Ron Kramer - CEO Brian Harris - CFO.

Lee Jagoda - CJS Securities Julio Romero - Sidoti & Company Justin Bergner - Gabelli & Company Andrew Casella - Deutsche Bank.

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

Thank you, Kevin. 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.

Now, I’ll turn the call over to Ron..

Good afternoon and thanks for joining us on today’s call. A solid quarter, a strong outlook and an excellent strategic acquisition. We continue to build upon the transformational actions executed over the last 12 months.

Our consolidated second quarter revenue increased 25% over the prior year quarter, driven by both acquisitions and organic growth in our Home & Building Products segment which as expected was partially offset by reduced revenue in Telephonics. We continue to expect defense orders and revenue to improve throughout the remainder of this year.

Our consolidated segment adjusted EBITDA from continuing operations increased 11% to $43.8 million compared to the prior year quarter of $39.4 million. I’d like to provide some high-level comments on our strategic actions and capital allocation. We’ve been busy.

Today, we announced our subsidiary Clopay Building Products Company has entered into a definitive agreement to acquire CornellCookson, a leading manufacturer of rolling steel door and grille products designed for commercial, industrial, institutional and retail use, for $180 million.

After taking into account tax benefits resulting from the transaction, the effective purchase price is approximately $170 million. CornellCookson is expected to generate $200 million of revenue and $0.15 of earnings per share during the first 12 months after the acquisition.

The acquisition of CornellCookson broadens our commercial door offering and complements our premium residential and sectional commercial door business. Beyond the attractive financial aspects that bring immediate value to our shareholders, there is truly a strategic value to this transaction.

CornellCookson business is complementary to the Clopay Door business. Our companies have worked together over the years on bids that required each of our strengths in panel doors and rolling steel doors, respectively. We believe that this history will facilitate integration.

We are optimistic that the combined company will be a formidable competitor increasing the value of each business. On February 6, we completed the sale of our Plastics business to Berry Global for $475 million in cash and we recorded a pre-tax gain of $118 million.

On February 13, we bought Kelkay, a UK manufacturer and distributor of decorative outdoor landscaping products sold to leading garden centers, retailers and grocers in the UK and Ireland, for $56 million. We expect $40 million in revenue during the first full year of ownership and for it to be immediately accretive.

On March 13, we announced the combination of ClosetMaid with AMES. Mike Sarrica will evaluate the management structure of the companies while identifying opportunities to improve profitability, efficiencies and growth.

After we purchased ClosetMaid in October of 2017, we saw an opportunity to combine the two companies with their complementary customers, warehousing and distribution, manufacturing and sourcing capabilities.

Mike, the former President of AMES and now the Present of ClosetMaid, has demonstrated his ability to build strong leadership teams and improve operations and he’s uniquely qualified to lead the combined company. We continue to expect growth and profitability as we expand both products and geography. Moving to capital allocation.

During the second quarter, we also announced a one-time special cash dividend of $1 per share. The special dividend was a way to return cash to our shareholders which we seek to do through a variety of means and represents our persistence to drive shareholder value.

Additionally, the special dividend provided $5.7 million of benefit to most of our Griffon U.S. employees through our employee stock ownership plan which currently holds approximately 5.7 million shares. Earlier today, we announced our regular quarterly dividend of $0.07 per share payable June 21 to shareholders of record as of May 25.

And in addition, during the second quarter, we repurchased 1.4 million shares for $28.4 million. Since 2011, we’ve repurchased a total of $290 million of our common stock representing 21.8 million shares at an average price of $13.26 per share.

As of March 31, 2018, $21 million of repurchased authority remains under the August 2016 Board authorization. Next, I’d like to provide an update by segment before I turn it over to Brian to go through in a little bit more detail.

Home & Building Products; this segment’s sales increased 39% to $396 million due to both the benefits from recent acquisitions and organic growth. Segment adjusted EBITDA improved 44% to $40 million driven by the increase in revenue. We continue to see underlying strength in the U.S. housing market with the steady multi-year housing recovery.

Our Doors and ClosetMaid businesses are well positioned to capture increased new construction and remodeling activity while rising home ownership rates supports AMES’ tool business. As the global economy continues to improve, we see continued growth in both revenue and enhanced profitability.

With our transactions over the past 12 months, Griffon has expanded its reach in and around the house, broadened its customer base and expanded its geographic footprint with ClosetMaid and AMES’ bolt-on acquisitions and will further broaden its customer base with the inclusion of CornellCookson’s commercial solutions.

We’re very pleased with our business portfolio that demonstrated integration abilities of our team and we are poised for further growth and profitability as we build our global brands. Turning to Telephonics. Fiscal second quarter revenue was $82 million.

Though below the prior year of $98 million, revenue is up 24% over first quarter revenue of $66 million. Second quarter orders were $108 million for a 1.3 to 1 book-to-bill ratio and contributing to our backlog of $358 million compared to the last quarter backlog of $332 million and fiscal year ended September backlog of $350 million.

With better order rates, improving sequential trends and the recently signed defense budget, we remain optimistic in Telephonics long-term prospects. We continue to see opportunities from an expansion of the U.S.

Navy fleet, international opportunities including foreign military sales and direct commercial sales to existing customers as well as building on our market positions in electronic warfare, mobile border security and transit systems.

We remain highly focused on integrating and expanding upon the foundation of all of our key strategic initiatives and we expect to see revenue and margin expansions across all our businesses over the coming quarters. I’ll turn it over to Brian..

Thank you, Ron. Second quarter 2018 revenue increased 25% to $479 million compared to the prior year period of $384 million. Increased revenue in the quarter was driven by strong performance in our Home & Building Products segment with both acquisition and organic growth contributing to the increase.

Higher HBP revenue was partially offset by lower Telephonics revenue. Second quarter 2018 segment adjusted EBITDA from continuing operations was $43.8 million, an increase of 11% over the prior year. Looking at our segments. Home & Building Products second quarter revenue increased 39% to $396 million compared to the prior year period of $286 million.

The revenue growth was attributable to the acquisition of ClosetMaid, and AMES’ acquisitions of La Hacienda, Tuscan Path, Harper and Kelkay as well as improved volume, favorable mix and price at CBP. Quarter results include the impact of unfavorable winter and spring weather on our AMES business.

Home & Building Products second quarter segment adjusted EBITDA increased 44% to $39.8 million compared to $27.6 million in the prior year, primarily driven by higher revenue. Turning to Telephonics. As expected, second quarter segment revenue decreased to $82 million compared to $98 million in the prior year second quarter.

Segment adjusted EBITDA of $4 million decreased compared to the prior year of $11.8 million. At March 31, 2018, backlog was $358 million compared to $332 million at December 31, 2017 and $350 million at September 30, 2017. We continue to expect backlog and revenue to improve in the second half of the year.

On a consolidated basis, gross profit for the quarter was $121.5 million compared to the prior year of $98.9 million. Gross margin in the second quarter decreased 40 basis points to 25.4% compared with the prior year period of 25.8%.

Second quarter selling, general and administrative expenses, excluding items that affect comparability, were $104 million or 21.8% of sales compared to the prior year period of $82 million or 21.3% of sales. Current and prior year second quarter income from continuing operations were both $2 million or $0.05 per diluted share.

Excluding certain tax and other items that affect comparability from both periods, current quarter income from continuing operations was $2.7 million or $0.06 per share compared to the prior year period of $2.4 million or $0.06 a share. Second quarter capital spending was $10.8 million compared to the prior year of $7.8 million.

For fiscal '18, we expect capital spending to be approximately $45 million. As of March 31, 2018, we had $236 million in cash and total debt outstanding of $1.1 billion resulting in a net debt position of $855 million. We had $320 million available for borrowing under our revolving credit facility, subject to certain loan covenants.

Lastly, we continue to expect 2018 segment adjusted EBITDA of $205 million, we continue to expect high EBITDA performance in the back half of fiscal 2018 as a result of normal seasonality particularly in our Home & Building Products segment and improvements in Telephonics. Now, I’ll turn the call back over to Ron..

Thanks, Brian. We’re pleased with our performance through the midpoint of our fiscal year and we’re poised to grow our revenue and profitability in the second half. Our strategic initiatives have transformed our portfolio of businesses with a significantly higher free cash flow generation trajectory in the years ahead.

I want to end by welcoming the 750 employees from CornellCookson to the Griffon family. We’re very excited about continuing to build on our success. With that operator, we’ll open it up for questions..

Thank you. [Operator Instructions]. We will take our first question from Bob Labick with CJS Securities. Please go ahead..

Hi. Good afternoon. It’s actually Lee Jagoda for Bob..

Hi, Lee..

So, Ron, just to start, you guys have done a really good job diversifying AMES internationally. Can you talk about the seasonality of that business today versus what it was when you originally bought AMES? And how heavily weighted you are today to the U.S.

spring season?.

Australia, the United States, Canada and the United Kingdom that are going to continue to be a growing part of our company. So the weather issue is clearly going to have its variability. We think we know how to manage our way through both good cycles and bad. And this has been an extraordinary winter.

So I couldn’t be happier about how our team has been able to position ourselves and perform..

And I was going to touch on weather next and I know you don’t like to use it as an excuse.

That being said, is there – do you want to quantify or try to quantify the amount of revenue that you might have either lost or just delayed until next quarter as a result of the pretty severe weather?.

No..

So then turning towards the acquisition next, can you comment on whether the process was an auction or was it privately negotiated? And maybe give us a sense for the EBITDA margins in that business today and what they might be over time as you combine it with your Clopay business?.

Look, we are always active in looking at acquisition opportunities. This is a wonderful serendipity moment for us that this was a privately sourced negotiated transaction. We think that this is a wonderful strategic relationship for us to be able to complement our leading residential door business with a leading commercial door business.

So this fits out a footprint that we’ve talked about for a number of years and something that was desirous for us to be able to expand into. We have been in a conversation with Andrew Cornell who has been running this business which dates back through his family to 1828.

And we are very pleased to be able to have done this in a manner that was private and sole-sourced. In terms of its margins and profitability, as I said, this will be $200 million in revenue.

We think this is a business that will be not less than blended margins that we operate in within Home & Building Products or better than 10% is where we want it to be. And it’s not there today, but we see room for improvement in their operations in the first fiscal year that we own it. It’s immediately accretive to us.

Strategically, it’s a direction that we’ve wanted to go in. And the ability for us to have sold the Plastics business and having now bought Cornell, Kelkay and a variety of smaller tuck-in acquisitions.

We’ve replaced both the revenue, the EBITDA but most importantly we’ve eliminated the high CapEx component and our free cash flow generation that’s prospective has changed dramatically. And that’s really what the story of what you’re going to see in Griffon going forward.

Home & Building Products is clearly a place we have scale, we have both management capabilities but the ability for us to continue to grow both our revenue and increase the EBITDA margins and ultimately the EPS margins for our company are quite dramatically improved..

And I assume the $0.15 of accretion doesn’t include acquisition accounting and doesn’t include any future synergies.

Is that correct?.

That’s correct..

We always hope for synergies. We don’t bake them into our forward guidance..

Perfect. Thank you..

Thank you. We will take our next question from Julio Romero with Sidoti & Company. Please go ahead..

Hi. Good afternoon..

Hi, Julio..

Hi, Julio..

Just wanted to start with Clopay garage doors. Can you talk about what drove that 13% year-over-year growth? I know you called out some price increases. Am I to assume that cost inflation is part of it, but what’s driving the volumes, what’s driving price? Any color you could give on that..

Sure. So it’s a mixture of volume, mix and price. We are seeing very good mix coming out of the business. We’re seeing people stepping up to better doors, insulated doors. We call it Intellicore for certain of our products. And we’re seeing less of what we’ll call the simple or panel doors..

Just can you break down how much of the price increase was driven by cost inflation versus just strength from the end customer?.

No, I can’t..

Okay, that’s fair. And just moving on to the CornellCookson deal.

I know you called out in the press release how you expect it to strengthen your relationship with the dealer channel, but can you just talk about a big picture on how you see that leverage benefitting your other businesses and Home & Building Products?.

This is really about the door business is how we see this. This is complementary and over time our ability to both buy raw materials more efficiently, increase sales through both our dealers that are currently in residential and their ability to have a commercial offering.

And from the Cornell side we think that this is going to leverage off of our footprint to be able to continue to grow their business in both the commercial, industrial and retail channels. So this is about adding on to Clopay doors. Within our Home & Building Products segment, ClosetMaid and AMES are very much a separate branded consumer business..

Got it, understood.

And then just lastly, can you just remind us how you think about leverage in the long term? I know you’re in the middle of a portfolio transformation, but what would be a fair expectation for maybe a long-term target leverage ratio?.

Brian, why don’t you take it..

Sure. Currently, our leverage is a little higher than usual but it’s very manageable for us. Ultimately with the cash flow that we’re expecting from our current businesses, we expect that leverage to go down to something with a 3 in front of it, I’ll call 3.5, in a three to five-year period..

Perfect. Thanks for taking my questions, guys..

Thank you..

Thank you..

Thank you. We’ll go next to Justin Bergner with Gabelli & Company. Please go ahead..

Good afternoon, Ron; good afternoon, Brian..

Hi.

How are you doing?.

Good.

How are you?.

Fine..

First question just on CornellCookson.

Are you currently operating in any of the markets that they’re in on the commercial side? And sort of how would you define that market size incremental to what I think you’ve called out in your 10-K as the market size that’s your addressable market today?.

So the market size in totality is effectively the same. What this does for us is it gives us a growing steel and grille offering that we don’t currently have and gives us a more complete portfolio to go to market with.

So currently at times we and Cookson go to market together because we don’t have overlap in products but together we have the complete product line offering for commercial requirements. So we have commercial sales but they’re sectional doors and CornellCookson has the rolling doors themselves..

But our existing commercial door business is relatively small..

Correct..

So this is really about filling out the strategic direction for Clopay by adding a leading commercial door business to complement the leading residential door business. And we think that that will have enhanced revenues and enhanced profitability for the company going forward..

Okay, that makes sense.

And then in terms of the $0.15 of accretion in the first full year, does that assume in that first full year that the margins are going to be above the Home & Building Products average? And does that include amortization expense to the extent there is amortization expense?.

It does include amortization related to the deal. So for things like customer relations and things like that, yes..

Okay.

And then does it surmise that you’ll be above that 10% margin in the first full year?.

Initially, we will be slightly below that but we expect to be able to move towards that and towards our overall Home & Building Products margins within a reasonably short period. We’ll call it two years..

Okay.

I guess switching gears to the existing Clopay business, are you seeing headwinds today from raw material prices?.

Yes. Clearly input costs are going up whether it’s steel, whether it’s labor, whether it’s energy costs. In spite of that we view this as what we expect it going into this year. So we continue to see the housing markets recovering but nowhere near the buoyancy and nowhere near the volumes that we would view is peak. So we still see a steady recovery.

We see the mix of our business improving which has been able to offset higher commodity costs. But there’s no question about it that steel has gone up, energy has gone up, labor costs have gone up..

Okay, that’s helpful.

And just remind me on Clopay, what is the accounting? Is it FIFO or LIFO or something in between?.

We do not use LIFO..

It is FIFO. I’m sorry, you said FIFO..

That’s correct, FIFO..

Okay, great. That’s it for me. Thanks..

Okay..

[Operator Instructions]. We will take our next question from Andrew Casella with Deutsche Bank. Please go ahead..

Hi. Thanks for taking the questions. I just wanted to ask quickly about ClosetMaid. I know you guys don’t break out EBITDA by kind of like the brand, but I know you guys had said during the acquisition it would contribute about $20 million, $25 million of EBITDA.

Just curious like what the contribution was if you could disclose it or if you’ve kind of reached that run rate on an annualized contribution basis? Thanks..

Sure. On the ClosetMaid, we are seeing the business run at our expectations..

Slightly above..

Okay, fair enough. And then just when we think about free cash flow and funding and whatnot, so my math was if you have $240 million of cash at the end of the quarter, the special dividend I think went out the door in April.

And then when we think about funding for this asset, are you guys anticipating I guess drawing upon the revolver again or are you potentially looking at the capital markets to help replenish cash? Just curious how you guys are thinking about liquidity and overall funding for this?.

We still have ample liquidity and undrawn revolver and no use for the revolver, but we like to have it..

In addition – sorry, Ron. In addition in the second half of the year is when we generate the majority of our cash. The first half of the year we use cash. Second half of the year we generate cash well in excess of the first half of the year..

Okay, got it. Thanks so much. I’ll get back in the queue..

Next, we have a follow up from Justin Bergner with Gabelli & Company. Please go ahead..

Thanks again.

On the AMES business, can you break out what the organic growth is versus the acquired growth in the quarter?.

Sure. The organic growth was revenue wise in AMES approximately 5%..

Okay. And then secondly, now that you’ve done CornellCookson and congratulations on the deal I should have said earlier.

Are you focused on sort of integrating that over the coming quarters or are you still sort of on the hunt for additional acquisitions?.

We’ve got our plate full integrating not just CornellCookson but Kelkay, La Hacienda, Tuscan Path, Harper, all of which is going quite well. But we see our existing businesses as being the place that we’re going to be spending our time. The ability for us to source opportunities is always unpredictable. So we’ll always continue to look.

But right now we’re very pleased with what we’ve done in the last 12 months and we just want to continue to execute as well as we have and there’s a significant room for improvement in both revenue and profitability just running the businesses that we have increasingly well.

So that’s really our focus certainly for the balance of 2018 and then we’ll see what opportunities present themselves in the future..

Okay. Thank you, again..

There are no further questions at this time. I’d like to turn the conference back over to Ron Kramer for any additional or closing remarks. End of Q&A.

Thanks for joining us. We’re really excited about what we’ve achieved over the last year and we’ll be working hard to continue to deliver excellent results. Bye-bye..

Ladies and gentlemen, this does conclude today’s conference. Thank you for your participation. You may now disconnect..