Q2 2020 Earnings Call
Greetings and welcome to the Griffon Corporation second quarter 2020 earnings Conference call.
This time, all participants are in listen only mode.
Brief question answer session will follow the formal presentation.
Anyone require operators since during the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host Brian Harris Chief Financial Officer. Please go ahead.
Thank you.
Good afternoon, everyone with me on the call is Ron Kramer, our chairman and Chief Executive Officer.
Calls being recorded it will be available for playback to teach outs with later in our press release issued earlier today.
And then the passenger car which include forward looking statements about the company's performance based on our views of Griffin's businesses and the environments in which they operate.
Statements are subject to inherent risks and uncertainties that can change or the wall changes.
He see the cautionary statements in today's press release, no value Securities and Exchange Commission.
Finally during today's remarks, well just for those items that affect compatibility between reporting periods. These items are explained in our non-GAAP reconciliation is included in our press release now I'll turn the call overdrawn.
Thanks, and good afternoon, everyone. Let me start by saying I hope that old view and your families for safe and healthy.
Griffin entered this unprecedented covert 19 pandemic from a position of strength on an operational and a competitive basis.
Our positive momentum along with enhanced liquidity in a strengthened balance sheet enable us to manage the near term affects the current environment well continuing to make the necessary investments in our business to execute our strategic growth plan and drive long term shareholder value.
Our top priority has been and we'll continue to be ensuring the health and safety of our employees and our customers. Since early March we've been proactively implementing health and safety measures across our global workforce.
As local and national authorities have circulated additional guidelines for employee health and safety, we've incorporated those as well.
It's almost all of our facilities have been opened and remain operational or additional safety measures include increasing the cleaning frequency and enhancing the sanitation of all of our facilities restricting external visitor access store facilities adjusting production schedules in hours or whopper.
Ration to promote dispensing between employees in the workplace implementing work from home programs or wherever possible and canceling all travel and not necessary work travel.
These are samplings or the brought actions we've taken across all of our business is to protect our workers while maintaining critical operations in mid March. We also began an appreciation award program to hourly U.S. employees on the front lines working at our manufacturing and distribution sites as recognition of the difficulties they've been through.
Facing this situation has put a tremendous drain on our entire workforce, but they've done an exceptional job keeping our operations running well simultaneously keeping everyone sake.
We owe them our gratitude not just for doing an outstanding job, but also for supporting operations that are critical to our country.
Oh, let's go through some of the specific businesses and consumer and professional products went home and building products all of our U.S. Canadian and Australian facilities are operational. This includes all aims closetmaid CLO paying Cornell cookson facilities. Each of these businesses provide critical products supporting national infrastructure.
To the extent practical we are permitting our employees in these segments to work remotely as I mentioned before all of our manufacturing and distribution facilities headroom have implemented strict protocols to ensure employee health and safety while at the workplace.
In the United Kingdom in accordance with UK government directives in late March our aims UK facilities or not operating at this time and employees have been directed to stay home until what we expect to be reopening the end of June.
In Mexico, our Closetmaid manufacturing facility closed earlier in April with the direction of Mexican authorities. This facility supports closetmaid sales principally in the U.S. and Canada and is expected to resume operations imminently.
Ah Telephonics, our defense electronics business continues to operate at all that sites as it provides critical manufacturing and services supporting the U.S. military and its operations are essential for maintaining our national security.
Let me go through an update on the second quarter performance, starting with the consumer and professional products, we sort of steady demand through the entire quarter for seasonal lawn and garden products tools and storage and organizational solutions at major retailers in home centers across North America and in Australia. The UK.
Was impacted by the March Covidien related shut down.
In home and building products, a strong demand for sectional residential and commercial doors continued through the end to the quarter. We also saw increasing demand for rolling steel products in the quarter at Telephonics, the long anticipated Lockheed Martin MH 60, our Fms program with India was signed Telephonics received an initial.
5 million booking in March which is the first part of the 50 million in total bookings expected from this production contract.
We expect the balance of this contract to be booked in this fiscal year.
Cross all of our segments, our suppliers have largely been able to support us and we've not experienced any meaningful supply chain issues to date currently we have sufficient components of material on hand to sustain our operations without major interruptions.
Let's talk about our balance sheet Ah well the covert 19 pandemic clearly is a web start typical business update on a call out attention to some of the recent developments.
In January 2020, we expanded the capacity and extended the term of our revolving credit facility to 2025, we increased the revolver by 50 million to 400 million and have an additional 100 billion of availability through its accordion feature.
On our last call in January Thirtyth, we discussed our intent to refinance a portion of our 2022 bonds. Shortly thereafter on February 4th we completed a private placement refinancing 850 million of our 1 billion five in a quarter bonds due in 2022 with five in three quarter percent notes.
Doing 2028 substantially all of these bonds were exchanged for registered bonds on April 22nd.
We're pleased by the success and the timing of a bond offering and revolver expansion and with how these actions position us for the future. These transactions enhance our liquidity and extend our maturities reinforcing forcing or balance sheet to weather the unpredictable conditions were operating in today.
Lastly, we expect to continue our dividend program, we understand how important or dividends to shareholders and it reflects the resilience of our business even in difficult times.
That in earlier today, our board authorized a seven and a half cent per share dividend payable on June 18, 2020 to shareholders of record on May 21st 2020. This marks the 35th consecutive quarterly dividend to shareholders, which has grown at an annualized compound rate of 17% since we initiated it.
2012.
Let me turn it over to Brian for a closer look at the results Brian.
Thank you Ron.
I'll start by highlighting our second quarter consolidated performance compared to <unk>, probably important results.
A few increased 3% of 566 million, an adjusted EBITDA increased 13% to 50 48 million.
Gross profit for the quarter was 152 million, which included 1.4 million of charges related to these strategic initiative.
Excluding this charge gross profit was 153 million, increasing 12% rich gross margin, increasing 210 basis points.
Second quarter selling general administrative expenses of 126 million included 4.7 billion of charges related to the age strategic initiative and acquisition costs related to after an M&A activity postponed at the end of Q2.
Excluding these charges that's gene expenses were 122 million increasing 9%.
Hi, good percentage of sales that you need adjusting for the charges increased 120 basis points to 21.5% consulting coping related expenses in compensation.
Second quarter gaps 2020, net income was 900000 or two cents per share compared to the prior year period of 6.5 million a 15 cents per share excluding items that affect comparability from both periods third quarter. Adjusted net income was 10 million or 23 cents per share compared to the prior year of 6.4 million, let's say.
He centsper share an increase of 53% on a per share basis.
The effective tax rate, excluding items affecting comparability for the quarter, 35.9% and for the year to date period was 34.4 per se.
Capital spending was 9 million in second quarter inline with prior year.
Depreciation amortization for the quarter was 16 million.
Regarding our segments consumer professional products second quarter revenue decreased 4% to 275 million driven by decreased volume due to prior year, new product loadings in the current quarter intact coping 19 on the UK as well as an unfavorable foreign exchange impact of 1%.
This is partially offset by favorable mix and pricing and the incremental contribution from the apt acquisition of 2%.
Adjusted EBITDA was 25 million decreasing 13% due to reduced sales in Paris.
Partially offset by contribution from out there.
According to even though also had a 1% unfavorable foreign exchange impacts adjusted EBITDA margin was 9.1% compared to 9.9% prior year quarter.
The aim strategic initiative continues on plan and we expect to exit the bell burning P.A. and faulty Nebraska facilities by the end of fiscal year.
Only building products second quarter revenue increased 12% to 210 million driven by increased volume and favorable mix and pricing.
Adjusted EBITDA increased 52% for 31 million driven by increased revenue and improved operational efficiencies.
Adjusted EBITDA margin was 14.6% in the current quarter compared to 10.8% in the prior year quarter.
It sounds like Tronics first quarter revenue was 82 million compared to the prior year period of 75 million.
I know you due to increased volume.
Adjusted EBITDA during that period is 4.2 million compared with prior quarter 4.9 million impacted by mix and timing of bid and proposal.
Backlog at March 31st 2020 was 332 million.
Well bring unallocated expenses, excluding depreciation were 11.9 billion in second quarter.
Regarding our balance sheet and liquidity as of March 31st 2020, we had 69 million in cash and total debt outstanding of 1.23 billion, resulting in net debt position of 1.16 billion net debt to EBITDA leverage at 5.1 time defined in our debt covenant.
Further we expect benefits from the cares act another legislation to provide 10 million plus cash inflow to fiscal 2020, and five plus million physical 21.
We have ample liquidity the magnitude of coking 19 pandemic as previously mentioned, we refinanced our 800 850 about 1 billion five in the quarter bonds do 22.
The maturity of the new bonds as much 28, the coupon at 5.75%, having approximately 2.5, knowing that interest expenses this fiscal year.
Also during the quarter decking extended its revolving credit facility to 2025, an increase the maximum borrowing them out by 50 million to 400 million with 195 million a Bell Boy March 31st 2020. In addition, so when we had 100 million accordion feature.
Also note that has gripping entered the month of April seasonal cash generation periods dog, which capable continues through the end of fiscal year.
He first six months or be it was strong with our trailing 12 month adjusted EBITDA before unallocated expenses up 70 million to 263 million as compared to fiscal 2019 246 million.
Regarding Q3, we expect the vast majority of opportunities to remain operational as our production and distribution is considered essential.
Ample liquidity anticipate strong free cash flow in the second half of that fiscal year.
Yes, long extending maturities of our debt also to support our business as we navigate your near term challenges.
Notwithstanding there are several factors that are bobbing and and are unpredictable at this time.
Doctors and could get installation of global Colby 19 weighted business interruption, its ultimate impact on economic conditions and the costs associated with enhanced safety modified production measures and appreciation awards.
We normally give guidance once you there and do not paid back on guidance during.
These are not normal times.
The uncertainty, resulting from koby Nike makes it extremely difficult to provide guidance as a result, we've decided to spend or two twentytwenty guidance <unk>.
As you can see for our results were making good progress and they're treating our guidance, but at least 250 million of adjusted EBITDA before unallocated expenses and would it be were indeed ahead of that plan.
Our long term deleveraging strategy in gold of 3.5 times net debt to EBITDA remains unchanged.
Let me give you some commentary regarding what we have observed across our businesses over the last six weeks.
Beginning with C.P.P., we continued to see steady demand in North American Australian markets. However aims UK currently does not expect to resume operations until July.
Home and building products called paid rational sexual doors that seemed buying declined approximately 15% to 20% during the month of April but commercial volumes our study.
You're not expecting immaterial and have not seen immaterial impact on defense electronics revenue through Q3, now I'll turn the call back over to Ron.
Yes, Brian.
We had a solid second quarter and our year to date performance was well ahead of last year.
Well, we adjust to the current circumstances, our long term strategy remains intact and we have the conviction to follow through on the key elements of our long term strategic growth plans.
Our capital investments will continue per original guidance of 60 million recall that roughly half of our capital expenditures are related to maintenance operations with the other half promoting our growth and competitiveness. We will continue to make all these investments, including our aim strategic initiative as I mentioned earlier, we will.
Continue our dividend program and while we have 58 million remaining under our board approved share buyback program. We currently do not intend to repurchase shares.
Second half of our fiscal year generate significant free cash flow due to the seasonality of our businesses will continue to focus on de leveraging our balance sheet and reaching our goal at three and a half times net debt to EBITDA on the next few years.
Our workforce has shown an exceptional dedication throughout this crisis. We all appreciate the importance of their work supporting the critical infrastructure of our global home markets will continue to be proactive would taking measures to maintain their health and safety as we work our way through this pandemic.
I just like to say that our management team is up to this challenge a will persevere through it and I'm confident that we will build to a bigger and better tomorrow.
Operator, let's take a whatever questions.
[noise]. Thank you will now be conducting a question and answer session. If he would like to ask a question. Please press star one on your telephone keypad a confirmation channel indicate your line is in the question can you maybe press star to if he would like to remove your question from the Q.
Participants using speaker equipment and may be necessary to pick up your handset to four pressing the star keys.
One moment, please mildly poll for questions.
The first question is from Bob Labick CJS Securities. Please go ahead.
Hi, it's actually.
Good afternoon.
Good afternoon.
Well.
Just just starting with Ames business as you look into April or are you seeing anything.
I mean, even say it could be a benefit relating to.
Stay at home and people gardening and.
At retail there in terms of.
We clearly you know are seeing as people who.
Our at home and as the economy, you know goes through this adjustment to this incredible set of circumstances.
People are that are home or spending money in and around their house. We are a beneficiary of that we expect that to you know manifests itself in our ability to support our a retail partners in their E commerce business.
You know the mega trends of of home investment.
And yeah, well, it's it's obviously terribly unfortunate the level of unemployment. That's you know waving through Theres still a tremendous a number of homeowners and there's still a tremendous amount of liquidity.
That's a provided that people are that are home that are not going to restaurants that are not going out to shop.
At retail and are adjusting their patterns, we believe that that trend, which is clearly within the range of products and the brands that you know we represent within names he's going to be in a sweet spot of what a is going to be the you know the new.
Normal, but how people spend money in the U.S. and the one other point that they don't make is you know the impact of book a monetary and fiscal policy you know the seven trillion, that's going to get pumped into our system. You know is one of the things that gives US you know so.
Significant hope that Oh, you know the recovery in particular it away that 26 million people that are you know.
Having become unemployed or going to get back into the workforce.
The trends around urbanization, yeah, we're likely to end up with more single home you know ownership, but you know the broader speaking of where what this means frames is an underlying positive.
And going towards increasing investment in the home can can you give us a sense for what.
Typically happens on the residential garage door side in periods of economic slowdowns, and then just as a follow up to that or commodity prices you're seeing.
Stealing particular, giving you any tailwind.
Offset some of the potential.
Volume headwinds yeah, there there's a couple of questions in there, but let me let me start by saying that you know in the last housing crisis, yeah. The the.
Homeownership.
Was.
A a cause of the financial Calamity you know in this case the home is a victim of it and you know and the distinction is that whatever economic decline were currently going through it is a result, you know of a natural disaster and so.
Trying to compare this to any prior cycle is you know informational only <unk>.
We're too early in this the to know with any certainty what the ultimate impact is going to be but you know certainly through the end of March we were seeing you know you know notches good volumes, but way ahead of last year in a the residential side of the business.
Remember the biggest part of our business is repair and remodel.
New home construction, which you know there's a clear you know supply demand imbalance a that you know we.
I believe.
This is only going to accelerate when we ultimately get into the recovery phase. So it's it's way too early to talk about what the impact is.
You have the repair and remodel cycle continues dealer business, well, you know well down and I think Brian use the number 15, 20% yeah. When in the month of April you know from where we're sitting we see that that means.
80% to 85% of who have a expected orders. So there is very much a heartbeat of an economy that still going in spite of the lockdowns and all the necessary safety precautions that states have put in place with shelter in place with lock down.
So how that's going to ultimately go the other way as we start to open up again. This week and then you know prospectively into May and June remains to be seen we believe we have to leading brand. We had the best dealer network were sold through the best retailers in the garage.
Door business and we bought the best commercial door business in Cornell Cookson, we see no drop off in volumes on the commercial side of our business. So we remain relatively positive about the trends. That's we're sitting here in April but you know the impact of what this is going to.
How long this is going to last isn't about economic forecasting or views about politics, it's about science and ultimately.
Testing and vaccination will lead to show how much people reengage and how quickly the economy recovers.
The one thing that were certain note is that you know our broader strategy of products that are in and around the house garden to garage.
Hi, this is where the functioning part of the U.S. economy is likely to continue to notch as function, but the benefit from the trends that are going on.
Great.
And then the commodity side Brian.
Yeah sure so to address your commodity question I show, we saw some changes in commodities over the last.
60 days or so.
However, we also have increased cost related to covert itself with me.
Testing at the facility than the cleaning not to mention the appreciation awards. So overall, our cost structure is up not down.
Thank you.
[noise]. The next question is from Chile over there so T. and company. Please go ahead.
Hey, good afternoon.
Well.
You too Julio.
Well one of the sort of TPP you'd mentioned all your facilities minus the UK in Mexico, our operational and you discussed utilization rate.
Are you, having reduced hours or your shifts or any color that would help.
Sure.
So are the facilities, our operating their fulfilling and see normal orders or we do have some shifts in the way we operate the facilities to enhance social Disney thing, but their facilities are really fully operational.
Okay, that's helpful and on home and building products.
Just thinking about the sales process there with installers, you know how to get into the old I I believe.
Yeah that would lend itself to elevated risk there.
You know what do margins look liking and Oh and building products, you know assuming that that volume decline maybe seeing there.
Oh, so for us selling residential garage doors actually you don't need much interaction at all they don't go inside your house, Yeah, that's an outsized plausible to go.
Right and also.
Particularly through our dealers.
They had software called my door that they can deal with customers that it just things online or through.
Yeah, that'd be online portal to design the door showing a picture of the house showing up at all to look like nobody knew who interact with anybody directly they can give their credit card. Some show how install you don't think anywhere near again, so that whole process is fully operational.
And Ron did I hear you say in your prepared remarks that about half of your FX is a bad I guess would that be about 30 million.
Or so.
You do know Yasser exactly are generally our top that's runs about 50 50.
In terms of I mean, its first.
Investment more business expansion. So this year, we had been capex out there 60 million guidance. He know even that is related to deems initiative I would say the balance there and after that is roughly 50 50.
If that's okay got it okay understood you.
Thanks, taking my questions and stay healthy.
You mentioned.
The next question is from Justin Bergner as GE Research. Please go ahead.
Hi, good afternoon wrong back and Brian.
Hi, Jonathan.
Two clarification questions to start to make sure I heard your comments correctly.
Could you repeat what the revolver availability or I guess unused portion of the revolver was at March 31st.
Sure. So at March 31st we had 195 million available under the revolver.
And in addition to that.
We do have 100 million dollar accordion feature in our credit facility and I'd also like to add right now the end of March throughout our peak a working capital. Please be here and there are people comes in our cash generation cycle begins and goes right through the end of our fiscal year, we expect strong free cash flow.
We ended the year, which will reduce the revolver balance.
Understood and.
What is the leverage ratio covenant that you need to be mindful of her that revolver.
I've heard me, where at 6.2 sides it'd be covenant and our actual is 5.1.
At RBC tokens.
And I'll remind you there's another 100 million of a revolver.
Oh, well accordion.
Okay.
The second just comment I want to clarify the down 15% to 20% April that was specific to residential.
Garage doors.
Right. So we were seeing in the residential side of the co pay business.
15% to 20% decline of orders in the month of April I generally that what's coming out of the retail sector.
So as you can imagine people are not going into home depot standing in an ideal for very long to order a garage door, but we see our Jordan networks are being pretty strong you're not much degradation there at all.
Okay that makes sense any comment on how consumer professional.
Products trend in April.
Sure we actually saw a in the U.S., our North America, I should say in Australia, a steady normal Bonnie good volumes throughout that period of course UK is not operating right now so.
That's the only exception in that business, but we expect you came to be operational in early July.
Okay, but that you're talking about demand there not just production.
You say.
I'm talking about demand a in what I just said our production is normal as well.
Okay, Great. That's good and then what.
Sorry.
Okay.
Oh I guess my last question was in terms of the cares Act benefits could you just a the 10 million. This fiscal year 5 billion next fiscal year could you, maybe just give us a little clarity as to.
Where those benefits coming through.
Sure. So there are many benefits related and the cares Act I don't want to go through all the potentials, but right now what we see it could benefit from deferring employer portion social security.
And.
The rule works they did you defer those payments.
Through the end of the calendar year, so for us it'll be Q3 in Q4. This year in Q1 fiscal 21, and that's 10 million in fiscal 2000 25 million in fiscal 21 that makes that benefit that is that you see that is repayable by December 50% in the next.
Two years in December of each of those years.
So doing the math would be 7.5 million in December of 21, and 7.5 just under 22.
Okay. Thanks, I'll hop back in the Q.
Yes.
As a reminder, it has started wanted to ask a question.
Next question is from 10 why says Baird. Please go ahead.
Hey, everybody or good afternoon, what do you guys are safe you to how you doing Tim Tim Good. Good. Thank you I I guess, just just a couple of follow up questions for me.
How would you think you know relative to normal I would you think about walking capital you know in the back half year relative to production. If you you know do you see you know you know volume weakness you know kind of persists through the summer and into the back half a year I guess, how would you manage that relative to relative to normal and maybe well.
Give to us were down cycle.
Oh sure so.
We have adjusted already some of our ships.
Should we be a residential door facility to accommodate the fact that we have less money.
I will continue to watch out working capital continue to watch our collections and we will adjust our business accordingly based on demand that we see in default and becoming month.
Okay. So would you would you normally you would it be fair that you would normally the least working capital from inventory if there. If there is in this Florida men environment.
Yes, correct.
Oh, we should see we're now it will naturally be working capital decreased in the second half of our year per our normal cycle and occasionally.
Yeah sales decrease will see additional working capital generally come out of the balance sheet come down the balance sheet.
Okay. Okay that makes sense and then in the U.S. businesses that yeah price mix was still relatively solid in the second quarter, you're just with I guess, a more uncertain consumer <unk>. How would you think about that over the next few quarters. If you have you seen any changes in mix I'm sure. It's really the various U.S. businesses, thus far in April.
Sure. So it's actually a little difficulty project, what that would be I can give you some and anecdotal items. So in our garage door business generally we see better mix out of our dealers than we do out of the retail channel.
And on our inside a I don't anticipate.
Uh huh.
Really any change in mix that I could foresee anyway.
Oh, Okay, and then and then the last one just in the residential garage door business, how much would you estimate its blake six versus some sort of discretionary replacement.
Its very difficult to estimate exactly what we do see generally the business is by far the repair more repair in the model that you construction. So generally that will be resistance of downturns as people have a regular cycle the placing doors.
Okay, Okay sounds good.
Thanks for the time, then look on the back half the year guys. Thanks.
Thank you.
Next is a follow up questions Phantom Justin Bergner of GE Research. Please go ahead.
Oh, Thank you again to a follow up here.
I guess mentioned in the press for at least since proposal costs.
Are those going to continue for a while.
[noise] any sort of I guess clarification on the magnitude of those.
Costs and what their associated with.
Sure so.
They are exactly as their name bid and proposal costs. We had seemed very good activity, we have a lot of opportunity.
In front of loss that we are bidding on Oh, we don't expect it cost would really be outside necessarily the second half of the year as a lot of that work has already occurred but we will continue to.
Go after the business, that's before us and we do have the very strong pipeline.
Okay. That's helpful. Those those though those cars go work related to the Lockheed Martin.
India.
Contract goes were different opportunities you are different or different often generally different opportunities correct.
Okay and then the second question on defense was a little bit more Big picture you know obviously the company.
Operates at high leverage.
For the most part has during its lifetime, if the recession gets difficult.
Wood.
The company consider you know different strategic options for the defense business.
And you know how does the political uncertainty.
Now potentially alter how you think about the long term a you know place for defense and the portfolio.
Weve owned Telephonics for very long time, we're very comfortable with its strategic plan, we see near term growth in its backlog. It is a core asset and were very excited about what we see going on for its future.
Okay, great. Thank you for the fault.
[noise], that's considered Steve question and answer session I would like to turn the floor back over to Ron Kramer, Chief Executive Officer for closing comments.
Well we've.
Been able to make it through these incredibly turbulent times, we believe we continue to be well positioned I'm very confident and optimistic about what's going on within the company.
And very excited about our future.
Everybody on the call I hope, you're all safe healthy and we look forward to speaking to you again after the end of this quarter. Thank you and goodbye.
[noise]. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
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