Griffon Corp (GFF) 2017 Q2 法說會逐字稿

Good day, and welcome to the Griffon Corporation's Second Quarter 2017 Earnings Conference Call.

Today's conference is being recorded.

At this time, I'd like to turn the conference over to Mr. Brian Harris, Chief Financial Officer.

Please go ahead, sir.

Thank you, Dennis.

Good afternoon, everyone.

With me on the call is Ron Kramer, our Chief Executive Officer.

Our call is being recorded and will be available for playback, the details of which are in our press release issued earlier today and on our website.

As in the past, our comments will include forward-looking statements about the company's performance based on our views of Griffon's 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.

Also some of 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.

Good afternoon, and thanks for joining us.

We built on our first quarter performance with a record second quarter's segment adjusted EBITDA of $51.3 million, driven by growth in our Home & Building Products segment and improved EBITDA and margins across all of our segments.

These results were mainly attributable to continued steady execution as we were able to more than offset lower revenue in Telephonics and Plastics in the quarter.

The underlying trends in our businesses remain positive, and we are firmly committed to drive continued improvements and operating efficiencies.

Revenues for the quarter decreased 1%, which was consistent with our internal expectations.

We anticipate, as the year progresses, that we will be on track for 2% to 3% consolidated revenue growth.

Before turning to our segment-level comments, I want to provide an update on some recent news, capital deployment activities and return of cash to our shareholders.

On April 29, AMES welcome President, Donald J. Trump on his 100th day in office along with Vice President, Michael R. Pence, and Secretary of Commerce, Wilbur L. Ross to our wheelbarrow manufacturing plant in Harrisburg, Pennsylvania.

Following a tour, President Trump signed 2 executive orders, adding another milestone to our company's rich American history.

Honored guests included Secretary of Veterans Affairs, David L. Shulkin; and Director of Trade Industrial Policy, Peter Navarro.

Griffon is uniquely positioned to support the President's policies to promote economic growth, domestic infrastructure improvements and national security with our businesses.

Moving to capital deployment and return of cash to shareholders.

Earlier today, we announced a quarterly dividend of $0.06 per share.

Year-to-date free cash flow improved $15 million over the prior year period, resulting in negative free cash flow of $33.7 million.

Consistent with the seasonality of our businesses, we expect strong second half free cash flow and much more in the future.

On January 17, we settled our $100 million 4% convertible notes for a total of $174 million comprised of $125 million in cash and 1.95 million shares of common stock.

We borrowed on our revolving line of credit for the cash portion of the settlement.

We did not purchase any common shares this quarter under our board repurchase program as we continue to analyze the benefits of reducing net debt versus share repurchases.

As of March 31, 2017, $49 million remains under the August 2016 board authorization, should we see an opportunity to repurchase shares.

I'll go through our businesses, and then I'll turn the call back over to Brian for a more discussion on some of the financial results and outlook.

Let's start with Home & Building Products.

We remain positive on the outlook for the Home & Building Products segment as we continue to grow sales and leverage our manufacturing and distribution footprint.

We continue to see underlying strength in the U.S. housing market with the slow but steady multiyear housing recovery contributing to our improved results.

Single-family residential construction continues to improve.

However, annualized starts remain below historical norms.

The U.S. Census Bureau indicated 2017 year-to-date March single-family residential construction starts increased 6% over the 2016 period.

Also according to the National Association of Realtors, March 2017 annualized existing single-family and condo home sales increased to $5.1 million for a 4.3% improvement over the comparable 2016 data, further indicators that the market continues to improve.

In our doors business, Clopay is using a variety of consumer touch points to boost sales by augmenting their multichannel imagination advertising campaign with technology and in-store displays, so competitive advantage.

Utilizing the mobile application MyDoor or the Home Depot design configurator, consumers can upload a picture of their home to design the right door that complements their interior -- exterior, excuse me.

The order then can be sent seamlessly to our manufacturing facilities.

Clopay door investments and innovation and capacity underscore our commitment to and confidence in future of the business.

Turning to Telephonics.

Second quarter segment adjusted EBITDA improved 13% year-over-year, with a 210 basis point margin expansion due to improved program mix and operational efficiencies.

Second quarter orders improved 8% to $101 million over the prior year quarter.

Backlogs stood at $387 million with 73% expected to be fulfilled over the next 12 months, giving us good visibility throughout the second half of fiscal 2017.

Telephonics continues to have multiple opportunities for its radar and communication systems in both the U.S. and internationally as well as opportunities with public transit systems, the FAA and border security.

Earlier this week, Congress reached an agreement to fund the government through September 2017.

This bipartisan plan is expected to be approved by Congress soon.

The deal included up to $15 billion in supplemental defense funding, which provides for an implied $197 billion of weapon spending, which is a 5% increase over the prior year.

Telephonics with highly sophisticated intelligence, surveillance and communication solutions should benefit from this increase in spending.

Despite bipartisan plan, we'll also fund an incremental $1.5 billion in spending for border security, including for technology and fixing existing infrastructure.

Stability in government funding for defense and border security for the balance of 2017 provides visibility and reduces risk for defense and security contractors overall, including Telephonics.

Moving to our Plastics business.

On April 3, we announced that Alan Koblin, President of Clopay Plastics, will retire on September 30, 2017.

Ron Zinco, currently the Chief Operating Officer of Clopay Plastics, will succeed Alan.

During his 5-year tenure, Alan did a great job leading our Plastics business and has significantly strengthened the company.

Ron, who is named Plastics CEO in 2016, is the ideal candidate to assume the role of President with his 30 years of experience at Clopay, extensive knowledge of the industry and customer relations.

We are confident in Ron's leadership to oversee the business and with the support of the entire Clopay Plastics team continue to drive revenue and operational performance.

For the quarter, Plastics EBITDA margin improved 40 basis points over the prior year to 10.6%, reflecting management's continued focus on operational performance.

Our Plastics business continues to execute on its breathable films strategic initiatives focused on innovation and capacity expansion.

Efforts on these initiatives will continue to be a focus for the Plastics team throughout the balance of this year.

With that, I'll give it over to Brian for some more financial details.

Thank you, Ron.

Consolidated second quarter revenues declined approximately 1% to $495.8 million compared to the prior year.

By segment, Home & Building Products second quarter revenue increased 2%, while Telephonics and Plastics decreased 7% and 3%, respectively, all in comparisons with the prior year quarter.

As Ron mentioned earlier, year-to-date revenue was in line with our internal expectations, and we continue to expect consolidating revenue to improve 2% to 3% for the year.

Gross profit for the quarter was $115.5 million, an increase of 1% over the prior year quarter.

Gross margin increased 50 basis points to 23.3% compared to 22.8% in the prior year quarter.

Quarter selling, general and administrative expenses were $92.5 million or 18.7% of revenue compared to $91.6 million or 18.3% of revenue in the prior year quarter.

Segment adjusted EBITDA increased 6% to $51.3 million.

By segment, Home & Building Products, Telephonics and Plastics increased 5%, 13% and 1%, respectively.

We continue to expect full year segment adjusted EBITDA of $225 million or greater.

Our effective tax rate for the second quarter was 50.7% compared to 38% in the prior year quarter.

Excluding certain tax items that affect comparability in the current quarter, both years approximated 38%.

For the full year of fiscal 2017, we continue to expect the tax rate excluding any period items to be approximately 38%.

As is always the case, geographic earnings mix and any legislative action may impact rates.

GAAP net income in the second quarter was $5 million or $0.12 per diluted share compared to the prior year period of $6.1 million or $0.14 per share.

Excluding current period tax items that affect comparability, adjusted net income was $6.4 million or $0.15 per diluted share.

Second quarter capital spending was $20 million.

For the full year of 2017, we continue to expect capital expenditures to be in the range of $80 million to $85 million.

Depreciation and amortization for the second quarter of 2017 was $18.8 million.

For the balance of fiscal 2017, we expect depreciation to be approximately $66 million and amortization to be approximately $8 million.

As of March 31, 2017, we had $47 million in cash and total debt outstanding of $1.01 billion, resulting in net debt position of $963 million.

We had $158 million available for borrowing under our revolving credit facility.

Consistent with Griffon's historical cash flow patterns, the first 6 months of the fiscal year used cash and the second half of the fiscal year is expected to generate significant cash flow.

I'll now turn the call back over to Ron for his closing comments.

We executed well in the second quarter, and I'm very pleased with our first half performance.

We've made solid progress with operational improvements in all of our businesses and are looking to build on these results over the balance of this year.

We have ample resources to invest in each of our segments and remain committed to shareholder value creation through the growth of our business, return of cash via dividends and when appropriate through stock repurchases.

Additionally, we're always looking for new opportunities.

Finally, I want to thank our 6,000 employees in North America and around the world for their extraordinary efforts.

And we look to ramp up our performance in the second half of this year.

Thank you.

With that, operator, we'll open it up for questions.

(Operator Instructions) We'll take our first question from Bob Labick with CJS Securities.

I wanted to start with AMES since that one can have weather impact.

Obviously, you had a nice quarter there.

But could you talk a little bit about what the -- I guess, 2 things.

One, the snowfall was a little late.

How does that impact you retrospectively or prospectively?

And then also on the home and garden side, it's been kind of a wet spring and a late spring.

Have you guys been impacted by that?

Or how has that been going for you as well?

Weather is a fact.

We're never going to use it as an excuse.

We're always going to be impacted by weather.

What we do with the weather is a function of how well we can operate our business.

And what I'm particularly happy about this quarter is that we had a lousy snow season, and we performed very well.

We continue to look at making operational improvements to deal with the things that are within our control.

Weather is not one of them.

We'll continue to run this business.

There will be good weather patterns.

And the point that I takeaway from this quarter is when things go our way, the operating efficiencies that we have in this business that the earnings power within AMES, within our doors segment is yet to really see both a strong economy and good weather.

And I hope to be able to see that happen at some point in the future.

Good.

And switching over to Plastics.

You've done a very good job there.

Obviously, you mentioned in terms of your operating margins have been strong after bringing them up over the last few years.

Can you talk a little bit about the overall market -- you're talking about the new breathable film with Sof-flex, but the overall breathable market?

And then maybe talk a little bit about the differences between your experiences in U.S., Brazil and Europe?

We continue to look to rollout the technology.

Our North American business continues to be very strong.

We continue to want both operating improvement as well as volume improvement in Germany.

And Brazil, we're very pleased about where the business is.

Overall, we see this business as getting better as consumer markets around the world get better.

We're integral to some very large consumer product supply chains.

And we're going to continue to strive to not just to stay competitive but to be innovative and ultimately to try to drive margins through both operating efficiencies as well as a getting paid for the new technologies that we put into the business.

Okay, great.

And then one last one, and I'll jump back in queue.

On the Telephonics side, can you talk a little bit about -- obviously, backlogs come down a little bit, but you still have pretty good visibility in the near term.

What's coming up after that?

And what are the opportunities in border patrol and increased military spending?

Because the environment seems like it could be getting better, but we saw -- nothing's happened yet there.

I think that's a fair assessment.

We've been in this business for a very long time.

Telephonics goes back to 1933, and it's been part of Griffon from the time we became a public company in 1961.

So we've seen more than a few cycles.

This is a trough.

And you're exactly right that expectations for defense spending are higher, but sequester still hasn't been resolved.

So in the things that we do, intelligence, surveillance reconnaissance products, particularly radar-driven products and the adaptation of that maritime radar for custom and border patrol use are terrific opportunities for us in the future, but defense spending has to increase.

And when it does, we fully expect that Telephonics will be a beneficiary.

(Operator Instructions) Our next question comes from Justin Bergner with Gabelli & Company.

I guess just to start with your guidance, EBITDA is sort of tracking up nicely in the first half of the year, but revenue is sort of tracking down.

And I was just sort of wondering how I should think about the pieces of the business that get you to that plus 2% to 3% versus the sort of down first half of the year?

And if you get there, does that mean that your EBITDA will be higher than sort of the range you provided?

I'll remind you we give guidance once a year in the hopes of giving people a expectation of how we see things from a credit standpoint.

From an earnings standpoint, we always believe that the earnings power of our business should be higher though in any given year things can happen.

So the revenue forecast that we have provided and our confidence in seeing growth in the second half of this year, really relates to growth that we see pretty much across all the businesses, but particularly in Home & Building Products that goes into its major selling season for our Clopay doors part of the business.

So the guidance remains $225 million or better at the EBITDA line.

And we're comfortable we're going to be able to get to that 2% top line growth.

Okay.

On Home & Building Products, I guess your margin was relatively, I guess, flat year-on-year and operating profit basis, maybe up a bit on an EBITDA basis.

Were there challenges to leveraging the sales growth in building products in the second quarter?

I mean, do you think that this margin sort of fell short of reflecting full potential for that business?

Any sort of comments on inflationary headwinds or tailwinds will be helpful, too.

Sure, Justin.

So we have completed the plant expansion at Troy.

We will continue to leverage that and see more and more efficiencies as we live and grow with that.

We had no problems meeting the additional capacity because we anticipated that, that would be happening and the expansion help us there.

And also on the AMES side of the business, though our revenue was slightly down from the prior year, we are operating efficiently, which help in contributing to our EBITDA.

And we foresee -- we continue to see rather the efficiency gains that we realized from our 2015 plant consolidation.

And we will continue to leverage that as well.

Particularly as the economy improves and revenue improves, we have the capacity to meet that.

And we should get very nice leverage from it.

Okay.

And then finally, the comment at the beginning of the call about focus on paying down debt at the current juncture, maybe if you could just sort of put that in perspective for us versus other alternatives?

I'll say a little bit differently.

We view building up cash is being opportunistic for us going forward.

So the leverage ratios that we're at is pretty much the outer limit of what we feel comfortable with.

But we're very comfortable with our businesses' ability to generate cash going forward.

Increased cash has multiple uses.

We can either use it to pay down our revolver, which is the most natural thing to do.

We could use it to increase our dividends, which is something we might consider.

And we're always looking for new opportunities that on to the businesses we already own as well as some opportunities that might grow the pie.

So we think the company is in very good shape.

The base line is something that we look at as the result of many years of hard work in getting the plant efficiencies to where they are.

And we are very optimistic about what we see going on and particularly, in the U.S. economy, where our businesses are skewed that an increase more robust economic environment continue to strengthen the housing markets, money spent on infrastructure spending, lower corporate taxes, higher defense spending is going to lead to a very robust growth at both the top line, the EBITDA line, for us most importantly, the free cash flow line.

And how we deploy that remains to be seen.

But a lot of things have to happen for all those things I just outlined to actually flow through and create that cash flow.

Okay.

And then maybe I'll throw in one more.

This may vary by business, but I think there's a lot of, obviously, hope for what new fiscal and regulatory policy can accomplish.

But in the sort of the interim until we get clarity there, it seems like there's a fair amount of uncertainty.

Do you feel like uncertainty is holding back demand in any of your businesses?

I will tell you that I think we have forecasted and we've executed, not just this year over last several years, in the same low growth, sluggish global economy.

And while the housing markets have significantly improved, we're nowhere near a recovery in housing in the United States.

There's still an enormous amount of pent-up demand from multifamily rentals to move into single-family homes.

And as more people get jobs, as people with jobs have higher disposable income, the housing markets will improve, the amount of money they spend around the house.

And from garden to garage, we have a set of businesses that will be a beneficiary.

So I don't believe that we're anywhere near peak in terms of the housing recovery.

And I think last numbers I've seen, they're less than 1% GDP growth in the overall U.S. economy.

If we get to a 3% GDP economy, our businesses are going to reflect that in the top line.

Defense clearly has been held back by governmental fiscal policies.

The world is not getting any safer.

Our military has been held back by sequester for years now.

And we think that, that is going to change with the new administration.

Okay.

One more just came to my mind, which is in Clopay garage doors, the revenue growth -- I'm not sure if you guys spoke -- I joined the call minute or 2 late, if you guys spoke about the components of that growth mix versus price versus volume?

Sure.

So it was volume driven.

And we had some pricing that offset some of the steel impact.

Steel prices this year are much higher than they were last year.

And there appear to be no further questions at this time.

I'd like to turn the conference back over to Ron Kramer for any additional or closing remarks.

Thanks very much.

We're going to continue to work hard to deliver the balance of this year, and we look forward to speaking to you in August.

Ladies and gentlemen, that does conclude today's presentation.

Thank you for your participation.

You may now disconnect.