Q3 2020 Griffon Corp Earnings Call
Thank you for standing by this is the conference operator, welcome to the Griffon Corporation third quarter 2020, <unk> earnings Conference call.
As a reminder, all participants are in listen only mode and the conference is being recorded.
After the presentation, there will be an opportunity to ask questions.
Who joined the question Q you May Press Star then one on your telephone keypad should you need assistance during the conference call you may signal and operator by pressing star and zero I would now like to turn the conference over to Brian Harris Chief Financial Officer. Please go ahead.
Thank you.
Good afternoon, everyone with me on the call, it's Ron Kramer, our chairman and Chief Executive Officer.
A call is being recorded and will be available for playback details of which are in our press release issued earlier today.
As in the past a college include forward looking statements about the company's performance based on our views of coatings businesses and the environments in which they operate.
Such statements are subject to inherent risks and uncertainties that can change is the won't change and.
We see the cautionary statements in today's press release, and they're not very Securities and Exchange Commission filings.
Finally, some today's remarks I'll just for those items that affect comparability between periods. These items are explained in our non-GAAP. Reconciliations are included in our press release now I'll turn the call overture element.
Thanks, and good afternoon, everyone. I Hope you went all your families are doing well in these turbulent times.
Gryphon entered the unprecedented covert 19 pandemic from a position of strength, both operationally and competitor for.
Building on our already strong results in this fiscal year prior to March or businesses benefited from the stay at home nature of the pandemic.
Both existing and new customers have been investing in home projects, such as closet renovations tending to their lawns and gardens and enhancing their enjoyment of the outdoors upgrading the exterior their homes, including their garage doors. We believe these trends will continue to grow in the years ahead.
Our third quarter results were outstanding revenues increased 10% adjusted EBITDA increased 31% and adjusted earnings per share increased 90 per cent compared to the prior year period.
These results are a reflection or the strategic actions taken by Gryphon, starting with the September 27 team announcement regarding the disposition of our plastics business and the purchase of Closetmaid further enhanced by the purchase of Cornell Cooks in June of 28 team coupled with the home improvement trends that I described.
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Our pivot out of the capital intensive commodity driven plastics business into branded domestically manufactured consumer professional product business is positioned us for market share gains as well as revenue earnings and cash flow growth.
Further underscoring this quarter's results are 2029 month free cash flow increased 34 million over the comparable 29 team nine month period and builds on the prior years full year free cash flow of 69 million.
As a result of this performance our net debt to EBITDA leverage has been reduced by one full turn from the prior year quarter to 4.4 times.
Ensuring that health and safety of our employees and our customers continues to be our top priority.
Since early March Weve proactively implemented health and safety measures across our global workforce as local and national authorities of circulated additional guidelines for employee health and safety, we've incorporated those as well.
All of our facilities are operational and continue to maintain additional safety measures to protect our workers well maintaining operations and consumer professional products and home and building products all of our U.S. Canadian and Australian facilities were operational throughout the quarter. This includes all names closet.
Made co pay and Cornell cooks in facilities.
Each of these businesses provide critical products supporting national infrastructure to the extent practical we continue to permit our employees in these segments to work remotely and as I've mentioned before all of our manufacturing and distribution facilities have implemented strict protocols to ensure employee health and safety while at the workplace.
In late March our aims UK facilities were close by government directed and our employees were directed to stay at home by early June we were able to reopen or facility. There, which was ahead of our anticipated July resumption of operations.
In Mexico, our Closetmaid manufacturing facility that supports the U.S. and Canada sales close for approximately one and a half weeks in April but has been operational sense.
Turning to our defense electronics business Telephonics continues to operate that all of its sites as it provides critical manufacturing and services supporting the U.S. military and its operations are essential for maintaining our national security.
Oh, let's talk about the quarter in performance a in consumer and professional products, we saw strong third quarter demand for seasonal lawn and garden tools.
Storage and organizational solutions at major retailers and home centers across North America and in Australia. Upon reopening in June there was strong UK demand for our product offerings as well our aim strategic initiative remains on track and includes implementing and integrated business intelligence system supporting all of our.
Our aims operations rationalizing our distribution in manufacturing facilities and investing in automation in E commerce capabilities.
Our home and building products segment revenue declined slightly compared to the prior year quarter strong residential sectional garage door sales later in the quarter almost completely offset the reduction in sales seen in the first part of a quarter sales in our commercial door business increased slightly in the quarter compared to the prior year.
Operations had telephonics if continued on interrupted in Q3 revenue exceeded the prior year <unk>.
The anticipated second tranche of bookings related to the Lockheed Martin MH 60, Romeo Foreign military sale program with India was funded and 49 million was booked backlog in the quarter.
Telephonics experience some slowing from suppliers during Q3, which could slow certain customer deliveries and work performed in Q4.
We also are announcing today that were evaluating strategic alternatives for the system Engineering group, which we call lessee Jay.
Which is the technical services subsidiary within our Defense Electronics segment, providing advanced simulation and analysis for the U.S. Navy in U.S. missile Defense Agency.
Well phonics core business focuses on defense electronic systems products and systems, we believe that SCG would benefit from being part of a parent organization as that is more focused on government technical services. Additionally, we're cognizant of the government's organizational conflict of interest called Oh Sea ice standards and.
Believes that such a sale better aligns our businesses with those standards a C.G. is a well run with a strong management team and annual revenues of approximately 30 million. The timing of this process is bolstered by assay G.'s reason hundred 19 million dollar award from the naval surface Warfare Center.
Algren Division. This is an opportunity for us to provide incremental value to Griffin shareholders. While also positioning S.C.G. for enhanced growth with the suitable acquirer. We've already started the process to sell this business and we're working.
To get that done.
In the near future.
Let's turn to our balance sheet during the quarter, we continue to work on strengthening our balance sheet and positioning the company for future growth in June we issued an additional 150 million of senior notes as attack on to the five in three quarter notes, we issued in February 2020, we've now fully refinance.
Star $1 billion of five in a quarter percent notes due when 2022 with five in three quarter percent notes that maturity in 2028 as a reminder, in January we also extended the maturity of our revolving credit facility to 2025 and expanded its borrowing capacity by 50 million to 400 million.
With an additional 100 million of availability through an accordion feature.
We've established a solid foundation for growing the company and we have ample liquidity to whether any near term effects of the pandemic and other market uncertainty, while continuing to invest in all of our businesses.
Finally earlier today, our board authorized a seven and a half cent per share dividend payable on September 17th 2022 shareholders of record on August 20, 2020. This marks the 36 consecutive quarterly dividend to shareholders, which has grown at an annualized compound rate of 17% setting.
Created in 2012, I'll, let me turn it over to Brian for a little closer look at some of the number it's Brian.
Thank you Ron.
I'll start by highlighting our third quarter consolidated performance revenue increased 10% to 632 million adjusted EBITDA increased 31% of 69 million both in comparison to the prior year quarter.
Normalized gross profit for the quarter was 165 million increasing 6.8% over the prior quarter.
Gross margin contracted 80 basis points to 26.1%.
Third quarter selling general administrative expenses were 114 million included 1.6 million of charges related to the aim strategic initiatives.
As a percentage of southwest DNA adjusting for the charges decreased 280 basis points to 17.7%.
Third quarter GAAP income from continuing operations was 22 million or 50 cents per share compared to the prior year period, and 14 million or 33 cents per share.
Excluding items that affect comparability from both gauge current quarterly adjusted net income was 26 million or 59 cents a share.
Compared to the prior year $13 million 31 Centsper share.
That's a tax rate excluding items that affect comparability for the quarter was 30.8% and year to date was 32.6%.
Capital spending was 12 million in third quarter inline with prior year, depreciation and amortization totaled 16 million <unk> third quarter.
Regarding our segments consumer professional products third quarter revenue increased 20% gets ranging 29 million over the prior year quarter, driven by increased volume up 19% propelled by customer demand for home improvement North American Australia.
Several price and mix of 1% and then can make incremental revenue from the after the acquisition was 2% <unk>.
Well, partially offset by unfavorable impact of foreign exchange of 2%.
Organic growth was 18%.
Adjusted EBITDA was 37 million, increasing 55% prior year quarter do you see increase revenue as you mentioned a moment ago, partially offset by increased tariffs and covert 19 related costs.
Adjusted EBITDA margin was 11.3% compared to 8.8% in the prior year quarter.
The answer changing initiative continues on plan, we expect to close or don't burn in Pennsylvania fault city. The basket facilities by the ended the fiscal year.
Owned building products third quarter revenue decreased 1% to 219 million over the prior year quarter.
Due primarily to decrease volume of residential sectional garage door orders in April which were down 18%, but they had subsequent recovery in may and June.
Adjusted EBITDA increased 16% to 39 million over the prior year quarter due to the benefits of general operating efficiency improvement, partially offset by the decrease in revenue and coping 19 related inefficiencies and direct costs.
Adjusted EBITDA margin was 17.9% in the quarter.
Thank you for 15.3% in the prior year quarter.
Defense Electronics third quarter revenue increased 5% 84 million compared to the prior year period, primarily due to increased deliveries in volume I played on communication system.
Adjusted EBITDA during that period was 4 million compared to the prior quarters 7 million impacted by mixing program in efficiencies on the radar and communication system as well as increased bid and proposal costs.
Yesterday backlog as of June Thirtyth, 2020 was 350 million a 19 million increase since you too and we expect to continue to go backlog in the fourth quarter.
Corporate and unallocated expenses, excluding depreciation were 11 million in the third quarter.
Regarding our balance sheet as of June Thirtyth 2020, we had 70 to 90 cash and total debt outstanding of 1.13 billion, resulting in a net debt position of 1.6 billion and debt to EBITDA leverage a 4.4 times as calculated based on our debt covenant.
This reflects one pulled turn of deleveraging from the prior year period.
Borrowing availability under the revolving credit facility with 274 million subject to certain loan covenants.
Moving to our fourth quarter and full year outlook like many other companies last quarter, we withdrew our guidance because of the uncertainties arising out of the cobot 19 pandemic. We now have a clear picture of the effects of the pandemic impact for this year.
As a result, we are really bhavan guidance for fiscal 2020.
We normally give guidance once you haven't do not update that guidance during the year, we plan to return to that policy. However, given the continued uncertainty resolved, resulting from Koby 19, you felt it was appropriate for us to provide an update as an exception in this instance.
Okay.
We are now providing guidance for the full year 2020 of approximately 2.3 billion revenue and 270 million plus of adjusted EBITDA before unallocated extension no better overall guidance, even with the Conservative Q4 outlook is higher than our original guidance for the year.
I've 250 million plus of adjusted EBITDA before allocate extensive that we provided back in November.
Further our full year fiscal 2020 guidance.
Includes approximately 60 million for capital expenditures.
64 million for depreciation and amortization 65 million for net interest expense and 45 billion for unallocated expenses.
With all of these remaining the same as originally communicated during November 2019 earnings call now I'll turn the call back over to Ron.
Thanks, Brian.
Griffin's year to date performance is something we are all collectively very proud of.
Considering how much we've achieved in just a few short years since we began this portfolio repositioning, it's especially gratifying.
At this at the time, we announced at a we discuss the opportunities for topline growth and margin expansion through the realization of efficiencies during the integration process of all of our acquired companies.
Further we expected to become stronger competitively by providing increased value to our customers in terms of fire a broader product offering prove service levels and enhanced and efficiency. We continue to believe the diversity of our businesses our emphasis on domestic manufacturing and our focus on the leading brands provides a strong found.
Nation for future growth.
This quarter in particular brings into focus what our reposition portfolio can accomplish and the potential upside of following our strategy.
Griffin's performance has been excellent and we believe there is still considerable opportunity for improving the performance of our businesses. In addition, we remain committed to finding strategic acquisitions that expand and strengthen our port <unk> product portfolio within our home markets.
We're getting closer to our objective of three and a half times net debt to EBITDA leverage our free cash flow has and will continue to improve and we expect to see our leverage to continue to decline further as we execute our business plan.
In closing I'd like to thank our workforce, which is shown exceptional dedication and perseverance throughout this challenging period. We appreciate the importance of their work in order to deliver these excellent results.
Operator, we'll take any questions.
Certainly.
We will begin the question and answer session to join the question Q You May Press Star then one on your telephone keypad, you will hear a Tony acknowledging your request. If you are using a speakerphone. Please pick up your handset before pressing any keys to withdraw your question. Please press Star then too to join the question Keith Please press.
Star then one now.
Our first question comes from Bob Labick CJS.
C.J.S. Securities. Please go ahead.
Good afternoon, and congratulations on some terrific results.
Thank you Bob it's Bob.
Yeah I'm. So was just start obviously, particularly in.
He just.
Banding.
Demand, how do I guess, how long do you think this can laugh and how do you position your products and brands to get more attention to.
You know repeat purchases and replacement purchases you know what do you need to do with this increased focus on your products to fulfill the demand that's out there.
Well I'll start by reminding you that we were having a very good year going into a cove. It and you know the strength of our brands.
The demand for our product was already ahead of expectations and certainly ahead of last year going into.
Yeah. This a pandemic.
You know the structural changes that that we clearly are seeing how people are purchasing a the types of products that we provide is had been moving to weigh a far more.
Deliberate E commerce supported and that's both you know web searching as well as brick and mortar and you know when our strategy has been for for some time that we're going to be the leading brands and the best products in every product that we sell that that was the story around aims.
That was the story around us buying Closetmaid and then fitting it into names. So the strategy was clearly working what happened with the stay at home is you know things are accelerating and you know there's clearly a a economy of.
That's functioning quite well even during the this incredibly.
Difficult time, you know, it's not lost on US that you know were record unemployment, it's not lost on US that you know we're in a recession and yet our business trends you know we're not only you know surviving their prospering. So you know that that result of be at home a week.
You as it was working going into this accelerating during it and our you know the the backend of your question is you know what we've been doing in terms of <unk> and investing in the business. The project Bridgewater that we announced in November was about the future for that.
Company about being able to expand our distribution capability expand our product offerings.
We are believers in brands were builders of brands. We've bought you know a companies in every product category, where at the early stages of what we view is the aims.
Growth.
Initiative and you know what you see in this quarter is clearly a very robust demand at the same time, a set of operating efficiencies that were already in place.
Driving increased performance. So you know our plan going forward is to continue to do exactly what we have been doing.
In building the brands and you know supporting the best retailers, both brick and mortar and online for every product that we sell.
Okay. That's great very helpful. Appreciate it and then.
Shifting over to telephonics.
International is coming on and.
You know margins were a little light I guess in the quarter. How do you see is this your kind of the trough and we see some growth adjusting for this sag potential strategic alternatives as you said and.
How do you kind of look at the next 12 to 24 months a on a telephonic side.
Yeah, we we've talked about for some time that the telephonics business was bottoming. We view that process is having played out as as we expect that Cove. It clearly has an impact on timing of orders, but demand for the course surveillance and reconnaissance.
Products, particularly radar systems, we continue to see the backlog improving yes, we expect that to showcase itself in the fourth quarter. The sale of a S. E. G is you know the conclusion of what's been you know a very nice a piece of.
Telephonics you know in the story behind it is we bought it in 2005, we've built it up the sale of it is really a a about the three things one it allows us to focus on core of what telephonics does.
It should be a margin improvements story prospectively for us and it'll be in a small yeah, but a meaningful additional part of our de leveraging story. So you know it's again, a it's a business that you know weve.
Built and the harvesting of it is part of our broader strategy of continuing to grow the core of telephonics.
Okay Super Congrats again on a quarter and no I appreciate it.
Our next question comes from Julio from Merrill Sidoti and company. Please go ahead.
Hey, good afternoon, everyone.
Oh, Hi, who Oh.
Hum CPP the strength, you're seeing there can you give us a little more granularity on you know what products are leading that growth. So I know you've got a very diverse portfolio and then you called out outdoor lawn and garden, but you've also got some indoor lines that closetmaid, but I assume you know would also done well given everyone's got cooped up and doors. So I was hoping to give us some.
Maybe specific examples out some product lines that are kind of leading that growth.
Sure. So you sort of headache, we have seen growth in demand in both the lawn and garden and the home organization side.
Oh organization is though.
Well I pretty much to do it yourself type item, where people can buy that product either as a store online and install it home and garden of course is something that's done mostly outside and we're seeing people using their time at home and the fact that they're not spending on other things such as travel are going to restaurants and.
Investing in their homes and generally speaking our politics, so our price points that are affordable, they're not very large ticket items and that's what's been driving we believe that you're driving some of that demand.
Got it and could you talk about maybe the sequential trend in CPP or maybe how that business performed it in may and June.
And maybe give us a sense of how trends until rates are quarter to date.
We continue to see what's wrong.
We continue to see trends improving the you know the stabilization that happened after the last time, we spoke which was late April.
Went into May a accelerated into the end to the quarter and continues into July.
We expect this is going to continue.
That the market share gains of products that we provide a the domestic not just manufacturing, but distribution and we've been talking about this for several years that this focus of ours on being able to support the biggest providers of all the products it's clear that.
You know the supply chains are moving to domestically sourced product, where the leading product you know leading market share in every product that we sell and we're going to continue to invest in the brands to make sure that we get you know increased market share as we go forward.
Got it and you know you saw really nice rebound on the residential garage door side.
I remember last quarter, you called out some customer hesitancy on the retail side, you know individuals kind of didn't want to stand in line at home depot.
Do you think there's been more of a changing customer behavior since April or was it more or like the dealer side that drove that growth.
Oh, So yes, correct. Our we saw a decline in April our orders in April were down, 18%, mostly being driven by home centers or retail type sales or with some decline in the dealers as we progressed into may I say they'll start to normalize.
Hi, Matt and all those channels and then come June and into July.
Sales through accelerated quite well and the commercial side, so good and normal volume and sales through the entire guaranteed.
Got it so across the board kind of.
Dealer and retail did well in Asia.
Yes June and continued into July and we continue to see that that you know trending up you know the other but the other point that I'll. Just make is you know the commercial side of the business. You know is doing well yeah, we bought Cornell cooks and we had talked about you know the the bill.
<unk> to provide the rolling steel doors as part of the you know warehouse Ah, yes that warehouse business that was going to grow as you know retail was going to continue to go through a transformation.
The you know security part of our business, you know, where the leading manufacturer of a series of security doors.
Which is called the defenders series continues to show growth you know the a civil unrest that's going on around the country is actually spurred a level of demand in that business.
You know the CLO pay business was already the leading residential or a manufacturer.
Owning Cornell cooks and gives us a leverage and where the early days of the integration of that business.
Obviously very gratifying to see the a recovery from April Residentially into May and you know, it's a into our view a reflection of you know the stay at home trends that are going on.
Great very nice job, everyone I'll hop back into queue.
We appreciate it thanks.
Thanks <unk>.
Once again, if you had a question. Please press Star then one.
Our next question comes from Tim Weiss of Baird. Please go ahead.
Hi, gentlemen, good afternoon, that's job.
Thanks, Tim and then how you doing.
Good good thanks.
I guess my first question just.
Curious on channel inventory, particularly in CPP.
How would you characterize that relative to normal you know we're hearing center the categories are pretty tight just in terms of.
Are you know that the <unk> the level of demand kind of in May and June and into July. So I'm. Just curious you know how you characterize you know some of your partners channel inventories within your within your categories.
I think so normal we're actually.
Oh, sorry, I do need to seek over your.
So we've actually seen a good demand for our prices we've already discussed our we have been able to service our customers very well our domestic manufacturing capability has really.
Benefited us compared to others.
So when home depot needs products, and we're able to provided to them.
Oh I win any other <unk>, our home center or reach our need that.
So we have adequate inventory and adequate manufacturing his ability to get you need for fibers provide those products.
Okay. Okay, I think yeah, I think in general you know the yeah. The inventory levels that were seeing across and remember we we serve as all of you know the the major retailers you know from home depot to lows to Menards you know the.
You know the national Hardwares. The big boxes. This is you know a trend that we continued to see that you know that they're ordering more and Ah, yes, we expect that trend to continue.
Okay. Okay.
And then as you think outside this strategic initiatives.
Could you could you just talking about kind of kind of way or add on I'm on the you know the process there and just how has the pandemic through the quarter had any impact on on the timing or you guys, you know head or kind of on track there.
I think where we continue to be on track.
Oh, Yeah, it's a three year plan or things are going on as planned on budget Ontime nothing has slowed down from <unk> and diner.
Okay great.
And then the free cash flow performance in the quarter was really good how can we think about free cash flow maybe into fourth quarter. She she also has a pretty good quarter, just just given the demand strength you've seen.
Yes, so our second half a year that so our Q3 that we just ended in our Q fours are stronger Saar cash flow months cash generation not quarters, I should say and we continue to do you expect to increase cash flow into the fourth quarter.
Okay, Great Nice nice work on the quarter and good luck on the rest of the year yes.
Thanks, Tim.
Thanks Dennis.
This concludes the question and answer session I'd like to turn the conference back over to run Kramer for any closing remarks.
Thank you all stay safe be well.
Hi Bye.
This concludes today's conference call you may disconnect. Your lines. Thank you for participating and have a pleasant day.
Oh.
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