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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Greetings and welcome to Griffon Corporation’s First Quarter 2020 Earnings Conference Call. At this time all participants are in a listen-only mode. [Operator Instructions]. Please note that this conference is being recorded.
I would now like to turn the conference over to your host, Mr. Brian Harris, Chief Financial Officer. Thank you, you may begin.
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. We're off to an excellent start for our fiscal year 2020. I want to start by discussing the enhanced reporting of our three segments and our public filings. We believe this change provides our shareholders increased transparency and further highlights the significant opportunities for each of our businesses by demonstrating the positive impacts of the operational improvements and strategic investments we've undertaken.
Our segments are Consumer and Professional Products, consisting primarily of our AMES business, inclusive of the ClosetMaid brand; Home and Building Products which is our Clopay business, which includes the CornellCookson brand; and our Defense Electronics segment, Telephonics, which is unchanged. Our results we're discussing today reflect this new segmentation, so let's move to the quarter.
Couldn't be happier with the start of our fiscal year. First quarter revenue increased 7% to $548 million and our adjusted EBITDA increased 21.5% to $55 million. This was driven by growth across our Clopay and AMES businesses. We continue to make progress on the AMES strategic initiative announced in November. This is a multiyear investment in the AMES next generation business platform to enhance the growth, efficiency, and competitiveness of our AMES and ClosetMaid U.S. businesses.
This platform will improve business tracking, enable faster decision making and improve AMES’ ability to predict and respond to external factors with improved lead times. During the quarter, we began the rationalization process of the distribution and manufacturing facilities. We continue to make strong progress and our internal milestones for this project remain on track.
Additionally, we completed construction on our $14 million Mountain Top, Pennsylvania expansion project that serves our CornellCookson brand. The team has moved into the expanded facility and is now transitioning operations to take advantage of the new equipment and space. This facility will increase our manufacturing capacity to support organic volume growth, improve operational efficiencies and enable us to bring new products to market.
Earlier this month, our Telephonics business was awarded first place in the U.S. Navy MUX Prize Challenge for our MOSAIC AESA radar system. This award is recognition of strong technical innovation of the next generation radar currently under development at Telephonics and also is an indication of the significant value proposition this technology provides to our customers.
Moreover, shortly after receiving this prize we began flight testing the new radar technology with the U.S. Navy on their MH-60S Sea Hawk helicopters and initial feedback has been positive.
Further, we continue to see progress with the Indian government regarding our MH-60R radar systems and discussions between the parties are highly encouraging.
We continue to expect a formal contract award in excess of $50 million for this program within this fiscal year. Overall, Telephonics continues to see a strong pipeline of opportunities on a foreign and domestic basis, leaving us highly optimistic about the organic growth through the balance of the year and beyond.
Let's turn to capital allocation. We continue to benefit from an enhanced free cash flow profile, driven by our portfolio reshaping and efficiency initiatives. I'm pleased to report that even with the cash usage required to meet our seasonal demands in our first quarter, our leverage ratio remained the same as last quarter at 4.8x. We continue to focus on deleveraging, working towards our 3.5x net debt to EBITDA goal.
In December we acquired Apta, a leading U.K. supplier of innovative garden pottery and associated products sold to leading U.K. and Ireland garden centers. Apta strengthens the diversification of our product offerings, while increasing our operational footprint in the region. We expect Apta to be accretive to our earnings in fiscal 2020.
We are active in sourcing and evaluating strategic bolt-on-acquisitions like Apta to further drive long term growth. We remain disciplined in our approach and are focused on ensuring that any acquisition would be both value enhancing and immediately accretive.
Additionally, earlier today our Board authorized a $0.075 per share dividend payable on March 19, 2020 to shareholders of record on February 20, 2020. This marks the 34th consecutive quarterly dividend to shareholders, which has grown at an annualized compound rate of 18% since we initiated it in 2012.
Earlier today we announce the amendment of our revolving credit facility, which now extends until March 2025. The amended and extended agreement has lower borrowing cost with reduced spread over LIBOR and reduced fees.
Additionally, the amount available was increased to $400 million, and other terms were substantially the same. At quarter end we had approximately $229 million available for borrowing under the revolver, subject to certain loan covenants. With the extension of the bank agreement, you could expect us to refinance our $1 billion or 5.25% notes sometime this year.
With that, I'm going to turn it over to Brian for details on the financial results.
Thank you, Ron. I’ll start by highlighting our first quarter consolidated performance. Revenue increased 7% to $548 million and adjusted EBITDA increased 22% to $55 million, both in comparison to the prior year quarter.
Gross profit for the quarter was $150 million and included $2.7 million of charges related to the AMES strategic initiative. Excluding this charge, gross profit was $153 million, increasing 7% over the prior year quarter with gross margin decreasing 20 basis points primarily due to tariffs.
First quarter selling, general and administrative expenses of $118 million included a $3.7 million charge related to the AMES strategic initiative. Excluding this charge SG&A expenses were $114 million, essentially flat compared to the prior year first quarter. As a percentage of sales SG&A adjusted for the change decreased 150 basis points to 20.8%.
First quarter GAAP-net income was $10.6 million or $0.24 per share compared to the prior year period of $8.8 million or $0.21 per share. Excluding items that affect comparability from both periods, current quarter adjusted net income was $15.6 million or $0.36 per share compared to the prior year of $9.2 million or $0.22 per share.
Our effective tax rate excluding items that affect comparability for the quarter was 33.3%. Capital spending was $13 million compared to $8 million of the prior year quarter, with the increase primarily due to expenditures for the recently completed Home and Building products Mountain Top facility expansion.
Depreciation and amortization totaled $16 million for the first quarter, as of December 31, 2019 we had $65 million in cash and total debt outstanding of $1.15 billion, resulting in a net debt position of $1.08 billion and debt to EBITDA leverage of 4.8x as calculated based on our debt covenants.
As we’ve noted previously, the first half of our year is the cash usage period and the second half is our cash generation period.
Regarding our segments, Consumer and Professional Products first quarter revenue increased 11% to $241 million over the prior year quarter, driven by increased volume, and favorable price and mix, partially offset by 1% unfavorable impact due to foreign exchange.
Adjusted EBITDA was $22 million increasing 7% from the prior year quarter due to leverage on sales partially offset by increased tariffs. Home and Building Products first quarter revenue increased 8% to $241 million over the prior year quarter, driven by increased volume, and favorable mix and pricing.
Adjusted EBITDA increased 30% to $41 million over the prior year quarter due to the benefit of increased revenue, including volume related benefits on absorption and improved operational efficiencies. Adjusted EBITDA margin was 16.9% in the current quarter compared to 14% in the prior year quarter.
Defense Electronics first quarter revenue was $66 million compared to the prior period of $71 million, primarily due to timing of orders. Adjusted EBITDA during the period was $4.5 million compared to the prior quarter of $4.8 million.
Our trailing 12-month book-to-bill ratio was a little over 1x and backlog at December 31 was $370 million. Corporate and unallocated expenses, excluding depreciation were $11.9 million in the first quarter. We are reiterating our full year 2020 guidance given during our November earnings call, which was total revenue to increase 2% to 3% compared to FY ’19 and $250 million plus of EBITDA excluding both unallocated cost of $45 million and one-time charges relating to the AMES strategic initiative.
Capital expenditures, G&A and interest expense guidance remains the same at $60 million, $64 million and $65 million, respectively. We continue to expect to generate free cash flow in excess of net income.
Now, I’ll turn the call back over to Ron.
Thanks. We are off to an excellent start to fiscal 2020. Griffon is well positioned to generate significant cash flow and continue to expand margins through execution of our strategic initiatives. We are excited about the opportunities in front of us and we continue to see a healthy U.S. consumer and economy that’s supportive of all of our businesses. We remain intensely focused on driving long term shareholder value and we're really pleased about where the company is.
And with that operator, we’ll take any questions.
Thank you. [Operator Instructions]. Our first question comes from the line of Bob Labick with CJS Securities. Please proceed with your question.
Good afternoon. Congratulations on a great start to fiscal ’20.
Thank you.
Thanks Bob.
I want to start with the AMES initiative. Obviously, it's a really exciting thing you discussed last quarter, you've started to dig in. I was wondering, could you tell us have there been any surprises, good or bad with the initial stages of the initiative. I know it’s a three-year project, but anything that you’ve learned so far and what are the next kind of milestones and steps we should expect.
So there really have been no surprises. It started off as expected and we continue to expect it to go as planned. We’ll continue each step as we go, so right now we're working on a couple of facilities and those will be closed by the end of the year, and in the spring we will begin the process of implementing our business intelligence system.
Okay, great. And then you talked a little about Telephonics, some very optimistic things. Could you maybe expand a little bit on the international opportunity? I think you gave us the size, but I wasn’t able to write it down fast enough. And then also you mention the AESA radar. Could you talk a little bit more about that and if that's a medium-term opportunity or when that would become part of you know sales for Telephonics?
Sure, so yes, we continue to see a lot of opportunities internationally. The one we were specifically talking about was India, which is a $50 million plus initial booking opportunity that we expect to happen this fiscal year. We see other opportunities with our allies across the globe and we see a strong pipeline both domestically and internationally.
On the Active Electronically Scanned Array (AESA) radar, we will likely start seeing sales in about two years. It will start off slowly and then continue from there, but we're very excited about the technology as our customers, as I mentioned the Navy, we had a test with the Navy, the test was successful and we see a lot of interest in the product. One other note, likely the initial sales of that product will be international.
And Bob, it's Ron. But one other thing I’d add is that you know we said that we see the cycle having turned in fiscal ’19, and now in ‘20 for Telephonics. We see a five-year runway here, both improving backlog, orders, you know the investments that we've made in the business. So coming out of sequestration, the defense budget changes in 2017, we feel like the company is really positioned for a multi-year expansion.
Okay, that's great. And then last one for me – we’re liking the new segmentation and it’s going to take us a little while to get used to it, but the incremental information, particularly on HBP, Clopay and Cornell, the margins are I think 16.9% in a quarter were obviously terrific. Can you talk a little bit about the drivers for the margin and you know what range of margin should be expected going forward?
I'll start by saying that you know we have always talked about our business as being accurate reflections of what's going on in the housing market and you know our businesses are continuing to show us that the U.S. housing market is strong and not at the end of the cycle, but showing volume increases, as well as cost reductions in manufacturing, which is really an efficiency story for us and with some level of commodity help.
But the business is really strong. We continue to see growth. We think 2020 is shaping up to be a very good year. We’re one quarter into it, so you know we’re always cautious about what the balance of any year can bring us, but we see a lot of very positive signs in the housing market.
The separate part of the conversation about our Consumer and Professional Products, what it should really showcase to you is that the “Bridgewater” project (the AMES initiatives that we discussed) is room for 300 plus basis points of margin expansion and that is something that has been planned. The segmentation allows you to see the progress we're making on taking the margins on what's now more than $1 billion of revenue under AMES and we expect to be able to build that out to our stated goal, more than 12% over the next several years.
So we’re feeling very optimistic about what's going on, not just in the company, but all signs show us what the year is shaping up to be for the U.S. economy are positive.
I would just add to that we have out there that we are building to a 15% margin in the Home Building Products segment, annualized full year margin. So in that business generally Q1 and Q4 are the strongest quarters with Q2 being the weakest quarter, just the regular cycle of the business and Q3 being a little better than Q2, so I wanted just to point that out.
And on our CPP business, you know ultimately we see a 12% margin and that business strongest quarters are generally Q2 and Q3.
Super! Okay, thank you so much.
Our next question comes from the line of Julio Romero with Sidoti. Please state your question.
Hey, good afternoon. I wanted to ask about the Apta deal. How do you see that fitting in with KelKay and you know which product lines attracted you to that business?
So you know the after deal really expands our global footprint of pots and planters, it's our first pots and planters business in the UK. So overall just like I point you to what we did in Australia where we built a business from negligible revenue of $10 million to $15 million to $160 million, $170 million business, under one management, using one distribution footprint that is what we’ve started to do in the U.K. So KelKay, La Hacienda and now Apta will be combined and they are under one set of managers and it's another adjacency for that geography.
Got it, and on the restructuring costs I think you did about $6 million in the quarter. It’s a little higher than the run rate that I had modeled in for you guys. I mean you’re still expecting $35 million in one-time items over that three-year period and kind of maybe kind of – maybe what kind of cadence we should expect that to spread out over the next 11 or so quarters.
Sure, no problem. The expense is $35 million for the three year period. You should expect full year expense for each year to be roughly equal chunks of that $35 million. So the balance of this year will be somewhere in that $7 million plus minus range. Nothing particular occurred. Just we were able to start on facilities and we've got moving and we had some charges related to it.
Got it. Great start to the year. I’ll hop back in queue. Thank you.
Thank you.
Thank you.
Our next question comes from the line of Justin Bergner with Gabelli. Please proceed with your question.
Good afternoon, Ron. Good afternoon, Brian.
Hi Justin.
Hi Justin.
Is there any more detail you can provide on sort of the volume acceleration? I mean looking at the sort of 2% volume print in the September quarter for your combined Home & Buildings products business under the old reporting versus what looks like an average 6% volume increase this quarter, was there anything you know weather related, calendar related, lapped comp related that would explain the way some of that acceleration or is it all real end market acceleration?
So we are seeing a good market out there in general, but for us specifically we continue to gain market share is what you're seeing in those volume increases. So we believe we are outperforming the market, and that’s across both our Home & Building Products business and the AMES business and that includes AMES and ClosetMaid and both the commercial and residential side of it.
Okay. And then I guess the price mix element, you know if I average the two new reporting segments, it’s about 4%, consistent with what you reported last quarter. So that dynamic I guess is relatively constant, but has the price versus mix components sort of changed at all within that 4%?
No, there is contribution from both. Actually it's a little more mixed focus this quarter than price. We continue to improve the type of product we are selling, and you know in the better and best categories. On the AMES side, ClosetMaid is a very strong brand and we continue to come out with products that people are investing in, and investing in to improve their homes and then on Home &and Building Products side we continue to see people investing in a nicer, on the residential side, a nicer door. It's a very important element to a home.
A recent survey that came out says number one and two of the benefits you can do to improve the look of your home is the entry door and the garage door and one other element is we are very focused on the AMES side, the tool side we are very focused on the pro, which generally is a higher end product.
Okay. Back to my initial question of volume mix arrangements, was there anything weather related that was going on in the quarter with the 7% volume in consumer and professional products.
No, not in particular weather related.
Okay. Capital allocation, have any of your priorities changed over the last three to six months, you know in terms of your appetite for acquisitions versus debt pay down.
No. I mean the hunt for acquisitions is always topical for us. The reality is there is you know too much capital chasing assets and we have a very hard time being a disciplined value buyer, finding things that we can improve, that we meet our own standards, that we can pay a full price, because by definition the acquisition business is about who's willing to pay the highest price.
So our strategy has been to digest the acquisitions that we've made and I'll remind you, we bought 11 companies in the last six years. So you should always expect that there's something in our pipeline. The reality for us has been that the value has being in tuck-in acquisitions. Transactions are unpredictable as to when and if they come along.
So the big acquisitions for us, both CornellCookson which really is turning out to be every bit as good as we had hoped it was going to be, to be able to diversify what was already the leading residential door business, but now have the leading commercial door business and we will build and grow that business you know for hopefully decades.
The ClosetMaid acquisition and the opportunities that it's created for us to consolidate with AMES are just beginning to be reflected. So the tuck-ins that we've done, and in this quarter Apta, are the types of things that we see. We see far more value in smaller deals, but the reality for us is, we see the benefit of deleveraging and be more rewarded in the equity markets and while we haven’t bought back stock, we still think our stock is compelling in value, but we are far better and will continue to go down our deleveraging story from a credit standpoint and that's how you should be thinking about us from an M&A standpoint going forward.
Okay, and just on the Telephonics side, I mean are you likely to do anything material there given that we have an election coming up one way or another or is that sort of something that you're kind of going to take a little bit of a wait and see approach until after the election?
We love the defense business and Telephonics is a gem, we have a multiyear, strategic initiative there to grow the business. We have every intention of continuing to build it, grow it. I wish we can find acquisitions to compliment it and you know those tend to be of multiples that make it completely uneconomic. So we'll continue to take that business back to where it was in both revenues and profitability over the next several years.
We've been in that business for a very long time; we’ve see lots of Presidents come and go, you know the business that we're in is essential, it's you know like an incumbent position on multiple platforms. We want to keep that business for a very long time and build it.
Okay, thanks for taking my questions.
Thank you.
[Operator Instructions]. Our next question comes from the line of Tim Wojs with Baird. Please proceed with your question.
Hey guys, good afternoon. Nice job.
Thanks Tim.
How are you doing?
Good, good thanks. There is some snow out here, so that’s good. So I guess maybe just the thing about CornellCookson, I was just curious if Ron you can maybe add a little bit of color now that you are on the business for close to 18 months now, either where the synergy opportunity relative to maybe what your internal benchmark was today and how that’s performed relative to your expectations. And then secondly, just kind of curious what you are seeing in kind of the overall non-res market right now in terms of order activity and backlogs.
So, I'll start by telling you that yeah the diversification of the Clopay business was always you know something that we wanted to accomplish, and we were already in the commercial door business. CornellCookson was a unique opportunity for us to be able to not just expand what we already were doing and some of the complementary things that in fact we have been doing together with them, but it was putting two cultures together that we thought would lead to synergies.
We are beginning to see that, everything from purchasing and all the obvious things, but the broader discussion is about being able to leverage our dealer network and to be able to offer far more products on the commercial side, to be able to bid for more jobs by on us going and trying to invest in the sales and marketing of Cornell. And to do all that, the first step was to get the physical footprint rationalized.
We expanded the facility, we just completed it in December, so the road ahead of us is quite optimistic about both volume, expansion and ultimately margin expansion as we are able to leverage the fixed overhead of both the Clopay and the CornellCookson business.
Brian you want to add to that?
Yeah, I would just add to that. We added 400 dealers that we did not have before in either side the business when we bought CornellCookson. So we have the opportunity and actually have started the process where a dealer who had CornellCookson product but did not have the Clopay commercial product is now starting to buy the Clopay commercial products, because they like dealing with one customer, and vice versa, so that opportunity is in front of us and we’ve begun changing over some dealers already.
In the commercial section, we continue to see a good volume. We are not seeing weakness there.
Okay, great. And then just with – when you think about ClosetMaid and some of the expansion opportunities there. I guess how important or attractive it is getting into the garage space?
It's opportunistic. You know it's not at all reflective in current or projected plans, it’s something that if anybody's going to figure out garage organization, on a national basis it should be us, so stay tuned.
Okay, okay perfect. And then just in terms of the refinancing that you talked about you know Ron on the notes, how would you kind of you know think about the time line there or just how you know the debt markets are relative to kind of your current facility?
We are always opportunistic about coming back to the market. You know the company is in excellent shape. By all appearances the credit markets are up and available and at the appropriate time we’ll come back, but you know sometime this year is what you should be expecting.
Okay, okay, great. Well congrats on the first quarter here and good luck to the rest of the year.
Yeah we're very pleased about what you say and appreciate it. Thank you.
Ladies and gentlemen, we have reached the end of our question-and-answer session and I would like to turn the floor back over to Mr. Ron Kramer for any closing remarks.
Thank you all and we look forward to reporting in May.
This concludes today’s teleconference. You may now disconnect your lines at this time. Thank you for your participation and have a wonderful day!
Thank you.