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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 the Griffon Corporation’s Fourth Quarter Fiscal Year 2019 Earnings Call. At this time, all participants are in a listen-only mode. [Operator Instructions] Please note this conference is being recorded.
I will now turn the conference over to your host, Brian Harris, Griffon’s Chief Financial Officer.. You may begin.
Thank you, Ashley. 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 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.
Thanks, and welcome, everyone. I’m very pleased with our strong results for our fiscal fourth quarter and full-year growth. Our 2019 revenue increased 12%, organic growth was 5%, driven by strong demand across our portfolio in both our Home & Building Products and Defense Electronics business.
We generated $69 million in free cash flow during 2019, which reflects solid operating results coupled with the benefits of Griffon’s portfolio reshaping and integration activities. Our improved free cash flow profile has allowed us to lower net debt to EBITDA to 4.8 times which is down from the prior year end of 5.5 times. We remain focused on our goal of driving leverage down to 3.5 times.
Let’s go through some strategic updates. So first, let me spend a few minutes providing an operational update, including some comments on the initiative for the AMES and ClosetMaid businesses and an update on our CornellCookson facility expansion project. We announced earlier today the development of a next-generation business platform for the AMES and ClosetMaid U.S. businesses to enhance the growth, efficiency and competitiveness of these operations. The goal is to further enhance our profitability.
As part of this initiative, multiple independent information systems will be unified into a single data and analytics platform, which will serve the entire AMES U.S. enterprise. 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. Given the seasonal and weather-dependent nature of the AMES businesses, these enhancements in tracking and prediction will allow us to improve our service and speed up the velocity of our operations. In addition, this initiative will consolidate manufacturing and distribution, better leveraging the investments in talent and infrastructure at our key sites. We will also see benefits from reduced fixed cost and a streamlined facilities footprint.
The final piece of this next-generation platform is an investment in plant automation. We remain committed to being a U.S. manufacturer of U.S. products. Deploying the latest manufacturing and distribution automation keeps us competitive in the face of global competition, and it provides a solid foundation supporting the high-mix, fast-flow operational activity necessary for our customer channels, including the growing e-commerce channel. This strategic initiative is expected to be completed by the end of calendar 2022. When fully implemented, we expect annualized cash savings of $15 million to $20 million and a reduction in inventory of $20 million to $25 million. To execute on this strategic initiative, we will invest approximately $40 million in capital and incur approximately $35 million of cash and noncash charges as onetime expenses. In addition to the growth, efficiency and competitive benefits, this initiative is intended to enhance our operating margins and expand our free cash flow.
Moving to CornellCookson. Our previously announced $14 million Mountaintop, Pennsylvania facility expansion remains on track to be completed at the end of this calendar year. This project will increase our manufacturing capacity to support volume growth, improve operational efficiencies and bring new products to market.
Let’s move to the capital allocation story. Griffon’s free cash flow profile has benefited from solid operating performance and the strategic actions taken to reshape the portfolio and integrate the acquisitions that we’ve made. This has enabled us to make substantial progress towards deleveraging our balance sheet as we work towards our 3.5 times net debt-to-EBITDA. We continue to maintain ample flexibility to source and evaluate strategic bolt-on acquisitions to drive long-term growth. We remain disciplined in our approach and are focused on ensuring that any acquisition would be value-enhancing and immediately accretive.
As we announced earlier today, our Board authorized a $0.075 per share dividend payable on December 19, 2019, to shareholders of record on November 27, 2019. This marks the eighth consecutive year of increasing the dividends paid to shareholders, which has grown at an annualized compound rate of 18% since initiated in 2012.
Before turning it over to Brian, I’ll provide some additional comments on each of our operating segments.
Let’s start with Home & Building products. Full year revenue increased 13% to $1.9 billion, driven by favorable mix and pricing, increased volume and the contribution of the CornellCookson acquisition, offset somewhat by the unfavorable foreign exchange. For full fiscal year 2019, sales grew organically by 6%. Despite the uncertain global macroeconomic backdrop affecting our home markets, we continue to see steady demand for our products across the segment and are realizing benefits from our market and product diversity.
Adjusted EBITDA for the year grew 19% to $211 million, driven by increased revenue and efficiency initiatives, along with the contribution from the CornellCookson acquisition. EBITDA margin of 11.2% improved by 50 basis points year-over-year, reflecting steady progress towards our 12% plus EBITDA goal.
Turning to Telephonics, our Defense Electronics business. Returned to growth, with full year revenue increasing 3% to $335 million. Adjusted EBITDA from continuing operation was $35 million compared to $36 million in the prior year. This decrease was attributable to program mix, which was partially offset by reduced operating expenses. During the quarter, we received the $36 million contract award from Lockheed Martin for Multi-Mode Radar spares and helicopter common cockpit, electronics supporting the LAMPS program. We also announced the $23 million contract for an IFF system from Huneed Technologies to support the South Korea’s naval modernization program. This marks the second contract of fiscal 2019 for this product, and we are pleased with the continued global traction we are seeing across Telephonics’ diversified portfolio of products and customers.
Bookings for the full year were $350 million, resulting in a book-to-bill ratio of 1.05. Backlog at the end of September 30 was $389 million, a 4% increase from the prior year period. We’re pleased with these results, particularly given that we are expecting sizable program awards for MH-60R systems from India and Greece that are now expected to be awarded in fiscal 2020. Looking ahead, we remain confident in the outlook for our Defense Electronics business, and our pipeline of opportunities continues to expand both in domestic and foreign applications. We’re very excited about what we see going on in Telephonics.
With that, I’m going to turn it over to Brian for some more details on the financial results.
Thank you, Ron. I’ll start by highlighting our consolidated performance in the fourth quarter. We reported revenue increasing 5% to $574 million, all of which was organic, and gross profit increasing 8% to $160 million, both in comparison to the prior year quarter. Gross margin increased 70 basis points to 27.9%.
Fourth quarter selling, general and administrative expenses, excluding items that affect comparability, were $118 million, up 7% from the prior year, primarily due to acquisitions. As a percentage of sales, SG&A adjusted for items that affect comparability were in line with the prior year quarter.
Fourth quarter GAAP 2019 income from continuing operations was $16 million or $0.37 per share compared to the prior year period of $1 million or $0.02 per share. Excluding items that affect comparability from both periods, current quarter adjusted income from continuing operations was $17 million or $0.40 per share compared to the prior year of $16 million or $0.38 per share.
Our effective tax rate, excluding items that affect comparability, for fiscal 2019 was 34.3%. The rate was negatively impacted by geographic mix in comparison to our expectation of 33%. Over time, as our businesses generate increased revenue and profitability, we expect to see our tax rate decrease. Capital spending was $18 million in the quarter compared to $17 million in the prior year quarter. Capital expenditures were $45 million for the full year 2019 compared to $50 million in the prior year.
Depreciation and amortization totaled $16 million for the fourth quarter and $62 million for the full fiscal year. As of September 30, 2019, we had $72 million in cash and total debt outstanding of $1.1 billion, resulting in a net debt position of $1 billion. We had approximately $279 million available for borrowing under the revolving credit facility subject to certain loan covenants.
Corporate and unallocated expenses, excluding depreciation were $12 million in the quarter and $46 million in the year.
Now I would like to turn to our annual guidance. We expect total revenue for fiscal year 2020 to increase 2% to 3% compared to fiscal 2019. Fiscal 2020 adjusted EBITDA is expected to be $250 million or better, excluding both unallocated cost of $45 million and onetime charges relating to the AMES strategic initiative. We expect to continue to generate free cash flow in excess of net income inclusive of capital investment and spending related to the AMES strategic initiative.
Capital expenditures for fiscal year 2020 are expected to be $60 million, again including the AMES strategic initiative investment. Depreciation and amortization is expected to be $64 million, of which $10 million is amortization. We expect net interest expense of approximately $55 million for fiscal 2020.
Our expected normalized tax rate will be approximately 33% in 2020. As is always the case, geographic, earnings mix and any legislative action including new tax guidance on tax reform matters may impact the rate.
I’d like to note that our results in fiscal 2019 exceeded both our guidance and our internal expectation. Our guidance for fiscal 2020, similar to last year, reflects some restraint, which we feel is warranted given the global macroeconomic uncertainty affecting our home market.
Now, I’ll turn the call back over to Ron.
Thanks, Brian. Our fiscal 2019 was the first full year of operation after repositioning Griffon’s portfolio of businesses. Our objective was to significantly enhance shareholder value by improving margins and generating stronger free cash flow. In 2019, we generated $69 million in free cash flow on continuing net income of $46 million while reducing net leverage from 5.5 times to 4.8 times.
Our EBITDA margin, excluding unallocated costs, improved by over 30 basis points to 11.14%, while organic revenue increased by 5%. We had an excellent year. We have significant top and bottom-line growth opportunities ahead of us, such as the exciting initiatives we kicked off at CornellCookson and the AMES plan that we’ve outlined, the building momentum at Telephonics with backlog up year-over-year and a growing pipeline of new business opportunities. These opportunities are driven by the hard work and dedication of our 7,200-plus employees, and I’d like to thank them for all of their efforts and our shareholders for their continued support.
We are proud of what we’ve accomplished this year, and we’re excited about our prospects to continue to deliver exceptional returns to our shareholders in the years ahead.
Operator, we’ll take any questions.
Thank you. [Operator Instructions] Your first question comes from Bob Labick with CJS Securities. Please go ahead.
Thank you, and good afternoon. Congratulations on a nice quarter and fiscal 2019.
Thanks, Bob.
I know you just mentioned this. I just wanted to ask if you could expand a little bit. Obviously, you had a really strong year in 2019 that exceeded expectations, and your guidance appears a bit conservative for 2020. You mentioned some restraint there. So maybe you could just walk us through some of the potential headwinds that you see out there and then some of the upside potential where you may be conservative if things don’t turn out as bad as you might think.
Look, we give guidance once a year. We’ve always said that we try to balance all the risks and opportunities. We clearly all live in uncertain times, and we feel that on balance across our businesses we are performing well. We believe the earnings power of our businesses is always potentially higher than what guidance is in any one year. We’ve been showing that consistently over a period of years. We think 2020 is shaping up to be a better year than 2019 was. In 2019, we significantly outperformed our guidance. We have every expectation that our teams are working hard.
But you set a bar once, we go into a fiscal year that starts on October 1 each year. We react to things that are moving. The landscape of issues that have been out there over the last year are still unsettled. Most importantly, trade and tariffs are still there. We’re hopeful that it’ll be resolved. But when we went into our planning cycle this summer and we started the year in October 1, we’re going to take the worst-case scenario view. And if you’re going to give guidance, you should be able to have confidence you’re going to be able to exceed guidance. So for now, we’re very pleased about what we did in 2019. We like the way the year ahead of us is shaping up, but we’ve got a long way to go until November 2020. And I’ll remind you, there’ll be an election by the time we have our year-end call next year. So being on the conservative side, to us, we rather under promise and overperform.
Got it. Okay. Now that’s great. And then the new announcement this afternoon about the AMES initiative sounds really exciting. Obviously, it seems like it’ll be a terrific payback when you’re done. And I’m sure you guys – you’re giving yourselves a couple of years to do it. Can you talk about some of the risk of implementing a change this big and what you have in plans to mitigate any risks for making these changes?
Look, I think you have to look at it relative to our track record over a period of years in a number of different businesses. We are very good at looking at ourselves. We’re never satisfied. And we’re always looking for room for improvement. The ClosetMaid acquisition has unlocked a whole series of potential improvements, enhancements and refinements to the AMES company. Consolidating ClosetMaid into AMES was something that we talked about a year ago. We’ve only owned ClosetMaid for two years. We sit here now with ClosetMaid fully integrated into AMES. I’m talking to you from our new AMES corporate headquarter in Orlando, Florida.
We see the ability to both grow the business, expand the footprint and at the same time, take costs out of redundant pieces of both parts of the company that are all about margin improvement, free cash flow generation and positioning the company for the next five years. We see significant opportunities. And the range of degrees of difficulty, we’ve been here before. I’ll remind you all, from where we were with our garage door business 10 years ago at the depth of the housing crisis, we consolidated plants, we went through a strategic revitalization, the benefits we’re starting to enjoy in the process of building the company. Where in the AMES business combined with ClosetMaid with this plan, with the goal of significantly expanding what we do in terms of customer service and the end goal of having a platform that’s more profitable than the business that we have today. And I’ll say simply that we think this is the next step in the evolution. There’s nothing about this that is defensive. This is all offensive. And it’s about building a pipeline of innovation, it’s about attracting talent and it’s about being the most efficient manufacturer of the essential products and leading brands that we represent.
Got it. Okay, perfect. And then kind of last one for me is on the product side. You’ve been, I think, kind of upgrading and enhancing the product mix over the past multiple years. But certainly, recently in the last year as well, you got some margin out of it and some better mix. Can you just talk about where you are in terms of new product initiatives and how you feel about the current products mix? And what’s going to continue to drive organic growth going forward?
Sure. So we are constantly investing in our products and innovating our products. We expect our mix to continue to improve over time, and that’s really across all our businesses. So for instance, in our CornellCookson business, we recently launched some products. We have something called storm defender and entry defender in our CornellCookson line and also a micro grill that’s been a very big hit with architects. They like the aesthetic of it. And that’s part of the reason why we expanded our CornellCookson facility. So we will continue to innovate, our customers want the innovation, it helps them sell products and do well as we do well.
Great, all right. Thank you so much.
Thanks, Bob.
Your next question comes from Julio Romero with Sidoti & Co. Please go ahead.
Hi, good afternoon everyone.
Hi, Julio.
The first question I had was on the fiscal 2020 guidance. Can you maybe walk us through that revenue outlook? I know 2% to 3% is certainly there’s some conservatism built in. But can you maybe try to bucket us – that into which businesses may potentially do above that growth rate and which businesses less likely to do so?
Sure. First, we see a 2% to 3% across our businesses. So it’s as simple as that.
Okay. Fair enough and in terms of this past year’s performance, obviously, you outperformed what you were looking for. And you mentioned going into the year that one of the big drivers is going to be procurement savings, steel purchasing, wood purchasing, wire purchasing. Can you maybe try to quantify for us the benefit you saw from procurement in 2019?
No. I’m not sure that – I think it’s more about operational improvement. There’s no pattern of improvements related to commodities. We see this as being about the operating margin expansion story that we laid out at the time that we bought ClosetMaid two years ago and the CornellCookson transaction that happened subsequent to that. So this is early days for us on the integration story on both sides of that segment of our business. So, this is really more about our view of the business conditions continuing to be improving. The housing market, we’ve said it consistently now for the last several years, it is a slow, unremarkable, continuing improvement in repair and remodel. The recession obsession and the conversation about the downturn in the housing markets couldn’t have been more inaccurate over the last year. And we said that we’ve looked at the trends in our own business. And while the headlines were screaming about the decline in housing, we were saying consistently quarter-over-quarter and now year-over-year the trends in our business have been and remain good. We still think the best part of the housing recovery is ahead of us, and the repair and remodel trends that we see in the consumer markets continue to be strong.
So, this is not about any commodity cost one-time effect. If anything, now that I’m on the topic, I’ll go the other way. Look at the impact of trade and tariff, how much it hurt us this year, as to how much better we would’ve done if not for having to deal with those one-timers.
Okay, understood. And on the strategic initiative that rolled out. One thing that caught my eyes was the inventory reduction numbers you’re looking to do. Can you just maybe give us some color onto some of the initiatives there? I mean I assume there’s going to be some SKU reductions, maybe carrying less inventory. But if you could give us any additional color, that would be helpful. Thank you.
Sure. So we always look at our SKU count, but this is really about being more efficient in manufacturing and being able to produce things and having better data from our consolidated information systems that will allow us to produce lower levels of inventory yet still serve our customers at the same level that they have seen – they see now.
Okay. So, kind of information system-driven more efficient type of work there.
Correct. And as we mentioned, there will be some warehouse consolidation and smaller footprint to have things in one place instead of multiple places. That will help us as well.
Okay. Thanks very much. I’ll hop back in queue.
Thank you.
Your next question comes from Justin Bergner with G. Research. Please go ahead.
Good afternoon, Ron. Good afternoon, Brian.
Hi, Justin.
Hi, Justin.
Nice finish to the year.
Thank you.
Sure. To start off, I may have missed one or two details in the guidance. Did you actually guide for the corporate cost below that $250 million plus of segment EBITDA?
Yes. $45 million.
Okay. And is it safe to say that the cost of the strategic initiative that will run through the P&L are going to be excluded in that $250 million plus of adjusted EBITDA?
Yes, that’s correct. The $250 million excludes those costs.
Okay, great. And over what time frame will those costs be incurred?
Yes. So, the time frame is three years and the cost will be incurred over the three-year period, more or less evenly.
Similarly with cash? Or the cash more front-loaded?
That will be more or less even as well.
Okay, great. Stepping away from some of those nuanced questions. If we look back on 2019, you obviously got a pretty big benefit from price and mix, and there’s an element of price that was either more or less passing through tariffs or inflation immediately or in a lag. I mean how much of the lower revenue guide just reflects the fact that the need to price through inflation and tariffs won’t repeat?
Our overall guidance includes many, many factors so I can’t pinpoint it to that one factor. So overall, considering the economy, considering our pricing, considering all gains or changes in what we’re going to sell, we feel 2% to 3% is a prudent amount.
And I’d also say that it’s not about the pricing as much as it’s about the mitigation of the impact of all the issues you outlined. This is about the management teams being able to adapt in an environment of increased costs, to be able to take cost out of the business and the pricing is with a lag. So this is more about our own operating efficiency than it is about the price pass-through.
Sure. But I mean I guess, if I look at your revenue guidance of 2% to 3% and compare it to the volume growth of 3% that you did in Home & Building Products this year, so obviously the lion’s share of your revenue, should I think about that volume number perhaps just modestly decelerating and the price/mix sort of coming down materially from this year’s levels? Or is it going to be sort of more – will volume also come down materially in that 2% to 3% guide from what you delivered this year, in your view?
We’re seeing the 2% to 3% being a combination of both volume and mix as we look into 2020. So we see volume – steady volume continuing with some improvement, and we expect mix to improve. So it’s both improving.
Okay, got it. And then lastly, what would cause you to sort of deviate from the delevering path at this point? And what size bolt-on acquisition would you be open to in the context of continuing up the delevering path?
We’ve been very clear. We have a very clear value-enhancing stockholder appreciation strategy in the environment that we are operating in, to improve our operations based on the strategic plans that we’ve outlined, there will be a natural deleveraging of our balance sheet, which we proved this year. The earnings capability and free cash flow generation could allow us to delever faster than any expectation that could have been out there a year ago. So let’s remember, we were at 5.5x levered going into this year. The acquisition story for us is about running the businesses we already own increasingly better, executing the plan that we are going to start with the AMES business to enhance their profitability and as a result, significantly enhance the free cash flow in years 2023 and beyond. And this is about positioning the company for long-term growth. And I’ll bring it back to you that while we have plenty of balance sheet capacity to buy things, we like what we’re doing running the things we already own and investing in the businesses that we already have leading positions in.
So, the ability for us to be able to invest over a period of the year $75 million and expect to generate $15 million to $20 million a year in cash returns as a result of that is the best acquisition profile that we can ever possibly have in terms of looking to go outside. So, the desire to grow the company for us right now is to get what we already own increasingly better, generating higher free cash flow. The result of that is going to be a very nice cash flow generation and earnings per share growth story and we performed very well for our equity holders and we performed very well with a full appreciation that the best part of our earnings cycle is still ahead of us. And that’s not based on an improvement in the market. And that even with the 2% to 3% top line growth, we expect to be able to significantly grow the cash flow profile of the business leading to the deleveraging, leading to a better valuation of our sum of the parts.
Okay, understood. Thank you.
[Operator Instructions] Your next question comes from Tim Wojs with Robert W. Baird & Co. Please go ahead.
Hey, gentlemen. Good afternoon. Nice finish to the year.
Thank you.
Thank you.
Maybe, just on the Telephonics business. You did mention a couple of nice orders, and I think that was – those are for both in the fourth quarter. Have you looked at your bookings over the last, maybe, 12 to 18 months? In terms of how those bookings convert to revenue, have you seen any changes or any sort of deviations versus historical precedent in terms of are you winning larger orders that might take a little bit more time to kind of convert to revenue? Or would you say the conversion from backlog is pretty consistent with what you’ve seen historically?
In general, we’ve seen it be consistent. It runs in the mid-60s through the mid-70s in conversion for the year going forward.
Okay. And can you remind me how big – or frame how big the MH-60R orders could be?
The India and Greece orders that we’ve referenced is $75 million plus, and we expect that in this fiscal year.
Okay, great. and then…
And then the timing and predictability of the FMS sales is really the biggest change. We see a multiyear buildup in that side of the business and you’ve heard me say it before that we thought we would book them in the last year. Ending this year with an increase in backlog is the direction forward. Pay attention to the backlog growth. It doesn’t happen month-over-month. But quarter-over-quarter, we think you’re going to see the turn in 2020, and we’re excited about what the next several years are going to look like for our portion of ISR in the defense contracting world.
Okay, okay. Great. And then as you think about return to growth this year in the Telephonics business, how do you – how should we think about just kind of the revenue drop-through in terms of the leverage you should be able to get on kind of incremental sales?
We do expect improved margin as the sales go up. We don’t give a particular formula for it, but our margin now is lower than we’ve seen historically. And we have a plan over the next several years to get back to a 13%, 14% margin on higher revenue.
Okay, okay. Great. And then just one clarification question, so, Brian, I think you said that the savings from the AMES strategic initiatives will kind of come through ratably over the next couple of years. I just want to make sure that, that includes fiscal 2020.
No, that would be expense I was referencing before. But we will see the savings benefits starting in 2021. And we’ll see it full year annualized in 2023.
Okay, okay. Great. Thank you very much. Appreciate the time.
Thank you.
Thank you.
We have reached the end of the question-and-answer session. I will now turn the call back over to Mr. Ron Kramer for closing remarks.
Thank you very much. We’re very excited about what we accomplished in 2019, and we’re hard at work to make 2020 an even better year. So thank you all. Bye-bye.
This concludes today’s conference and you may disconnect your lines at this time. Thank you for your participation.