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Edited Transcript of GFF earnings conference call or presentation 31-Jan-19 1:30pm GMT

Q1 2019 Griffon Corp Earnings Call

JERICHO Feb 4, 2019 (Thomson StreetEvents) -- Edited Transcript of Griffon Corp earnings conference call or presentation Thursday, January 31, 2019 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Brian G. Harris

Griffon Corporation - Senior VP & CFO

* Ronald J. Kramer

Griffon Corporation - Chairman of the Board & CEO

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Conference Call Participants

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* Alvaro Lacayo

G. Research, LLC - Research Analyst

* Andrew P. Casella

Deutsche Bank AG, Research Division - Director

* Elad Hillman

* Robert James Labick

CJS Securities, Inc. - President & Director of Research

* Timothy Ronald Wojs

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

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Presentation

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Operator [1]

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Greetings, and welcome to the Griffon Corporation First Quarter 2019 Earnings Call. (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.

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Brian G. Harris, Griffon Corporation - Senior VP & CFO [2]

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Thank you, Michelle. Good morning, everyone. With me on the call is Ron Kramer, our Chairman and Chief Executive Officer. The 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 business 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.

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Ronald J. Kramer, Griffon Corporation - Chairman of the Board & CEO [3]

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Thanks. Good morning. We are 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 on our operating businesses, supporting our dividend, opportunistically repurchasing shares and strategic M&A.

Those of you who follow 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 top-notch 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 2 years. Today, we're announcing an exciting strategic investment at Clopay building products, which will enable us to [lead] 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've 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, CornellCookson Mountain Top location will improve its manufacturing efficiency and shipping operations as well as increase manufacturing capacity to support full rate production of new products when they are ready to launch. We have high confidence in our management team's track record led by Steve Lynch at Clopay, and they have executed on and delivered outstanding results related to strategic capital initiatives in the past, and we've no doubt that 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 5.4x to 3.5x 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 shareholders through our dividend policy. As we announced earlier today, our board authorized the $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 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 or 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 2 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 "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?

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Brian G. Harris, Griffon Corporation - Senior VP & CFO [4]

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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 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 Mountain Top 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 covenant. 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.

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Ronald J. Kramer, Griffon Corporation - Chairman of the Board & CEO [5]

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I'm very pleased with our performance in the first quarter of fiscal 2019. Griffon's 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.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Bob Labick with CJS Securities.

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Robert James Labick, CJS Securities, Inc. - President & Director of Research [2]

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I just wanted to start -- so the biggest delta versus our expectations on the positive side was the margins in Home & 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 2 years in margins. So talk to us about synergies where you see the margins and the drivers there, please.

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Brian G. Harris, Griffon Corporation - Senior VP & CFO [3]

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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.

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Robert James Labick, CJS Securities, Inc. - President & Director of Research [4]

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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 is future headwind or if you've gotten it kind of all taken care of or where you stand on the tariff impact expected?

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Ronald J. Kramer, Griffon Corporation - Chairman of the Board & CEO [5]

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Look, we have done an excellent job of mitigating input cost. Over the last several years, there have been 3 factors that have affected manufacturing in our companies in our view in the economy: higher input cost, higher freight cost and higher labor cost. We have a really good management team that is adept at dealing with market conditions. This was just 1 more example of our ability to deal with whatever gets thrown at us. So we dealt with whatever tariff impact is out there. We'll continue to deal with it. We're excited about where these businesses are headed.

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Robert James Labick, CJS Securities, Inc. - President & Director of Research [6]

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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 before you start getting some revenues from that project?

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Brian G. Harris, Griffon Corporation - Senior VP & CFO [7]

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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 an investment in space for both current products and capacity needs and new products. And this project will give us a space for those items as well as give us additional space to allow us to operate in a much more efficient way.

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Ronald J. Kramer, Griffon Corporation - Chairman of the Board & CEO [8]

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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 we 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 unbelievably well with what we already own, and we think the combined company is going to be even more valuable in the future.

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Operator [9]

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Our next question comes from the line of Alvaro Lacayo with Gabelli.

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Alvaro Lacayo, G. Research, LLC - Research Analyst [10]

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A question on organic growth and Home & Building Products. Just if you can 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?

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Ronald J. Kramer, Griffon Corporation - Chairman of the Board & CEO [11]

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

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Brian G. Harris, Griffon Corporation - Senior VP & CFO [12]

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That's correct.

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Ronald J. Kramer, Griffon Corporation - Chairman of the Board & CEO [13]

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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 has been 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 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.

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Alvaro Lacayo, G. Research, LLC - Research Analyst [14]

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

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Brian G. Harris, Griffon Corporation - Senior VP & CFO [15]

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We don't break that in specifics; they both contributed to the growth. Mix should more -- slightly more than volume.

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Operator [16]

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Our next question comes from the line of Tim Wojs with Baird.

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Timothy Ronald Wojs, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [17]

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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...

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Ronald J. Kramer, Griffon Corporation - Chairman of the Board & CEO [18]

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No, we didn't.

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Timothy Ronald Wojs, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [19]

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

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Ronald J. Kramer, Griffon Corporation - Chairman of the Board & CEO [20]

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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.

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Timothy Ronald Wojs, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [21]

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Okay. So you guys -- there was nothing odd there, it was just kind of normal course of business, okay. And then if you think about the facility -- the CornellCookson facility, any way to think about the payback on the facility? Or what type of margin contribution we could see over kind of a multi-year period from just the efficiencies and the things that you talked about?

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Ronald J. Kramer, Griffon Corporation - Chairman of the Board & CEO [22]

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Sure. So this will help us contribute to get into our 12-plus percent 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 to improve the margin as well and keep us on track in that quest to 12%.

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Timothy Ronald Wojs, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [23]

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

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Ronald J. Kramer, Griffon Corporation - Chairman of the Board & CEO [24]

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I think it's obvious.

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Brian G. Harris, Griffon Corporation - Senior VP & CFO [25]

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Yes, that's right.

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Timothy Ronald Wojs, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [26]

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

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Brian G. Harris, Griffon Corporation - Senior VP & CFO [27]

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Sure. So we have adopted revenue -- 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 it 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 will wave up and down as the year goes and be immaterial for the year in total.

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Timothy Ronald Wojs, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [28]

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Okay. Does that have to do with like the commitments in inventory-type accounting that's going through aerospace?

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Ronald J. Kramer, Griffon Corporation - Chairman of the Board & CEO [29]

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

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Timothy Ronald Wojs, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [30]

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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 in AMES and in the storage business you're trending over the last 12 months to 18 months?

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Brian G. Harris, Griffon Corporation - Senior VP & CFO [31]

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

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Ronald J. Kramer, Griffon Corporation - Chairman of the Board & CEO [32]

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We haven't owned the business for 18 months.

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Brian G. Harris, Griffon Corporation - Senior VP & CFO [33]

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Well, in ClosetMaid, we've had it for a full year now. So, yes -- I'm sorry.

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Ronald J. Kramer, Griffon Corporation - Chairman of the Board & CEO [34]

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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 real good acquisition that we see our ability to improve the business that we bought and integrated 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.

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Brian G. Harris, Griffon Corporation - Senior VP & CFO [35]

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

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Operator [36]

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Our next question comes from the line of Nishu Sood with Deutsche Bank.

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Unidentified Analyst, [37]

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This is [Mario] in for Nishu. Quick question. Given that steel and aluminum have come down a bit in the last 2 months, has your input cost outlook for full year '19 changed?

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Ronald J. Kramer, Griffon Corporation - Chairman of the Board & CEO [38]

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We give guidance once a year.

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Unidentified Analyst, [39]

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Okay. And my second question, could you give us maybe an update on the procurement synergies and planned rationalization? Are you still in the planning phase, or have you moved to the implementation phase on those?

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Ronald J. Kramer, Griffon Corporation - Chairman of the Board & CEO [40]

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I think it's -- our investment into the CornellCookson facility shows you that we're in the implementation stage.

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Operator [41]

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Our next question comes from the line of Andrew Casella with Deutsche Bank.

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Andrew P. Casella, Deutsche Bank AG, Research Division - Director [42]

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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 would be a little bit weaker than the second half, just as we think about kind of the growth throughout the year. But could you revisit that, if that's changed at all? I mean, obviously, I think you've exceeded expectations. So just how you're kind of thinking about that run rate coming out of the first quarter?

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Brian G. Harris, Griffon Corporation - Senior VP & CFO [43]

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Sure. So generally, we'll see Q1 and Q2 being our lower quarters and the third and fourth quarter being our higher quarters, but we were off to a good start, and then we have really no change through the remainder of the year.

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Andrew P. Casella, Deutsche Bank AG, Research Division - Director [44]

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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?

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Ronald J. Kramer, Griffon Corporation - Chairman of the Board & CEO [45]

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Run the business, build up cash flow.

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Operator [46]

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Our next question comes from the line of Michael Rehaut with JPMorgan.

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Elad Hillman, [47]

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This is Elad Hillman on for Mike Rehaut. So one of the things I want to just kind of look at a little closer is given the increased margin this quarter in home building products, which is really encouraging, but at the same time, you've sort of maintained your full year margin targets. 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?

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Brian G. Harris, Griffon Corporation - Senior VP & CFO [48]

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So we really do guidance once a year, and we haven't changed it -- [wherever] in the year.

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Ronald J. Kramer, Griffon Corporation - Chairman of the Board & CEO [49]

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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're early in getting both ClosetMaid and Cornell integrated into the rest of our Home & Building Products segment. We feel really good about where we're headed, 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.

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Operator [50]

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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.

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Ronald J. Kramer, Griffon Corporation - Chairman of the Board & CEO [51]

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Thank you all. We'll look forward to reporting our first -- second quarter in May. So thank you, and goodbye.

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Operator [52]

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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.