Griffon Corporation's (GFF) CEO Ron Kramer on Q1 2016 Results - Earnings Call Transcript

| About: Griffon Corporation (GFF)

Griffon Corporation (NYSE:GFF)

Q1 2016 Earnings Conference Call

January 28, 2015 4:30 PM ET

Executives

Ron Kramer - CEO

Brian Harris - CFO

Analysts

Bob Labick - CJS Securities

Justin Bergner - Gabelli & Company

Operator

Good day and welcome to the Griffon Corporation First Quarter 2016 Earnings Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Mr. Brian Harris, Chief Financial Officer. Please go ahead sir.

Brian Harris

Thank you, Cassandra. 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 environments in which they operate. Some 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 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 will turn the call over to Ron.

Ron Kramer

Good afternoon. Thanks for joining us today. We’re off to a good start to our fiscal year, and reported GAAP earnings per share of $0.19 versus $0.16 in the prior year quarter or a 19% increase. Adjusted EPS was $0.18, up 12.5% against the prior year of first quarter.

Increased earnings stem from the success of several components of our strategy, including improved margins in our Home & Building Products segment. We’re pleased with this performance and believe it demonstrates the effectiveness of our discipline to drive growth. We delivered segment adjusted EBITDA of $52 million, up 6% from the prior year and 12% on a constant currency basis.

Total sales of $494 million marked an expected 2% decline from the prior year, and a positive 3% on a constant currency basis. Before digging into the details by segment, I’d like to provide an update on our capital allocation activities and returning cash to shareholders.

In the first quarter, we continue to executive on our Board authorized share repurchase program and opportunistically repurchased just over 432,000 shares for a total of $7.2 million. Since we began buying back shares in August 2011, we’ve repurchased 17.2 million shares for a total of $210 million or $12.24 per share. In addition, earlier today, we announced a quarterly dividend of $0.05 which marks a 25% increase to our 2015 quarterly dividend.

Next I’d like to provide you some details and key business highlights for each of the segments, and then I’ll turn the call over to Brian for more detailed discussion of the financial results and our outlook.

For Home & Building Products, we generated first quarter revenue of $261 million, down from the prior year of $272 million and the sales acquired resulted from both negative currency effect and a reduced demand for snow tools due to the mild winter. This was partially offset by continued growth in our Clopay door business. On a constant currency basis, total sales were flat against the prior year.

Segment adjusted EBITDA was $30 million, which represents a 240 basis point margin improvement over the prior year first quarter to 11.4%. This increase was driven by AMES, operational efficiency improvements and decreased volume and a favorable mix at the Clopay doors business.

We believe the underlying trends for Home & Building Products remain positive and are pleased to see the slow steady multiyear housing recovery continue and we’ve discussed this for some time and we continue to see it driving positive organic results.

In addition earlier this month, the National Association of Realtors announced 2015 sales of existing home increase 6% to 5.3 million, further supporting our view of the market and our belief that around the house for both the door business and the AMES business continues to have a good uptrend.

Telephonics. First quarter revenue was $109 million, a 20% improvement over the prior year, due to timing of work performed on maritime surveillance radars and delivery of wireless communication systems.

The international defense electronic market continues to represent a new business pipeline for continued growth, leveraging off Telephonics longstanding market presence in its core business. Along these lines, Telephonics increased its equity stake in our joint-venture, Mahindra Telephonics Integrated Systems, a joint-venture with Mahindra Defense Systems, from 26% to 49%.

Our plastics business, Clopay Plastics was the case throughout most of 2015. Currency reflected an 8% headwind to our top line and as a result the first quarter’s segment level revenue was $124 million, which was down 11% compared to the prior year. Plastics continue to make operational improvements, while investing in capacity and developing new technology.

Overall, I’m appreciative of the efforts of each of our operating companies and their dedicated workforce. They’ve continued to successfully navigate several macro headwinds and executed on our earnings growth objectives. We remain confident in our ability to deliver on our fiscal 2016 earnings guidance. Also today, we launched our new website, www.griffon.com. We encourage you to visit the site, review the content, follow the links to each of our operating sites and tell us the story of how we view ourselves as a conglomerate growth story with unrelated businesses.

With that, I’m going to turn it over to Brian, who is going to take you through a closer look at the progress.

Brian Harris

Thank you, Ron. I’d like to begin with some comments on our consolidated results and will then walk you through the segment level details and finish up with our guidance.

Consolidated first quarter revenue was $494.1 million, down 2% against the prior year. Excluding the impact of foreign currency, revenue increased 3%. Segment adjusted EBITDA increased 6% to $52 million and increased 12% excluding the impact of foreign currency.

By segment, Home & Building Products’ first quarter revenue of $261.2 million trailed to prior year of $271.7 million, primarily due to a 4% unfavorable foreign currency impacts. AMES revenue declined 11% to $118.3 million, primarily as a result of decreased snow tool sales as we experienced a mild start to the winter and a 6% unfavorable impact in currency.

In our doors business, sales increased 3% to $142.9 million as a result of favorable mix in increased volume, partially offset by 1% currency headwind.

Home & Building Products segment adjusted EBITDA increased 22% to $29.8 million, resulting in 11.4% margin for 240 basis point improvement over the prior year. The improved margin reflects operational efficiency improvements and cost control measures implemented at AMES and the continuation of the favorable mix shift to higher end doors. The quarter results included a 11% unfavorable foreign currency impact.

Turning to Telephonics, segment revenue increased 20% to $109 million, compared to the prior year, primarily as a result of increased shipments and work performed in recent awards, partially offset by cost growth recognized in certain components for airport surveillance radar and secure digital communication contracts. Segment adjusted EBITDA increased 3% to $10.3 million, as increased revenue was partially offset by unfavorable mix and the cost growth.

Segment backlog remains healthy and increased $17 million from September year-end to $459 million, 70% of which is expected to be realized in the next 12 months giving us good visibility through 2016. Bookings for the quarter were $125 million which supported a book-to-bill ratio of 1.15 to 1.

In our Plastics segment, revenue declined 11% to $123.9 million compared to the prior year, primarily due to an 8% currency headwind from the Euro and the Brazilian real and decreased volume primarily due to product rationalizations completed in the prior year.

As we expected, segment adjusted EBITDA declined 19% from the prior year as a result of lower volume and inefficiencies related to planned equipment maintenance in Europe, partially offset by the change in the impact of resin pricing pass through. The impact of foreign currency was not material.

Griffon consolidated gross profit for the quarter was $116.1 million or a margin of 23.5%, which was in line with the prior year. First quarter selling, general and administrative expenses were $91.3 million or 18.5% of sales compared to $93.9 million or 18.7% of sales in the prior year.

Our effective tax rate was 35.6% compared to 37.8% last year. For the full-year, we continue to expect a tax rate excluding any discrete period items to be approximately 36%. As is always the case, geographic earnings mix and any legislative action may impact rates.

GAAP net income in the first quarter was $8.6 million or $0.19 per share compared to $7.5 million or $0.16 in the prior year. Excluding discrete tax items in both periods, current quarter adjusted net income was $8.2 million or $0.18 per diluted share compared to $7.8 million or $0.16 per diluted share in the prior year periods. Net income included approximately $1.5 million of unfavorable foreign currency impact.

First quarter capital spending was $25 million, inclusive of the October 2015 purchase of our Camp Hill, Pennsylvania manufacturing facility. For the full-year of 2016, we continue to expect capital expenditures to be in the range of $90 million to $95 million, which includes the expansion and upgrade of our doors manufacturing facility, the Camp Hill property purchase and investment in plastics capacity and equipment upgrades for new technology.

Depreciation and amortization for the quarter was $17.1 million. For fiscal 2016, we expect depreciation to be approximately $63 million and amortization to be approximately $8 million.

As of December 31, 2015, we had $15 million in cash and total debt outstanding of $901.2 million, resulting in a net debt position of $831.2 million. We had $139 million available for borrowing under revolving credit facility subject to certain covenants. As in the past, the first six months of fiscal year have operating cash usage mostly related to seasonal inventory build at AMES. Accordingly, we expect strong positive cash flow generation in the second half of the year.

Corporate and unallocated expenses are expected to approximate $38 million for the year, including all equity compensation for the company, which will approximate $12 million to $13 million. Given our results for Q1 and our expectations for the balance of fiscal 2016, we are confirming our guidance of $215 million or better for segment adjusted EBITDA. In providing this guidance, we are mindful of the risks and impacts of weather to AMES, the health of the housing market on Home & Building Products, U.S. Department of Defense budgets on Telephonics, resin pricing on Plastics and foreign currency and macro conditions on Plastics and Home & Building Products.

In addition, we are giving considerations to continuation of certain long-term R&D initiatives that we have underway. Most notably in Telephonics and Plastics, that would impact operating results for the next few years, but we will - of which we expect we will have significant benefits in the years to come.

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

Ron Kramer

We’re very pleased with our performance and it indicates that our strategy is delivering results. Looking forward, we have ample resources to invest in each of our businesses to support their growth while maintaining balance sheet strength for future acquisitions. We expect the additional CapEx we’re spending this year incrementally contribute to future sales and earnings growth.

I’d like to take a minute and thank our 6,000 employees in North America and around the world for their extraordinary efforts and we’re all going to be working very hard to continue to build shareholder value for the balance of this year and the years ahead.

So with that, operator, we will open it up to questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] And we’ll pause for just a moment to assemble the queue. And we’ll take our first question from Bob Labick of CJS Securities.

Bob Labick

Good afternoon. Congratulations on a nice start to the year.

Ron Kramer

Thank you.

Brian Harris

Thank you, Bob.

Bob Labick

Yes, sure. I’d love to start with the obvious one. In the quarter you were impacted by the lack of snow through December. We had a nice big storm in January. Can you just remind us the cycle for sales, given that you’re the North American leader in snow shovel sales, and will this benefit you, is it too late? How should this play out?

Ron Kramer

No, we’re in our season. The snowfall is measured both over the first and second quarter. And in this quarter, we just started to load in for the spring sale season, and so every time it snows, we work through both inventory and reorders, which has an impact on our manufacturing efficiencies for 2017. So we’ll always have some level of variability in this business, but what I think our first quarter really speaks to is how well we have planned the manufacturing and the sales footprint of the business over the last several years. And while there is always going to be a weather variable in the AMES business, our ability to be able to deliver operating results and to be able to maintain margins regardless of where we are on top line variability, I think we’ve gotten a lot smarter and our management team has done just a fabulous job of positioning this company.

Bob Labick

Okay, great. And then just looking at raw materials, obviously there has been a lot of movement in commodities, both on the, I guess, oil and gas, resin side and also on the steel side. Could you just talk a little bit about the impact you may have seen other in building products or films or any benefits or potential headwinds you might expect going forward?

Ron Kramer

We continue to have sort of watch steel prices with a cautious eye. The resin prices, as you know in the plastics business is on a pass through to our customers on a three to four month lag. So whether they go up or go down, we are able to maintain our operating efficiency. And the real story for us is about margin improvement regardless of where we are. Our purchasing clearly has been trying to take costs out of our businesses. Our manufacturing is trying to be increasingly more efficient with those raw materials but there is no big benefit to us from either one of those components. So this story for us has been and continues to be about operational excellence with the levels of revenue, and we’re going to continue to work on making that even more efficient in the years ahead.

Brian Harris

Yes, Bob, to that, I would just add that, though steel prices have fallen, other costs, labor as one of them has gone up and just overall our costs are net zero.

Bob Labick

Okay, great. And then you mentioned towards the end of the prepared remarks, the R&D you’ve talked about for the last several quarters, both in films and Telephonics. And I know there is some sensitive information in there as well, but can you just give us a sense of when industry should expect to learn more about the products that should come out from the increased spendings and what kind of returns you’re targeting?

Ron Kramer

Sure. For the Plastics business, we’ll be looking at ‘17 and to ‘18, and for Telephonics, that’s a little further out. For the next generation of radar, we’re talking more of a three year to four or five year cycle.

Bob Labick

Got it. Okay, great. And then just have a broader question. With the market correction or pullback certainly in the public equity markets, has there been any impacts on your ability to find tuck-in acquisitions or have private market values come down as well or how do you view the opportunity pull out there for potential acquisitions given the...

Ron Kramer

I’d answer as following. Our story for the last several years has really been about getting our businesses in as good as shaped as they could be and I think our quarter-over-quarter progression, year-over-year growth in earnings speaks to what we’ve been able to accomplish building our management teams and being able to continue to deliver results in good markets and in bad.

The M&A component becomes much more actionable for us as the markets are going through this latest round of uncertainty, and for us, we’re an opportunistic buyer. We certainly are looking for tuck-in acquisitions, particularly around our Home & Building Products segment, where we see both product expansion and geographic expansion as things that are very much on the top of our mind.

And beyond that, we are try to be a disciplined value buyer, and as financing becomes more complicated and more expensive and frankly more difficult for a lot of financial buyers, we buy businesses to own them with a forever horizon and we’re going to continue to look at the pipeline of both carve-outs from larger companies, private equity sales and potentially things that are in the IPO pipeline that don’t quite make it out.

So this is a good time for us. We’re very busy and our businesses are all doing things that we expected. We have succession planning issues that we worked through with each of our companies. We’ve built up our corporate office significantly over the last several years with a focus on making it much more involved in the operating directions of each of those businesses and the reality is the results speak to a strategy that’s working, and then A [ph] becomes into next part of the growth cycle for us. So when markets are findings problems, it may lead to us finding opportunities.

Bob Labick

Great. Thanks very much.

Operator

[Operator Instructions] And we’ll go next to Justin Bergner of Gabelli & Company.

Justin Bergner

Good afternoon, Ron. Good afternoon, Brian.

Ron Kramer

Hi Justin.

Brian Harris

Hi Justin.

Justin Bergner

I apologize if I may ask some questions that are similar to the prior questions, perhaps a different construct. But to start, could you maybe talk about the level of inventories at the customer level and sort of in your business as it relates to the AMES True Temper business and what that might mean for margins over the coming quarters?

Brian Harris

Sure. So first off, we start by saying the storm certainly helped our snow tools sales obviously, but before that storm and since that storm we continue with unseasonably warm winter. Comparing to 2015, 2016 is likely to be down in total snow tool sales.

As far as your question, so we know we still have a lot. We know a lot of inventory went out of our customers. We don’t know the amount yet. Those reports take time and that storm is just fresh four or five days ago. So we only can speculate that it cleared quite a bit, but it probably has not cleared all of theirs and has not cleared all of ours as of yet but the season has some time left in it.

Justin Bergner

Are you helped by last year’s strong winter in terms of entering this winter with lower than normal inventories at both the customer and in your own business?

Brian Harris

Our initial loading was good back in Q1 but because of the unseasonably warm winter, there was no reload related in Q1.

Justin Bergner

Got it. Okay. Switching gears to cash flow and repurchases, should I read anything into the fact that the magnitude of share repurchases slowed a bit in the December quarter year-on-year versus sort of the last fiscal year?

Ron Kramer

We’re an opportunistic buyer.

Justin Bergner

Okay, that’s fair. And then do you have in front of you what your share count is or was at the end of the quarter?

Brian Harris

48 million shares give or take a few.

Justin Bergner

Okay, got it. And that’s on the basic share count?

Brian Harris

That’s the outstanding shares, the 48 million.

Justin Bergner

Okay, got it. All right, and then on the subject of Home & Building Products margins, the margin you put up this quarter is among the best quarterly margins over the last couple of years. How should I think about the sustainability of that into the rest of the fiscal year in terms of potential raw material tailwinds that may taper as the year goes along? Is that a margin run rate that is sustainable?

Ron Kramer

We’ve been consistent in talking about margins in our Home & Building Products segment at being sustainable at 10% or better, and we’ve said that for some time. And this quarter should give you some level of confidence of the operating efficiencies in our business, particularly given our comments related to the lack of snow sales and the revenue decrease and the margins that we’ve been able to achieve. So we believe we have a sustainable plus-10% EBITDA margin business over a sustained period of time.

We are in the process of investing in our garage door business, which is a sign of what we believe the future growth top line in that business is going to look like over the next several years, and regardless of the variability of weather in the AMES business, we like the way we’re positioned in terms of both product and our ability to execute on whatever levels of revenue is driven by the point of sales from big-box retailers who are our channels of distribution for that business.

So this is a confirmation quarter for us of what we’ve been doing over the last several years and how we view the growth. So the more we get on the top line, you should start to look at seeing that flow through at both the EBITDA line and obviously our goal to bring it down to the bottom line.

Justin Bergner

Okay. Thank you. One more, if I may. On the increased R&D that reflects sort of multiyear investments in Plastics and Telephonics. Is that a comment that’s meant to sort of provide a perspective on spending levels in fiscal year ‘17 and ‘18, or is that meant to be a qualitative comment in regards to spending levels this year?

Brian Harris

Those spending will be in this year as well as next year, particularly for Plastics and to the next several years in relationship to Telephonics - in relation to Telephonics.

Justin Bergner

Okay. Would it be fair to expect the R&D levels to increase as we move forward out of this fiscal year into next fiscal year given your comments?

Brian Harris

This year and next year should be relatively the same R&D-wise.

Justin Bergner

Okay. Thank you and best of luck for the rest of fiscal year.

Ron Kramer

Thank you.

Brian Harris

Thank you.

Operator

It appears there are no further questions from the phone lines. At this time, I will turn the conference back to management for any additional or closing remarks.

Ron Kramer

Thank you. Good quarter, good start to the year. We’re going to do everything we can to continue to deliver great results.

Operator

And this does conclude today’s conference. We thank you for your participation. You may now disconnect.

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