Griffon Corporation (GFF) Q4 2020 Earnings Report, Transcript and Summary

Greetings and welcome to the Griffon Corporation's Fourth Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. A 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, Brian Harris, Senior Vice President and Chief Financial Officer. Thank you. You may begin.

Thank you, Maria. 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, from today’s remarks, we’ll adjust for those items that affect comparability between periods. These items are explained in our non-GAAP reconciliations included in our press release. Now I will turn the call over to Ron.

Thanks, and good afternoon, everyone. Griffon entered this year from a position of strength both operationally and competitively. Our 2018 pivot out of the capital intensive commodity driven Plastics business and continued focus on branded domestically manufactured products set the stage for strong revenue, earnings and cash flow growth. We have also captured additional market share as we continue to realize synergies across our businesses, innovate new products, maintain our exceptional product quality and deliver superior service to our customers. Our businesses were performing well before the pandemic and the performance of our product portfolio has continued to show strength throughout this unprecedented year as consumers organized their living spaces, repaired and upgraded their homes and spent more time outdoors. Our strong fourth quarter and fiscal year results reflect the strengths as well as the actions we've taken over the last several years through our portfolio reshaping. We finished the year with revenue up 9%. Adjusted EBITDA up 18% and adjusted EPS up 50% compared to the prior year results. We also generated strong free cash flow of $88 million in 2020 compared to $69 million in 2019. We continue to see consumers investing in home projects, such as closet renovations, tending to their lawns and gardens, enhancing their enjoyment of the outdoors, and upgrading the exterior of their homes, including their garage doors. We took action this year to fortify our already strong balance sheet. In August we completed a public offering of 8.7 million shares of common stock with net proceeds of $178 million. This equity offering, coupled with extending maturities on our unsecured bonds to 2028 and our credit facility to 2025, will help us execute on our growth strategy and continue to invest in our businesses and to reduce leverage while providing sufficient liquidity to weather any near-term effects of the pandemic or other market uncertainties. To that end, achieving a leverage ratio of 3.5 times was one of our key priorities coming into the year and we're pleased to have executed on this target as our strong financial performance and free cash flow conversion during the year, coupled with our equity offering brought our net-debt-to EBITDA leverage to 3.4 times. At the onset of the COVID-19 pandemic, ensuring the health and safety of our employees and our customers has been and continues to be our top priority. Since early March, we have proactively implemented health and safety measures across all of our global facilities, and as local and national authorities have circulated additional guidelines for employee health and safety, we're incorporating those as well. We reacted immediately, decisively and have spared no expense in dealing with the COVID-19 risk and will continue to do so. All of our facilities are currently operational; however, we continue to be mindful of elevated case counts in Europe and now in the U.S. again. In the previous shutdown, all of our U.S. facilities were deemed essential businesses and we expect that to continue should another broad shutdown occur. Turning to the market update, beginning with Consumer and Professional products, we saw strong fourth quarter demand for seasonal lawn and garden products, tools, storage and organizational solutions at major retailers and home centers across all of our geographies, U.S., Canada, Australia, UK and Ireland. We're excited about the progress we've made in our previously announced AMES strategic initiative. We've recently broadened this strategic initiative across all of our AMES businesses and will now include all the North American facilities, AMES United Kingdom, AMES Australasia and our manufacturing facility in China. The expanded focus of this initiative leverages the same three key development areas being executed within our U.S. operations, first multiple independent information systems we unified into a single data and analytics platform, which will now serve AMES globally. Second, certain global operations will be consolidated to optimize facilities footprint and talent. Third, strategic investments in automation and facilities expansion will be made to increase the efficiency of our manufacturing and fulfillment operations and support our growing e-commerce initiative. Expanding the rollout of the new business platform beyond AMES U.S. to include our global operations will extend the project by one year with completion now expected by the end of calendar year 2023. When fully implemented, these actions will result in an annual cash savings of $30 million to $35 million, which is $15 million more than we planned with the original initiative and a $30 million to $35 million reduction in inventory which is $10 million more than we planned in the original initiative. These improvements are based on our fiscal 2020 operating results. Moving to Home and Building Products segment, in 2020 we had strong residential section garage door demand resulting from the same drivers around investing in homes as our Consumer Professional Products segment. Our commercial door business also had strong demand driven by the benefits of being combined with Clopay, e-commerce warehouse construction and demand for security products. Telephonics 2020 revenue increased over the prior year and order demand was strong in the fourth quarter, increasing 22% compared to the prior year fourth quarter. Backlog ended the year at $380 million. We continue to have a good pipeline of opportunities, both domestically and internationally. We also announced today that Telephonics implemented an initiative to improve its operational efficiencies to streamline its organization and consolidating facilities. Brian will discuss this more as he goes through the financial details. Finally, earlier today our Board authorized an $0.08 per share dividend payable on December 17, 2020 to shareholders of record on November 25, 2020. This marks the 37th consecutive quarterly dividend to shareholders, which has grown at an annualized compound rate of 17% since we initiated it in 2012. We're continuing to focus on managing our cost structure and improving operating efficiencies, strengthening our balance sheet and increasing value to our customers to better service and a broader branded product portfolio. We believe our 2020 results demonstrate we can do that successfully and more to come in 2021. With that, let me turn it over to Brian to take you through a little more detail. Brian?

Thank you, Ron. I'll start by highlighting our fourth quarter consolidated performance. Revenue increased 15% to $661 million and adjusted EBITDA increased 8% to $63,000 both in comparison to the prior year quarter. Normalized gross profit for the quarter was $175 million, increasing 10% over the prior year quarter. Our gross margin contracted 118 basis points to 26.4%. Fourth quarter normalized selling, general and administrative expenses were $126 million or 19% of revenue compared to $115 million or 20.1% in the prior year fourth quarter. Fourth quarter GAAP income from continuing operations is $20.1 million or $0.41 per share compared to the prior year period of $16 million or $0.37 per share. Excluding items that affect comparability from both periods, current quarter adjusted net income from continuing operations was $22 million or $0.44 per share compared to the prior year of $17 million or $0.40 per share. Turning to our full year results, consolidated revenue increased 9%to $2.4 billion and adjusted EBITDA increased 18% to $236 million, both in comparison to the prior year. Normalized gross profit for the year was $646 million increasing 11%, while gross margin increased 41 basis points to 26.8%. 2020 normalized selling, general and administrative expenses were $474 million or 19.7% of revenue compared to $449 million or 20.3% in the prior year. 2020 GAAP income from continuing operations was $53 million or $1.19 per share compared to the prior-year period of $46 million or $1.6 per share. Again, excluding items that affect compatibility from both periods, 2020 adjusted net income from continuing operations were $73 million or $1.62 per share compared to the prior year of $46 million or $1.8 per share. Corporate and unallocated expenses, excluding depreciation, were $12 million in the fourth quarter and $47 million for the full year. Effective tax rate, excluding items that affect comparability for the full fiscal year was 32.2% compared to 34.3% in the prior year. Capital spending was $14 million in the fourth quarter compared to $18 million in the prior year quarter. For the full year capital expenditures was $49 million compared to $45 million in the prior year. The current year included $7 million of capital expenditures related to the AMES strategic initiative. Depreciation and amortization totaled $15 million for the fourth quarter and $52 million for the full year. Regarding our balance sheet and liquidity as of September 30, 2020 we had a net debt position of $825 million and debt-to-EBITDA leverage of 3.4x as calculated based on our debt covenant. This reflects one and a half turns of deleveraging from the prior year period. Our cash and equivalents were $218 million and total debt outstanding was $1.05 billion. Borrowing availability under the revolving credit facility was $370 million subject to certain loan covenants. Regarding Q1 in 2021 guidance, like many other companies, we withdrew our guidance in our fiscal second quarter because of uncertainties arising out of the COVID-19 pandemic. We reinstated it in our fiscal third quarter having gained a clear picture of the effects of the pandemic's impact for this fiscal year. Our regular practice has been to give guidance once a year and not to update that guidance during interim periods. We are returning to that practice. We are pleased that we exceeded both our revenue and adjusted EBITDA guidance. Our full year 2020 revenue guidance was approximately $2.3 billion and we achieved $2.4 billion. Our full year 2020 adjusted EBITDA before unallocated expenses guidance was $270 million plus and we achieved $283 million. It is also worth noting that our reinstated guidance in the third quarter was significantly higher than our original guidance provided back in November 2019. That guidance was 2% to 3% revenue increase compared to 2019 and adjusted EBITDA before unallocated expenses of $250 million plus. Regarding our 2021 annual guidance, providing guidance for 2021 is particularly challenging given the unprecedented events in 2020, and the continued global uncertainty we all face as we enter 2021. Nevertheless, we intend to follow our policy of providing guidance we feel to achieve more at the beginning at the year, and not providing updates with the guidance afterwards. We expect Griffon's overall revenue in 2021 to be approximately $2.4 billion. In terms of profitability, we expect fiscal year 2021 adjusted EBITDA to be $285 million or better excluding both unallocated costs of $47 million and one-time charges related to the AMES and Telephonics initiative. As Ron stated earlier, the expanded AMES initiative will extend the project by one year and we now expect completion by the end of calendar 2023. When fully implemented these actions will result in annual cash savings of $30 million to $35 million, and a reduction in inventory of $30 million to $35 million; both based on fiscal 2020 operating levels. The cost to implement this new business platform will include one-time charges of approximately $65 million, which increased from $35 million under the original initiative and capital investments of approximately $65 million increased from $40 million under the original initiative. The one-time charges are comprised of $46 million of cash charges which includes $26 million of personal related costs, such as training, severance and duplicate personnel costs, as well as $20 million of facility and lease exit costs. The remaining $19 million of charges are non-cash and are primarily related to asset write-downs. During the fourth quarter, Telephonics initiated a Voluntary Employee Retirement Plan, which was followed with reduction in force in order to streamline the organization and improve efficiencies. These actions will cost approximately $4.5 million, $2.1 million of which was recognized in Q4, and the remainder will be recognized in the first quarter of fiscal 2021. Telephonics is also consolidating its three Long Island based facilities into two company owned facilities. Total costs for the facility consolidation will be approximately $4 million, which primarily consists of capital expenditures occurring in 2021. Total capital expenditures for 2021 are expected to be $65 million, which includes $15 million supporting the AMES initiative and $4 million supporting the Telephonics facilities consolidation. Depreciation and amortization is expected to be $64 million of which $10 million is amortization. We expect to continue to generate free cash flow in excess of net income, inclusive of the capital investments and other investments we are making at AMES and Telephonics. We expect net interest expense of approximately $63 million for fiscal 2021. Our expected normalized tax rate will be approximately 32%, as is always the case geographic earnings mix and any legislative action including new guidance on tax reform matters may impact grades. As a final comment with our guidance for fiscal 2021 attempts to factor in external variability, the potential impacts from a global increase in COVID-19 cases, and the related potential shutdowns to combat the spread of the virus, as well as the challenging global macroeconomic environment and the uncertain U.S. political environment, all make providing guidance challenging. Our guidance also assumes that we will be able to offset wage and commodity inflation through a combination of cost mitigation actions and pricing. Now, I'll turn the call back over to Ron.

Thanks, Brian. Griffon’s 2020 total year performance is something we are proud of, considering how much has been achieved in just a few years since we began the portfolio repositioning, and then adding the impact to the disruptions from the COVID-19 pandemic in 2020. We expected the portfolio actions would provide opportunities for top line growth and margin expansion through the realization of efficiencies during the integration process of our acquired companies. Further, we expect it to become stronger competitively by providing increased value to our customers in terms of our broader product offerings, improved service levels, and enhanced efficiency. Our results for 2020 are consistent with achieving those opportunities. Total year revenues grew 9%. Adjusted EBITDA increased 18%, and earnings per share increased 50%. Free cash flow totaled $88 million, and we strengthened our financial position, through better cash performance and paying down debt, achieving our net debt to EBITDA leverage goal was September 30, 2020 leverage of 3.4 times. We continue to believe the diversity of our businesses, our emphasis on domestic manufacturing, and our focus on leading brands provides a strong foundation for growth and a competitive advantage. We have made progress, but we know there is still considerable opportunity for improving the performance of all of our existing businesses. In addition, we remain committed to finding strategic acquisitions that expand and strengthen our product portfolio within each of our home markets. In closing, I'd like to thank our workforce, which has shown exceptional dedication and perseverance throughout this challenging period. We appreciate the importance of their work in order to deliver these excellent results. We know we will continue to face obstacles and are monitoring any new developments on COVID-19, but we are committed to the safety and welfare of our 7,400 employees, as well as our customers and all of our communities. With that operator, we're happy to take any questions.

[Operator Instructions] Our first question is from Bob Labick with CJS Securities. Please proceed with your question.

Our next question is with Julio Romero with Sidoti & Co. Please proceed with your question.

Our next question is from Josh Chan with Baird. Please proceed with your question.

Our next question is with Justin Bergner from G Research. Please proceed with your question.

Our next question is with Keith Hughes with Truist. Please proceed with your question.

[Operator Instructions] Our next question is with Trey Grooms with Stephens. Please proceed with your question.

Our next question is with Justin Bergner with G Research. Please proceed with your question.

We have reached the end of our question-and-answer session. I would like to turn the floor back over to Ron Kramer, Chief Executive Officer for concluding comments.

Thank you. Take care, stay safe, be well. We look forward to following up with you in January. Bye-bye.

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