Griffon Corporation (NYSE:GFF)
Q4 2016 Earnings Conference Call
November 16, 2016, 04:30 PM ET
Ron Kramer - CEO
Brian Harris - CFO
Bob Labick - CJS Securities
Michael Conti - Sidoti
Justin Bergner - Gabelli & Company
Good day, and welcome to the Griffon Corporation Fourth 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.
Thank you, Kevin. 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 view of Griffon's businesses and 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 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.
Good afternoon. We're pleased with our performance in the fourth quarter and full year 2016 as we delivered solid results and consistent performance throughout the year.
Our fourth quarter and full-year 2016 adjusted earnings per share was $0.27 and $0.84 respectively, an increase of 17% and 15% compared to the prior year period. This performance was the result of strong operational execution in a difficult macro environment, which resulted in Q4 revenue of $501 million, which was consistent with the prior year quarter and full-year revenue of $1.96 billion, which decreased 3% from the prior year, excluding the negative impact of foreign exchange full-year revenue decreased 1%.
Despite sluggish revenues, our fourth quarter and full-year segment adjusted EBITDA was $60 million and $218 million, an increase of 8% and 7% respectively from the prior year periods. Excluding the negative impact of foreign exchange, full-year segment adjusted EBITDA increased 8%.
Before discussing the segment, I would like to provide an update on our capital performance activities and return of cash to shareholders. In fiscal 2016, we continue to execute on our Board-authorized share repurchase program and bought over 3.5 million shares for a total of $56.3 million or $15.86 per share.
As of September 30, 2016, 51.6 million remains of our repurchase authorization. In addition earlier today, I am pleased to say that we announced a 20% increase to $0.06 in our quarterly dividend. In the last five years, we've repurchased 20.3 million shares, which is nearly a third of our outstanding common stock for a total $259 million or $12.78 per share.
Our buybacks and dividends have been accomplished while maintaining balance sheet liquidity and strength. Looking forward over the next few years, we expect increasing free cash flow generation as our businesses continue to improve margin performance and capital expenditures return to normalized levels.
Also as previously announced, Griffon will settle in cash upon conversion up to $125 million of the conversion value of its $100 million principle amount 4% convertible notes due January 2017, with the incremental amount that needs to be settled in shares of Griffon common stock.
Griffon expects to use the revolver to finance the settlement of these notes at November 14, 2016, the conversion rate was 70.6000 of principle amount or $14.17 per share. I'll now turn to the business and then we'll provide more detail by giving it to Brian. So let's start with home and building products.
Beginning with home and building products, our full-year segment revenue over $1 billion was consistent with the prior year, while excluding a 1% foreign exchange impact. Our doors business grew 2% in 2016 supported by our superior product offerings and improving housing market.
AMES revenue declined 4%, primarily driven by a combination of a arm winter and a cold and wet spring in both the U.S. and Canada resulting in reduced snow and spring tool sales. However AMES had improved North American pot and planter and Australian sales.
For the full year, home and building products generated segment adjusted EBITDA of $115 million a 22% improvement compared to the prior year. Segment EBITDA benefited from AMES operational efficiency improvements, favorable door mix, improved volume and decreased material costs.
We believe the underlying trends for home and building products remains positive and we are pleased to see the continuation of the slow but steady multiyear housing recovery. U.S. Census Bureau data indicated year-to-date new single-family construction spending increase 6% over the prior year nine months and the October 2016 Dodge & Cox single-family construction outlook forecast 9% calendar 2017 unit growth. We believe our home and building products segment continues to have significant earnings growth potential.
Telephonics full-year revenues increased 1% to $436 million primarily due to mobile ground surveillance systems and dismounted electronic countermeasure systems. During 2016, Telephonics was awarded several new contracts and incremental funding on existing contracts approximating $413 million.
Contract backlog was $420 million at September 30, 2016 with 71% expected to be filled in the next 12 months. In October, Telephonics all mode identification friend or foe, IFF interrogator, obtained certification on the Japan Air Defense Ground Environment Program. This is the first IFF interrogator to achieve the more stringent test requirement for the AIM's DoD Certification.
We're pleased with this certification and it speaks to our technology and research and development teams creating world-class products to serve both our international and domestic customers. We continue to expect growth from both international and domestic opportunities including those related to foreign policy in the South China Sea and Middle East and leveraging commercial opportunities like our communication systems contract with the Long Island Railroad and our position on the FAA's common terminal digitizer program, very well positioned for growth in Telephonics.
Plastics revenues 2016 decreased 10% to $480 million in comparison to 2015. The decrease was primarily due to decreased volume driven by reduced North America and Europe baby care orders, unfavorable mix and a 3% unfavorable foreign currency impact.
Trends in the fourth quarter begin to show some improvement with increased volume and improved operational performance. We're continuing with the previously announced investments in Sof-flex Breathable Film, our lighter weight back sheet and expect this initiative to drive long-term growth and solidify our leadership position.
I'll turn it over to Brian and he will take us through a closer look at the numbers, Brian?
Thank you, Ron. Consolidated fourth quarter revenue was $501 million which is essentially flat compared to 2015. Current quarter segment adjusted EBITDA of $60 million increased 8% over the prior year.
Full year revenue of $1.96 billion decreased 3% from the prior year.
Excluding a $32 million unfavorable foreign currency impact revenue decreased 1%. Full year segment adjusted EBITDA was $218 million, an increase of 7% over the prior year or 8% excluding a $3 million unfavorable foreign exchange impact.
By segment, home building product's fourth quarter revenue of $245 million was consistent with the prior year. Full year revenue of $1 billion decreased 1% from the prior year but was consistent with prior year when excluding a $15 million unfavorable foreign currency impact.
AMES' fourth quarter revenue increased 4% to $208 million but decreased 4% for the full year. The quarter increase was due to improved U.S. lawn tool and pot and planter sales and increased product offerings in Australia, partially offset by the impact of unfavorable weather on Canadian sales.
For the full-year the decrease was mainly driven by a combination of a warm winter and a cold wet spring, both in the U.S. and Canada resulting in reduced snow tool and spring tool category sales, partially offset by improved sales of North American pots and planters and increased product offerings in Australia. The full year included a 2% unfavorable currency impact.
In our doors business, fourth quarter revenue decreased 3% to $138 million, but increased 2% to $527 million for the full year both compared to prior year periods. The quarter decrease was due to reduced volume, partially offset by favorable product mix and the full increases due to both improved volume and favorable product mix.
Home building products fourth quarter segment EBITDA -- adjusted EBITDA of $27 million decreased 1% from the prior period due to reduced volume in doors partially offset by favorable door product mix and continued operational efficiency improvements and cost control measures at AMES.
For the full year segment adjusted EBITDA increased 22% to $115 million primarily due to operational improvements and cost control measures at AMES, increased volume and favorable mix of doors and decreased material cost. The full year included a 3% unfavorable foreign currency impact.
Turning to Telephonics, fourth quarter 2016 revenue increased 2% to $129 million and 1% to $436 million respectively. Q4 and full-year revenue increased due to dismounted electronic countermeasure systems with the full-year also benefited from increased ground surveillance systems, partially offset by decreased airborne maritime and identification friend or foe system sales.
Q4 segment adjusted EBITDA increased 31% to $20.5 million over the prior year quarter, driven by favorable product mix and margin improvement. 2016 full-year segment adjusted EBITDA of $53 million was consistent with the prior-year.
At September 30, 2016 Telephonics backlog was $420 million, 71% of which is expected to be realized in the next 12 months, giving us good visibility into fiscal 2017. Bookings for the quarter were $134 million resulting in a positive book-to-bill ratio.
In our Plastics segment, fourth quarter revenue decreased 4% to $126 million from the prior year quarter, primarily due to unfavorable mix. 2016 revenue decreased 10% to $480 million due to decreased volume driven by North America and Europe baby care orders unfavorable mix and a 3% or $17 million unfavorable foreign currency impact. Resin pricing did not have a material impact on either the quarter of the year.
Segment adjusted EBITDA increased 2% to $13 million from the prior year quarter, reflecting improved operational efficiencies in both North America and Europe, which more than offset the sales decline. Full your segment adjusted EBITDA decreased 12% to $50 million from the prior year, primarily due to reduced volume and unfavorable mix, partially offset by decreased SG&A spending. Resin and foreign exchange did not materially impact segment adjusted EBITDA.
Moving back to our consolidated results, gross profit for the quarter increased 3% to $124 million compared to the prior year period. Gross margin for the fourth quarter increased 80 basis points to 24.7% compared to 23.9% in 2015. Full your gross profit was $473 million or a margin of 24.2% compared to 2015 gross profit of $476 million or margin of 23.6% resulting in 60 basis point improvement.
Fourth quarter SG&A expenses were $92 million or 18.4% of revenue compared to $92 million or 18.3% of revenue in the prior-year. Full year 2016 SG&A expenses were $364 million compared to $375 million in the prior-year. Both were 18.6% of revenue.
Our 2016 effective tax rate was 43.6% compared to 36.1% last year. The 2016 tax rate included $2.7 million provision consisting of a valuation allowance on current year Germany net operating loss carry-forwards that did not expire, partially offset by discrete tax benefits. The 2015 tax rate included $100,000 discrete tax benefit.
Excluding these tax items and the impact of the restructuring, our 2016 tax rate was 37.5% compared to 36.2% in the prior-year, primarily reflecting a change in geographic mix -- earnings mix. For the full year of fiscal 2017, we expect the tax rate excluding discrete period and certain other tax items to be approximately 38%. As is always the case, geographic earnings mix and legislative action may impact rates.
GAAP net income in the fourth quarter was $7.7 million or $0.18 per share compared to $10.8 million or 24% in the prior-year. Excluding the tax items mentioned earlier in both periods, adjusted net income was $1.5 million of $0.27 per share compared to $10.5 million or $0.23 per share in the prior year period.
For the full year, GAAP net income was $30 million or $0.68 per share compared to $34.3 million or $0.73 in the prior year. Excluding the earlier mentioned tax items in both periods -- from both periods and the impacts from 2016 restructuring charge, adjusted net income was $36.9 million or $0.84 per share, compared to $34.2 million or $0.73 in the prior year period.
Net income included approximately $1.6 million of unfavorable foreign currency impact.
Capital spending net of equipment sales in 2016 was $90 million. For full year 2017, we expect capital expenditures to be in the range of $80 million to $85 million, which includes the previous announced investments in Plastics capacity and equipment upgrades for new technology.
Depreciation and amortization for the full year 2016 was $70 million. For fiscal 2017, we expect depreciation to be approximately $65 million and amortization to be approximately $8 million. As of September 30, 2016, we had $72.6 million in cash and total debt outstanding of $936.5 million resulting in a net debt addition of $864 million.
We have $334 million available for borrowing under our revolving credit facility, subject to certain loan covenants. Corporate and unallocated expenses for the full year of 2016 were $39 million, including all equity compensation for the company and we expect approximately $40 million of expenses in 2017.
Turning to our guidance for 2017, we expect 2% to 3% revenue growth for the entire company -- for the total company. Home and building products revenue growth of 2% to 4% is expected to remain consistent with 2016 and we expect Telephonics revenue growth of 2% to 4%.
In providing this guidance we're mindful of the risks and impacts of weather to AMES. The health of the housing market on home and building products, the U.S. Department of Defense Budgets on Telephonics, resin pricing on plastics and foreign exchange and macro conditions on plastics and home and building products.
Based on revenue guidance and with consideration to continued improvement in operations and rising material costs, we expect segment adjusted EBITDA of $225 million or better in 2017. I'll now turn the call back over to Ron for his closing comments.
Thanks. I am very pleased with our performance for 2016. 2017 is off to a good start and we remain committed to shareholder value creation. Looking to the future we're excited about the progress we've made in improving our margins and we look to build on that momentum.
We're hopeful that increased spending on infrastructure and defense will benefit our business. We've positioned Griffon very well over the past eight years that I've been CEO but we're nowhere near the peak performance for our companies. I am very optimistic about our future.
Finally I want to thank our 6000 employees in North America and around the world for their extraordinary efforts as we close out another successful year.
Thank you and with that operator we'll open it up for questions.
Thank you. [Operator Instructions] We'll take our first question from Bob Labick with CJS securities. Go ahead please.
Thank you. Good afternoon and congratulations on a nice quarter and year.
Just wanted to start off I think as it's a good quarter very straightforward, why don’t you start like thinking about some of the growth opportunities going ahead and start with doors, could you talk about the opportunity, I know it's small for you right now in terms of commercial doors, but the opportunity to grow that organically or potentially through M&A and why that market maybe attractive over the next five to 10 years?
Look, we have always focused on being a dominant high-end residential garage door manufacturer and we have a very nice commercial and industrial door piece to that. We think there is significant growth in all of our categories with the main driver being continued residential housing recovery and while the housing markets have come significantly off where they were off the bottom from 2008, homeownership in the United States is at a 50-year low.
So we've got plenty of room to go and we see volume increases in the residential business, but we see a continued growth in the commercial door business. Retailing is clearly going through a transformation. Commercial warehouses are going to continue to grow as the Internet continues to be a way that consumers purchase goods.
The storing of those goods requires commercial doors. We believe that both organically we're going to address the commercial door market and we're very opportunistic and very active in looking for ways to grow through acquisition our commercial door business.
Great. Thank you. And then on the AMES side, you talked about for some time the potential opportunity out there for the U.K. lawn and garden market. Can you talk about where you stand positioned relative to that market now and what are opportunities again over the next three to five years there?
We've enjoyed a very good relationship with Bunnings in Australia and they purchased Homebase in the U.K., which they will be converting into Bunnings stores and we're very much following our customer into the U.K. market and we're hopeful that we're going to be able to supply them successfully in their efforts there as we have been in Australia.
So it's an organic growth story for us and then from an acquisition standpoint, we continue to believe the U.K. market is opportunistic and we're actively looking at some targets.
Okay. Super. Switching over to the film side, can you just give us an update on Sof-Flex? Is it out yet or when does that start hit the market and if it has hit the market, what's been the reception so far?
Sof-Flex has not been rolled out to the market yet. We continue to work with our first customer on that product and expect rollout sometime during '17 and we continue to see interest from other customers as well.
Okay. Great. And then just lastly over on the Telephonics side, can you give us a sense of some of the drivers there? You obviously, you're looking for 2% to 4% growth. You have some products that they have certainly used or having used in border patrol already.
Is there an increasing interest in that or what are some of the growth drivers that you're looking for on the Telephonics side?
We continue to believe that we are a irrelevant solution for custom and border patrol and our ability to adapt our maritime radar systems or use on border patrol is something that we think with increased defense spending, with an increased focus on seeing that happen, that Telephonics should be a beneficiary of it/
If there is obviously a lot of flux going on politically and the one thing that I'll comment is the worst thing that’s happened in the defense industry was sequestration and getting a government that's going to provide funds for continued expansion of the defense industry and particularly the custom and border patrol, homeland security initiative is something that we think will be very beneficial to Telephonics.
I'll just add to that. We continue to see international opportunities for our products as well in Telephonics and extensions from our base products into other markets.
Great. All right. Thank you very much.
We'll go next to Michael Conti with Sidoti. Go ahead please.
Hey, good afternoon.
Mike, how are you doing?
Good, good. Yes, so can you just talk a bit about your unit volume within doors, I am surprised to see that decline year-over-year that’s more of a timing issue or a end customer string issue there.
I don't see any particular issue with any end customer. We’ve seen fluctuations in the past quarter-to-quarters. So, if you look back last year, fourth quarter was pretty much flat with the year before that and then going into '16 we saw Q1 with a 3% increase over that prior year quarter and then an 8% increase in Q2. So we see these fluctuations. There is nothing particular that we're seeing out there.
Got it. Okay. And then you talk about the opportunity within the commercial doors, but can you just give us an idea on the margin profile on commercial doors first, the residential side.
Sure. Commercial doors have a slightly lower margin, but they're higher dollar products generally. Their industrial people are willing to pay more for that type of stronger product and that’s a profile that’s what we generally see, but not significantly lower.
Got it. Okay. And then just on the EBITDA guidance for next year looking around the $7 million increase, I guess which segment will be the highest contributor there.
Well we see contributions really from all our segments, of course our home and building products space has been a large contributor to us. We continue to expect that and additionally we expect better results out of plastics now that volumes from our major customers have normalized.
Got it. Okay. And then just switching over to Telephonics, just looking at the EBITDA margin there, the highest it's been in couple of quarters, how we should think about the margins there over the next several quarters just given the backlog should stay elevated at these levels in the near term before leveling down to more normalized levels?
I think we will tract more in the 12% range where we tracted historically. We have movements up and down quarter to quarter, but 12% is where we generally land over time.
Got it. Okay. Then just last one for me with the swings in steel pricing over the last couple of months, can you just remind us if any lag time between passing any price increases in raw material cost to customers in the form of higher selling prices.
For resin you said or steel. We don’t necessarily pass steel through to our customers by contract. Of course if our cost go up we will go to our customers if the market can take a price increase and implement a price increase. But there is -- it's not a set timeline that would occur unlike resin where we do pass it through on a regular lag.
Got it. Thank you.
Sure, thanks Mike.
[Operator Instructions] We'll go next to Justin Bergner with Gabelli & Company. Go ahead please.
Good afternoon, Ron. Good afternoon, Brain.
Thanks for taking my questions. I guess to start, given that you had stronger than 5% EBITDA growth in the fiscal year just ended and you’re guiding a little bit less than that, should we think that there was a few million of raw material tailwind in '16 that’s going to reverse in '17 any ability to frame those numbers for us?
Justin, we’ve always tried to be conservative and balance a lot of the things that are going to happen and giving guidance by definition is, we look into the future. We have consistently tried to set expectations at levels that take all the rest of all the things that we have to worry about across geographies, across weather patterns, across raw materials and the bottom line to it is that we see that this as an improving environment.
We think that the political environment may turn into something substantially more robust going into next year. But based on everything that we look at, when we start a fiscal year on October 1, we saw that this is an improved year from 2016 and I would rather under promise and over deliver.
Okay. But it's safe to assume that there was some raw material tailwind in '16 that’s becoming some raw material headwind in '17, is that fair calculation?
We assume that’s already baked into our expectations.
Okay. Great and then on the guidance for '17, within home and building products, that 2% to 4%, could you maybe frame where AMES and Clopay Doors are going to fall out relative to that 2% to 4%?
We see similar growth for both. It's really -- we don't expect much variation between the two.
Okay. And then I guess my final question would be given the move up in your stock along with other stocks that have followed the election, does that change how you think about capital deployment with your stock at $20 when clearly you're repurchasing shares at a much lower price in both the fiscal year and the fourth quarter?
Look we continue to believe that our stock is a compelling opportunity and we have a buyback plan in place that we will look at as the day-to-day market presents opportunities to us. Our goal has been to grow the company, position it, improve its operations. I think we've done that effectively. There are moments where the market recognizes that and there are moments where it doesn’t.
I think you should look at the pattern that we've established over a period of years, look at the fact that we've been in a difficult macroeconomic environment and in spite of sluggish revenues, we've dramatically increased both our EBITDA and our EPS not this year, but over a period of years.
In a better economy, you should expect higher revenues, higher EBITDA and higher EPS and what the stock market does, I can't begin to tell you, but I believe that our stock is still very, very much a compelling value.
Okay. And then just one other question, on a related front which is you talked about the potential defense and border tailwind post-election. Are there other election effects on your business may be second order that you've talked about and that we should think about here and is there anything that changes your view towards M&A today versus a week ago as use of capital?
There is still a robust M&A environment that we're a participant in. It is very difficult to find things that are value enhancing that we see the continued pattern for us of looking at tuck-in acquisitions around the businesses, particularly home and building products that we'll be able to accelerate our growth, but our organic growth story is what you should be focused on.
We don’t need M&A, it's opportunistic and we can do something. We clearly have a desire and capacity to do things and the political environment, a lot is going to happen come January 20 and afterwards, but you've got to let the clock burn-off. You have to see what's going to actually go from being conversation to reality.
But big picture we believe that increased defense spending, we think that more infrastructure spending, remember the gray shovel ready, we've got the shovels when they finally start to open America. We've been doing it for a long time and we think that that's very beneficial to our company.
In addition, a stronger U.S. economy which we haven't been in for many, many years is going to create higher consumer spending that spills over into our housing market related businesses. So look there is a lot to be hopeful and optimistic about, about the macro environment here. Corporate tax reform, our tax rate as a reflection has got a lot of leverage to the bottom line.
So we're very encouraged about what we see going on and we're hopeful that the government is going to do a lot of things that we thought might have happened over the last eight years.
Okay. Thanks for that description and for taking my questions.
And at this time, I would like to turn the conference back over to you presenters for any additional or closing comments.
Thanks very much. We'll be working very hard on making 2017 a success. Bye-bye.
Ladies and gentlemen, this does conclude today's conference. We thank you for your participation.
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