Griffon Corp (GFF) 2017 Q3 法說會逐字稿

Good day, and welcome to the Griffon Corporation Third Quarter 2017 Earnings Conference Call.

Today's conference is being recorded.

And at this time, I would like to turn the conference over to Mr. Brian Harris, Chief Financial Officer.

Please go ahead, sir.

Thank you, Matt.

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.

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.

Finally, 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 today's call.

We're pleased with our third quarter results.

Strong demand in Home & Building Products resulted in its 8% increase in revenue and record segment adjusted EBITDA.

Plastics revenue and EBITDA remained consistent with the prior year quarter and Telephonics revenue and EBITDA has decreased from the prior year quarter.

We remain positive on the earning power of our businesses and are confirming our $225 million segment adjusted EBITDA guidance for fiscal 2017.

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

On July 31, AMES acquired the La Hacienda Limited, a leading United Kingdom outdoor living brand of unique heating and garden decor products, for approximately $11 million.

The acquisition broadens AMES' global outdoor living and lawn and garden business and supports its U.K. expansion strategy.

The acquisition's expected to generate $18 million in annualized revenue and to be accretive to Griffon's earnings in its first full year of operations.

Also in July, AMES represented the Commonwealth of Pennsylvania at the White House Made in America Product Showcase.

Founded in 1774, AMES is the third oldest brand in America and the nation's leading manufacturer of landscape and gardening tools.

AMES has a rich history of building America and manufacturing in the United States.

And we were very pleased to be featured, and it's an exciting moment for our employees to be recognized on a national level.

For Griffon, we are in a unique position to benefit from enhanced economic growth, domestic infrastructure and national security spending and tax reform.

And we remain optimistic that all these things are going to happen.

Moving to our capital deployment and return of cash to shareholders.

We've not repurchased any common stock since the first quarter.

As of June 30, 2017, $49 million remains under the August 2016 board authorization.

In addition, earlier today we announced a quarterly dividend of $0.06 per share.

Consistent with the seasonality of our businesses, Griffon's first half of the year had free cash usage and the second half of the year is expected to generate significant free cash flow.

Griffon's businesses provided $40 million in free cash flow in the third quarter resulting in $6 million of free cash flow year-to-date, which is a $10 million increase over the prior year-to-date period.

We expect significant additional free cash flow generation in the fourth quarter and ultimately, that's the story about the years to come generating increasing amounts of free cash flow.

Now I'd like to provide an update on our segments before turning the call over to Brian for more a detailed discussion of our financial results and outlook.

Let's start with Home & Building Products.

Clopay doors in AMES saw a strong growth during the quarter.

And we remain very positive on the outlook for Home & Building Products as we continue to grow sales and improve our profitability through efficiency initiatives and product innovation.

Segment revenue was up 8% during the quarter, while segment-adjusted EBITDA was up 3.3% to a record $33 million.

This improvement in EBITDA was achieved despite an unusually cold and wet spring in North America and a headwind from higher steel cost.

So while the performance is excellent, the potential here is even better.

We continue to see underlying strength in the U.S. housing market with a slow, 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 in 2017, year-to-date June single-family residential construction starts increased 8% over the 2016 period.

Also according to the NAR, National Association of Realtors, June 2017 annualized existing single-family sales increased to $4.9 million or 0.6% improvement over the comparable 2016 data.

These data points further indicate the housing market continues to improve.

We expect Home & Building Products to further its revenue and earnings growth in the years ahead.

Turning to Telephonics; the results this quarter reflect the current slow pace of U.S. defense spending and the timing of international orders.

During the quarter, Telephonics was awarded year 2 of a multiyear Indefinite Delivery Indefinite Quantity production contract by Lockheed Martin for the Automatic Radar Periscope Detection and Discrimination, radar retrofit kits, which is valued at approximately $37 million.

This contract supports the retrofit program for the U.S. Navy's MH-60R Sea Hawk helicopters.

We're expecting initial deliveries to begin in spring 2018.

Though sequestration continues to be in effect, there have been some recent indicators that defense spending will be increasing.

For instance, the House Budget Committee mark-up of its fiscal year 2018 defense budget proposes elevated spending consistent with The House and Senate Armed Services Committees, National Defense Authorization Acts, the budget proposes a base budget of $621 billion inclusive of national security spending, an increase of 11% over fiscal 2017.

In addition, the budget included $75 billion for the Global War on Terrorism in border and homeland security.

Telephonics with its highly sophisticated technology and product offerings, along with their incumbent positions and field-proven capabilities is well positioned to ultimately benefit from these improved levels of spending.

In addition, there are many international opportunities such as the recent $350 million (sic) [$350 billion] 10-year U.S.-Saudi weapons deal, which Telephonics expects to participate in.

Turning to Plastics.

We continue to execute well on our breathable film strategic initiatives, focusing on innovation and capacity expansion.

We continue to see additional breathable film opportunities as more products switch from non-breathable and white film to breathable printed films for baby diapers.

This supports our ongoing investment in breathable and print capacity in innovation.

With that, I'll turn it over to Brian for a closer look at the numbers.

Thanks, Ron.

Consolidated third quarter revenue increased 2.4% to $473 million compared to the prior year level of $462 million.

Increased revenue in the quarter was driven by strong performance in our Home & Building Products segment with Plastics revenue being consistent with prior year and partially offset by lower sales at Telephonics.

Third quarter 2017 consolidated segment adjusted EBITDA declined to $53.2 million compared to the prior year period of $57.8 million.

We continue to expect fiscal 2017 segment adjusted EBITDA of $225 million, driven by continued improvement in our Home & Building Products segment.

As usual, we are mindful of risks related to timing impacts on Telephonics revenue, fluctuations in resin pricing and foreign exchange rates, and in the case of the fourth quarter, timing of winter snow tool [loading] sales.

By segment, Home & Building Products third quarter revenue increased 8% to $277 million compared to prior year period of $256 million.

AMES revenue increased 11% to $136 million compared to the prior year period of $122 million.

Despite a second conservative year with a cold and wet spring in North America, AMES sales improved from market expansion in the December 2016 Hills acquisition in Australia and increased AMES U.S. lawn tool, hose reel and wheelbarrow sales.

In our doors business, revenue increased 5% to $140 million compared to the prior year period of $133 million.

The doors business benefited from increased volume and pricing.

Home & Building Products segment adjusted EBITDA increased 3% to a record $33 million compared to $32 million in the prior year period, driven by volume and partially offset by increased steel costs.

Turning to Telephonics.

Segment revenue declined to $82 million compared to $92 million in the third quarter 2016 due to lower volume of multi-mode radar systems, partially offset by increased electronic countermeasure devices and IFF systems revenue.

Segment adjusted EBITDA of $7 million declined compared to prior year period of $12 million.

The decrease is a result of decreased revenue, I just noted, along with unfavorable program mix and the impact of revised estimates to complete remaining performance obligations on certain radar and communications programs.

Third quarter orders of $50 million declined from $61 million in the prior year quarter.

Backlogs stood at $355 million with 79% expected to be fulfilled over the next 12 months.

Recent levels of orders and backlog are due to timing of U.S. and international orders and the continued effects of sequestration.

Like last year, we expect a significant sequential improvement in our fourth quarter.

In our Plastics segment, third quarter revenue of $115 million of EBITDA -- an EBITDA of $13.3 million were consistent with the prior year quarter.

Moving back to consolidated results, gross profit for the quarter was $116 million compared to the prior year level of $119 million.

Gross margin for the third quarter was 24.5% compared to the prior level of 25.8%, with the decrease primarily driven by Telephonics.

Third quarter selling, general and administration expenses were $90.7 million compared to $88.9 million in the prior year resulting in 19.2% of sales in both years.

Our effective tax rate, excluding the prior year restructuring in certain tax items that affect comparability, for the current and prior year third quarters, is 36.4% and 37.5%, respectively.

For the full fiscal year 2017, we continue to expect the tax rate, excluding items that affect comparability, to be approximately 38%.

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

GAAP net income in the third quarter was $9.6 million or $0.22 per share compared to the prior year period of $7.6 million or $0.18 per share.

Excluding certain tax items in both periods and the restructuring of the prior year, adjusted current quarter net income was $7.4 million or $0.17 per share compared to $11 million or 26% -- $0.26 per share in the prior year.

Third quarter capital spending was $16.6 million.

For the full fiscal year 2017, we continue to expect capital expenditures to be in the range of $80 million to $85 million, which includes the previously announced investments in plastics capacity and equipment upgrades.

Depreciation and amortization for the third quarter 2017 was $19 million.

For full year fiscal 2017, we expect depreciation to be approximately $67 million and amortization to be approximately $8 million.

As of June 30, 2017, we had $69 million in cash and total debt outstanding of $997 million, resulting in a net debt position of $928 million.

We had $172 million available for borrowing under our revolving credit facility, subject to certain loan covenants.

Consistent with Griffon's historical cash flow patterns, the first 6 months of the fiscal year used cash in the second half of the year is expected to generate significant free cash flow, which we noted earlier started in the third quarter.

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

As we finish fiscal 2017, we're positioned to deliver on our full year EBITDA commitments as we continue to grow and improve our operations through innovation and efficiency initiatives.

Our businesses are poised for further growth and enhanced profitability.

All of us are hard at work to make our existing businesses better while actively looking for new acquisition opportunities.

We're very excited about our prospects.

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

(Operator Instructions) And at this time, we'll take a question from Rob Labick with CJS Securities.

This is actually Lee Jagoda for Bob Labick.

So Ron, just starting with Telephonics, it sounds like there's some timing aspect and some push out to Q3 and Q4 in some of the product lines.

Can you talk about whether it's more new products waiting to kick in or existing programs accelerating?

I'd say it's more a timing of international orders that is becoming increasingly part of the mix as well as run-off of existing programs, as expected, and timing of orders going from one quarter to another.

But the overall direction is, fundamentals of the business remain very sound.

The talk of increased defense spending and the reality of it flowing down to subcontractors like Telephonics is going to be measured over a period of years.

And we fully expect Telephonics to benefit from the ultimate increase in defense spending.

The reality is, is that our near-term positioning is more attuned to international orders and the timing of the receipt of those orders is less predictable for us on a quarter-to-quarter basis.

On an aggregate basis, we continue to believe that we're in very good shape for the programs that we're on to get new funding, but that's going to be measured in years not in quarters, and for the international orders to continue to improve.

And clearly, there's been some increased chatter in news flow around international conflicts and the border wall and increased U.S. security.

And I'm sure it's a sensitive topic in terms of you can't disclose certain things, but are you seeing [RFPs] and other indications of more near-term interest related to those issues?

We clearly believe that our products play a role in border security.

The funding for that is caught in a very complicated government budgeting and political process that includes both fixed barriers as well as technology, as well as people.

So we think Telephonics has a role to play.

We think we're a cost-effective provider.

And when this decision-making gets done and the initial funding for increased border security has really just started, we hope to be a beneficiary.

We believe we have the products that really do solve a big part of the problem at a very cost-effective basis.

And we're hopeful that that's the way custom and border patrol, homeland security sees it.

And I'll just add to that.

We have many international orders where terms are negotiated.

We are just really awaiting funding.

Perfect.

And then switching gears to the Home & Building Products piece, sort of a multipart question around Hacienda.

First and foremost, can you discuss sort of its positioning within the U.K. market?

Obviously, it's small.

Discuss where you guys see yourselves in 3 to 5 years in the U.K.?

And then lastly, with regard to Hacienda, is there any opportunity to bring that product line to the U.S.?

I'll start to answer it by telling you that we have had as a corporate objective that we've discussed about wanting to expand our presence in the U.K. It's a very large lawn and garden market.

We've been following our biggest customer in Australia in support of their business of going into the U.K. when Bunnings bought Homebase.

So we had already been looking for acquisition opportunities, but the market there is diverse, lawn and garden centers and other retailers, are also an important part of our long-term strategy.

And the way I would describe the U.K. for us is, look at what we did in Australia over a multiyear period of buying, consolidating, building and investing around branded products.

And we've built a very nice business in Australia to complement our North American business, Canada and the U.S. around AMES.

Our intent is, La Hacienda is meant to be the first of what we hope to be many acquisitions, small and large to do to expand our footprint in that market.

The specific La Hacienda product is something that we see as being potentially an introduction into other markets, but that's not the intent to buying the company.

It's really to support its existing position.

It's an entrepreneurial-run company.

We've had good luck in bringing pride of owners into our public company environment, nurturing the growth of their business, expanding their management capacity and the Goodwin brothers who founded this business in 1989 are now joining a bigger team with bigger resources, and we hope that they're going to go and help us build a bigger business in the U.K.

At this time, we'll move to Justin Bergner with Gabelli & Company.

First question would just to be to clarify some comments you made.

I think you said that the orders in Telephonics were $51 million versus $60 million, was that a year-on-year or a sequential comment?

And then, the big order that you described from Lockheed Martin, I think of $37 million, is that in the backlog?

Or is that -- will that show up in future backlog?

Brian?

Sure, the order is in backlog.

And that was a current year quarter versus prior year quarter comparison.

Okay.

So that order would have been, I guess, close to 3 quarters of the orders you received...

Yes...

In the current quarter?

In the quarter.

Okay.

As you sort of look out to the rest of the fiscal year, I guess, segment EBITDA has been relatively flat for the first 3 quarters, and you're expecting it to sort of increase by, I don't know, roughly $5 million in the fourth quarter to hit that $225 million number.

And you're also sort of lapping a good fourth quarter in the last fiscal year in Telephonics.

So just help me understand sort of what parts of the business are going to materially pick up in the fourth quarter?

We continue to see Home & Building Products improving.

And we continue to believe that Telephonics' fourth quarter sequentially is an improvement, same as last year, from third to fourth quarter.

Plastics continues to be on the trajectory, pleased with their results and we're hopeful that there is more coming in the years ahead as they continue to position themselves to benefit from the Sof-flex investments that are already -- been made and will continue to be introduced.

Okay.

With respect to the steel cost headwinds in Home & Building Products, were those sort of both on the AMES and Clopay side?

And was that more of a lag issue?

Or does that -- is that going to sort of persist in future quarters?

So while we will continue to see headwinds from steel in the fourth quarter, it's more doors than AMES, but it does affect both of them.

Okay.

And on Plastics, do you -- are you -- do you think you're gaining share with your Sof-flex capability and sort of, if so, I guess, it's bringing -- it seems to be bringing your volumes to more flat from prior declines; so sort of -- does it have the ability to meaningfully affect your volumes into positive territory?

So Justin, the Sof-flex is something that hasn't fully rolled out by our first launch customer.

We expect them to launch in first half of calendar '18.

What we are seeing is many customers moving from white or unprinted film that's non-breathable to breathable printed film, that's where we are strong and that is where a lot of our investment that we've made and continue to make right now, we're going to benefit from that.

So our volume overall is a little flat, most of that's driven by a Europe volume that is not doing well.

However, in North America and in Brazil, we continue to see growth.

Okay.

And then just one follow-up there.

When you say it hasn't fully rolled out with the launch customer, is -- are there meaningful opportunities beyond that one large customer?

Or does sort of the upside drop off materially beyond that one large customer?

No, there are opportunities beyond that launch customer.

We have other customers looking at it now.

But one customer is not just looking, they are updating their production, they're updating their packaging and marketing to actually roll it out.

And is that...

We're still at the early stages of the introduction of the Sof-flex technology and the products to thinner film and the potential is to be game changing.

But this is going to be measured, again, over a period of years, not over any immediate quarter-to-quarter growth.

Okay.

And is that Sof-flex introduction with the one customer going to be focused around Europe or is it a global opportunity at present?

We're not disclosing that at this time, at the request of our customer.

(Operator Instructions) And it appears we have no further questions in the queue.

I'll hand things back over to Ron Kramer for additional or closing remarks.

Thank you.

We'll be working very hard to finish up the year and look forward to speaking to everyone again in November.

Again, that does conclude today's conference call.

Thank you all for your participation.