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Griffon Corp  (NYSE:GFF)
Q1 2019 Earnings Conference Call
Jan. 31, 2019, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings, and welcome to the Griffon Corporation First Quarter 2019 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Mr. Brian Harris, Chief Financial Officer. Thank you. You may begin.

Brian G. Harris -- Senior Vice President and Chief Financial Officer

Thank you, Michelle. Good morning, 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 the business 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.

Ronald J. Kramer -- Chairman of the Board and Chief Executive Officer

Thanks. Good morning. We're off to an excellent start to fiscal 2019 with double-digit growth in sales and EBITDA, driven by solid underlying demand coupled with the benefits of our portfolio reshaping initiatives. First quarter 2019 revenue increased 17% to $511 million and our segment adjusted EBITDA from continuing operations increased 30% to $57 million compared to the prior year.

Higher revenue was driven by growth across our Home & Building Products segment, both organically and through acquisitions. Our improved profitability reflects the steady progress we have made with operational efficiency improvements and the integration of ClosetMaid and CornellCookson. In addition, we've mitigated higher input costs by realizing product pricing increases with our customers and continue to make progress.

With respect to our capital allocation strategy, we've been disciplined about directing capital to maximize shareholder value, including making growth investments on our operating businesses, supporting our dividend, opportunistically repurchasing shares and strategic M&A. Those of you who followed Griffon know that we have been enthusiastic about our June 2018 acquisition of CornellCookson, which is the North America leader in rolling steel and grille products. This business is proving to be an advantageous addition to Clopay through providing top notch commercial rolling steel products to be offered alongside our commercial sectional doors along with adding hundreds of professional dealers to our network.

CornellCookson continues to see strong demand for its products and has more than a dozen new products in its pipeline, which are expected to be ready for full scale production within the next two years. Today, we're announcing an exciting strategic investment at Clopay building products, which will enable us to meet increased customer demand for our core products as well as support our launch of a wave of new commercial products resulting from our CornellCookson acquisition. To support these activities and sustain product demand, we have launched a $14 million investment in facilities infrastructure and equipment at the CornellCookson location in Mountain Top Pennsylvania, which serves the eastern half of North America.

This expansion project includes a 90,000 square foot expansion to the existing 184,000 square foot facility along with the addition of state-of-the-art manufacturing equipment. Through this expansion, the CornellCookson Mountain Top location will improve its manufacturing efficiency and shipping operations as well as increase manufacturing capacity to support full rate production of new products when they're ready to launch. We have high confidence on our management teams' track record led by Steve Lynch at Clopay and they've executed on and delivered outstanding results related to strategic capital initiatives in the past and we have no doubt they're going to do it in this project.

The outlook across all of our businesses is positive, which will allow us to reduce our net debt to EBITDA leverage from its current 5.4 times to 3.5 times over the next few years as we execute our strategic plan. Finally during the quarter, we repurchased 29,300 shares of common stock for a total of $300,0000 at $9.91 per share, which still leaves us $58 million remaining under our existing Board authorizations. We'll continue to return cash to shareholders through our dividend policy. As we announced earlier today, our Board authorized this $7.25 per share dividend payable on March 21, 2019 to shareholders of record on February 21. This marks the 34th consecutive quarterly dividend paid to shareholders and it has grown at an annualized compound rate of 20% since 2012.

Let me spend a few minutes and go through each of the segments before I give it to Brian to go through the financials in a bit more detail. Start with the Home & Building Products, first quarter revenue increased 19% to $440 million, driven both by the contributions from recent acquisitions on organic growth, paced by favorable mix pricing and increased volume, partially offset by lower sales resulting from adverse weather conditions in Australia and Canada and a reduction in storage and organizational sales due to timing.

Segment adjusted EBITDA increased 31% to $52 million, driven by higher revenue and the related drivers of its growth, partially offset by increased input costs and tariffs. We continue to see strong demand for our products across the segment and to realize benefits from the diversity of our products and markets served.

Turning to Telephonics, our defense electronics business. Fiscal first quarter revenue increase $71 million compared to the prior year of $66 million; segment adjusted EBITDA from continuing operations increased to $4.8 million from $4.2 million in the prior year; backlog at the end of December was $367 million. During the quarter, Telephonics received two contracts of note, first was for maritime surveillance radars for the U.S. Navy, MH-60 Romeo helicopters, second contract is a replacement upgrade for NASA's existing Airport Surveillance Radar-8, secondary surveillance radar at its Wallops Island Flight Center. These awards underscore the scope of our product offerings as well as the range of government entities, which we can provide value-added systems and services.

Overall, we're confident in the outlook in our defense electronics business. We have a healthy pipeline of U.S. and international opportunities, we're seeing increased activity in quotes and bidding, which supports our expectation that Telephonics will return to growth in 2020 and beyond. It's an excellent business. We're really excited about its future.

Brian, why don't you take them through the financials a little more?

Brian G. Harris -- Senior Vice President and Chief Financial Officer

Thanks, Ron. Beginning with a brief recap of our consolidated performance in the first quarter, revenue of $511 million increased 17%, and gross profit increased 18% to $143 million, both in comparison to the prior year quarter, with the increase driven by a combination of organic growth and contributions from acquisitions. Gross margin increased 40 basis points to 28% compared to the prior year quarter.

First quarter selling, general and administrative expenses, excluding items that affect comparability, were $114 million, up 11% from the prior year, primarily due to acquisitions. As a percentage of sales, SG&A was lower by 110 basis points year-over-year to 22.3%.

First quarter GAAP 2019 income from continuing operations was $8.8 million or $0.21 per share compared to the prior year period of $22.8 million or $0.53 per share. Excluding items that affect comparability from both periods, current quarter adjusted income from continuing operations was $9.2 million or $0.22 per share compared to the prior year of $2.4 million or $0.06 per share. Our effective tax rate excluding items that affect comparability for the quarter was 34%. Capital spending was $8.4 million compared to $10.8 million in the prior year quarter. Including the strategic capital investment in the CornellCookson Mountain Top facility that Ron mentioned, we now expect fiscal 2019 capital spending to be approximately $55 million, up $5 million from our previous CapEx target of $50 million. We expect that spending related to the Mountain Top project will be $10 million in fiscal 2019, partially offset by a reduction of $5 million in other CapEx. Depreciation and amortization totaled $15.1 million for the first quarter. As of December 31st, 2018, we had $82 million in cash and total debt outstanding of $1.15 billion resulting in a net debt position of $1.07 billion. We had approximately $275 million available for borrowing under our revolving credit facility subject to certain loan covenants.

Corporate and unallocated expenses, excluding depreciation, were $11.3 million in the first quarter. Our annual guidance for FY '19 given during our November earnings call remains unchanged, our $230 million plus of EBITDA and $2.2 billion in revenue. We expect free cash flow to exceed net income for the year.

Now I'll turn the call back over to Ron.

Ronald J. Kramer -- Chairman of the Board and Chief Executive Officer

I'm very pleased with our performance in the first quarter of fiscal 2019, Griffon's well-positioned to generate significant cash flow and continue to increase margin through the consolidation of our 2018 acquisitions and continued efficiency initiatives, which will all drive long-term shareholder value. We think the Company is doing very well, and we're really excited about where we're going.

Operator, we'll take any questions.

Questions and Answers:

Operator

Thank you. We will now be conducting a question-and-answer session. (Operator Instructions) And our first question comes from the line of Bob Labick with CJS Securities. Please proceed with your question.

Bob Labick -- CJS Securities -- Analyst

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

Ronald J. Kramer -- Chairman of the Board and Chief Executive Officer

Thanks, Bob. Good morning.

Bob Labick -- CJS Securities -- Analyst

Just wanted to start -- so, the biggest delta versus our expectations on the positive side was the margins in Home & Building Products, and so I was hoping you could kind of talk us through in a little more detail the drivers of the margin expansion year-over-year, particularly as we thought maybe the acquisitions were going to come in a little bit lower and then you were going to get the synergies and then grow over the next two years in margin. So talk to us about synergies where you see the margins and the drivers there, please.

Ronald J. Kramer -- Chairman of the Board and Chief Executive Officer

Sure. So first, the drivers were mostly mix and volume generated from our lawn and garden AMES business and our Clopay residential garage door business. Our acquisitions are performing well. Their margins are: for the CornellCookson business in line with our expectations with our ClosetMaid business starting to exceed the original 8% margin that we would put out there, but still in line with our expectations. All those businesses are on track over the next several years to get to our 12% plus that we've indicated in the past. So in short, it's really a mix and volume story that drove the results.

Bob Labick -- CJS Securities -- Analyst

Okay, terrific. And then I know you've done a lot of work with your customers, and I guess suppliers and stuff as it relates to higher raw materials and tariff impacts. Can you just give us an update as to where that stands if you think there's future headwinds or if you've gotten it kind of all taken care of or where you stand on the tariff impact expected?

Ronald J. Kramer -- Chairman of the Board and Chief Executive Officer

Look, we have done an excellent job of mitigating input costs. Over the last several years, there have been three factors that have affected manufacturing in our Company and in our view in the economy; higher input costs, higher freight costs and higher labor costs. We have a really good management team that is adept at dealing with market conditions. This is just one more example of our ability to deal with whatever gets thrown at us. So we've dealt with whatever tariff impact is out there, we'll continue to deal with it. We're excited about where these businesses are headed.

Bob Labick -- CJS Securities -- Analyst

Okay, great. If I could sneak one last one in. Just as it relates to the increased investment in CornellCookson, can you talk about the market opportunity there, and I guess how long the project should take and before you start getting some revenues from that project?

Brian G. Harris -- Senior Vice President and Chief Financial Officer

Sure. So we'll start to see the benefits of the project -- which will complete toward the end of calendar '19, so we'll start to see those benefits come through in the second half of '20 as we ramp up. So this is an investment in a space for both current products and capacity needs, and our new products. And this project will give us the space for those items as well as give us additional space to allow us to operate in a much more efficient rate.

Ronald J. Kramer -- Chairman of the Board and Chief Executive Officer

And I'll add to that. Strategically, we bought CornellCookson because of what we saw as the opportunity in the commercial door business. We have proven over how we repositioned and built Clopay in the residential side during the depths of the downturn, and now enjoy the benefits of it. We see the commercial business as being a natural adjunct to our residential business. We see CornellCookson as being able to improve its profitability. We look at building these businesses long-term, and we're very excited that by making these investments we'll be able to grow both revenues, free cash flow over a long period of time. This is a really good business that fits unbelievably well with what we already own, and we think the combined company is going to be even more valuable in the future.

Bob Labick -- CJS Securities -- Analyst

Super. Thank you so much.

Operator

Thank you. Our next question comes from the line of Alvaro Lacayo with Gabelli. Please proceed with your question.

Alvaro Lacayo -- Gabelli -- Analyst

Good morning. A question on organic growth in Home & Building Products, just if you could sort of provide more detail on the drivers of organic growth? And then maybe in the context of a little bit of the macro volatility we've been seeing, maybe some thoughts on what the drivers will be going forward, if they're the same or if anything changes?

Ronald J. Kramer -- Chairman of the Board and Chief Executive Officer

So, I guess the organic growth is about 5% for the quarter?

Brian G. Harris -- Senior Vice President and Chief Financial Officer

That's correct.

Ronald J. Kramer -- Chairman of the Board and Chief Executive Officer

So the broader comment is, we see our ability to both gain market share, our ability to run the business as being beneficial. And while the negative sentiment around housing has been out there, there's still very much a functioning economy and there's still a housing market. We are positioned around the repair and remodel market, and with a very small exposure throughout all our home and products businesses to new home construction. So consumer spending is really what drives people spending money around their house, and our products and our businesses continue to do well. So while we clearly see the headlines, we see no evidence in our businesses that these trends are going to mitigate or slow down this year.

Alvaro Lacayo -- Gabelli -- Analyst

And just the detail around volume versus price mix on that 5% organic number?

Brian G. Harris -- Senior Vice President and Chief Financial Officer

We don't break that out in specifics. They both contributed to the growth, mix slightly more than volume.

Alvaro Lacayo -- Gabelli -- Analyst

Okay. Thank you.

Operator

Thank you. Our next question comes from the line of Tim Wojs with Baird. Please proceed with your question.

Tim Wojs -- Baird -- Analyst

Hey, guys, good morning. Nice start to the year. ClosetMaid, you made some comments in the press release that there were some delays there, and just as you've kind of gotten the business --

Ronald J. Kramer -- Chairman of the Board and Chief Executive Officer

No, we didn't.

Tim Wojs -- Baird -- Analyst

I thought you said there were some storage delays in the -- reduced storage and organizational volume due to the timing of orders.

Brian G. Harris -- Senior Vice President and Chief Financial Officer

Yes, it's actually year-over-year, so we actually knew that timing, we expected that timing of orders to be delayed a little into -- not even delayed, just to be in the second quarter versus the first. So, it's just a matter of working with our customers and seeing that ahead of us.

Tim Wojs -- Baird -- Analyst

Okay, there was nothing on there, it was just kind of normal course of business, OK. And then if you think about the facility, the CornellCookson facility, any way to think about the payback on that facility or what type of margin contribution we could see over kind of a multi-year period from just the efficiencies and the things that you talked about?

Brian G. Harris -- Senior Vice President and Chief Financial Officer

Sure. So this will help us contribute to getting to our 12%-plus that we've been talking about. These products, the new products, will be at margins better than the base business. And, yes, the efficiencies will be there, which will help us improve the margin as well. And keep us on track in that quest to 12%.

Tim Wojs -- Baird -- Analyst

Okay. And then if we look at just maybe pricing and mix, and then you look at just inflation costs and the tariffs, would you say that price and mix was able to offset the tariff and inflation benefits in the quarter. It looks like it did; I just want to confirm that.

Ronald J. Kramer -- Chairman of the Board and Chief Executive Officer

I think it's obvious.

Tim Wojs -- Baird -- Analyst

Okay. And then on Telephonics, could you just walk through what the accounting adjustment was that impacted backlog?

Brian G. Harris -- Senior Vice President and Chief Financial Officer

Sure. So, we've adopted revenue recognition guidance. In certain products now, you recognize the revenue when they're shipped. And in the past they would be -- sorry, cost to cost, so you recognize it over time. So in the quarter, we had a $4 million plus revenue benefit and a $1 million plus EBITDA benefit from that. Over the course of the year, we expect that to be immaterial, meaning it'll wave up and down as the year goes, and be immaterial for the year in total.

Tim Wojs -- Baird -- Analyst

Okay, does that have to do with like the commitment to inventory type accounting that's going through aerospace?

Brian G. Harris -- Senior Vice President and Chief Financial Officer

I'm not familiar with that term, frankly, so I'll say no.

Tim Wojs -- Baird -- Analyst

Okay. I'll talk to you about it later. And then maybe just the last question, you talked about mix, I think, at Clopay a little bit. How do you see mix in AMES and in the storage business trending over the last 12 to 18 months?

Brian G. Harris -- Senior Vice President and Chief Financial Officer

We have been able to improve our mix with innovations in our products and in our placements and our customers.

Ronald J. Kramer -- Chairman of the Board and Chief Executive Officer

We haven't owned the business for 18 months.

Brian G. Harris -- Senior Vice President and Chief Financial Officer

While in ClosetMaid, we've had it a full year now. So, yes -- I'm sorry.

Ronald J. Kramer -- Chairman of the Board and Chief Executive Officer

We're at the beginning of what we expect to be the improvement in ClosetMaid. And it is meeting and exceeding all of our internal expectations. Very excited about what it's going to be able to do for us, being part of AMES, in terms of efficiency, in terms of being able to have a broad range of products with branded consumer benefits. This is a really good acquisition that we see our ability to improve the business that we bought and integrated in with the business that we already owned, be able to take the products into new geographies, Australia, Canada, and the UK that are all our home markets. Stay tuned.

Brian G. Harris -- Senior Vice President and Chief Financial Officer

And I will just add, in our Clopay business we continue to see improvements in our mix.

Operator

Thank you. Our next question comes from the line of Nishu Sood with Deutsche Bank. Please proceed with your question.

Marius Suta -- Deutsche Bank -- Analyst

Hi, this is Marius Suta (ph). Hi, can you hear me?

Ronald J. Kramer -- Chairman of the Board and Chief Executive Officer

Yes. Could you hear us?

Marius Suta -- Deutsche Bank -- Analyst

Yes. Quick question, given that steel and aluminum have come down a bit in the last two months, has your input cost outlook for full year '19 changed?

Ronald J. Kramer -- Chairman of the Board and Chief Executive Officer

We give guidance once a year.

Marius Suta -- Deutsche Bank -- Analyst

Okay. And my second question, could you give us maybe an update on the procurement synergies and plant rationalization? Are you still in the planning phase or have you moved to the implementation phase on those?

Ronald J. Kramer -- Chairman of the Board and Chief Executive Officer

I think our investment into the CornellCookson facility shows you that we are in the implementation stage.

Marius Suta -- Deutsche Bank -- Analyst

All right. Thank you.

Operator

Thank you. Our next question comes from the line of Andrew Casella with Deutsche Bank. Please proceed with your question.

Andrew Casella -- Deutsche Bank -- Analyst

Hey, guys. Thanks for taking the question. Nice quarter. I guess first just can you just take us through again just the cadence of kind of when we think about the guidance you provided. And I think in the last quarter, I think the indication was that first-half would be a little bit weaker than the second-half just as we think about kind of the growth throughout the year. But could you revisit that, if that's changed at all, I mean, obviously I think you exceeded expectation, so just how you're thinking about that run rate coming out of the first quarter?

Ronald J. Kramer -- Chairman of the Board and Chief Executive Officer

Sure. So, generally, we will see Q1 and Q2 being our lower quarters and the third and fourth quarter being our higher quarters. So we were off to a good start and then we have really no change through the remainder of the year.

Andrew Casella -- Deutsche Bank -- Analyst

Okay, great. And then a final question from me, just as we kind of sit here, obviously, you have the 2022 maturity, just any thoughts on strategies around potentially terming that out? Thanks.

Ronald J. Kramer -- Chairman of the Board and Chief Executive Officer

Run the business, build up cash flow.

Andrew Casella -- Deutsche Bank -- Analyst

Okay.

Operator

Thank you. Our next question comes from the line of Michael Rehaut with JPMorgan. Please proceed with your question.

Elad Hillman -- JPMorgan -- Analyst

Hi. This is Elad Hillman on for Mike Rehaut. So, one of the things I wanted to just kind of look at a little closer is given the increased margin this quarter in home building products, which is really encouraging, but at the same time you've sort of maintained your full-year margin target. So how should I be thinking about the cadence of margin realization throughout the rest of the year? And could this potentially represent some upside to your full-year guidance? Thanks.

Ronald J. Kramer -- Chairman of the Board and Chief Executive Officer

So, we really give guidance once a year and we haven't changed it. wherever (ph) we are in the year, and we have always said that we believe the earnings power of our businesses are going to play out over time. We really like the acquisitions that we made, we are early in getting both ClosetMaid and Cornell integrated into the rest of our Home & Building products segment. We feel really good about where we're headed, but we are building this Company and have over a long period of time building shareholder value. We don't get distracted by year-to-year guidance.

Operator

Thank you. We have reached the end of our question-and-answer session. I would like to turn the call back over to Mr. Kramer for any closing remarks.

Ronald J. Kramer -- Chairman of the Board and Chief Executive Officer

Thank you, all. We'll look forward to reporting our second quarter in May. So, thank you and goodbye.

Operator

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.

Duration: 25 minutes

Call participants:

Brian G. Harris -- Senior Vice President and Chief Financial Officer

Ronald J. Kramer -- Chairman of the Board and Chief Executive Officer

Bob Labick -- CJS Securities -- Analyst

Alvaro Lacayo -- Gabelli -- Analyst

Tim Wojs -- Baird -- Analyst

Marius Suta -- Deutsche Bank -- Analyst

Andrew Casella -- Deutsche Bank -- Analyst

Elad Hillman -- JPMorgan -- Analyst

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