Q2 2022 Griffon Corp Earnings Call
As a reminder, this conference is being recorded.
And now I'd like to turn the conference over to your host, Brian Harris, Chief Financial Officer of Griffon Corporation.
Please go ahead.
Thank you Vikram.
Good morning, everyone with me on the call is Ron Kramer, our chairman and Chief Executive Officer, our COO.
Is being recorded and will be available for playback the details of which are in our press release issued earlier today.
As in the past our comments will include forward looking statements about the company's performance based on our views of <unk> businesses and the environments in which they operate.
Such statements are subject to inherent risks and uncertainties that can change as the world changes.
Please see the cautionary statements in today's press release and in our various Securities and Exchange Commission filings.
Some of today's remarks will adjust for those items that affect comparability between reporting periods. These.
These items are explained in our non-GAAP reconciliations included in our press release now I will turn the call over to Ron.
Thank you and good morning, everyone. We had record sales adjusted EBITDA and adjusted EPS in the second quarter. Our performance was driven by pricing and product mix led by our home and building products segment and the contribution from the January 24th 2022 acquisition of Hunter.
Fine.
We've made significant progress with price realization during this quarter. These pricing actions along with fixed cost leverage resulted in increases in sales and profitability.
Revenue has increased by 36% adjusted EBITDA more than doubled and adjusted EPS is almost tripled on a year over year basis.
Our businesses in the global economy continued to navigate a challenging environment with regard to labor supply chain transportation issues and inflation. Our employees have worked tirelessly to manage through these obstacles and have generated outstanding results. We think all of them for their efforts.
From a strategic perspective, we closed the acquisition of Hunter fan. This quarter. There was strong demand in our new term loan B facility and as a result, we were able to finance the acquisition unfavorable terms. We're in the early stages of integrating hunter into the rest of the C. P. P segment and we're pleased with the Hunter teams performance.
The business has been performing as expected and we continue to be enthusiastic about the strategic fit of Hunter.
Last week, we announced that we entered into a definitive agreement to sell telephonics to TTM technologies for 330 million or approximately 300 million after tax pending regulatory approvals and certain closing conditions, we expect to close the transaction by June 30, yet the sale of Telus.
Onyx will increase long term value for our shareholders by strengthening our balance sheet.
Turning to our segments during the quarter consumer and professional products made progress in reaching price cost parity.
These efforts coupled with our focus on more attractive products and categories resulted in strong price and mix for the quarter.
Unfavorable weather conditions year to date have resulted in a slow start to our spring selling season as expected.
Volume has also declined from customer supplier diversification on an organic basis. These declines mostly offset the benefits from improved price and mix during the quarter.
Our Ames strategic initiative, which we initiated in November 2019 has made steady progress we consolidated five manufacturing and distribution facilities rationalizing approximately 800000 square feet of facility footprint in the process.
We recently consolidated two other facilities in Reno, Nevada, and two new expanded West coast distribution and digital Commerce fulfillment Center, we opened in East Coast Digital Commerce fulfillment Center in Carlisle, Pennsylvania, and successfully implemented a new business system and business intelligence platform Bill.
Building out the new and upgraded East coast and West Coast fulfillment distribution centers was a big step for positioning us for the future and the successful initial implementation of the business system and business intelligence capabilities in the United States establishes a solid foundation for our global operations. The fact that the team was able to accomplish.
All this during the course of the pandemic is quite remarkable and speaks volumes about their skills and commitment to making the initiative a success.
According to our original plan. The next major step with the Ames initiative was to establish a new manufacturing and distribution facility and further consolidate existing facilities into that new operation keep in mind. We originally blueprint that these strategic actions before COVID-19 as planting activities progressed untenable construction.
<unk> and equipment procurement lead times, along with a significant increase in cost for the build out of a new facility in the procurement of specialized manufacturing equipment resulted in ingest an unacceptable return on investment in light of these evolving factors, we've decided to reduce the scope of the Ames strategic initiative.
We will conclude the current activities by September 30 of this year, which is one year earlier than originally anticipated.
At its conclusion the initiative will have a cost of $65 million, which is half of the original 130 million when fully implementing that and the efficiencies are realized we now anticipate annual savings of 25 million compared to the original expectation of $30 million to $35 million.
By any measure this was a more efficient strategy for improving our cost structure and competitiveness.
Let's shift to our home and building products businesses our.
Continued customer demand along with the team's successful efforts to address price cost parity led to the strong results for the quarter.
Our residential door business demand continues to be healthy thanks to sustained repair and remodeling activity higher home prices and continued builder activity price and mix were particularly strong with these products due to the ongoing labor shortages and supply chain disruptions residential door volume decreased in.
The quarter and the backlog continues to be significantly greater than historical levels.
The commercial door business continues to see favorable pricing and mix as well as increased volume I'll remind you that our acquisition of Cornell Cookson in 2018 diversified and strengthened our commercial offerings in anticipation of volume growth and margin improvement.
Forward, our leading commercial door business today is performing well and we expect further growth.
Let's go to the balance sheet, we continue to have excellent flexibility in our capital structure to execute on organic and acquisition opportunities and return cash to shareholders through quarterly dividends and our net debt to EBITDA. Currently stands at four four times using proceeds from the anticipated sale of telephonics.
X coupled with strong second half operating results and the free cash flow generation, we expect to significantly delever and end the year with leverage less than three times.
Additionally, we have ample liquidity with $122 million in cash and $233 million available on our revolving credit facility.
Finally yesterday, our board authorized a nine cents per share dividend payable on June 16th 2022 to shareholders of record on May 19th 2022. This marks the 43rd consecutive quarterly dividend to shareholders, which has grown at an annualized compound rate of 17% since we first initiated it in.
2012, let me turn it over to Brian will take you through some of the financials.
Thank you Ron.
Start by highlighting our second quarter consolidated performance on a continuing basis.
Revenue increased by 36% to $780 million and adjusted EBITDA more than doubled to $140 million. Both in comparison to the prior year quarter. Adjusted EBITDA margin was 17, 9% grew.
Gross profit on a GAAP basis for the quarter was $261 million compared to $161 million in the prior year quarter.
<unk> restructuring related charges and acquisition write up of inventory is applicable from both years gross profit was $266 million in the current quarter, increasing 62% over the prior year quarter with a gross margin of 34, 1%.
Second quarter, GAAP, selling general and administrative expenses were $158 million compared to $118 million in the prior year, excluding adjusting items from both periods selling general and administrative expenses were $144 million or 18, 5% of revenue compared to $113 million or 19, 7% in the prior year quarter.
Quarter GAAP income from continuing operations was $59 million or $1 10 per share compared to the prior year period of $18 million or 34 cents per share.
Excluding adjusting items from both periods current quarter adjusted net income was $73 million or $1 37 per share compared to the prior year of $25 million 47 per share on a continuing basis.
Corporate and unallocated expenses, excluding depreciation were $12 8 million in the quarter compared to $12 1 million in the prior year, our normalized effective tax rate, excluding adjusting items for the quarter was 28, 3% and for the year to date period was 29%.
Capital spending was $1 5 million in the second quarter compared to $8 8 million in the prior year depreciation and amortization totaled $16 3 million for the second quarter compared to $13 1 million in the prior year.
Regarding our segment performance revenue for CPP increase over the prior year by 24% Hunter fan contributed $71 million or 21%.
Excluding hunter revenue increased 3% due to favorable price and mix of 15%.
Partially offset by unfavorable volume of 11%, primarily due to U S demand and unfavorable foreign exchange.
Adjusted EBITDA increased over the prior year by 28% due to the $14 million contribution from Hunter.
Favorable price and mix, partially offset by the unfavorable impact of reduced U S volume and increased costs for labor materials and transportation.
<unk> revenue increased 52% over the prior year quarter due to favorable pricing and mix for both commercial and residential products increased commercial volume was offset by decreased residential volume adjusted.
Adjusted EBITDA increased 161% compared to the prior year quarter, driven by increased revenue and fixed cost leverage partially offset by increased costs for labor materials and transportation.
As Ron mentioned earlier, we are accelerating the Ames strategic initiative and concluding the effort at the end of fiscal 'twenty two.
Our revised forecast for the initiative will be approximately $50 million of one time charges and $15 million in capital expenditures net of expected proceeds from the sale of exited facilities compared to the original expectation of $65 million in expenses and $65 million of capital investments or in total half the cost.
When fully implemented and the efficiencies are fully realized we now expect annual savings of $25 million compared to the original expectations of $30 million to $35 million.
Remaining expenditures after the end of fiscal 'twenty, two including those related to deployment of Ames's Global information systems will be included in the continuing operations of the business.
Future investments in equipment, particularly for automation will be included as part of normal course annual capital expenditures.
During the second quarter Ames incurred pre tax restructuring related charges of approximately $4 8 million and capital expenditures of 900000 supporting the Ames initiative.
Regarding our balance sheet and liquidity as of March 31, 2022, we had net debt of $1 8 billion and leverage of four four times as calculated based on our debt covenants.
The increased leverage from the prior quarter of three three times as related to the Hunter acquisition that we closed in January and the $800 million term loan B facility that we secured to finance the transaction.
We plan to use the $300 million of net proceeds from the sale with telephonics to pay down debt and that contribution along with free cash flow generated in the second half of our year and our expected.
EBITDA results should result in a leverage ratio of less than three times, which is below our target of three five times.
As a reminder, gryphon uses cash in the first six months of its fiscal year, which were more than offset by the generation of significant cash flow in the second half.
Regarding our 2022 guidance.
In February we provided updated guidance for revenue of $2 75 billion and segment adjusted EBITDA of $355 million for fiscal 2022.
That reflected also the additional contribution of Hunter fan for only eight months of fiscal 'twenty two.
As a result of our outperformance in the first half of the year and with consideration to current market conditions, we are updating our fiscal 'twenty two guidance.
We now expect on a continuing operations basis, which includes the eight month contribution from Hunter and excludes telephonics revenue of $2 85 billion and.
And segment adjusted EBITDA of $475 million.
The increase in revenue and EBITDA guidance is driven by the continued price.
The continued benefit of price and mix of <unk> in the second half, partially offset by softer demand at Ames and the CPP segment.
Included in our guidance and consistent with the Q1 update we continue to expect the Hunter contribution for the eight months of fiscal 'twenty, two and which we owned the business to be $250 million of revenue and $55 million of EBITDA.
Excluding the effects of the acquisition related costs and purchase accounting.
Continue to expect contracts contributed $400 million of revenue and $90 million of EBITDA for fiscal 'twenty three.
The EBITDA guidance excludes unallocated costs of approximately $49 million in one time charges of approximately $15 million related to the Ames initiative as well as charges related to proxy hunter related acquisitions expenses in telephonics related divestiture expenses.
Total capital expenditures for fiscal year 'twenty, two are expected to be $55 million, which now includes approximately $5 million supporting names initiative and $5 million for the addition of Hunter.
Depreciation and amortization are expected to be 68 million of which $18 million as amortization. These.
These are inclusive of approximately $5 million of depreciation and <unk> 8 million of amortization related to hunter.
We expect net interest expense inclusive of the financing for Hunter of approximately 83 million for fiscal 'twenty two.
Our expected normalized continuing operations' tax rate, including Hunter will be approximately 29% as is always the case geographic earnings mix and any legislative action, including new guidance on tax reform matters may impact rates now I'll turn the call back over to Rob. Thanks, Brian Griffin team continues to be extremely.
Greenlee active executing on our strategic actions to build shareholder value at the halfway point in the year, we have already completed the largest acquisition in Griffin's history with the Hunter fan.
Company are highly complementary business to our <unk> segment.
<unk> the Hunter acquisition with new debt secured at attractive terms accelerated the Ames strategic initiative to fundamentally strengthen the CPP business and signed a definitive agreement to divest telephonics for $330 million, which will strengthen our balance sheet and allow us to focus our resources.
In closing our management teams continue to successfully navigate an unprecedented set of challenges in the current environment. Despite these challenges we're raising our guidance as a direct result of the efforts of our talented teams our performance this quarter as confirmation of the strength of our strategic plan resilience.
Of our businesses and excellence of our operating management.
Operator, we'll take any questions.
Thank you Dan and myself.
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One moment please for questions.
As a reminder, we ask that you limit to one question and one follow up.
We have our first question from the line up Bob Lubbock.
With CJS Securities. Please go ahead.
Good morning, Congratulations on outstanding results.
Thanks, Bob Good morning.
Good morning, Yeah, I'm still trying to wrap my head around all this fantastic, but maybe we can start with HB P and could you dig in a little on the primary strength in commercial and the outlook, there and kind of the drivers.
This is such a huge.
Increased what what changed and how sustainable is this outlook because obviously the guidance is materially higher including in the second half as well. So maybe just dig in a little on an H P. P commercial and residential view please.
Sure. So I would start by saying this quarter reflects a price cost benefit after multiple quarters of price cost lag.
The commercial business continues to see very good demand look at the landscape with increasing warehouse space being built out of <unk>.
We will also lead to future replacements and those types of facilities.
Our manufacturing facilities have you know that we expanded back in 2019 have definitely been.
<unk> paid off and put us in position to meet the demand that we're seeing.
Okay.
Got it okay, great and then.
Obviously with the strong results for cash flow and the favorable proceeds from telephonics.
The targeted leverage at the end of this years.
Can you get below three times.
Remarkable how how fast you're paying down the debt and reducing leverage are there other targets for M&A on your horizon right now is share repurchase obviously, given valuation consideration or how are you thinking about kind of capital allocation going forward with the rapid deleveraging that's occurring right now.
We've always looked at building long term value and.
The acceleration of our cash flow generation.
As part of what we viewed as a series of acquisitions that were meant to grow the company Delever and position us for future growth what what's clear is that the price of our stock there is no relationship to the value of our business.
We closed on telephonics.
In this quarter.
Everything's on the table, we'll take a look at our where our cashes and stock buybacks dividends.
Dividends.
We see ourselves as being the cheapest alternative.
M&A is always topical for us, but we look at ourselves as being far more.
Mr opportunistic.
Yeah.
Okay Super Thank you.
Thank you we have next question from the line of Julian Mitchell.
Jay Please go ahead.
Yeah.
Hey, good morning, everyone.
Good morning <unk>.
Obviously <unk> was very strong performance, but maybe on CPP, if you could talk about.
What youre seeing in terms of demand by product line, and maybe talk a little bit about interest rates and how they're if they're having any effect on current demand at this time.
Sure. So we are seeing a little softness in the demand.
The season, the spring season is off to a slow start with weather, particularly in the northeast.
The demand is definitely softened a bit but we do feel that that's something that's more seasonal this year and or temporary and we look forward to the balance of the year and what will happen there as far as interest.
Crist rates interest rates go higher are still historically low.
Housing demand continues to be strong and theres still a significant shortage of housing so.
Your longer term outlook or the future outlook of the business still is very strong.
And I'd add to that that our strategy has been built around.
Leading brands and essential products. So the long term ability for us to grow with the U S economy is improving.
This cycle that were in <unk>.
It remains unclear whats going to happen with both monetary policy the impact of interest rates.
If you look at our housing business as a reflection, we've seen no drop off.
Demand, we continue to believe that the housing market is constructive from a shortage of housing and the things that go in and around the house that our CPP business.
Has been built around.
Long term.
Demand drivers.
We continue to be very optimistic about the long term view of the CPP segment Hunter in particular Theres been no change in our view of what that business looks like both near term and long term.
And these are again.
<unk> that go into the home that go into commercial use that have essential positioning and we're always the leading brand in every product that we sell.
Okay very helpful. And then I guess for my follow up back to the H B P business.
You did see increased commercial volume reduced.
<unk> volume due to labor and some supply chain, but I'm.
I'm just curious if on the resi side, despite the supply chain issues, if you're seeing more inquiries from the new construction channel and would that be a potential opportunity progression. Thank you.
Sure, Yes, new construction certainly is an opportunity for the business.
Though we are primarily repair and remodel we.
We certainly do serve the new construction.
Space and as well as we don't always actually know where our doors go particularly from smaller builders they buy doors for them from dealers and we don't know where they ultimately end up.
But a strong housing market is certainly a positive.
For the overall HP residential side of the business.
Thank you.
Again to ask a question. Please press star one on your telephone keypad.
We have next question from the line of Justin Bergner with Gabelli funds. Please go ahead.
Good morning, Brian Good morning, Brian Good morning, Brian .
Morning, Justin.
Congratulations on the good quarter and improved outlook.
I guess to start I, just want to make sure I heard a couple of numbers correctly.
So the after tax proceeds from defense electronics sale, that's about $300 million.
That's correct, Okay, and then the new segment adjusted EBITDA Guide is $475 million and there's a $55 million contribution from the eight months of Hunter.
$55 million is included in the $475 million okay.
Got it.
So now onto the substantive questions.
With respect to your new segment adjusted EBITDA Guide I guess, you did $150 million.
At over 150 million in the first quarter that puts the remaining three quarters at about 325 million.
Should I think of the step down from sort of the $150 million this quarter to the implied call. It 105 hundred $10 million in each of the next few quarters as demand driven or is this just a function of the short term price cost dynamics and inventory accounting sort of getting sorted out in the 105 to 100 tenants.
More representative of Sigma.
Segment EBITDA at current demand levels.
Sure so on the.
Ames' business, we've taken a more conservative posture for the second half of the year on demand on the <unk> business. We expect continued.
Yeah.
Continued good revenue and EBITDA with margin looking like the first half of the year.
Okay.
Got it so look at the first half margins rather than the second quarter as representative for the go forward yes.
Yes margins, Okay, and just one last question on the HB P side.
You know obviously you are unable to fully deliver on the residential demand do you effectively have a backlog there that's sort of priced a few quarters out at this point given.
The strong demand or you know.
How does the next couple of quarters look in terms of catching up to demand both from a volume point of view and sort of a price cost point of view.
Sure. So yes, we do have significant backlog that we expect to make progress against as we go through the balance of this year and into <unk>.
Next year fiscal 'twenty three.
Price is there is some.
The lag in pricing that backlog, but it is mostly price.
At the right level.
Got it so the the sort of price and margin for <unk> is pretty visible for the next couple of quarters. It's only when you get into the next fiscal year that youre going to be sort of filling material, new backlog and I guess pricing that a new youre thinking about it correctly.
Thank you.
Yeah.
Thank you.
Ladies and gentlemen, we have reached the end of the question and answer session and I'd like to turn the call back to Ron Kramer CEO for closing remarks over to you Sir.
We're doing very well and we expect to continue to do better.
And we're all hard at work to continue to build shareholder value. Thank you.
Thank you. This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation.