Greetings, and welcome to the Griffin 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. 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.
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, 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.
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. 1st quarter 2019 revenue increased 17% to $511,000,000 and our segment adjusted EBITDA from continuing operations increased 30% to $57,000,000 compared to the prior year. Higher revenue was driven by growth across our Home and 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 have been disciplined about directing capital to maximize shareholder value, including making growth investments in our operating businesses, supporting our dividend, opportunistically repurchasing shares and strategic M and A. Those of you who followed Griffin know that we have been enthusiastic about our June 2018 acquisition of Cornell Hopson, which is the North America leader in rolling steel and grilled products. This business is proving to be an advantageous addition to propane 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
in its pipeline, which are expected to be ready for full scale production within the next 2 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've launched a $14,000,000 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 mountaintop location will improve its manufacturing efficiency, shipping operations as well as increased manufacturing capacity to support full rate production of new products when they're ready to launch.
We have high confidence in our management team's track record led by Steve Lynch, at CLO Pay, and they've executed on and delivered spending 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 current 5.4x to 3.5x 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 $300,000 $9.91 per share, which still leaves us $58,000,000 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 a $0.075 per share dividend payable on March 21, 2019 to shareholders of record.
On February 21, this marks the 34th consecutive quarterly dividend paid 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, then I'll give it to Brian to go through the financials in a bit more detail. Let's start with Home and Building Products. 1st quarter revenue increased 19% to $440,000,000 driven both by the contributions from recent acquisitions and 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 $52,000,000 driven by higher revenue the related drivers of its growth, partially offset by increased input costs in 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 increased $71,000,000 compared to the prior year of $66,000,000 Segment adjusted EBITDA from continuing operations increased to $4,800,000 from $4,200,000 in the prior year. Backlog at the end of December was $367,000,000 During the quarter, Telephonics received 2 contracts of note. First was for maritime surveillance radars for the U.
S. Navy MH-sixty Romeo Helicopters. 2nd 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. It supports our expectation that Telefonica will return to growth in 2020 beyond.
It's an excellent business. We're really excited about its future. Brian, why
don't you
take him through the financials a little more? Thanks, Ron.
Beginning with a brief recap of our consolidated performance in the Q1, revenue of $511,000,000 increased 17% and gross profit increased 18% to $143,000,000 both in comparison to the prior year quarter. With the increase driven by the combination of organic growth and contributions from acquisitions, gross margin increased 40 basis points to 28% compared with prior year quarter. 1st quarter selling, general and administrative expenses excluding items that affect comparability were $114,000,000 up 11% from the prior year, primarily due to acquisitions. As a percentage of sales, SG and A was lower by 110 basis points year over year to 22.3%. First quarter GAAP 2019 income from continuing operations was $8,800,000 or $0.21 per share compared to the prior year period of $22,800,000 or $0.53 per share.
Excluding items that affect comparability from both periods, adjusted income from continuing operations was $9,200,000 or $0.22 per share compared to the prior year of $2,400,000
or $0.06 per share.
Our effective tax rate excluding items that affect the liability for the quarter was 34%. Capital spending was 8,400,000 compared to $10,800,000 in the prior year quarter. Including the strategic capital investment in the CornellCookson mountaintop facility that Ron mentioned, we now expect fiscal 2019 capital spending to be approximately $55,000,000 up $5,000,000 from our previous CapEx target of 50,000,000 We expect that spending related to the mountaintop project will be $10,000,000 in fiscal 2019, partially offset by a reduction of $5,000,000 in other CapEx. Depreciation and amortization totaled $15,100,000 for the Q1. As of December 31, 2018, we had $82,000,000 in cash and total debt outstanding of $1,150,000,000 resulting in a net debt position of $1,070,000,000 We had approximately $275,000,000 of balance for borrowing under a revolving credit facility subject to certain loan covenants.
Corporate and unallocated expenses, excluding depreciation, were $11,300,000 in the Q1. Our annual guidance for FY 2019 given during our November earnings call remains unchanged, a $230,000,000 plus of EBITDA on $2,200,000,000 in revenue, We 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 first quarter of fiscal 2019. Griffin is 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.
Thank you. We will now be conducting a question and answer session. Our first question comes from the line of Bob Zick with GJS Securities. Please proceed with your question.
Good morning. Congratulations on a nice start to the year.
Thanks, Bob. Good morning.
Just wanted to start, so the biggest delta versus our expectations on the positive side was the margins in Home and 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 2 years in margin. So talk to us about synergies, where you see the margins and the drivers there, please.
Sure. So first, the drivers were mostly mix and volume generated from our lawn and garden inns business and our copay residential garage door business. Our acquisitions are performing well. Their margins are for the CornellCooking business in line with our expectations with our closet made business starting to exceed the original 3% 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.
Okay. Terrific. And I know you've done a lot of work with your customers and your 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 no future happening or if you've gotten it kind of all taken care of or where you stand on the tariff impact expected?
Look, we have done an excellent job of mitigating input costs. Over the last several years, there have been 3 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.
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?
Sure. So we'll start to see the benefits of the project, which will complete towards the end of calendar 'nineteen. So we'll start to see those benefits come through in the second half of 'twenty as we ramp up. So this is an investment in space for both current products and capacity needs and new products. And this project will give us a space for those items as well as give us additional space to allow us to operate in a much more efficient
and I'll add to that. Strategically, we bought CornellCookson because of what we saw as 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 really a 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.
Your next question comes from the line of Salbao Lacayo with Gabelli. Please proceed with your question.
Good morning.
Good morning.
A question on organic growth in homebuilding 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?
So I guess the organic growth is about 5% for the quarter? That's correct. So the quarter comment is we see our ability to gain market share, our ability to run the business is 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.
And just the detail around volume versus price mix on that 5% organic number?
We don't break down it in specifics. They both contributed to the growth, mix more slightly more than volume.
Okay. Thank you.
Thank you. Our next question comes from the line of Tim Wojs with Baird. Please proceed with your question.
Hey, guys. Good morning. Nice start to the year.
Thank you. Thanks. Good morning.
CrozetMaid, you made some comments in the press release that there were some delays there. And just as you kind of gotten the business No, we don't. I thought you said there was some storage delays in the reduced storage and organizational volumes given the timing of orders?
Yes. It's just 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 Q2 1st to 1st. So it's just a matter of working working with our customers and seeing that ahead of us.
Okay. So you guys there was
a lot there. It was just kind of normal close to business. Okay. And then if you could talk to the facility, the Cardinal Pacific facility, any way to think about the feedback on that facility or what sort
of margin
contribution we could see over the coming multi year period from just the efficiencies and the things that you're talking about?
Sure. So this will help us contribute to get into our 12 plus percent 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%. Okay.
Okay. And then if
you look at just maybe price and mix and then you look at the inflation costs and the tariffs, would you say that price and mix would be able to offset the tariffs and inflation benefits in the quarter? It looks like it's there Just one.
I think it's obvious. Yes. That's
right. Okay. And then on Telephonics, could you just talk to what the accounting adjustment was that impacted backlog?
Sure. So we've adopted new 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 $4,000,000 plus revenue benefit and a $1,000,000 plus EBITDA benefit from that.
Over the course of the year, we expect that to be immaterial, meaning it will wave up and down as the year goes and be immaterial for the year in total. Okay. Does that have to do
with the commitment to inventory to the accounting that's coming to Aerospace?
I'm not familiar with the term, frankly, so
Okay. I'll talk to you that later. Okay. And then maybe just the last question. You talked about mix at Clopay a little bit.
How do you see mix in AIMS and in the storage business trending over the last 4 to 3 months?
We have been able to improve our mix with indications in our products and in our placements at our customers. We haven't owned
the business for 18 months.
Well, on ClosetMaid, we have it a full year now. So yes, I'm sorry. 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 AIMS 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 integrate it in with a business that we already owned, be able to take the products into new geographies, Australia, Canada and the U. K, that are all our home markets. Stay tuned.
And I'll just add, in our co pay business, we continue to see improvements in our mix.
Our next question comes from the line of Nishu Sood with Deutsche Bank. Please proceed with your question.
Hi, this is Martin Sin for Nishu. Hello? Hi, can you hear me? This is Mario Yes,
I can hear you. Can you hear us?
Yes. Quick question, Given that steel and aluminum have come down a bit in the last few months, has your input cost outlook for full year 'nineteen changed?
We give guidance once a year.
Okay. And my second question, could you give us maybe an update on the procurement synergies and rationalization? Are you still in the planning phase? Or have you moved to the implementation phase?
I think that our investment into the CornellCookson facility shows you that we're in the implementation stage.
All right. Thank you.
Your next question comes from the line of Andrew Kusalla with Deutsche Bank. Please proceed with your question.
Hey, guys. Hi, Andrew. Nice quarter.
Hi, Andrew.
I guess, first, just can you just take us through again 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
the 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 expectations. So just how you're kind of thinking about that run rate coming out of the Q1?
Sure. So generally, we'll see Q1 and Q2 being our lower quarters and the 3rd and 4th quarter being our higher quarters. So we were off to a good start. And then we have really no change since the remainder of the year.
Okay, great. And then final question for me. Just as you as we kind of sit here, obviously, you have a 2022 maturity. Just any thoughts on strategies around potentially terming that out? Thanks.
Run the business, cash flow.
Okay.
Thank you. Our next question comes from the line of Michael Rehaut with JPMorgan. Please proceed with your question.
Hi. This is Elad Hillman on for Mike Rehat. So one
of the things I wanted
to just kind of look at a little closer was given the increased margin this quarter in homebuilding products, which is really encouraging. But at the same time, you've still 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?
So we really give guidance once a year and we haven't changed it. We're early 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're early in getting both CrozzetMaid and Cornell integrated into the rest of our Home and Building Products segment. We feel really good about where we're headed. But we're building this company and have over a long period of time building shareholder value.
We don't get distracted by year to year guidance.
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.
Thank you all. We'll look forward to reporting our first Q2 in May. So thank you and goodbye.
Thank you. This concludes today's teleconference. You may disconnect your lines at