Griffon Corporation

Please state your name, phone number, and company after the tone. Press the pound key when you are finished. Your entry is confirmed. At any time during playback, you may press zero, pound, to go to the playback help menu.

Thank you for standing by. This is the conference operator. Welcome to the Griffin Corporation's third quarter 2020 earnings conference call. As a reminder, all participants are in listen-only mode, and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. To join the question queue, you may press star then one on your telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing star and zero. I would now like to turn the conference over to Brian Harris, Chief Financial Officer. Please go ahead.

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 Griffin's businesses and the environments in which they operate. Such statements are subject to inherent risk 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, from today's remarks, we'll address for those items that affect comparability between periods. These items are explained in our non-debt reconciliations included in our press release. Now it's time to call over to Alan. Thanks, and good afternoon, everyone. I hope you and all your families are doing well in these turbulent times. Griffin entered the unprecedented COVID-19 pandemic from a position of strength, both operationally and competitively. Building on our already strong results in this fiscal year prior to March, our businesses have benefited from the stay-at-home nature of the pandemic. Both existing and new customers have been investing in home projects, such as closet renovations, tending to their lawns and gardens, and enhancing their enjoyment of the outdoors, upgrading the exterior of their homes, including their garage doors. We believe these trends will continue to grow in the years ahead. Our third quarter results were outstanding. Revenues increased 10%, adjusted EBITDA increased 31%, and adjusted earnings per share increased 90% compared to the prior year period. These results are a reflection of the strategic actions taken by Griffin starting with the September 2017 announcement regarding the disposition of our plastics business and the purchase of ClosetMaid. further enhanced by the purchase of Cornell Cooksham in June of 2018, coupled with the home improvement trends that I described. Our pivot out of the capital-intensive, commodity-driven plastics business into branded, domestically manufactured, consumer, professional product businesses positioned us for market share gains as well as revenue, earnings, and cash flow growth. Further underscoring this quarter's results, our 2020 nine-month free cash flow increased $34 million over the comparable 2019 nine-month period and builds on the prior year's full-year free cash flow of $69 million. As a result of this performance, our net debt to EBITDA leverage has been reduced by one full turn from the prior year quarter to 4.4 times. Ensuring the health and safety of our employees and our customers continues to be our top priority. Since early March, we have proactively implemented health and safety measures across our global workforce. As local and national authorities have circulated additional guidelines for employee health and safety, we've incorporated those as well. All of our facilities are operational and continue to maintain additional safety measures to protect our workers while maintaining operations. In consumer and professional products and home and building products, all of our U.S., Canadian, and Australian facilities were operational throughout the quarter. This includes all Ames, ClosetMate, Clopay, and Cornell-Cookson facilities. Each of these businesses provide critical products supporting national infrastructure. To the extent practical, we continue to permit our employees in these segments to work remotely, and as I've mentioned before, all of our manufacturing and distribution facilities have implemented strict protocols to ensure employee health and safety while at the workplace. In late March, our AIMS UK facilities were closed by government directive, and our employees were directed to stay at home. By early June, we were able to reopen our facility there, which was ahead of our anticipated July resumption of operations. In Mexico, our closet-made manufacturing facility that supports the U.S. and Canada sales closed for approximately one and a half weeks in April, but has been operational since. Turning forward to Vence Electronics' business, Telephonics continues to operate at all of its sites as it provides critical manufacturing and services supporting the U.S. military, and its operations are essential for maintaining our national security. Let's talk about the quarter and performance. In consumer and professional products, we saw strong third quarter demand for seasonal lawn and garden tools, storage and organizational solutions at major retailers and home centers across North America and in Australia. Upon reopening in June, there was strong U.K. demand for our product offerings as well. Our AIM strategic initiative remains on track and includes implementing an integrated business intelligence system, supporting all of our AIM's operations, rationalizing our distribution and manufacturing facilities, and investing in automation and e-commerce capabilities. Our home and building product segment revenue declined slightly compared to the prior year quarter, Strong residential sectional garage door sales later in the quarter almost completely offset the reduction in sales seen in the first part of the quarter. Sales in our commercial door business increased slightly in the quarter compared to the prior year. Operations at Telephonics have continued uninterrupted, and Q3 revenue exceeded the prior year. The anticipated second tranche of bookings related to the Lockheed Martin MH60 Romeo foreign military sale program with India was funded. and $49 million was booked to backlog in the quarter. Telephonics experienced some slowing from suppliers during Q3, which could slow certain customer deliveries and work performed in Q4. We also are announcing today that we're evaluating strategic alternatives for the system engineering group, which we call SEG. which is a technical services subsidiary within our defense electronics segment, providing advanced simulation and analysis for the U.S. Navy and U.S. Missile Defense Agency. Telephonics core business focuses on defense electronics systems, products, and systems. We believe that SEG would benefit from being part of a parent organization that is more focused on government technical services. Additionally, we're cognizant of the government's organizational conflict of interest called OCI standards and believe that such a sale better aligns our businesses with those standards. SEG is well-run with a strong management team and annual revenues of approximately $30 million. The timing of this process is bolstered by SEG's recent $119 million award from the Naval Service Warfare Center-Balgrain Division. This is an opportunity for us to provide incremental value to Griffin shareholders while also positioning SEG for enhanced growth with a suitable acquirer. We've already started the process to sell this business, and we're working to get that done in the near future. Let's turn to our balance sheet. During the quarter, we continue to work on strengthening our balance sheet and positioning the company for future growth. In June, we issued an additional 150 million senior notes as a tack-on to the five and three-quarter notes we issued in February 2020. We've now fully refinanced our $1 billion of five and a quarter percent notes due in 2022 with five and three-quarter percent notes that have maturity in 2028. As a reminder, in January, we also extended the maturity of our revolving credit facility to 2025. and expanded its borrowing capacity by $50 million to $400 million, with an additional $100 million of availability through an accordion feature. We've established a solid foundation for growing the company, and we have ample liquidity to weather any near-term effects of the pandemic and other market uncertainty while continuing to invest in all of our businesses. Finally, earlier today, our board authorized a 7.5 cent per share dividend payable on September 17, 2020 to shareholders of record on August 20, 2020. This marks the 36th consecutive quarterly dividend to shareholders, which has grown at an annualized compound rate of 17% since we initiated it in 2012. Let me turn it over to Brian for a little closer look at some of the numbers. Brian? Thank you, Ron. I'll start by highlighting our third quarter consolidated performance. Revenue increased 10 percent to $632 million, and adjusted EBITDA increased 31 percent to $69 million, both in comparison to the prior year quarter. Normalized gross profit for the quarter was $165 million, increasing 6.8 percent over the prior year quarter. Our gross margin contracted 80 basis points to 26.1 percent. Third quarter, so in general, administrative expenses for $114 million, including $1.6 million of charges related to the AIM strategic initiative. As a percentage of sales, SG&A adjusted for the charges decreased to a generated basis point of 17.7%. Every quarter of draft income from continuing operations was $22 million, or $0.50 per share, compared to the prior year period of $13 million, or $0.33 per share. Excluding items that affect comparability from both periods, current quarter adjusted net income was $26 million, or $0.59 a share, compared to the prior year of $13 million, or $0.31 per share. Effective tax rate excluding items that affect comparability for the quarter was 30.8%, and year-to-date was 32.6%. Capital spending was $12 million in the third quarter, in line with prior year. Depreciation and amortization covered $16 million for the third quarter. Regarding our segments, consumer professional products, third quarter revenue increased 20% to $329 million over the prior year quarter, driven by increased volume of 19% prepared by customer demand for home improvement in North America and Australia. Favorable price and mix of 1% and incremental revenue from the acquisition was 2%, all partially offset by an unfavorable impact of foreign exchange of 2%. Organic growth was 18%. Adjusted EBITDA was $37 million, increasing 55% in the prior year quarter due to the increased revenue as mentioned a moment ago, partially offset by increased tariffs and COVID-19-related costs. Adjusted EBITDA margin was 11.3% compared to 8.8% in the prior year quarter. The strategic initiative continues on plan, and we expect to close our ballroom in Pennsylvania and South City Nebraska facilities by the end of the fiscal year. Home building products third quarter revenue decreased 1% to $219 million over the prior year quarter. And primarily, it's a decreased volume of residential, sectional, garage store orders in April, which were down 18%, but then had subsequent recovery in May and June. Adjusted EBITDA increased 16% to $39 million over the prior year quarter due to the benefits of general operating efficiency improvements, partially offset by the decrease in revenue and COVID-19-related inefficiencies and direct costs. Adjusted EBITDA margin was 17.9% in the quarter, compared to 15.3% in the prior year quarter. Defense Electronics' third quarter revenue increased 5% to $84 million compared to the prior year period, primarily due to increased deliveries and volume of radar and communication systems. Adjusted EBITDA during the period was $4 million compared to the prior year quarter of $7 million, impacted by mixed and programming efficiencies in radar and communication systems, as well as increased bid and proposal costs. Year-to-date backlog as of June 30, 2020 was $350 million, a $19 million increase from Q2, and we expect to continue to build backlog in the fourth quarter. Corporate loan allocators' expenses, excluding depreciation, were $11 million in the third quarter. Regarding our balance sheet, as of June 30, 2020, we had $72 million in cash and total debt outstanding of $1.13 billion, resulting in a net debt position of $1.06 billion. and debt to even our leverage of 4.4 times as calculated based on our debt covenant. This reflects one full turn of due leveraging from the prior year period, along with our ability under the revolving credit facility with $274 million subject to certain non-covenants. Moving to our fourth quarter and failure outlook, like many other companies, last quarter we withdrew our guidance because of the uncertainties arising of the COVID-19 pandemic. We now have a clearer picture of the effects of the pandemic impact for this year. As a result, we are reinstating guidance for fiscal 2020. We normally give guidance once a year and do not update that guidance during the year, and we plan to return to that policy. However, given the continued uncertainty resulting from COVID-19, we felt it was appropriate for us to provide an update as an exception in this instance. We are now providing guidance for the full year 2020 of approximately $2.3 billion in revenue, and $270 million plus of adjusted EBITDA before unallocated expenses. No federal overall guidance, even with the conservative Q4 outlook, is higher than our original guidance for the year of $250 million plus of adjusted EBITDA before unallocated expenses that we provided back in November. Further, a four-year fiscal 2020 guidance includes approximately $60 million for capital expenditures, $64 million for depreciation and amortization, $65 million for rent interest expense, and $35 million for unallocated expenses. With all of these remaining the same as originally communicated during the November 2019 earnings call. Now I'll turn the call back over to Ron. Thanks, Brian. Griffin's year-to-date performance is something we are all collectively very proud of. Considering how much we've achieved in just a few short years since we began this portfolio repositioning, it's especially gratifying. At the time we announced it, we discussed the opportunities for pipeline growth and margin expansion through the realization of efficiencies during the integration process of all of our acquired companies. Further, we expect it to become stronger competitively by providing increased value to our customers in terms of our broader product offering, improved service levels, and enhanced efficiency. We continue to believe the diversity of our businesses, our emphasis on domestic manufacturing, and our focus on leading brands provides a strong foundation for future growth. This quarter in particular brings into focus what our repositioned portfolio can accomplish and the potential upside of following our strategy. Griffin's performance has been excellent, and we believe there is still considerable opportunity for improving the performance of our businesses. In addition, we remain committed to finding strategic acquisitions that expand and strengthen our product portfolio within our home markets. We're getting closer to our objective of three and a half times net debt to EBITDA leverage. Our free cash flow has and will continue to improve, and we expect to see our leverage to continue to decline further as we execute our business plan. In closing, I'd like to thank our workforce, which has shown exceptional dedication and perseverance throughout this challenging period. We appreciate the importance of their work in order to deliver these excellent results. Operator, we'll take any questions.