Griffon Corp (GFF) 2022 Q2 法說會逐字稿

Greetings, and welcome to Griffon Corporation's Second Quarter 2022 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. I'd now 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 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.

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 24, 2022, acquisition of Hunter Fan. We've made significant progress with price realization during this quarter. These pricing actions, along with fixed cost leverage, have resulted in increases in sales and profitability. Revenue has increased by 36%, adjusted EBITDA more than doubled, and adjusted EPS has almost tripled on a year-over-year basis.

Our businesses in the global economy continue 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 generated outstanding results. We thank 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 on favorable terms. We're in the early stages of integrating Hunter into the rest of the CPP segment, and we're pleased with the Hunter team's performance. The businesses have 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. The sale of Telephonics 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 pricing mix during the quarter.

Our AMES strategic initiative, which we initiated in November 2019, has made steady progress. We consolidated 5 manufacturing and distribution facilities, rationalizing approximately 800,000 square feet of facility footprint in the process. We recently consolidated 2 other facilities in Reno, Nevada, into a new expanded West Coast distribution and digital commerce fulfillment center. We opened an East Coast digital commerce fulfillment center in Carlisle, Pennsylvania, and successfully implemented a new business system and business intelligence platform. 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 commitments to making the initiative of 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 blueprinted these strategic actions before COVID. As planning activities progressed, untenable construction schedules and equipment procurement lead times, along with a significant increase in costs for the build-out of a new facility and the procurement of specialized manufacturing equipment, resulted in just an unacceptable return on investment.

In light of these evolving factors, we've decided to reduce the scope of the AMES strategic initiative. We'll conclude the current activities by September 30 of this year, which is 1 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 implemented 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 is a more efficient strategy for improving our cost structure and competitiveness.

Let's shift to our Home and Building Products businesses. 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 CornellCookson in 2018 diversified and strengthened our commercial offerings in anticipation of volume growth and margin improvement. Fast 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. Our net debt-to-EBITDA currently stands at 4.4x. Using proceeds from the anticipated sale of Telephonics, 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 3x. 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 $0.09 per share dividend payable on June 15, 2022, to shareholders of record on May 19, 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, who'll take you through some of the financials.

Thank you, Ron. I'll 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%. Gross profit on a GAAP basis for the quarter was $261 million compared to $161 million in the prior year quarter. Excluding restructuring-related charges and acquisition write-up of inventory as 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. Second quarter GAAP income from continuing operations was $59 million or $1.10 per share compared to the prior year period of $18 million or $0.34 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 or $0.47 per share on a continuing basis.

Corporate and unallocated expenses, excluding depreciation, was $12.8 million in the quarter compared to $12.1 million in the prior year. Our normalized effective tax rate, excluding adjusted items, for the quarter was 28.3% and for the year-to-date period was 29%. Capital spending was $11.5 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 increased 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 and favorable price and mix, partially offset by the unfavorable impact of reduced U.S. volumes and increased costs for labor, materials and transportation.

HBP 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 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 '22. Our revised forecast for the initiative will be approximately $50 million of onetime 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 expectation of $30 million to $35 million. Remaining expenditures after the end of fiscal '22, including those related to the deployment of AMES 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 pretax restructuring-related charges of approximately $4.8 million and capital expenditures of $900,000 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 4.4x as calculated based on our debt covenants. The increased leverage from the prior quarter of 3.3x is 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 of 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 less than 3x, which is below our target of 3.5x. As a reminder, Griffon uses cash in the first 6 months of its fiscal year, which will be 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 8 months of fiscal '22.

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 '22 guidance. We now expect, on a continuing operations basis, which includes the 8-month contribution from Hunter and excludes Telephonics, revenue of $2.85 billion and segment adjusted EBITDA of $475 million.

The increase in revenue and EBITDA guidance is driven by the continued price -- continued benefit of price and mix of HBP in the second half, partially offset by softer demand at AMES in the CPP segment. Included in our guidance and consistent with the Q1 update, we continue to expect the Hunter contribution for the 8 months of fiscal '22, in which we own the business, to be $250 million of revenue and $55 million of EBITDA. Excluding the effects of the acquisition-related costs and purchase accounting, we continue to expect Hunter to contribute $400 million of revenue and $90 million of EBITDA for fiscal '23.

The EBITDA guidance excludes unallocated costs of approximately $49 million and onetime charges of approximately $15 million related to the AMES initiative as well as charges related to proxy Hunter-related acquisitions, expenses and Telephonics-related divestiture expenses.

Total capital expenditures for fiscal year '22 are expected to be $55 million, which now includes approximately $5 million supporting AMES initiatives and $5 million for the addition of Hunter. Depreciation and amortization are expected to be $68 million, of which $18 million is amortization. These are inclusive of approximately $5 million of depreciation and $8 million of amortization related to Hunter. We expect net interest expense inclusive of the financing for Hunter of approximately $83 million for fiscal '22. 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 Ron.

Thanks, Brian. The Griffon team continues to be extremely 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 Griffon's history with the Hunter Fan Company, a highly complementary business to our CPP segment. Financed 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 on 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 is confirmation of the strength of our strategic plan, resilience of our businesses and excellence of our operating management.

Operator, we'll take any questions.

(Operator Instructions) We have a first question from the line of Bob Labick with CJS Securities.

Congratulations on outstanding results.

Thanks, Bob.

Yes, I'm still trying to wrap my head around all this. It's fantastic. But maybe we can start with HBP. And could you dig in a little on the primary strength in commercial and the outlook there and kind of the drivers? And -- I mean this is such a huge increase. 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 HBP, commercial and residential here, please.

Sure. So I'll start by saying this quarter reflects 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, that, of course, will also lead to future replacements in those types of facilities. Our manufacturing facilities have -- that we expanded back in 2019 have definitely been paid off and placed and positioned to meet the demand that we're seeing.

Got it. Okay. Great. And then obviously, with the strong results, the cash flow and the favorable proceeds from Telephonics, the targeted leverage at the end of this year is, as you said, below 3x. It's just remarkable 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, a 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 is 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'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, and everything is on the table. We'll take a look at where our cash is. And stock buybacks, 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 opportunistic.

We have next question from the line of Julio Romero with Sidoti.

Obviously, HBP was very strong performance, but maybe on CPP, if you could talk about what you're 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. And the season -- the spring season was off to a slow start with weather, particularly in the Northeast. The demand has definitely softened a bit, but we do feel that, that's something that's more seasonal this year or temporary, and we look forward to the balance of the year and what will happen there.

As far as interest rates, interest rates, though higher, are still historically low. Housing demand continues to be strong. There's still a significant shortage of housing. So the 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, it is proven this cycle that we're in remains unclear what's going to happen with both monetary policy, the impact of interest rates.

But if you look at our housing business as a reflection, we've seen no drop-off in 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 are 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, there's been no change in our view of what that business looks like, both near term and long term. And these are, again, products that go into the home, that go into commercial use, that have essential positioning. And we are always the leading brand in every product that we sell.

Okay. Very helpful. And then I guess for my follow-up, back to the HBP business. You did see increased commercial volume reduced residential volume due to labor and supply chain. But 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 for Griffon?

Sure. Yes. New construction certainly is an opportunity for the business. Though we are primarily repair and remodel, we certainly do serve the new construction space. And as well, we don't always actually know where our doors go, particularly from smaller builders. They buy doors from dealers, and we don't know where they ultimately end up. But a strong housing market is certainly a positive for the overall HBP residential side of the business.

(Operator Instructions) We have next question from the line of Justin Bergner with Gabelli Funds.

Congratulations on the good quarter and improved outlook. I guess to start, I just wanted 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.

Correct.

Okay. And then the new segment adjusted EBITDA guide is $475 million, and there's a $55 million contribution from the 8 months of Hunter?

The $55 million is included in the $475 million.

Okay. Got it. All right. So now on to the substantive questions. With respect to your new segment adjusted EBITDA guide, I guess you did $150 million -- a little over $150 million in the first quarter. That puts the remaining 3 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 million, $110 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 million to $110 million as more representative of segment EBITDA at current demand levels?

Sure. So on the AMES business, we have taken a more conservative posture for the second half of the year on demand. On the HBP business, we expect continued good revenue and EBITDA with margin looking like the first half of the year.

Got it. So look at the first half margins rather than the second quarter is representative for the go forward.

Yes.

Margins Okay. And just 1 last question on the HBP side. Obviously, you're unable to fully deliver on the residential demand. Do you effectively have a backlog there that sort of priced a few quarters out at this point, given the strong demand? Or how does the next couple of quarters look in terms of catching up the demand at 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 next year, fiscal '23. Price is -- there is some lag in price in that backlog, but it is mostly priced at the right level.

Got it. So the sort of price and margin for HBP is pretty visible for the next couple of quarters. It's only when you get to the next fiscal year that you're going to be sort of filling material, new backlog and I guess pricing that anew?

You're thinking about it correctly. That's correct.

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.