Greetings, and welcome to the Griffin Corporation's 2nd Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen only mode. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Brian Harris. Please go ahead.
Thank you. Good afternoon, everyone. With me on the call is 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. 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 risks and uncertainties that can change as the world changes. Please see the cautionary statements in today's press release and 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.
Thanks. Welcome, everyone. We're off to a great start in the first half of fiscal twenty nineteen as our second quarter results continue to reflect the benefits of our strategic portfolio reshaping and efficiency initiatives. Our performance was driven by robust demand for our diversified product offerings in home and building products and our team's solid execution across our businesses. 2nd quarter 2019 revenue increased 15% to $550,000,000 compared to the prior year period and our segment adjusted EBITDA increased 23 percent to $54,000,000 Both the revenue and segment EBITDA improvements were driven by our Home and Building Products segment, as I mentioned earlier, which had a 20% increase in revenue, 8% of which was organic with the balance from our June 2018 CornellCookson acquisition.
Segment adjusted EBITDA reflects the increased sales in the quarter, as well as the effects of our continuing integration and efficiency initiative efforts. Across our organization, we're executing our strategy to optimize our businesses and seeing excellent results. At Aims, we continue to identify opportunities to gain market share and improve productivity through combining the resources of AIMS and ClosetMaid, while also making investments in new product innovation. Clopay is beginning to see the benefits of the CornellCookson acquisition through leveraging its increased scale in the supply chain, improving productivity and finding opportunities to cross sell by leveraging the complementary nature of its products across the two businesses. To that end, we have ample resources to invest in our businesses to capture these opportunities.
Our previously announced CornellCookson facility expansion of our mountaintop Pennsylvania facility speaks to the opportunity ahead of us and our commitment to invest in our business to realize that. This project remains on track as we look to bring on an additional 90,000 square feet of manufacturing space, which will support volume growth, improve operational efficiencies and deliver new products into the pipeline over the next 2 years. Moving on to capital allocation, our efficiency initiatives and business integration plans will contribute to enhanced long term free cash flow generation, which will drive our deleveraging efforts over the next few years. We continue to evaluate strategic bolt on acquisitions to drive long term growth. However, we remain disciplined in our approach and are focused on ensuring that any acquisition would be highly aligned within our existing businesses and immediately accretive.
As we announced earlier today, our Board authorized a $0.075 per share dividend payable on June 20, 2019 to shareholders of record on May 24, 2019. This marks the 35th consecutive quarterly dividend paid to shareholders and it has grown at an annualized compound rate of 20% since 2012. We still have $58,000,000 remaining under our existing board approved buyback authorizations. We continue to believe our stock is a compelling value story, but we're laser focused on executing on our strategic plan, which will drive higher profitability and free cash flow over the coming years to delever to our 3.5x target. Let me now spend a few minutes and provide some additional comments on each of our operating segments.
Start with Home and Building Products. 2nd quarter revenue increased 20 percent to $475,000,000 due to the contributions from the CornellCookson acquisition and 8% organic growth driven by increased volume, new product introductions and pricing. Segment adjusted EBITDA increased 23 percent to $49,000,000 driven primarily by revenue, partially offset by increased input costs, including raw materials and the effects of tariffs. We continue to see strong demand for our products across the segment and realize benefits from electronics business, 2nd quarter revenue decreased to $75,000,000 compared to the prior year period of $82,000,000 segment adjusted EBITDA from continuing operations increased to $4,900,000 from $4,000,000 in the prior year backlog at the end of March 31 was 3 $78,000,000 We continue to remain confident in the outlook for telephonics. We have a healthy pipeline of U.
S. And international opportunities, including a $50,000,000 plus opportunity for foreign military sales of MH-60R radar communication systems with India. We're seeing increased activity in quotes and bidding. And during the quarter, we saw a strong conversion resulting in a rising backlog with a book to bill of 1.15 times. This increased activity continues to support our expectation that telephonics will return to growth in 2020.
I'm going to turn it over to Brian for more details on the financial results. Brian? Thanks, Ron. Beginning with a brief recap of our consolidated performance. In the Q2, revenue of $550,000,000 increased 15% and gross profit increased 13% to $138,000,000 both in comparison to the prior year quarter.
Gross margin decreased 40 basis points to 25% compared to the prior year quarter. 2nd quarter of selling, general and administrative expenses, excluding items that affect comparability, were $112,000,000 up 8% from the prior year, primarily due to acquisitions. As a percentage of sales, SG and A adjusted items that affect comparability decreased 130 basis points year over year to 20.3%. 2nd quarter 2019 GAAP income from continuing operations was CAD 6,500,000 or CAD 0.15 per share compared to the prior year period of CAD 2,000,000 or CAD 0.05 per share. Excluding items that affect comparability from both periods, current quarter, adjusted income from continuing operations was $6,400,000 or $0.15 per share compared to the prior year of CAD 2,700,000 or CAD 0.06 per share.
Our effective tax rate excluding items that affect comparability for the quarter was 34%. Capital spending was CAD 9,000,000 compared to CAD 11,000,000 in the prior year quarter. We continue to expect CapEx for fiscal 2019 to approximate CAD 55,000,000 Depreciation and amortization totaled $15,500,000 for the Q2. As of March 31, 2019, we had $58,000,000 in cash and total debt outstanding of $1,220,000,000 resulting in a net debt position of $1,160,000,000 We had approximately $176,000,000 available for borrowing under the revolving credit facility subject to certain loan covenants. Corporate and unallocated expenses, excluding depreciation, was $11,200,000 in the quarter.
Our annual guidance for 2019 given our November earnings call remains unchanged at $230,000,000 plus of EBITDA and $2,200,000,000 in revenue. We still expect free cash flow to exceed net income for the year. Now I'll turn the call back over to Ron. I'm very pleased with our performance in the Q2 of fiscal 2019. We're excited about the trends we see across all of our businesses.
We see margin improvement through the consolidation of our recent acquisitions and continued efficiency initiatives driving long term shareholder value. We're executing well and we're confident on our outlook. Operator, we're happy to take any calls.
Thank you. We will now be conducting a question and answer session. Your first question comes from Bob Lubick, CJS Securities. Go ahead please.
Good afternoon. Congratulations on a nice quarter.
Thanks, Paul. Thanks. I wanted to start with
the organic growth. Obviously, 8% is very attractive. I was hoping you could kind of dig down a little bit and kind of give us a sense of what areas that's in, how much is new product introduction and kind of share gains versus pricing? And how should we think about that going forward? Because that's certainly a nice number and higher than we were anticipating.
Sure. So the organic growth was driven by the AIMS business this quarter. It was a combination of all those things, frankly, volume, new product and mix. The CBP business, excluding CornellCookson, was flat for the quarter, mostly related to a tough comp in the prior year. Looking forward, we continue to expect organic growth of 5% to 6% in our home and building products space for the year.
No change there.
Okay. Great. And then just moving over, I think you touched on this quickly in your prepared remarks, but the mountaintop expansion, if you could just talk about the progress there and remind us of the benefits and the timing of when you'll have new products out
of that facility and stuff?
Sure. It's progressing as planned. Construction has started. As far as the new products, they'll start in 2020, and this is a multiyear effort to get those products rolled out. These new products are revenue sorry, revenue enhancing, of course, and margin enhancing.
And we're looking forward to their rollout. We're very excited about them.
Okay. Great. Last one for me then. Just kind of on the synergy update, given that you have a lot of in hand margin opportunities over the next, I guess, 12 to 24 months. If you can give us a sense on integration of management teams, looking to purchase commodities together and other synergies that you have in your roadmap ahead?
It's early days. We view the integration of CornellCookson into Clopay and ClosetMaid in James as multiyear journeys to get to 12% or better at the EBITDA line. And we're very confident that that's where we're headed in both of those businesses.
Thank you. Your next question comes from Giulio Romero, Sidoti and Co. Go ahead please.
Hi, good afternoon.
Hi, Julien.
So I wanted to ask about the seasonality of revenues in CBP. Can you just speak on that? And maybe what's a fair estimate for the back half of the year?
Sure. For CBP, second quarter is generally and what is expected to be this year is its lowest quarter. So as the year progresses, we expect increased revenue into Q3 and even more so into Q4 as their general trend.
Okay. And could you just maybe speak to pricevolume mix in the quarter in maybe the AIMS business, if you could?
Sure. For the AIMS business, all those things contributed. We don't give specifics, but they all contributed significantly, I'd say, roughly in line with each other. Actually, I should say volume was significant in the quarter and the other 2 were mostly in line with each other. So to call it 50% volume with the balance of the other.
Okay. Very good. I'll hop back in queue and thanks for taking the questions.
Sure. Thank you. Your next question comes from Justin Barringer Gould Research. Go ahead please.
Sorry, good afternoon. It's been that type of day. Yes, it is the afternoon. I guess within Clopay Building Products, you mentioned that organically it was flat, but it was lapping a tough comp. Beyond the tough comp, are you seeing any sort of deceleration in newer remodeling demand for garage doors?
Because if it was flat organically, there's price some price to volumetrically, it was probably a little negative. So maybe a little clarity there would help.
The answer to your question is no, we're not. The weather patterns were a big impact for that business in the quarter. We're very encouraged about the trends we're seeing for the spring and April is off to an excellent start.
Okay. That's good. With respect to CornellCookson, I mean, are you able to evaluate sort of the ramp for the product among commercial customers? Or are you effectively capacity constrained prior to the mountaintop expansion?
So we currently have capacity enough capacity to meet current demand. We're expecting increased demand on both our current products, and we're rolling out new products. In addition, we're expanding the facility to help us be more efficiently operationally by adding base and staging space. And we have a West Coast facility in Goodyear, Arizona that we think has much work ahead of it to get to a level of operating efficiency and that will further drive the profitability of that segment. So this is much about an operational improvement story than it is about us having grow the top line of that business.
We think we can make substantially more money on the existing levels of revenue. And we think by being more efficient and applying many of the things that Clopay has done in its own integration over the last 10 years to become the leading residential business, very optimistic about what we're going to be able to do to improve the CornellCookson business profitability from where we acquired it and over time, in addition, grow the revenue stream.
Okay. That makes sense. Are you able to break out any financial metrics, revenues or EBITDA margins for CornellCookson this quarter or maybe qualitatively directionally discuss where the business is at?
Well, I think going back historically, when we bought it, we said we were buying it at 9% or less EBITDA margin. And we continue to see it on a path to being better than 12%,
and we're not there yet.
We still expect $200,000,000 for the year, and I believe the quarter revenue is $48,000,000
Okay. In terms of bolt on acquisitions, is there any change to your strategy? Obviously, there seems to be a preference for debt pay down. But in terms of what you might be looking at present, what types of buckets do they fall in?
Broadly, we like consumer businesses that were Australian business substantially through acquisition. We intend to do the same thing in the UK. We're off to a good start there. And what's obviously from Brexit and some of the other pressures, a difficult economy that could be opportunistic for us to be able to be a dollar investor into what's going on there. So we actually see a number of different categories that are of interest, number of different companies that are out there.
Pricing is always a challenge and competition against an unlimited amount of private equity capital chasing assets is something that we're constantly competing against, but we feel really good about where our businesses are, how they're performing. And I think our proven ability to take the businesses that we bought and make them better. And over time, we expect to apply that to other products and other businesses.
Got it. All right. Thanks for taking my questions.
Thank you.
Thank you. Your next question comes from Tim Wojs from Baird. Go ahead please.
Hey, good afternoon gentlemen. Nice job.
Thanks, Matthew.
I had a couple of questions. I mean, maybe first in the AIMS business. I was just curious if you had any color just on how the season developed for you? Just a lot of, I don't know if you want
to call it weather whirlwinds or whatever.
We had snow here last week in Milwaukee. So how maybe the season developed for you there? And then I'm not sure if you get access to or could see PLS data, but any sort of comments on kind of what you're seeing from a sell out perspective just as kind of get into the March, April, May type time frames?
Sure. So we did see a good load in, which is which drove some of the volume in the quarter. We don't see POS necessarily this early, but as the quarter progresses, May is only a few months. And when that if good weather occurs in May, then we'll see better load or better replenishment, I should say, and that will drive the second or the third quarter rather.
Okay. Okay, great. And then from a raw material perspective, I think steel and oil has kind of come off a bit of the from the highs. How are you guys kind of balancing raw materials going forward? And is there any kind of expectation that there might be a little bit of benefit on the raw material side as you kind of work through the calendar year here?
So year over year, raw materials are still up. Whether they'll fluctuate a little bit here or there. It's always possible. We have many input costs. So one goes up, one goes down across many different companies and many different locations geography wise.
So I don't expect any particular benefit from any given item. And the other thing that I would add is, if you remember going into this year, we had talked about 70 +1000000 of potential negative impact from tariffs and other things. And I'm happy to say that we've worked our way through all of it and that's no longer a concern of our outlook.
That's great. It's encouraging to hear. So good luck on the second half here.
Thank you.
Thank you. Thank you. Your next question comes from Nishu Sood from Deutsche Bank. Go ahead please.
Hi. This is actually Maurice in for Nishu. Thank you for taking my question.
Hi. How are you doing?
Good, good. A quick question on copay. You mentioned unfavorable volume mix. What kind of mix is it? Could you tell us more about that?
Is it product mix? Is it lower priced products?
Yes. So that's exactly right, lower priced product. So basically, we had a tougher comp to the prior year Q2. It's generally our lightest quarter to begin with. And as Ron mentioned earlier, we had a bit of weather impact, particularly in February in the Midwest.
And do you see that more in the new construction market given that some of the dealers are starting to build more towards the lower end?
Yes. I think as you have looked and we've tried to explain, less than 10% of our overall throughout all of our businesses is new home construction related. So this is really just deferred purchases that we see that we had a bit of a weather impact in the quarter that has snapped back into the 3rd quarter. April was a very
positive month. Yes. That's very useful. Thank you for that. And then on ClosetMaid, I think last quarter you mentioned a timing impact and given the strong growth this quarter, I would imagine that some of the strength was driven by that, but I just wanted to confirm.
Yes. The timing was correct, and it did come through in the second quarter, and we're seeing nice volume there.
Okay. Appreciate it. Thank you very much. Okay.
Thank you.
Thank you. I will take the opportunity just to remind everyone, it is Your next question comes from Donovan Chaney, Wells Fargo. Go ahead please.
Hey, good afternoon and thanks for taking the question. Could you guys talk about working capital for
just a minute? It looks
like there's a kind of a good sized receivables usage this quarter that drove debt a bit higher, I'm assuming. I just want to understand how to what extent that's normal seasonal usage that should come back later in the year versus perhaps a more permanent investment in the business?
Sure. So you're just about right. So our historic history and we expect it to continue. The first half of the year is a cash nuisance period for us. In the second half of the year, we expect significant free cash flow.
So you'll see those receivables come back into the business via cash, and that cycle will continue again and again in the years
to come. There are no further questions at this time. I would like to hand the floor back to yourself, Brian.
Thanks, everyone, for joining. We look forward to a great second half of the year, and we'll speak to you next quarter.