Earnings Call Transcript - GFF Q3 2021

Operator, Operator

Thank you for standing by. This is the conference operator. Welcome to the Griffon Corporation Third Quarter Fiscal 2021 Earnings Conference Call. As a reminder, all participants are in a listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. I would now like to turn the conference over to Brian Harris, CFO. Please go ahead.

Brian Harris, CFO

Thank you. Good afternoon, 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 or in our investor presentation, which will be available on our website. Now I’ll turn the call over to Ron.

Ron Kramer, CEO

Thanks. Good afternoon, everyone. We're pleased with our third quarter performance, which was slightly above our expectations. Revenue increased 2% over the prior year quarter or 4% excluding the impact of the SEG disposition. Adjusted EBITDA was $76 million excluding unallocated costs and adjusted EPS was $0.43. We're executing well in a very complex operating environment. I want to spend a minute discussing it before moving to the segments. Demand remained very healthy across our product categories supported by a strong housing market, repair and remodel activity, and consumer spending. We're currently carrying record levels of backlog in both the CPP and HBP segments due to transportation disruptions and tight labor availability, which limited our ability to catch up with demand. We implemented price adjustments and continue to work through efficiency programs to mitigate rapidly rising input costs and we'll continue to work with our suppliers and customers to implement further price adjustments. Our businesses have proven to be resilient and we're reiterating our full-year guidance. Our AMES strategic initiative that will consolidate operations, increase automation, support e-commerce growth and create a new global data and analytics platform for AMES by the end of 2023 is on track. We expect this to further improve margins in the years ahead. We reiterate our expectation to realize annual cash savings of $30 million to $35 million and inventory reductions of the same magnitude when the benefits of the initiative are fully realized. As we navigate through the second year of managing our businesses during the global pandemic, we continue to prioritize protecting our employees even as restrictions in the United States, Canada, the United Kingdom, and Australia are evolving. We are closely monitoring the situation due to the spread of the COVID-19 Delta variant and we'll make adjustments as needed to be responsive to government guidelines and to ensure the safety of our employees and customers. Turning to the segments. In Consumer Professional Products, we saw robust demand across all geographies and product lines. Shipping delays related to availability of transportation impacted US revenue and EBITDA was impacted by the implementation of price adjustments, which as expected lagged input cost increases. In the Home and Building Products segment, we continue to see strong demand for both residential and commercial door products. Sales increased from the prior year quarter driven by increased volume and favorable pricing and mix. EBITDA also increased benefiting from the increased sales partially offset by the timing of price adjustments versus increasing input costs. In Defense Electronics, Telephonics revenue decreased from the prior year primarily driven by reduced volume resulting from timing of deliveries on communications and radar systems as well as the divestiture of SEG, partially offset by volume increases in Naval and Cyber systems. EBITDA increased over the prior year as actions taken to reduce operating expenses took effect and performance on Naval and Cyber system programs improved. Backlog in the quarter was $375 million compared to $341 million at June 30, 2020 excluding SEG with trailing 12-month book-to-bill of 1.1 times. We continue to see a bright future for the Telephonics intelligence, surveillance and reconnaissance products in the years ahead. Turning to the balance sheet. We continue to have a solid capital structure with excellent flexibility. We have $221 million in cash and $362 million available on our revolving credit facility, putting us in an excellent position to execute on our organic growth initiatives and to capitalize on an active pipeline of acquisition opportunities while returning cash to shareholders through our quarterly dividends. We've de-levered to 2.9 times, marking 1.5 turns of improvement over the prior year period. Earlier today our Board authorized an $0.08 per share dividend payable on September 16, 2021 to shareholders of record on August 19. This marks the 40th consecutive quarterly dividend to shareholders which has grown at an annualized compound rate of 17% since we initiated it in 2012.

Brian Harris, CFO

Thank you, Ron. I'll start by highlighting our third quarter consolidated performance. Revenue increased 2% to $647 million or increased 4% when excluding the SEG divestiture. Adjusted EBITDA decreased 7% to $65 million and adjusted EBITDA margins increased 100 basis points to 10%. Gross profit on a GAAP basis for the quarter was $170 million increasing 3% compared to the prior year quarter. Excluding restructuring-related charges gross profit was $171 million, increasing 3.5% compared to the prior year quarter with gross margin increasing 30 basis points to 26.4%. Third quarter GAAP selling, general, and administrative expenses were $126 million compared to $114 million in the prior year quarter. Excluding restructuring-related charges selling, general and administrative expenses were $122 million or 18.9% of revenue compared to $112 million or 17.7% in the prior year quarter primarily driven by restoration of selling and marketing expenditures, and increased distribution and transportation costs. Third quarter GAAP net income was $17 million or $0.31 per share compared to the prior year period of $22 million or $0.50 per share. Excluding items that affect comparability from both periods current quarter adjusted net income was $23 million or $0.43 per share compared to the prior year of $26 million or $0.59 per share. Keep in mind the equity offering in August 2020 impacted current quarter adjusted EBITDA by approximately $0.08. Corporate and unallocated expenses excluding depreciation were $11 million in the quarter in line with prior year third quarter. Our effective tax rate excluding items that affect comparability for the quarter was 31.2% and for the year-to-date period was 31.1%. Capital spending was $10 million in the third quarter compared to $12 million in the prior year quarter. Depreciation and amortization totaled $15.8 million, compared to $15.5 million in the prior year quarter. Regarding our balance sheet and liquidity. As of June 30, 2021, we had net debt of $835 million and leverage of 2.9 times calculated based on our debt covenants. This is a 1.5 turn reduction from our prior year third quarter and is a 0.5 turn reduction from our 2020 fiscal year-end. As a reminder, Griffon uses cash in the first six months of its fiscal year, which will be more than offset by the generation of significant cash flow in the second half. Our cash and equivalents were $221 million and debt outstanding was $1.06 billion. Borrowing availability under the revolving credit facility was $362 million subject to certain loan covenants. Regarding our 2021 guidance with our third quarter behind us, we are continuing to see strong demand for products across our portfolio, recovering consumer activity, and a strong housing market are contributing to a constructive macro environment, and homeowners continue to focus on outdoor living and repair and remodeling projects. While we are seeing the expected headwinds from cost inflation, supply chain disruptions, and a tight labor market, we are managing through those effects and we expect in excess of $2.5 billion of revenue and continue to expect $320 million of adjusted EBITDA excluding unallocated and one-time charges.

Ron Kramer, CEO

Thanks Brian. As we enter the final quarter of our fiscal year, we are seeing strong demand trends across all of our segments. We continue to successfully manage through this dynamic environment driven by the exceptional dedication, perseverance and performance of our 7,500 employees. Over the last three years since the sale of our Plastics business and the purchase of ClosetMaid and CornellCookson, we have fundamentally strengthened Griffon. During this period, our revenue and adjusted EBITDA have increased at a compound annual growth rate of 11% and 20% respectively. Adjusted earnings per share have grown from $0.67 to $1.91 on a trailing 12-month basis, which is a 42% compound annual growth rate. Most importantly, over this period, we've generated $212 million in free cash flow and reduced our leverage by almost three full turns to 2.9 times. We are very pleased with our progress creating long-term shareholder value. We expect significant additional benefits to come as we execute on our strategic initiatives to improve margins and take advantage of our balance sheet firepower to invest in our businesses and capitalize on acquisition opportunities. Our best is yet to come. Operator, we'll take any questions.

Operator, Operator

Thank you. We will now begin the question-and-answer session. The first question comes from Bob Labick with CJS Securities. Please go ahead.

Bob Labick, Analyst

Good afternoon, and congratulations on another strong quarter.

Ron Kramer, CEO

Thanks Bob.

Bob Labick, Analyst

I wanted to begin by addressing this topic and perhaps explore it in more detail. Raw material and transportation costs have clearly been a challenge recently. Your results indicate that you possess some strong pricing power, although we understand that this may take time to fully manifest. Could you share your perspective on how you expect to navigate this over the next six to twelve months in relation to your margins, your capacity for price increases, and the overall margin progression? When do you anticipate aligning with the current cost inflation that many are experiencing?

Ron Kramer, CEO

Well, as we discussed at the end of the second quarter, the pace of increases in raw material costs, freight, and labor were going up and our ability to pass along those increases was going to happen with a lag. We are continuing to pass along price increases and we're continuing to try to mitigate the inflationary trends that are going on for us and across all the economy, and our view is the consumer is strong. The housing market remains strong. The demand in our business has never been stronger. We're going to continue to try to deal with the things that are in our control, trying to be more efficient. Our AMES initiative in particular was always meant to be about a 300 basis point margin improvement story over a multi-year journey that still is in front of us. So we see this as evolutionary for our business and we're going to continue to find ways to pass along price increases and take costs out of our business in order to improve our margins. Most importantly, we see the demand trends as being strong and in our favor.

Brian Harris, CFO

I would like to add that costs have continued to rise quickly since our last call. As a result, we will need to implement price increases and will experience some cost pressure going into the fourth quarter. We anticipate that if costs stabilize, we will address this by early in our next fiscal year.

Bob Labick, Analyst

Got it. Okay. Great. And then in terms of my follow-up for lack of a better word. In the past you've obviously had some very nice success with small international tuck-in type acquisitions and medium-sized ones in that regard. You highlighted obviously below three turns of leverage now. Can you talk about the M&A environment? Because obviously, a lot of asset prices have risen. So are those things out there? Are you still looking in the international market, or how are you thinking about the M&A environment? And what's the environment like for you?

Ron Kramer, CEO

Well, the first part is that capital is unlimited and therefore competition is leading to increasingly higher prices, and that's something that's been happening and we expect will continue to happen. Our strategy has always been to buy things that we can run better. And we are improving our own businesses and allocating capital and looking at ways to make what we already have incrementally better, and that's the best acquisition that we can make. The pipeline of acquisitions has never been better and yet I'm disappointed this quarter that we don't have anything to announce because there are a lot of processes that ended up with prices that we weren't prepared to pay or values that we didn't think were incrementally better than what we already own. We're going to continue to look at things as they come along. We continue to believe that our ability to deploy capital is ahead of us. And the significant amount of cash that we have on our balance sheet and heading into our fourth quarter, we'll have even more at fiscal year-end. We're in a very good position to find things to do with our enhanced liquidity. And that will happen over time. We're in no rush. And until it's clear that we can all be traveling and visiting, the way we buy businesses, we like to be able to get under the hood and do due diligence at a level that I'm still uncomfortable that the world is opened where we're really understanding the things that we're looking at buying at the level that we want to. So we're very content to spend our time just getting the margin improvement story, the free cash flow story and the increasing earnings per share story that we've been able to deliver over the next several years.

Operator, Operator

The next question comes from Julio Romero with Sidoti & Co. Please go ahead.

Julio Romero, Analyst

Yes. Good afternoon, Ron, Brian. One thing that we've seen is some initial signs of slowing in DIY products. And when I think about Griffon's product portfolio, I think about the Consumer and Professional Product segment and ClosetMaid in particular to something that sticks out for me. So maybe could have some DIY exposure. Can you just talk about how demand is trending in ClosetMaid and broadly across the CPP segment?

Ron Kramer, CEO

We've seen the same commentary. And as we've said to you, we have backlog levels that say just the opposite.

Julio Romero, Analyst

That's encouraging to hear. For my follow-up, can you provide an update on how the new product launches in the HBP segment have been received?

Brian Harris, CFO

Sure. Our new product launches continue to perform well. We've come out with several things. Storm Defender, Entry Defender, and Store Defender, which do just what they say. We have a micro-grill product that has performed well and fire suppression products that the market has received well. So those products and the expansion we made in our Mountain Top facility to supply people with those products have been a good investment.

Ron Kramer, CEO

The CornellCookson acquisition is everything we had hoped and we continue to believe that regarding the growth of the commercial business and the innovation pipeline in both commercial and in residential, we are in a very, very strong position. I believe this is the first quarter in Clopay's history over the trailing 12 months we're over $1 billion in revenue. We're really executing well and we expect that business to continue to show growth.

Julio Romero, Analyst

Great. Thanks very much.

Operator, Operator

The next question comes from Justin Bergner with G. Research. Please go ahead.

Justin Bergner, Analyst

Hi, good afternoon, Ron, good afternoon, Brian.

Ron Kramer, CEO

Hi, Justin.

Brian Harris, CFO

Hi, Justin.

Justin Bergner, Analyst

Hi. So just to follow-up on the Consumer and Professional Products business. Did the shipping delays put any business at risk? And would the backlog still have been up in record levels if you had not experienced those shipping delays?

Brian Harris, CFO

So, I would say put the business at risk. We certainly had revenue that got pushed off to a later date by the pressure we had from transportation, not being as available as one would like. The demand has been very strong across CPP and across HBP as well. It's hard to say exactly what order patterns because people wouldn't necessarily order more until they got their original product. So, I can't fully answer your question. But the baseline is demand has been very strong.

Justin Bergner, Analyst

Okay. Just a follow-up on HBP. Are you observing any slowdown in demand trends there? It doesn't seem like it, and are there any restrictions on your ability to implement price increases? I assume that commodity prices might start to affect demand, but I'm curious about your perspective on this.

Brian Harris, CFO

Sure. The demand has continued to be strong. It has not dropped off. So far, the consumer continues to accept price. It's as simple as that.

Operator, Operator

The next question comes from Keith Hughes with Truist Securities. Please go ahead.

Denys Klimyentyev, Analyst

Hi. Good afternoon. This is Denys Klimyentyev in for Keith Hughes. Thank you for taking my question. My first question is about the HBP pricing, which has been notably strong at 13% this quarter. I'm curious if you could share some of the factors contributing to that strength in pricing within this segment. Additionally, I would like to ask about your general priorities regarding capital allocation, specifically the timing of share repurchases going forward and where that fits into your list of priorities. Thank you.

Brian Harris, CFO

Sure. So let me start with its pricing and mix that is at 13% just to be clear. And that's about 50-50 between the two. And it's a result of us on the pricing side, it's a result of us passing through price to customers to cover rapidly rising input costs. And those input costs are raw materials such as steel, it's labor, it's insurance, it's transportation cost. And we continue to see good demand and good mix in that demand, where people continue to buy higher-level doors for their homes and we continue to see a good result of our new product on the commercial side, which are at a higher price and margin. Do you want to take the capital, Ron?

Ron Kramer, CEO

Sure. We have a $58 million authorization for share repurchases and we believe our stock is a compelling value. We didn't buy any stock this quarter.

Operator, Operator

The next question comes from Trey Grooms with Stephens. Please go ahead.

Trey Grooms, Analyst

Hi, good afternoon, Ron and Brian.

Brian Harris, CFO

Hi.

Ron Kramer, CEO

How you doing?

Trey Grooms, Analyst

Doing well. Thank you. So I guess, just switching gears a little bit here. Ron, you mentioned on the demand front, clearly, still very strong. You mentioned housing you mentioned R&R and consumer spending that, they have all continued to be very, very healthy. And I think commercial, it does drop some business on the HBP side. Can you talk about what you're seeing on commercial specifically as it relates to the HBP business?

Ron Kramer, CEO

Very strong growth. And my personal expectation is, if we ever get an infrastructure bill we'll see even more commercial door growth.

Brian Harris, CFO

Yeah, I'll just add to that. We've seen good residential and commercial growth in this quarter – year-to-date and in the quarter. In this particular quarter, commercial is actually even stronger than residential although they were both – they both did well.

Trey Grooms, Analyst

Wow, that's encouraging. And I guess, on one other kind of housekeeping a little bit. I'm just trying to understand the mechanics. You mentioned, of course, both CPP and HBP with very strong backlog. And with the shipping delays that we have now, I guess, just trying to get my head around how this typically flows through and then transitions into – or excuse me, translates into revenue. But now with this kind of dynamic we have on the transportation situation, how is that impacting that? And when are you expecting that backlog to kind of start to transition into revenue?

Brian Harris, CFO

Yeah. So the transportation situation is really a global issue. It's not just our issue. Yes, it's hard to say when the backlog will release the orders keep coming in. We are doing everything we can to mitigate the transportation situation.

Ron Kramer, CEO

Look, we believe the recovery is still ahead of us. And the bottlenecks that you're seeing in this economy are which transportation is just one of are going to work themselves through. The timing and the predictability of it, you'll see it, clearly, across lots of different products and categories where we're doing everything we can to meet our backlog but the underlying trend that we clearly are saying is demand is strong.

Brian Harris, CFO

Yeah. And I'll just add one little thing to that. Hopefully, as the labor improves that will give more people to help the transportation situation, and hopefully, that will start clearing by the end of the year.

Trey Grooms, Analyst

Yeah. I hope you're right. I hope you're right. well, thank you very much for taking my questions.

Brian Harris, CFO

Appreciate it. Thank you.

Operator, Operator

This concludes the question-and-answer session. I would like to turn the conference back over to Ron Kramer for any closing remarks.

Ron Kramer, CEO

Thank you. Stay well everyone. Bye-bye.

Operator, Operator

This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.