Q1 2020 Earnings Call
Greetings and welcome to Griffon Corporation first quarter 2020 earnings Conference call. At this time all participants are in listen only mode. A question and answer session follow the formal presentation. If any what's required operator systems. During the conference. Please press star zero under telephone Keypad. Please note today's conference is being recorded I would now that's just on the comp.
So what's your host Mr., Brian Harris, Chief Financial Officer. Thank you you may begin.
Thank you.
Good afternoon, everyone with me on the call as Ron Kramer, our chairman and Chief Executive officer or Cold being recorded.
Well for play back a detailed which are in our press release issued earlier today.
I didn't pass or comments all forward looking statements about the company's performance based on our views of Gherkins businesses.
The environments in which they operate.
Such statements are subject to inherent risks or uncertainties I can change of the world changes.
We see the cautionary statements in today's press release and there are various securities Exchange Commission filing.
Finally, today's remarks, we'll just for those items that affect comparability between reporting periods. These items are explained in our non-GAAP reconciliation is included in our press release now I'll turn the call over the wrong.
Thanks, and good afternoon, everyone. We're off to an excellent start for fiscal year 2020 ought to start by discussing the enhanced reporting of our three segments or a public filings. We believe this change provides our shareholders increased transparency in further highlights the significant opportunities.
For each of our businesses by demonstrating the positive impacts the operational improvements and strategic investments we've undertaken.
Our segments, our consumer professional products, consisting primarily of our Ames business inclusive of the closet, They brands home and building products, which is our clung pay business, which includes the Cornell cooks and brand our defense electronic segment, Telephonics, which is unchanged our results as well.
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% of 548 million and our adjusted EBITDA increased 21.5% to 55 no. We have this was.
And by growth across our CLO paying names businesses, we continue to make progress on the aim strategic initiative announced in November . This is a multiyear investment in the aims next generation business platform to enhance the growth efficiency and competitiveness in our aims and Closetmaid U.S. businesses. This play.
Formal improved business tracking enable faster decision, making and improve aims ability to predict 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 of our $14 million mountaintop, Pennsylvania expansion project that serves our Cornell cooks in line. The team has moved into the expanded facility and it's now transitioning operations to take advantage of the new weapon in space. This facility will increase our manufacturing capacity.
Data 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., maybe Mucks price challenge for our mosaic I use our radar system. This award is recognition of the strong technical innovation to the next generation radar currently under development in cell products and also as an indication of that.
Significant value proposition. This technology provides to our customers. Moreover, shortly after receiving this fries, we began flight testing the new radar technology with the U.S. Navy on there and age 60 as Seahawk helicopter is an initial feedback has been positive further we continue to see progress.
The Indian government regarding our MH 60, our 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 AFFO.
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 on our first quarter. Our leverage ratio remained the same as last quarter.
At 4.8 times, we continue to focus on de leveraging working towards our three and a half times net debt to EBITDA goal in December we acquired after a leading UK supplier of innovative garden pottery and associated products sold to UK in Ireland Garden centers after strengthens the device.
First occasion of our product offerings, while increasing our operational footprint in the region. We expect after 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 any acquisition would be both value enhancing and immediately accretive. Additionally earlier today our board authorized.
Seven and a half cent per share dividend payable on March 19th 2020 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 in 2012.
Earlier today, we announced the amendment of our revolving credit facility, which now extends until March 2025, the amended and extended agreement as lower borrowing costs, whether do spread over LIBOR and reduce fees. Additionally, the amount available was increased to four under 1 billion or.
The terms are substantially the same at quarter end, we had approximately 229 billion available for borrowing under the revolver subject to certain loan covenants with the extension.
The bank agreement.
You could expect us to refinance our 1 billion of five in a quarter nodes sometime this year.
With that I'm going to turn it over to Brian for details on the financial results.
Thank you Ron.
Sorry by highlighting our first quarter consolidated performance.
Revenue increased 7% to 548 billion adjusted EBITDA increased 22% to 55 million both in comparison to the prior year quarter.
Gross profit for the quarter was 150 million.
And it included 2.7 billion of charges related to the aim strategic initiatives. 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 tower.
First quarter selling general administrative expenses of 118 million included a 3.7 million charge related to the strategic initiative. Excluding this charge X gene a expenses were 114 million essentially flat compared to prior year first quarter.
As a percentage of sales MSG nay adjustment for the charge decreased 150 basis points to 20.8%.
First quarter GAAP net income.
With 10.6 million or 24 cents per share compared to prior year period of 8.8 million or 21 cents per share.
Excluding items that affect comparability for both periods current quarter. Adjusted net income was 15.6 million or 36 cents per share compared to the prior year of 9.2 million or 22 cents per share.
Dr tax rate, excluding items that affect comparability for the quarter was 33.3%.
Capital spending was 13 million compared to $8 million in the prior year quarter with increased primarily due to expenditures for the recently completed home and building products mountaintop 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 4.8 times as calculated based on our debt covenants.
As we've noted previously the first half of our here is a cast issuance period and the second half as 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 mix, partially offset by 1% unfavorable impact due to foreign exchange adjusted EBITDA was 22 million increasing 7% from the prior quarter due.
Your leverage on sales, partially offset by increased hours.
We're building products first quarter revenue increased 8% to 241 million over the prior year quarter, driven by increased volume unfavorable mix and pricing.
Adjusted EBITDA increased 30% to 41 million over the prior quarter due to the benefit of increase revenue, including buyer 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 or Tronics first quarter revenue was 66 million compared to the prior period 71 million, primarily due to timing of orders.
Adjusted EBITDA during the period was 4.5 million compared to the prior quarter 4.8 million.
12 month book to Bill ratio with a little over one X and backlog at the at December 31 was 370 million.
Corporate 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 fly 19.
And Georgia 50 million parts of EBITDA, excluding the unallocated cost a 45 million and onetime charges relating to the strategic initiative.
Capital expenditures DNA 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're off to an excellent start to fiscal 2020, Gryphon is well positioned to generate significant cash flow continue to expand margins through execution of our strategic initiatives. We're excited about the opportunities in front of us and we continue to see a healthy.
US consumer an economy that supported or of all of our business as 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 at this time, we conducted a question and answer session. If you will access question. Please press star one on your telephone keypad confirmation. So indicate your line is in the question Q You me Prestart too. If you will look to remove your question from the Q for participants using speaker Carmen and may be necessary to be comprehensive before person. The starkey one moment. Please when we pull for questions.
Our first question comes on line of Bob Labick CJS Securities. Please state your question.
Good afternoon, congratulations on a great start to fiscal 2000.
Thank you thanks, Bob.
I wanted to start with the Ames initiative, obviously, it's really exciting thing you discussed last quarter, you started to dig and 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 learned so far and what are the next kind of milestones and steps we should expect.
So if it really I've been no surprises it started off as expected and we continue to expect it to go as planned.
Yes, well continue each step as we go so right now we're working on a couple of facilities and those will be close 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 can you talk a little about telephonics I'm very optimistic things could could you maybe expand a little bit up on the international opportunity. I think you gave us the size, but I I was didnt wasn't able to write down fast enough and then also you mentioned the ISO radar and you talk a little bit more about that and if that.
Medium term opportunity or when that would.
Become part of.
Sales for Telephonics.
Sure.
We continue to see a lot of opportunities internationally are the ones. We were specifically talking about was India, which is a 50 plus million.
Initial booking opportunity that we expect to happen this fiscal year.
We see other opportunities.
With our allies are across the globe and we see a strong pipeline both domestically and internationally.
The.
Active we're trying to be scan array Asia radar.
We will likely start seeing sales at about two years.
Sort off slowly and then continue from there.
But we're very excited about the technology as are our customers as you as we mentioned the Navy we had a test with the Navy. The tests were successful and we see a lot of interest in the product I would have been known likely the initial sales of that product will be international.
And Bob It's Ron the one other thing I'd add is that we've set that we see the cycle having turned in fiscal 19 and now in 20 for Telephonics, we see a five year runway here of both improving backlog.
Orders 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's really position for.
Multi year expansion.
Okay, that's great.
Then last one for me just the.
We are liking the new segmentation and can take us a little while to get used to it but the incremental information, particularly on.
BP and co pay and Cornell the margins of I think 16.9% in the quarter were obviously terrific can you talk a little bit about the drivers for the margin and what range of margin should be expected going forward.
I'll say I'll start by saying that we've always talked about our business is being accurate.
Reflections of what's going on in the housing market and our businesses are continuing to show us that the US housing market is strong and not just at the end of the cycle, but showing volume increases is well.
As cost reductions in manufacturing.
She is really in efficiency story for us.
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 we are 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.
It is separate part of the conversation about our consumer professional products. It what it should really showcase to you is that the Bridgewater project that the aims initiative that we discussed is the room for 300 plus basis points of margin expansion and that is something.
That is been planned.
Segmentation allows you to see the progress were making.
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 the company, but all signs to us of what did the year is shaping up to be for the us economy are positive.
Yes, I would just add to that.
We have out there that we are building to a 15% margin in the home and building products segment.
Annualized for full year margin.
So in that business generally Q1 in Q4 are the strongest quarters with Q2 being the weakest quarter, just a regular cycle that business in Q3 being a little better than Q2.
So I wanted to just point that out.
And on our CPP business ultimately, we see a 12% margin and that business. Our strongest quarters are generally Q2 in Q3.
Super Okay. Thank you so much.
Our next question comes on line improve your Romero with Sidoti. Please proceed with your question.
Hey, good afternoon.
Wanted to ask about the deal.
How do you see that fitting in with calculate and what product lines attracted you to that business.
So the after deal really expands our global footprint of pots and planters. So after the pots and planters business and it's our first parent pots and planters business in the UK.
So overall, just like I pointed with what we did in Australia, where we built a business from negligible revenue of 10 to 15 million $260 million to $170 million business under one management using one distribution footprint.
That is what we've started to do in the UK, So Cal cable Hacienda and now after.
We'll be combined.
Our under one set of managers and it's another good adjacent see 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 model then for you guys I mean.
You still expecting 35 million in one time items over that three year period, and kind of maybe what kind of cadence, we should expect that spread out over the next or 11, or so quarters shoring up our VP expenses, yes, still $35 million in a three year period, we do expect full year expense for each year to be roughly equal chunks of that 35.
Yeah.
So the balance of this year will be somewhere in that 7 million plus minus range.
In particular occurred to adjust we were able to start on the facilities and we 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 on line of Justin Bergner with Gabelli. Please proceed with your question.
Good afternoon wrong good afternoon, Brian .
Yes, Hi, Jessica.
Is there any more detail you can provide on sort of the volume excel ration.
Looking at the.
Sort of 2% volume print in the September quarter for your combine home and building products business.
Under the old reporting versus you know what looks like an average 6%.
Volume increase this quarter.
Was there anything whether related calendar related lap comp related that.
Would you explain away 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're outperforming the market.
Yeah, that's across both on the building products business and the Ames business and that includes aimed at closetmaid and both commercial and residential side.
Okay.
And then.
I guess the price mix element.
Average the two new reporting segments is about 4%.
Consistent with what you reported last quarter.
So that dynamic I guess is relatively constant but has the price versus mix components or have changed at all within that 4%.
I know theres contributions from both actually it's a little more mixed focused this quarter.
And price.
We continue to.
You know improve the type of product were selling and you know into.
Better best categories in the aim side are causing made is very strong brand and we continue to come out.
Products that people are investing in and investing in could you improve their homes.
And then our ongoing product side, we continue to see people investing in a nice or on the residential side on a nicer door.
It's very important element to home recent survey that came out say number one and two of the.
Our benefits you could do to improve the look of your home is the entry door and the garage door and one another element is we're very focused on the aim side tool side, we're very focused on the pro which generally is a higher end product.
Okay.
Back to my initial question on the volume acceleration was there anything weather related that.
I was going on the quarter with the 7% volume in consumer professional products show no nothing particular weather related.
Okay.
Capital allocation have any of your priorities change over the last three to six months.
In terms of your appetite for acquisitions.
This is debt pay down.
No.
In the the hunt for acquisitions.
Is always topical for us.
The reality is there's 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 we think that our strategy has been to digest the acquisitions that we've made and I'll remind you we bought a 11 companies in the last six years. So you should always expire.
That there is something in our pipeline the reality for US has been that the value is been tuck in acquisitions and in transactions that you are unpredictable as to when and if they come along so the big acquisitions for us both Cornell Cookson, 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. The now have the leading commercial door business, and we will build and grow that business for hopefully decades.
The.
Closetmaid acquisition and the opportunities that it's created for us to consolidate with aims are just beginning to be reflect that so the tuck ins that we've done then you know and in this quarter apt or the types of things that we see we see far more value in smaller deals.
But when the reality for US is we see the benefit of de leveraging.
In in being rewarded in the equity market and while we havent bought back stock.
We still think our stock is compelling and value, but we are far better and we'll continue to go down our de leveraging story.
From a credit standpoint and that's.
How you should be thinking about us from an M&A.
Standpoint going forward.
Okay and I'm just on the Telephonics side I mean are you likely to do anything material there given that we have an election coming up.
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One way or another or is that sort of something that you're kind of going to take a little bit as a wait and see approach until.
Sure.
The election.
We love the defense business and Telephonics is a gem, we have a multi year.
Strategic initiative there too.
Grow the business.
We we have every intention of continuing to build it grow it I wish we can find acquisitions.
The complemented and those tend to be at 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 very long time, we've seen lots of presidents come and go.
Business that wherein is is essential.
Its.
The incumbent position on multiple platforms, we want to keep that business for very long time and building.
Okay. Thanks for taking my questions.
Thank you.
Ladies and gentlemen, once again, if you will make sense a question. Please press star one on your telephone keypad. Once again, if you will just a question. Please press star one on your telephone keypad, one monkeys as we pull for questions.
Our next question comes from the lineups and was with Baird. Please proceed with your question.
Hey, Hey, guys good afternoon nice job.
Hi, Tim How're you doing.
Good good thanks, Theres some snowing here so thats good.
So I guess, maybe just.
Thinking about Cornell Tech Center, just curious if front could you maybe add a little bit of.
Little bit of color now that you've owned the business for close to 18 months now where the synergy opportunity relative to maybe what your internal benchmark was today and how that performed relative to your expectations.
Then secondly, just kind of curious what you're seeing in kind of the overall nonres market right now in terms of order activity and backlogs.
So I'll start by telling you that.
The diversification of a CLO pay business was always something that we wanted to accomplish and we were already in the commercial door business.
Cornell Cookson was unique opportunity.
For us to be able to not just expand what we already we're doing and some of the complimentary things that in fact, we've been doing together with them, but it was putting two cultures together that we thought would.
We to synergies, we're 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 far more jobs by us going and trying to invest in the sales and marketing.
Cornell and to do all that that was the the first step was to get the physical footprint.
Rationalized, we expanded the facility. We just completed in December So the road ahead of US is quite optimistic about both volume.
Expansion and ultimately margin expansion as were able to leverage the fixed overhead of both the CLO pay and the Cornell cooks in business.
Right, yes that add to our yeah, I'll do that as well.
We added 400 dealers that did not have before in either side of the business when we bought Cornell coaxing.
So we have the opportunity and actually have started the process, where a dealer who had cornell cookson product, but did not have the co pay commercial product is now starting to buy the Kobe commercial products, because they might dealing with one customer and vice versa. So that opportunities in front of us and we've begun changing over some dealers already.
Yes.
In the commercial session I know, we continue to see good volume, we're not seeing weakness there.
Okay. Okay, Great and then just with when do you think about Closetmaid and some of the expansion opportunities there.
I guess, how how important are attractive is getting into the garage space.
It's opportunistic so it's not at all reflected and current or projected it's something that if anybody is going to figure out garage organization on a national basis, it should be us stay tuned.
Okay, perfect and then.
Just in terms of the refinancing that you talked about Ron on the on the notes.
How would you kind of.
Think about the timeline there or just how how how are the debt markets are relative to kind of your current facility.
We.
We are always opportunistic about coming back to the market.
Company is in excellent shape.
It by all appearances.
The credit markets are opening in available and at the appropriate time, we'll come back but sometime this year is what you should be expecting.
Okay, Okay, great well congrats on the on the on the first quarter here and good luck for the rest of the here, Yes, we're very very pleased about what we see 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'll 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 have a wonderful day.
Thank you.
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