the last six weeks. Beginning with CPP. We continue to see steady demand in North America and Australian markets. However, AMES UK currently does not expect to resume operations until July. In Home and Building Products, Clopay residential sectional doors have seen volume declines of approximately 15% to 20% during the month of April, but commercial door volumes are steady. We have not seen and are not expecting a material impact on Defense Electronics revenue through Q3. Now, I’ll turn the call back over to Ron.

Thanks, Brian. We had a solid second quarter and our year-to-date performance was well ahead of last year. While we adjust to the current circumstances, our long-term strategy remains intact and we have the conviction to follow through on the key elements of our long-term strategic growth plans. Our capital investments will continue for our original guidance to $60 million. Recall that roughly half of our capital expenditures are related to maintenance operations, with the other half promoting our growth and competitiveness. We will continue to make all of these investments, including our AMES strategic initiative. As I mentioned earlier, we will continue our dividend program. And while we have $58 million remaining under our Board approved share buyback program, we currently do not intend to repurchase shares. Second half of our fiscal year generate significant free cash flow due to the seasonality of our businesses. We'll continue to focus on deleveraging our balance sheet and reaching our goal with 3.5 times net debt to EBITDA on the next few years. Our workforce has shown an exceptional dedication throughout this crisis. We all appreciate the importance of their work, supporting the critical infrastructure of our global home markets. We’ll continue to be proactive. We're taking measures to maintain their health and safety, as we work our way through this pandemic, I'd just like to say that our management team is up to this challenge, we’ll persevere through it and I'm confident that we will build to a bigger and better tomorrow. Operator, let's take whatever questions.

Thank you. We'll now be conducting a question-and-answer session. [Operator Instructions] Your first question is from Bob Labick of CJS Securities. Please go ahead.

The next question is from Julio Romero of Sidoti & Company. Please go ahead.

The next question is from Justin Bergner of G Research. Please go ahead.

[Operator Instructions] The next question is from Tim Wojs of Baird. Please go ahead.

Next is a follow-up question from Justin Bergner of G Research. Please go ahead.

This concludes the question-and-answer session. I would like to turn the floor back over to Ron Kramer, Chief Executive Officer for closing comments.

Well, we've been able to make it through these incredibly turbulent times. We believe we continue to be well positioned. I'm very confident and optimistic about what's going on within the company and very excited about our future. To everybody on the call I hope you're all safe, healthy, and we look forward to speaking to you again after the end of this quarter. Thank you and goodbye.

This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.