Q2 2021 Griffon Corp Earnings Call
Greetings and welcome to Griffon Corporation second quarter, 2021 earnings conference call.
At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad. As a reminder of this conference is being recorded I would now like to turn the conference over to your host Bryan Harris. Thank you you may begin.
Thank you Rob and good afternoon, everyone with me on the call is Ron Kramer, our chairman and Chief Executive Officer of Call's being recorded and will be available for playback with details of which are in our press release issued earlier today.
And in the past our comments will include forward looking statements about the company's performance based on our views of griffon businesses and the environments in which they operate sort.
Such statements are subject to inherent risks and uncertainties that can change of the world changes. Please see the cautionary statements in today's press release, and our various securities and Exchange Commission filings and.
Finally from the today's remarks will adjust for those items that affect comparability between reporting periods. These items are explained in our non-GAAP reconciliations included in our press release now I'll turn the call over to Ron. Thanks. Good afternoon, everyone. We're off to a great start and the first half of fiscal 2021 with our second quarter revenue increasing.
12% adjusted EBITDA of 41 per son, and adjusted EPS of 109 per cent compared to the prior year quarter. These results were driven by continued demand for our comprehensive consumer product categories and supported by a strong housing market and repair and remodel.
And all activity.
Our strategic actions to optimize our business remain on plan and we're realizing the early benefits of this work today highlighting the successes our increased cash generation profile, coupled with our EBITDA margin expansion in both the cheap he P and H B P, which increased 200.
And in 'twenty, and 190 basis points, respectively over the prior year period.
Our Ames strategic initiative is progressing on plan and on budget and.
Previously announced this investment will consolidate the operations increase automation and support e-commerce growth and create new data and analytics platform for Ames globally by the end of 2020 three we expect this to further improve margins and the years ahead.
As we move into our second year of managing our business during a global pandemic, we prioritize protecting our employees and we will continue to do so as restrictions and the United States begin to ease.
Turning to our segments and consumer and professional products. We saw a continued retail demand across all geographies and product lines. The aim of strategic initiative remains on schedule for completion by the end of 2020, three and we reiterate our expectation to realize annual cash savings of 30 million to <unk>.
35 million and inventory reductions of the same magnitude when the benefits of the initiative are fully realized and home and building products segment. We continue to see healthy demand for both residential and commercial door products and we continue to see demand outstripping supply.
And defense electronics, Telephonics revenue and profitability decreased from the prior year, primarily driven by reduced volume due to the timing of work performed and deliveries of uncertain communications and surveillance programs as well as of the divestiture of S. C. J telephonics actions to improve its operational efficiency.
With the work to consolidate three facilities into two which will be completed and in our fiscal fourth quarter earlier. This month Telephonics was awarded a 162 million five year of support contract from Lockheed Martin for our Multimode Maritime surveillance radars for the U S. Navy's MH are sick.
<unk> Maritime helicopters, we continue to see additional opportunities for our products and domestic applications as well as through our the MH 60 Romeo foreign military sales to countries like South Korea, and Greece backlog and the quarter was 305th.
The $4 million with trailing 12 month book to Bill of one one times.
Turning to our balance sheet, we continue to have excellent flexibility and our capital structure to execute on organic and acquisition opportunities and return cash to shareholders through our quarterly dividends, we delever to three one times net debt to EBITDA, marking two full turns of improvement over the prior year.
Period. Additionally, we have of $176 million and cash and $363 million available on our revolving credit facility, providing ample liquidity and putting us in an excellent position to capitalize on our active pipeline of acquisition opportunities.
Earlier today, our board authorized and <unk> <unk> per share dividend payable on June 17th 2021 to shareholders of record on May 22021. This marks the 39th consecutive quarterly dividend to shareholders, which has grown at an annualized compound rate of 17% since we initiated in 2012.
Griffon has evolved over the past decade from a decentralized holding company to a highly centralized operating focus conglomerate, we see growth through acquisitions, driving our future capitalizing on our strong bench of management and talent and.
And regarding our management, Steve <unk>, the President of co pay Corporation will retire at the end of our fiscal year. Steve has served as the president of Copay with distinction for the past 12 years and has been part of Clos paid since 2001 during his tenure of Steve navigated Clos pay through the financial crisis.
2009, and subsequently has transformed the business and to the industry leader. It is today through building the company's facilities equipment and products and technologies people and culture, Steve will continue working with co pay as consultant after his retirement and effective with Steve's retirement Vic Weldon.
Be appointed the new President of Copay Vic is the 20 year veteran of Copay, having served in leadership roles across the business, including supply chain logistics sales and operations and has been co pays chief operating officer. Since 2019 Vick has played an instrumental role in making Clos pay the company that it is.
Today, including leading the integration activities of the Cornell acquisition, which we completed in 2018.
Is the ideal candidate to assume the role of president work and apply as well the company customer and industry knowledge to the role we're looking forward to Vic continuing flow pays success.
Let me turn it over to Brian who will take you through some of the financials.
And you're wrong I'll start by highlighting our second quarter consolidated performance.
Revenue increased by 12% to 635 million and and adjusted EBITDA increased 41% of $67 8 million.
Both of the comparisons with prior year quarter, adjusted EBITDA margin increased 220 basis points to 10, 7%.
Gross profit on the GAAP basis for the quarter was $170 million, increasing 12% over the prior year quarter, excluding restructuring related charges gross profit was 174 million, increasing 13, 2% over the prior year quarter with growth with gross margin, increasing 30 basis points of 27, 4%.
The second quarter, GAAP, selling general and administrative expenses were $127 million compared to $226 million and the prior year quarter.
Excluding restructuring related charges from both periods selling general and administrative expenses were $123 million or 19, 3% of revenue comparator of 122 million of 21 five per cent and the prior year quarter.
Second quarter GAAP net income was $17 million of 32 per share compared to the prior year period of 1 million or <unk> <unk> per share excluding items that affect comparability from both periods current quarter. Adjusted net income was $25 million of 48 per share compared to $10 million and the prior year or 23 cents per share.
Corporate and unallocated expenses, excluding depreciation of $12 million and the current year quarter in line for the prior year second quarter.
Our effective tax rate, excluding items that affect comparability for all periods for the quarter was 30% and for the year to date period. It was 31, 1%.
Capital spending was $12 million and the second quarter compared to $9 million and the prior year quarter, depreciation and amortization totaled $15 9 million for the second quarter compared to $15 7 million and the prior year second quarter.
Regarding our segment performance Q2 revenue for CPP and <unk> increased over the prior year quarter by 21% and 16% respectively.
While the E decreased 26% or 19% of true and the impact of the seg disposition.
Adjusted EBITDA for CPP, and the <unk> increase over the prior year by 50% and 31% respectively Defense electronics decreased 48 per cent.
During the second quarter Ames incurred pre tax restructuring related charges of approximately $7 5 million supporting the strategic initiative capital expenditures and expenditures supporting the initiative of $3 2 million and the quarter.
And telephonics, we are executing on our efficiency initiatives, we have reduced head count and we expect to complete the consolidation of our three long island based facilities and through two company owned facilities by the end of this fiscal year. The total cost of the facility consolidation will be approximately $4 million, which were primarily consists of capital expenditures occurring and <unk>.
Thousand 21.
Regarding our balance sheet and liquidity as of March 31, and 2021, we had net debt of $883 million and leverage of three one times is calculated based on our debt covenants as of two turn reduction from our prior year of second quarter and the 0.3 turn reduction from our fiscal year and as a reminder of Gryphon uses cash and the first six.
Of its fiscal year, which would be more than offset by the generation of significant cash flow and the second half of the year.
Our cash and equivalents for $176 million and debt outstanding was 1.16 billion.
Borrowing availability under the revolving credit facility was $360 million.
Subject to certain loan covenants.
So regarding our 2021 guidance.
As most of you know, we typically provide guidance once a year during our November earnings call and generally do not update that guidance during the course of the year.
The guidance provided on our November call was revenue of approximately $2 4 billion and adjusted EBITDA, excluding unallocated and onetime charges related to Ames, and telephonics initiatives of $285 million or better.
With our second quarter behind US, we are continuing to see healthy demand for products across our portfolio of recovering consumer activity and a strong housing market and contributing to constructive macroeconomic.
Macroeconomic environment and homeowner focus on outdoor living and repair and remodel projects continue.
We are seeing.
The headwinds from cost inflation, some supply chain disruptions and a tight labor market. We are managing through those effects as a result of of our substantial outperformance and the first half of the year and with consideration to this year's Q3 and Q for comparative to a strong prior year quarter results, we are expecting our fiscal 2020 one.
<unk> will be substantially above our original guidance and in line with our trailing 12 months.
That produced approximately $2 5 billion of revenue and $320 million of adjusted EBITDA, Excluding unallocated and one time charges net.
Now I'll turn the call back over to Ron.
Thanks, Brian and we expect continued growth and the second half of fiscal 2021, driven by of strengthening global economy, a strong housing and repair and remodel and volume.
Coupled with our industry, leading product portfolio, we're active in evaluating potential acquisitions and opportunities to invest and our existing businesses and are actively exploring ways to further diversify and grow and we're pleased with the progress we've made on driving long term shareholder value. However, they are still our cigna.
And benefits to come from completing our strategic initiatives finally, I'd like to thank our 7500 employees for their exceptional dedication and performance and perseverance throughout this challenging period of.
Operator, we'll take any questions.
Thank you at this time, we'll be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad.
We ask that you please limit to one question and one follow up.
Confirmation tone will indicate your line is and the question queue. You May press star two and if you like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up of your handset before pressing the star of keys, one moment. Please while we poll for questions.
Our first question comes from the line of Bob in the Bank.
With the C. J S Securities. Please proceed with your question.
Thank you good afternoon, and congratulations on the fantastic first half of the fiscal year.
Thanks, Bob.
Did I I. This is the I guess rhetorical did I hear you correctly, youre actually raising guidance crazy, but anyway I'll get to my question.
Very strong margins you pointed pointed it out and C. P P and H B P.
Yeah up nicely year over year, how does that play out. Obviously you you you mentioned you see some raw material and supply chain headwinds you guys. I think are better positioned than most and in these situations, but can you just talk a little bit about how we should think about the margin profile and you know what you are able to do the.
You know mitigate some of the raw material or supply chain issues out there.
Sure I'll take this one.
A couple of things we continue to work on our efficiencies as always and work with our of our vendor.
Vendors. In addition, we have been working on passing price through some of that work continues and will continue into Q.
Q3, and we will have or should have the full benefit of that into our fourth quarter.
Got it okay, great and then.
And obviously, you're still relatively early on and the Ames initiative, but.
I think you're you're still suggesting that there's still room to run in in those margins as well I mean, obviously, it's the fluctuations aside from you know short term things, but is that right. We should still expect continued.
Margin expansion from C. P P over the.
The next several years.
Absolutely we are continuing to work that initiative and Youll continue to see the benefits from that initiative and that's really our best scorecard for the work we're doing.
And we are we've already started to realize some of those benefits even with the additional cost we saw in Q2, our margin overall across the businesses, but still our gross margin rather was still up.
The 300 basis points give or take all.
And the Tara and I'll, just add to that we've always talked about building for the long run and that we never worry about the things that are happening in the short run.
That are out of our control we try to stay focused on all of the things that are so managing through the initiative that we kicked off for margin improvement was obviously and.
Before we and we went into the.
And the COVID-19.
And demick, we've been able to not just manage our way through but we've been able to somewhat prosper as a result of demand where we.
We're very optimistic about what we have to do on a multi year journey to both improve the margins in the Ames business and the continued margin improvement story that if you look at where we were.
When Steve Lynch became president of co pay and where we are today as we pass the baton.
Margin improvement is part of the core of DNA of what makes Griffin aid and the ability to buy and improve businesses. We're going to continue to do the work on our telephonics business and get that back into shape.
That will happen as both the top line improves, but we see across our businesses margin improvement.
And as the core of what we're doing.
Our next question comes on the line of Julio Romero with Sidoti and company. Please proceed with your question.
Hey, good afternoon, Ron and Brian.
Oh yeah.
So I wanted to ask about your.
And your home and building products segment.
So I know you turn of inventory of about four times annually, there and I think the value of inventory at lower cost of market.
Just wondering on the margin dynamic there over the next few quarters.
Would you would you be in the position to benefit and the near term.
And then have margins moderate in that segment heading into the next fiscal year, just maybe if you could speak to how margins should play out of that segment.
Well and in general and for the third quarter as we continue to work and the timing of the price increase is the lack of price increases come into play Q3 could see some pressure and.
What we will see the offset of that once we get into Q4 and beyond.
Okay got it so that they should so then it would be near term potential moderation of while they're lagging price increases and then feel confident about your ability to pass that through.
Exactly.
Okay and.
And the like.
That's the only going to play out.
More towards the back end of this fiscal year. So you know, but with the clearly a confidence level that we chose to take this moment to increase our guidance for the year.
Absolutely and I guess, just my follow up is if you could just give US a reminder, on the seasonality within that segment typically and as I understand it. This is your debt.
Weakest quarter.
Is that correct.
And then.
Sure generally true during Q3 of the strongest quarters for CPP.
So honestly during the pandemic things had been different and we the demand has been strong and the expected to remain strong.
And through the balance of the year.
Our next question comes on the line of Josh Chan with Baird. Please proceed with your question.
Good afternoon, Ron and Brian Congrats on the strong corner.
And so our share of Oreo.
Hey, good good.
And I appreciate the comments about the day.
And I think that's it.
And that kind of confidence and continued strong execution. So that's the that's.
The C.
And I guess my first question is on the sort of of the headwind and mitigating I mean, you talked about the offsetting raw materials and the H VP of business, but how are you thinking about the same dynamics and the end of CPP businesses and any.
And any difference in terms of cadence in price and when that kind of offset the raw materials.
Yeah, it's simple.
So we're still working the price increases into the third quarter and there'll be a lag. So we'll expect to have that done and full benefit of it and the fourth quarter and.
I'd also just remind you.
And remind you that we had a very good weather last year and Q3.
And very strong comps last year of two three in Q4 for that matter, but you know our guidance overall says it will be in line on the second half of the year.
That's right okay.
And then my second question is on your internal inventory I guess the stepped up from Q1 of the Q2, which I think has happened before but that's not that typical of so anything in particular that drove that kind of a higher inventory there.
Yeah, and Theres a couple of things one you have higher commodity costs that are pulling into inventory there was the FX impact from Australia and the U K.
There's also been some advanced ordering for our international locations out of China and for the U S and as well.
To get material debt.
Product and place because thats most of US are aware of and I'm sure you are as well there are some.
Lags and getting things from China of airports are backed up so we're making sure. We're ahead of that and we continue to supply our customers and the manner in which they are accustomed.
Our next question comes from Justin Bergner with Gabelli and company. Please proceed with your question.
The good afternoon, Ron and good afternoon, Brian.
Hi, Justin Justin.
A few questions here I guess just to pick up on the last question.
So what are the primary products for materials that you're importing from China.
And just sort of.
Remind me how U S centric you are sort of in your manufacturing.
For C P P versus what you rely on internal.
Oh, sorry, no imports for it.
Sure so of CPP and 90% of what we sell and North America, we make and North America.
So when I talk about important that's the other 10% of lot of that is either components small components and some pots and planters the other.
Other part of what I was speaking of is Australia.
And.
The U K also get products from China in particular, and and also from other places.
But the core of the company as Brian said this is about American manufacturing and 90% that's sold in North America is manufactured in North America.
Got it.
Sort of taking the point over to the home and building products. I mean, you mentioned that demand is exceeding.
Supply and maybe if you could just elaborate on that a bit and.
And are there any imports there of note that are sort of being challenged by supply chain issues, which gives you an opportunity to take share given a greater ability to make to meet demand and some of your competitors.
Oh, where we're actually suggesting that the that and that comment we have a backlog and.
And that there is such robust consumer and commercial demand that were.
Able to.
To build a backlog for this business.
Gives us.
Some confidence about what we see is the trends that are playing out and how it played out and that's balanced against the obvious and inflationary pressures of steel and wood freight labor is tight across the country.
But we've we are.
Of experiencing very strong demand and we couldn't be happier about it and.
And the majority of H B P. L of their components feel and everything is sourced from the U S.
And as a reminder, if you'd like to ask the question. Please press star one on your telephone keypad one moment, please while we poll for questions.
Our next question comes on the line of Keith Hughes with true of Securities. Please proceed with your question.
Thank you question on C P T and another.
Strong growth quarter.
And we're always going to start coming against the difficult comps and the AR and the next several quarters. If you look at the pace of business and maybe your sales and that April not really looking for the guidance here, but just with the retrenchment and sales and those tough comps or is it you said none of them. So the poll.
And that's the route.
And for the next several quarters.
It was a little broken up what you said, but I believe you're just asking what we're seeing demand wise and demand continues to be strong cross across the board.
And you know and what were the other.
And equally saying is that we expect those trends and pricing pressures.
And more in the third quarter and for us to be able to pass along some of those into the fourth quarter.
And just a reminder, our Q3 last year was very strong with very good weather.
Particularly affecting cpp's excellent results last year.
And just as a note.
Our next question comes from the line of Trey Grooms with Stephens. Please proceed with your question.
Hey, good afternoon, Ron and Brian and I have to also give you my congrats on the strong first half.
Thanks strike.
And so.
I think most of the questions.
You know around cost of Ben kind of beaten to death here I think I think are pretty well get it.
But I guess, if we're if we're thinking about kind.
Kind of switching gears over to the day.
The defense electronics business.
<unk> issue and the quarter should should we expect this to continue in the fiscal third quarter and fourth quarter.
And also how should we be thinking about.
And the timing of the new contract win when it flows through and the cadence there.
Sure and generally we're expecting our second half to recover from our first half Theres, just some delays and certain contracts coming in and timing of.
The materials coming in and getting things back out the door the.
The business is doing fine nothing strange there, it's just by nature by its nature.
Net of a lumpy business.
Congrats on continued and continue to have some confidence and and the product category of intelligence surveillance reconnaissance.
This is about.
The building telephonics for the future.
Consolidation of plant facility that we've been doing well.
Show through as we get through this.
And this share into next share, but we remain very optimistic about telephonics core positioning its products, where it stands with its.
The incumbent position and and the ability to garner some of the foreign military sales that are just less predictable on timing.
This is about building the company and trying to grow and tomorrow.
Got it and then just for cash.
For modeling purposes.
And as the as the top line and kind of comes back here in the in the back half with these kind of being lumpy and the timing issues.
Would you expect the.
The margins to kind of also kind of rebound back to kind of historical type expectations.
Yes.
Yes, we would expect the margins to improve into the end of the year.
Perfect. That's it for me thanks, guys.
Thank you.
We have reached the end of the question and answer session. At this time I'd like to turn the call back over to Ron Kramer for closing comments.
Thank you all for joining us we will be working hard and look forward to talking to you in August and stay safe stay healthy everyone Bye bye.
This concludes today's conference you may disconnect your lines at this time and we thank you for your participation.
Yeah.
Yeah.
Today's conference has ended please disconnect your lines at this time. Thank you.
And.