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Griffon Corporation (GFF) Q2 2019 Earnings Call Transcript

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Griffon Corporation (NYSE: GFF)
Q2 2019 Earnings Call
May 2, 2019, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings and welcome to the Griffon Corporation second quarter 2019 earnings conference call. At this time, all participants are in a listen-only mode. If anyone should require operator assistance during the conference, please press * then 0 on your telephone keypad. As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host Brian Harris. Please go ahead.

Brian Harris -- Senior Vice President and Chief Financial Officer

Thank you. Good afternoon, everyone. With me on the call is Ron Kramer, 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 our various Securities and Exchange Commission filings.

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Finally, some of today's remarks will address 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.

Ronald Kramer -- Chairman of the Board and Chief Executive Officer

Thanks. Welcome, everyone. We're off to a great start in the first half of fiscal 2019 as our second quarter results continue to reflect the benefits of our strategic portfolio reshaping and efficiency initiatives. Our performance was driven by robust demand for our diversified product offerings in home and building products and our team's solid execution across our businesses. Second quarter 2019 revenue increased 15% to $550 million compared to the prior year period and our segment adjusted EBITDA increased 23% to $54 million.

Both the revenue and segment EBITDA improvements were driven by our home and building products segment, as I mentioned earlier, which had a 20% increase in revenue, 8% of which was organic with the balance from our June 2018 CornellCookson acquisition. Segment-adjusted EBITDA reflects the increased sales in the quarter as well as the effects of our continuing integration and efficiency initiative efforts.

Across our organization, we're executing our strategy to optimize our businesses and seeing excellent results. At Ames, we continue to identify opportunities to gain market share and improve productivity through combining the resources of Ames and ClosetMaid, while also making investments in new product innovation. Clopay is beginning to see the benefits of the CornellCookson acquisition through leveraging its increased scale in the supply chain, improving productivity, and finding opportunities to cross-sell by leveraging the complementary nature of its products across the two businesses.

To that end, we have ample resources to invest in our businesses to capture these opportunities, our previously announced CornellCookson facility expansion of our Mountain Top, Pennsylvania facility speaks to the opportunity ahead of us and our commitment to invest in our business to realize that. This project remains on track as we look to bring on an additional 90,000 square feet of manufacturing space, which will support volume growth, improve operational efficiencies, and deliver new products into the pipeline over the next two years.

Moving on to capital allocation, our efficiency initiatives and business integration plans will contribute to enhanced long-term free cash flow generation, which will drive our deleveraging efforts over the next few years. We continue to evaluate strategic bolt-on acquisitions to drive long-term growth. However, we remain disciplined in our approach and are focused on ensuring that any acquisition would be highly aligned within our existing businesses and immediately accrue them.

As we announced earlier today, our board authorized a $0.725 per share dividend payable on June 20th, 2019 to shareholders of record. On May 24th, 2019, this marks the 35th consecutive quarterly dividend paid to shareholders and it has grown at an annualized compound rate of 20% since 2012. We still have $58 million remaining under our existing board-approved buyback authorizations. We continue to believe our stock is a compelling value story, but we're laser-focused on executing on our strategic plan, which will drive higher profitability and free cash flow over the coming years to de-lever to our 3.5 times target.

Let me now spend a few minutes and provide some additional comments on each of our operating segments. Let's start with home and building products -- second quarter revenue increased 20% to $475 million due to the contributions from the CornellCookson acquisition and 8% organic growth driven by increased volume, new product introductions, and pricing.

Segment-adjusted EBITDA increased 23% to $49 million driven primarily by revenue, partially offset by increased input cost, including raw materials and the effects of tariffs. We continue to see strong demand for our products across the segment and realize the benefits from the diversity of our products and the markets in which we operate.

Turning to Telephonics, our defense electronics business, second quarter revenue decreased to $75 million compared to the prior year period of $82 million, segment-adjusted EBTIDA from continuing operations increased to $4.9 million from $4 million in the prior year. Backlog at the end of March 31 was $378 million.

We continue to remain confident in the outlook for Telephonics. We have a healthy pipeline of US and international opportunities including a $50+ million opportunity for foreign military sales of MH-60R radar and communications systems with India. We're seeing increased activity in quotes and bidding and during the quarter, we saw strong conversion resulting in rising backlog with the book to bill of 1.5 times. This increased activity continues to support our expectation that Telephonics will return to growth in 2020.

I'm going to turn it over to Brian for more details on the financial results. Brian?

Brian Harris -- Senior Vice President and Chief Financial Officer

Thanks, Ron. Continuing with a brief recap of our consolidated performance, in the second quarter, revenue of $550 million increased 15% and gross profit increased 13% to $138 million, both in comparison to the prior year quarter. Gross margin decreased 40 basis points at 25% compared to the prior year quarter.

Second quarter selling, general, and administrative expenses excluding items that affect comparability were $112 million, up 8% from the prior year, primarily due to acquisition. As a percentage of sales, SG&A adjusted for items that affect comparability decreased 130 basis points year over year to 20.3%.

The second quarter 2019 GAAP income from continuing operations was $6.5 million or $0.16 per share compared to the prior year period of $2 million or $0.05 per share. Excluding items that affect comparability from both periods, current quarter adjusted income from continuing operations was $6.4 million or $0.15 per share compared to the prior year of $2.7 million or $0.06 per share.

Our effective tax rate excluding items that affect comparability for the quarter was 34%. Capital spending was $9 million compared to $11 million in the prior year quarter. We continue to expect CapEx for fiscal 2019 to approximately $55 million. Depreciation and amortization totaled $15.5 million for the second quarter.

As of March 31, 2019, was had $58 million in cash and total debt outstanding of $1.22 billion, resulting in a net debt position of $1.16 billion. We had approximately $176 million available for borrowing under the revolving credit facility subject to a certain [inaudible]. Corporate and unallocated expenses excluding depreciation was $11.2 million in the quarter.

Our annual guidance for 2019 given during our November earnings call remains unchanged at $230+ million of EBITDA and $2.2 billion in revenue. We still expect free cash flow to exceed net income for the year.

Now, I'll turn the call back over to Ron.

Ronald Kramer -- Chairman of the Board and Chief Executive Officer

I'm very pleased with our performance in the second quarter of fiscal 2019. We're excited about the trends we see across all of our businesses. We see margin improvement through the consolidation of our recent acquisitions and continued efficiency initiatives driving long-term shareholder value. We're executing well and we're confident in our outlook.

Operator, we're happy to take any calls.

Questions and Answers:

Operator

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press * then 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press * then 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the * key. Please hold one moment while we poll for questions.

Thank you. Your first question comes from Bob Labick, CJS Securities. Go ahead, please.

Robert James Labick -- CJS Securities -- Analyst

Good afternoon. Congratulations on a nice quarter.

Ronald Kramer -- Chairman of the Board and Chief Executive Officer

Thanks, Bob.

Robert James Labick -- CJS Securities -- Analyst

I wanted to start with your organic growth. Obviously, 8% is very attractive. I was hoping you could kind of dig down a little bit and give us a sense of what areas that's in, how much is new product introduction and kind of share gains versus pricing and how should we think about that going forward. That's certainly a nice number and higher than we were anticipating.

Ronald Kramer -- Chairman of the Board and Chief Executive Officer

Sure. So, the organic growth was driven by the Ames business. This quarter, it was a combination of all those things, frankly -- volume, new product, and mix. The CVP business excluding CornellCookson was flat for the quarter, mostly related to a tough comp in the prior year. Looking forward, we continue to expect organic growth of 5% to 6% in our home and building products space for the year. No change there.

Robert James Labick -- CJS Securities -- Analyst

Great. Then just moving over, I think you touched on this quickly in your prepared remarks, but the Mountain Top expansion, if you could talk about the progress there and then remind us the benefits and the timing of when you'll have new products out of that facility.

Ronald Kramer -- Chairman of the Board and Chief Executive Officer

Sure. It's progressing as planned. Construction has started. As far as the new products, they'll start in 2020. This is a multi-year effort to get those products rolled out. These new products are revenue-enhancing and margin-enhancing. We're looking forward to their rollout. We're very excited about that.

Robert James Labick -- CJS Securities -- Analyst

Okay. Great. Last one for me then -- just kind of on the synergy update given that you have a lot of in hand margin opportunities over the next 12-24 months, if you could give us a sense on integration of management teams, looking to purchase commodities together and other synergies that you have in your roadmap ahead.

Ronald Kramer -- Chairman of the Board and Chief Executive Officer

It's early days. We view the integration of CornellCookson into Clopay and CosetMaid into Ames as multi-year journeys to get to 12% or better at the EBITDA line and we're very confident that that's where we're headed in both of those businesses.

Operator

Thank you. Your next question comes from Julio Romero, Sidoti & Co. Go ahead, please.

Julio Romero -- Sidoti & Company -- Analyst

Hi, good afternoon. I wanted to ask about the seasonality of revenues in CVP. Can you just speak on that, maybe with a fair estimate for the back-half of the year?

Ronald Kramer -- Chairman of the Board and Chief Executive Officer

Sure. For CVP, second quarter, at least generally, it's expected to be this year it's lowest quarter. So, as the year progresses, we expect increased revenue into Q3 and even more so into Q4, the general trend.

Julio Romero -- Sidoti & Company -- Analyst

Could you just maybe speak to price volume mix in the quarter and maybe the Ames business, if you could?

Ronald Kramer -- Chairman of the Board and Chief Executive Officer

Sure. For the Ames business, all those things contributed. We don't get specific, but they all contributed significantly, roughly in line with each other. Actually, I would say [inaudible] was significant in the quarter and the other two were in line with each other. We'll call it 50% with the balance.

Julio Romero -- Sidoti & Company -- Analyst

Okay. Very good. I'll hop back in queue. Thanks for taking my questions.

Ronald Kramer -- Chairman of the Board and Chief Executive Officer

Sure.

Operator

Thank you. Your next question comes from Justin Bergner, G. Research. Go ahead, please.

Justin Bergner -- Gabelli & Company -- Analyst

Good morning, Ron. Good morning, Brian. Sorry, good afternoon. It's been that type of day. I guess within Clopay building products, you mentioned that organically, it was flat but it was lapping a tough comp. Beyond the tough comp, are you seeing any deceleration in newer remodeling demand for garage doors? If it was flat organically, there's probably some price. So, volumetrically, it was probably a little negative. So, maybe a little clarity there would help.

Ronald Kramer -- Chairman of the Board and Chief Executive Officer

The answer to the question is no, we're not. The whether patterns were a big impact for that business in the quarter. We're very encouraged about the trends we're seeing for the spring and April is off to an excellent start.

Justin Bergner -- Gabelli & Company -- Analyst

Okay. That's good. With respect to CornellCookson, are you able to evaluate the ramp for the product among commercial customers or are you effectively capacity constrained prior to the Mountain Top expansion?

Ronald Kramer -- Chairman of the Board and Chief Executive Officer

We currently have enough capacity to meet the current demand. We are expecting increased demand on both our current products and we're rolling out new products. In addition, we're expanding the facility to help us be more efficient operationally by adding dates and [inaudible]. And we have a West Coast facility in Goodyear, Arizona that we think has much work ahead of it to get to a level of operating efficiency that will further drive the profitability of that segment.

So, this is as much about an operational improvement story than it is about us having to grow the top line of that business. We think we can make substantially more money on the existing levels of revenue and we think by being more efficient and applying many of the things that Clopay has done in its own integration over the last ten years to become the leading residential business, very optimistic about what we're going to be able to do improve the CornellCookson business profitability from where we acquired it and over time, in addition, grow the revenue stream.

Justin Bergner -- Gabelli & Company -- Analyst

Okay. That makes sense. Are you able to break out any financial metrics, revenues, or EBITDA margins for CornellCookson this quarter or maybe qualitatively directionally discuss where the business is at?

Ronald Kramer -- Chairman of the Board and Chief Executive Officer

I think going back historically, when we bought it, we said we were buying it at 9% or less EBITDA margin and we continue to see it on a path to being better than 12% and we're not there yet.

Brian Harris -- Senior Vice President and Chief Financial Officer

We still expect $200 million for the year and I believe the quarter revenue was $48 million.

Justin Bergner -- Gabelli & Company -- Analyst

Okay. In terms of bolt-on acquisitions, is there any change to your strategy? Obviously, there seems to be a preference for debt pay down, but in terms of what you might be looking at at present, what types of buckets do they fall in?

Ronald Kramer -- Chairman of the Board and Chief Executive Officer

Broadly, we like consumer businesses that are landscape and lifestyle, home improvement, outdoor living. There's a whole host of those products. We've expanded our Australian business substantially through acquisition. We intend to do the same thing in the UK. We're off to a good start there. What's obviously from Brexit and some of the other pressures, a difficult economy, that could be opportunistic for us to be able to be a dollar investor into what's going on there.

So, we actually see a number of different categories that are of interest, a number of different companies that are out there. Pricing is always a challenge and competition against an unlimited amount of private equity capital chasing assets is something that we're constantly competing against, but we feel really good about where our businesses are, how they're performing, and I think our proven ability to take the businesses that we've bought and make them better and over time, we expect to apply that to other products and other businesses.

Justin Bergner -- Gabelli & Company -- Analyst

Got it. Thanks for taking my questions.

Ronald Kramer -- Chairman of the Board and Chief Executive Officer

Thank you.

Operator

Thank you. Your next question comes from Tim Wojs from Baird. Go ahead, please.

Tim Wojs -- Robert W. Baird & Co. -- Analyst

Hey, good afternoon, gentlemen, nice job. I had a couple questions. Maybe first in the Ames business, I was just curious if you had any color just on how the season developed for you. Through a lot of weather whirlwinds or whatever -- we had snow here last week in Milwaukee. So, how has the season developed for you there? I'm not sure if you get access to or can see POS data, but any comment on what you're seeing from a sellout perspective as you get into the March, April, May timeframe?

Ronald Kramer -- Chairman of the Board and Chief Executive Officer

Sure. So, we did see a good load-in, which is what drove some of the volume in the quarter. We don't see POS necessarily this early, but as the quarter progresses, May is normally the month. If good weather occurs in May, then we'll see better replenishment, is should say, and that will drive the third quarter.

Tim Wojs -- Robert W. Baird & Co. -- Analyst

Okay. Great. Then from a raw materials perspective, I think steel and oil has come off a bit of the highs. How are you guys balancing raw materials going forward? Is there any expectation that there might be a little bit of benefit on the raw materials side as you work through the calendar year?

Brian Harris -- Senior Vice President and Chief Financial Officer

So, year over year, raw materials are still up. Whether they'll fluctuate a little bit here or there is always possible. We have many input costs. So, one goes up, one goes down across many different companies of many different location geography-wise. So, I don't expect any particular benefit from any given item.

Ronald Kramer -- Chairman of the Board and Chief Executive Officer

The other thing that I would add is if you remember going into this year, we have talked about $70+ million of potential negative impact from tariffs and other things and I'm happy to say that we've worked our way through all of it and that's no longer a concern of our outlook.

Tim Wojs -- Robert W. Baird & Co. -- Analyst

That's great. Encouraging to hear. Good luck in the second half.

Operator

Thank you. Your next question comes from Marius Suta from Deutsche Bank. Go ahead, please.

Marius Suta -- Deutsche Bank -- Analyst

Thanks for taking my question. Quick question on Clopay -- you mentioned unfavorable volume. What kind of makes is that? Can you talk more about it? Is it the lower-priced products?

Brian Harris -- Senior Vice President and Chief Financial Officer

Yeah, low-price products. Basically, we had a tougher comp to the prior year Q2. It's generally our lightest quarter to begin with. As Ron mentioned earlier, we had a bit of weather impact, particularly in February in the Midwest.

Marius Suta -- Deutsche Bank -- Analyst

Do you see that in the new construction market, given that builders are starting to build more on the lower end?

Ronald Kramer -- Chairman of the Board and Chief Executive Officer

I think as you have looked and we've tried to explain, less than 10% of overall throughout all of our businesses is new home construction-related. This is really just deferred purchases that we see that have a bit of a weather impact in the quarter that has snapped back into the third quarter.

Brian Harris -- Senior Vice President and Chief Financial Officer

April was a very positive month.

Marius Suta -- Deutsche Bank -- Analyst

Thank you for that. Then on ClosetMaid, I think last quarter, you mentioned a timing impact and given the strong growth this quarter, I would imagine some of the strength was driven by that.

Ronald Kramer -- Chairman of the Board and Chief Executive Officer

Yes. Our timing was correct and it did come through in the second quarter.

Operator

Thank you. I will take the opportunity just to remind everyone it is * followed by 1 on your telephone keypad to register for a question. Your next question comes from Donovan Chaney, Wells Fargo. Go ahead, please.

Donovan Chaney -- Wells Fargo -- Analyst

Hey, good afternoon and thanks for taking the question. Can you guys talk about working capital for just a minute? It looks like there's a good size receivables usage this quarter that drove debt a bit higher, I'm assuming. I just want to understand to what extent that's normal seasonal usage that should come back later in the year versus, perhaps, a more permanent investment in the business.

Ronald Kramer -- Chairman of the Board and Chief Executive Officer

Sure. So, our history, we expect it to continue the first half of the year in the contributions period for us, in the second half of the year, we expect significant free cash flow. So, you'll see those people come back into the business via cash. That cycle will continue again and again in the years to come.

Donovan Chaney -- Wells Fargo -- Analyst

That's great. Thanks a lot.

Operator

Thank you. There are no further questions at this time. I would like to hand the floor back to yourself, Brian.

Brian Harris -- Senior Vice President and Chief Financial Officer

Thanks, everyone for joining. We look forward to a great second half of the year and we'll speak to you next quarter.

Duration: 26 minutes

Call participants:

Ronald Kramer -- Chairman of the Board and Chief Executive Officer

Brian Harris -- Senior Vice President and Chief Financial Officer

Robert James Labick -- CJS Securities -- Analyst

Julio Romero -- Sidoti & Company -- Analyst

Justin Bergner -- Gabelli & Company -- Analyst

Tim Wojs -- Robert W. Baird & Co. -- Analyst

Marius Suta -- Deutsche Bank -- Analyst

Donovan Chaney -- Wells Fargo -- Analyst

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