Greetings, and welcome to the Gripen Corporation 4th Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Brian Harris, Chief Financial Officer.
Thank you, Omar. 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.
In providing this guidance, we are also mindful of the risks and impacts of weather to AIM's, the health of the economy on home and building products, the U. S. Department of Defense budget on defense electronics and foreign exchange fluctuations. 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 thank you for joining us on today's call. Our fiscal 2018 results begin to reflect the strategic actions we've taken to grow Griffin.
Full year revenue increased 30% to $2,000,000,000 reflecting the impact of our acquisitions and our segment adjusted EBITDA from continuing operations was up 24% to $213,000,000 I'll come back to our operating performance in a moment, but first, I'd like to take a few minutes to share some of our key takeaways as we focus on fiscal 2019. It's been nearly 2 years since we began to strategically reshape our portfolio with the goal of driving increased cash flow and improving our profitability. Our strategic actions included the acquisition of ClosetMaid in October 2017, the sale of our plastics business in February 2018 and the acquisition of CornellCookson in June 2018. These actions, along with the 5 bolt on Haynes acquisitions made over the last 20 months have created an operating structure with stronger free cash flow and a diversified portfolio of highly attractive leading brands in each of their respective categories. The integration process is proceeding as planned.
Aims and ClosetMaid have been combined under one leadership team, and the integration of ClosetMaid into AIMS is progressing. ClosetMaid's 1st year performance was right on target with our expectations. We're confident about the long term prospects of this acquisition as part of AIMS. We expect significant future improvement in the operating performance of these combined businesses. CornellCookson, we're delighted with the integration that we've seen into Clopay.
CornellCookson acquisition has delivered performance we expected since its acquisition in June. Our familiarity with the CornellCookson business and personnel prior to the acquisition, along with the highly aligned strategic and cultural fit of the businesses are expediting this transition. We continue to see CornellCookson as a fantastic complement for our Clopay doors business. Clopay is the leading residential garage door manufacturer in North America, and it also serves the market for commercial panel doors. With the CornellCookson acquisition, we've added to Clopay the U.
S. Leader in commercial rolling steel products. We expect this powerful combination to accelerate profitability in the years ahead. While we spend more time on our larger acquisitions, the bolt on ones are also making an important impact. Over the past 2 years, we acquired Kelke and La Hacienda in the United Kingdom.
With these businesses, we've now established the U. K. As our 4th home market. We have a strong management team at AIMS UK that has made tremendous progress in a relatively short period of time, and we have high expectations for these businesses in the years to come. Our other smaller acquisitions in the United States and Australia are helping to strengthen our position in those markets through expanding our product portfolio and increasing our market presence.
We've been able to identify and acquire these businesses at attractive valuations and seamlessly integrate them into our operations. As we continue to integrate these acquisitions and realize revenue and margin improvement opportunities, we expect to steadily increase Home and Building Products EBITDA margins. We remain positive on the outlook for our Home and Building Products segment, despite the concerns recently expressed by others about the U. S. Housing sector.
We continue to grow revenues and improve our profitabilities through product innovation and category expansion, efficiency initiatives and acquisition integration. There has been no slowdown in these trends subsequent to our fiscal ninethirty year end. Moving to our capital allocation strategy. We take a multipronged approach with the goals of driving both organic and inorganic growth, deleveraging our business and returning cash to shareholders. As a result of our portfolio reshaping, we've enhanced our free cash flow generation.
And in fiscal 2019, we expect free cash flow to exceed 100 percent of net income with a significantly reduced capital expenditure profile. We are keenly focused on directing our capital to reduce our net debt to EBITDA leverage from its current 5.5 times calculated as defined in our credit agreement to 3.5 times over the next few years. As part of our growth strategy, we will continue to target strategic bolt on acquisitions while remaining disciplined with our valuation and hurdle rates. Further, as we demonstrated throughout the years, we will continue to return cash to shareholders primarily through our quarterly dividend program. Earlier today, our Board authorized a $0.0725 per share dividend payable on December 20 to shareholders of record on November 29.
This is a 4% increase over the prior year quarterly dividend and our 7th consecutive year of increasing dividends. Since its inception, our regular dividend program has grown at an annual compound rate of 20% per year. And additionally, in April of this year, we returned cash to shareholders via $1 per share of special dividend. Next, I'd like to provide a brief update on our segment. So let's start with Home and Building Products.
Full year sales increased 48% to $1,700,000,000 driven both by the contributions from the recent acquisitions and 7% organic growth. Segment adjusted EBITDA grew by 40% to $177,000,000 driven by the increase in revenue, partially offset by the effects of higher input costs, including tariffs and commodities and the incorporation of the acquisitions initially operating at lower margins than our existing businesses, as expected. We continue to see strong demand for our products across the segment. It is important to note that as a result of our strategic repositioning and the steady evolution of our products, we have significantly diversified our businesses across product lines and markets. As a result, the residential new construction market is not the primary driver of our door business.
For Aims, our product portfolio continues to focus on professional and consumer tools and outdoor lifestyle products. We estimate that less than 10% of our combined home and building products businesses serve residential new construction. The vast majority of the growth in Clopay sales and margins has been focused on repair and remodeling activity and our investments in product design and production capacity have enabled us to better serve existing homeowners who desire premium high end doors as part of their remodeling. Additionally, with the recent acquisition of CornellCookson, our doors portfolio now includes increased commercial door solutions, further diversifying our offering. Lastly, the addition of ClosetMaid to Aims has increased our reach into the home with sales in that business principally driven by the general health of the economy rather than construction cycles.
Let's turn to Telephonics, our Defense Electronics business. Fiscal 2018 revenues, as expected, decreased to $326,000,000 compared to the prior year of $412,000,000 Segment adjusted EBITDA from continuing operations declined to $36,000,000 from $46,000,000 Backlog at the end of September was $345,000,000 which is slightly down year over year. Book to bill for the full year was approximately 1:one, showing that bookings and sales are stabilizing. Overall, we remain confident in the outlook of our Defense Electronics segment as we have a healthy pipeline of U. S.
And international opportunities to capture increased spending within the intelligence and surveillance sector, particularly as it relates to naval and army readiness, which has been increased under the budget appropriations. Overall, we're extremely positive about the untapped earnings potential across all of our businesses. I'll turn it over to Brian to go through the financials with a little more detail. Thank you, Ron. Beginning with a brief recap of our consolidated performance in the 4th quarter, revenue of $546,000,000 increased 27% and gross profit increased 30 percent to DKK148,000,000 both in comparison to the prior year quarter.
The increase is primarily due to acquisitions. Gross margin increased 63 basis points to 27.2% compared to the prior year quarter. 4th quarter selling, general and administrative expenses, excluding items that affect comparability, were $109,000,000 or 20 percent of sales compared to the prior year period of $83,000,000 or 19.3 percent of sales, with the increase in SG and A primarily due to acquisitions. 4th quarter GAAP 2018 income from continuing operations was $1,000,000 or $0.02 per share compared to the prior year period of 4,300,000 dollars or $0.10 per share. Excluding items that affect comparability from growth periods, current quarter adjusted income from continuing operations was $15,700,000 or $0.38 per share compared to the prior year period of $12,000,000 or $0.28 per share.
For the fiscal year, revenue of $2,000,000,000 increased 30 percent and gross profit increased 30% to $530,000,000 both in comparison to the prior year, with the increase primarily due to acquisitions. Gross margin was 26.8%, consistent with the prior year. Full year selling, general and administrative expenses, excluding items that affect comparability, were CNY418,000,000 or 21.2 percent of sales compared to the prior year period of CAD 324,000,000 or 21.3 percent of sales. Fiscal 2018 GAAP income from continuing operations increased to $33,300,000 or $0.78 per share compared to the prior year period of $17,800,000 or $0.41 per share. Excluding items that affect comparability from both periods, current year adjusted income from continuing operations was CAD 32,100,000 or CAD 0.76 per share compared to the prior year period of CAD 19,000,000 or CAD 0.44 per share.
Our effective tax rate, excluding items that affect comparability for the current and prior year, were 33.8% and 39.7%, respectively. For the full year fiscal 2019, we expect normalized tax rate to approximately 33%. As is always the case, geographic earnings mix and any legislative action, including new guidance on tax reform matters, may impact rates. Capital spending net was $49,000,000 compared to the prior year capital spending of $80,000,000 which included capital spending supporting the plastics business. For fiscal 2019, we expect capital spending to be approximately $50,000,000 Depreciation and amortization totaled $56,000,000 for fiscal 2018, and we expect the full year 2019 depreciation and amortization to approximately $63,000,000 of which approximately $10,000,000 is amortization.
The increase in D and A is primarily due to the acquisitions. As of September 30, 2018, we had $70,000,000 in cash and total debt outstanding of $1,100,000,000 resulting in a net debt position of $1,050,000,000 We had $310,000,000 available for borrowing under our revolving credit facility subject to certain loan covenants, and we expect net interest expense of approximately $66,000,000 dollars for fiscal 2019. Corporate and unallocated expenses, excluding depreciation for fiscal 2018, were 45,000,000 For 2018, this included company wide equity and ESOP compensation expenses totaling $16,000,000 We expect 2019 to be in line with 2018. Finally, regarding our guidance for fiscal 2019, we expect total revenue to increase 12% to $2,200,000,000 compared to $2,000,000,000 in 2018. The full year contribution of the Kornalcoxon acquisition is expected to be 7%, and organic growth is expected to be approximately 5%.
The Home and Building Products segment growth is expected to increase approximately 14% with organic growth of between 5% 6%, and Defense Electronics segment is expected to be consistent with 2018. Fiscal 2019 segment adjusted EBITDA is expected to be $230,000,000 or better or 8% growth versus 2018. The full year contribution of CornellCookson acquisition is expected to be approximately 6%, and organic growth is expected to be 2% regarding EBITDA. Our organic EBITDA assumes a lag of price realization and offsetting increased input costs, integration and innovation related investments the ClosetMaid and CornellCookson acquisitions and Defense Electronics EBITDA consistent with 2018 EBITDA levels. Consistent with our acquisition expectations, we expect fiscal 2019 CornellCookson revenue and EBITDA to be approximately $200,000,000 $18,000,000 respectively.
Our guidance does not include the potential 15% increase in Section 301 tariffs expected in January 2019. We would expect to pass these through additional costs if and when they become effective. Now with that, I'll turn the call back over to Roger. I'm excited about our future growth and want to thank our 7,000 plus employees for their dedication and perseverance. Our strategic actions represent the culmination of 10 years of hard work.
During this time, Griffin has evolved from a decentralized holding company to a more strategic and focused buyer and builder of businesses. We have a talented team both at the corporate and operating company level, which is the key to the success of our company. We have the opportunity to improve margins further by leveraging procurement, distribution and warehousing, manufacturing and administrative functions coupled with revenue enhancement opportunities. We're just starting to see the benefits of these businesses together within our portfolio. We're committed to long term value creation for our shareholders.
Griffin has never been in a better strategic position. Operator, we'll now take questions.
At this time, we'll be conducting a question and answer session. Our first question comes from Bob Labick, CJS Securities. Please proceed with your question.
Good afternoon. Thanks for taking my questions. It's obviously been a wonderful and transformational year for you.
Thanks, Bob. Thank you.
I just wanted to start with that. Obviously, you're still in the process of integrating 2 exciting acquisitions in Causobate and Cornell and then obviously the bolt ons as well. But could you talk about some of the synergy opportunities and the timing for these. It seems like you have a lot of opportunity in hand for margin growth. So give us a sense of how long that takes to play out and where your efforts are focused.
It's really 4 companies that are going to become 2, and let's talk about them separately. So you have ClosetMaid going into Aims and you have CornellCookson going into Clopay. They're very different businesses that have some similarity in their customer base, but the opportunities for us are really separate. The ability for the AIMS business to be able to take the whole organizational category and be able to provide the levels of service, the levels of innovation that we think we're able to do with that business really is about the longer term revenue enhancement and the margin improvement story for us has been about taking ClosetMaid, which is when we bought it was 300,000,000 dollars revenue business that was not performing nearly at the margin expectations that we wanted to. This was meant to be a multiyear journey.
We fully expect to be able to improve the margins of closet made as part of aims. And then separately, the Clopay business, which is the leading U. S. Residential garage store business. And we went through hopefully in detail that people understand of how diversified that stream of revenue is and how uncorrelated it is to the new home construction business to be able to combine that with the leading commercial door business at a time where the growth of distribution centers and commercial and institutional demand for those types of rolling steel doors is a broader complement.
So we're thinking about a multiyear ability to save on things like steel purchasing, wood purchasing, wire purchasing, facilities rationalization in terms of distribution centers. And all of those things come from taking what we've proven we can do in diverse businesses like plastics, manage through cycles and improve both revenues and reduce expenses. So we're just getting started in the ability to grow the margins of those businesses. If I had to put a number on it, I would tell you we want to get to better than 12% at the EBITDA line, and we think that's within our near term capability. That's far from what our long term desire is.
But it's a long way from where the acquisitions that we bought were running when we bought them. So hopefully, that gives you some flavor as to how much upside we see within our control.
Yes, that's great. Very helpful. I appreciate that. And then jumping over to Telephonics, obviously, you gave an outlook for consistent with this year for the most part, but also talked about the pipeline. What does it take to turn pipeline into backlog?
And how are you looking at things beyond fiscal 2019 there?
Sequestration was a 5 year exercise in a reduction in revenues and accordingly a reduction of profitability. Heliponics has been and will leader in the intelligence, surveillance and reconnaissance products, particularly maritime radar products. We saw revenue decrease as the defense budget was contracted. The churn in the defense budget really started in December of 2017. The flow through from that, we expect to impact 2020 beyond.
We believe we're at the bottom of the cycle, but that's a cycle that's been 5 plus years in the making. We see 2019 consistent with 2018. We see improvement in 2020, and we see growth beyond that. It is a fabulous business. It is desirable for us to build on it.
We really see it as a gem of a business at the bottom of a cycle, and we're excited about the programs and the investments that we've made during this downturn and fully expect to build back to a much higher level of both revenues and profitability in the future.
Super. Okay, great. I will jump back in queue. Thank you.
Thank you.
Our next question comes from Julio Romero, Sidoti and Company. Please proceed with your question. Hey, good afternoon, everyone.
Hello. Hi.
So Clopay had a nice 10% organic growth in the quarter. Could you give us a quick breakdown of maybe price volume mix and what you expect going forward for 2019?
Sure. So price and mix and volume all played a part with price and mix playing a larger part than volume in the quarter. We continue to see that business growing at a similar pace that we've seen in the past. Across our homebuilding products business, we expect to see a 5% to 6% organic growth. Roughly, I would say, half is price related with the balance being related to volume.
And that would more or less be equal across our businesses.
Got it. And then just ClosetMaid, I saw you had called out a $311,000,000 contribution in the year. Do you have the EBITDA contribution for that business during 2018?
So when we bought the business, we put out there that it was roughly a $25,000,000 EBITDA business in the 1st year of ownership, and we met that expectation.
Got it. So maybe you have that business under your belt for the past year. What have you learned after 1 year of having that business there? And what's a fair revenue and EBITDA expectation for 2019?
So again, we've combined that business with AIMS, and we won't be separating out revenue or really EBITDA for that business in the future. However, I really refer back to Ron's comments. So we've combining these businesses. We see a lot of opportunity. We have much improvement opportunities that we're going to be going after, particularly in this year.
And the combined homebuilding products, in this case, we're talking about Haynes and Cosmede Business, the benefits from those efforts will start showing themselves in 'twenty and beyond. And just to Julio, it's Ron. Just to add to that, when you look at AIMs, ClosetMaid is part of AIMs. That will be a $1,000,000,000 plus revenue part of our home and building products business. And we have every expectation of those blended margins growing to 12% in that business.
Got it. And then maybe just taking a step back here, I know you called out some there's multiple avenues for growth and hitting your financial targets, leveraging the manufacturing, procurement, G and A. But what do you guys view as the near term opportunity that we should expect to flow through the income statement? What's kind of the low hanging fruit that would come first?
So the first item we'll chase is procurement. And we've already actually started that process and obviously, we'll continue that through 'nineteen. But the majority of our efforts really will show the benefits, as I mentioned, in 'twenty as we have to go after some of these items in 'nineteen and there's cost associated in doing so.
Our next question comes from Justin Bergner, Gabelli and Company. Please proceed with your question.
Good afternoon, Ron. Good afternoon, Brian.
Hi, Justin. Hi.
Hi. First question would be, it seems like I infer that the Q4 of the 4% organic growth in Home and Building Products, it seems like from your comments that less than 2% of that was volume related. But it appears that as you look out to the next year, you see the volume should stay the same or so we accelerate in 'nineteen?
Sure. So in the quarter and in 2018 overall, AIMS' volume was impacted by timing and weather basically. So we don't expect that to reoccur. So that's correct. We've had roughly 2% organic in the AIMS business for the year, and we expect that to increase to roughly 3% going forward as that will normalize.
So that was the area that really impacted that. And the propane building products at roughly 11% organic growth. We don't expect that type of volume to continue necessarily, but of course, the business is very strong and we have roughly half half of price versus volume growth.
Okay. So just to make sure I understand, you're saying the fiscal year just completed, the volume growth in names was about 2% and the volume growth in Clopay was about 5%.
No. That's not actually what I meant. That's what it came across. So I'm saying organic growth in AIMS was 2% impacted by weather. CDP's organic growth was 11%, which was driven by price, mix and volume.
And I'm simply saying going forward, we see the price increases related to input costs, commodities, tariffs, etcetera, along with volume is about fifty-fifty for the 5% to 6% growth that we've had.
Okay. Thanks for clarifying. Just one or two more questions. When you were referring to the 10% of your business that was exposed to new construction, were you referring to homebuilding products as a whole or just Clopay?
As a whole.
Okay. Just to make sure,
as a whole.
Okay. So for Clopay, it might be a little bit higher than that 10%. For Ames, it might be a little bit less?
That's correct. So yes, Clopay itself, co pay building products excluding Cornell is plusminus15% for new construction and aims including actually, I just said the ClosetMaid business by itself is high teens new construction.
Okay. Got it. And then lastly, you mentioned the headwinds to margins looking out into fiscal year 'nineteen between integration expenses and sort of input costs. So the integration expenses then those will run through the adjusted numbers in 2019. Is that an appropriate inference?
And is it possible to sort of quantify roughly how much those headwinds will be in each of those 2 buckets?
So we have included in our guidance all items related to negotiating price increases with our customers, productivity initiatives or supply chain automation expense control, all the impacts of the tariffs, the commodities, freight, labor and the costs to go make investments to go after margin improvements. So we bake all these things in. We look at the risk rate spend into our budget. So to pull out a specific number is not really appropriate, and we don't really want to disclose exactly what we're going to be investing. But going back to the first part of your question, yes, we expect to absorb that into our adjusted EBITDA number of twothree.
And the only thing I'd add to that is when we give guidance, we give it for credit investors. We're nowhere near the peak earnings, and we try to be realistic about the ups and downs that could affect our business. Over any given 1 year period. And we think we've always consistently set the bar at places that we've been able to meet or exceed. And given all the clouds of uncertainty about the economy, the political risk that's out there, we're still very confident about what we see in our business.
And I will just say that we are nowhere near the peak earnings power of these businesses.
Okay, thanks. I'll hop back in the queue.
Thank you.
Our next question comes from Neerush Sood, Deutsche Bank. Please proceed with your question.
Thank you. Yes, and thanks for all the details and breakdowns. If we look at the margins in the HBP built business year over year, a decline of about 110 basis points, I believe. Part of that is acquisitions. Is that all of that decline?
How would if we looked at it on a kind of a legacy business or on a like for like basis, Did margins improve ex the acquisition dilution?
Excluding the CornellCookson and the Causeway acquisitions, margins remained in line really with the prior year, basically resulting from increase in sales offset partially by commodity, tariffs and other input costs.
Got it. Got it. Okay. And then there was some mention of tariffs, I believe. And can you just walk us through what the impacts have been?
And is that part of the price cost headwinds that you're mentioning for next year? And also the acceleration in the price cost, I think it was a little it sounds like it's weighing a little bit heavier on margins this quarter than last quarter. Was that just the flow through in terms of the amount of time the input cost takes to kind of flow through inventory and hit the income statement? So I apologize. That's a few questions.
But yes, just generally around those topics, please.
I won't try to tackle all that. So in 'eighteen overall, we estimate that we took on about $25,000,000 before being mitigated of costs related to tariffs as well as steel, aluminum, raw material input costs increases. We've mitigated that through increased sales, good mix and some price increases being passed through so far. So we continue our process of working with our customers on price increases. So some of that has been completed.
I would say about half has been completed. And we will continue that process through the end of our fiscal Q2, which would take us through the end of March of 2019. So the impact of the lag that I'm describing will certainly hit 4th quarter a little bit and it will also continue to hit us in Q1 and Q2. And then we'll be we'll expect to be done with our price negotiations by then and have mitigated the impact of tariffs, current tariffs to be specific, not the additional potential tariffs, and raw material and other input cost increases. And of course, with that, we continue to work on our supply chain, automation and expense controls.
So we're working on it on both ends. Got it. So 25 And just to add to and if and when the additional tariffs kick in, we'll pass those costs along like we've dealt with every other input costs, freight costs, labor costs that we've had to work through. So we will work our way through this and we're quite confident of our ability to manage any incremental tariffs.
Got it. So it's $25,000,000 that you have worked through? Or is it the net or is that half of what you will need to work through? I'm not so sure I
No problem. Dollars 25,000,000 is what we estimate we had in 2018. And we estimate that the $29,000,000 impact, meaning annualizing all the tariffs and commodity increases is roughly $70,000,000 So that will be flowing through over the course of the year. We are working on, as I said, negotiating with our customers to complete our price increases. Some of them are done, some of them are in process, and then we'll continue to work them and they'll continue to come to a conclusion between now and the end of our fiscal Q2, which ends in March.
And again, that will be done via those price increases and of course, we book in inverse as well, supply chain. We book to our vendors via supply chain, and we have automation and expense controls internally as well to offset that impact. And that's approximately 4% of our Home and Building Products segment sales? That's correct. So we expect pressure in the 1st and second quarter to be alleviated in the 3rd and fourth quarter.
And obviously, that will affect top to bottom results and leave us with what I would say, if I'm looking at last year versus this year, we'll have a similar type of earnings over the course of the year is the best way to put it here.
Got it. Okay. Thank you.
You're welcome. Sure.
Our next question comes from Andrew Casella, Deutsche Bank. Please proceed with your question.
Hey, guys, thanks for taking the question. I wanted to dive into some issues topics real quick. So just to be clear, the $25,000,000 that you quoted, is that just a tariff impact or is that tariff plus commodities? And then Ryan, I know you mentioned $70,000,000 What does that represent overall? And then obviously the follow on would be in the event that on January 1, these tariffs step up to 25%, do you have any way to kind of bookend what exactly that quantum could be as far as a headwind?
Sure. Sure. So yes, the $25,000,000 is both tariffs and input costs, mainly steel and aluminum is where we saw and wood, wood, sorry. And the $70,000,000 is related to tariffs and those same input cost increases. It does not assume the future, the January expect or not expected, the potential January 15% increase that is could be coming.
Roughly, I would say, dollars 15,000,000 of the 2019 annualized number is tariff, and the balance would be the input cost that I mentioned. And as far as what that means regarding the 15%, that would be $20 plus 1,000,000 of additional costs that we would expect to mitigate by passing on price increases to our customers, which we are currently discussing with them now in anticipation of it happening in January.
Okay. And then as far as free cash flow guidance, and I know you went through the numbers pretty quickly. But when we think about segment EBITDA for fiscal 2019, your forecast is or guidance is $230,000,000 The unallocated item is about $45,000,000 So that implies EBITDA about $185,000,000 You have CapEx of $50,000,000 cash interest of $60,000,000 And then I know your overall free cash flow guidance was expected to exceed 100% of net income. I just wanted to see if there were any other cash inflows or outflows or any restructuring charges that we should be mindful of? And then the follow on would be how you're expected to kind of deploy that capital?
I know in the past when we've kind of seen the shares at these levels, I know you've kind of gone down after them in the open market. I know you're obviously focused on producing leverage. So just if you could walk us through how you're going to treat that. Thank you.
Sure. There's no other charges. You got the numbers right. And our expectation is that we're going to run the businesses. We have a solid execution plan that we've been going down.
We expect to generate increasing amounts of cash. We expect to build it up on our balance sheet, and we expect that to be a natural deleveraging.
Okay, great. And then final question, just as I think about the pricing discussion that you're having with customers. So on January 1, if those tariffs come in place, do you have a mechanism to put those through immediately or how quickly could we see you mitigate that? I know you kind of called out some pressures in 1st fiscal quarter 'nineteen, 2nd fiscal quarter 'nineteen, but just trying to understand how quickly you can react to the other 15%?
We are working hard expecting that the tariffs are going to be in place, and we are making ourselves more efficient. And we're in negotiation with our customers on passing them along. So there'll be a lag on the input costs being able to be offset by price increases, and we've fully taken that into account in our consideration of what the calendar year 2019 could look like. Yes. And I would just add to that.
So when we were saying we expect to complete our price negotiations by the end of the March, the Q2, which ends in March, so that's really the lack. So we'll call it 90 days from January 1, which is the expected increase date, to the end of March.
Okay, great. Thanks so much guys. I'll get back in the queue.
Okay.
Our next question comes from Doug Clark, Goldman Sachs. Please proceed with your question.
Hey guys, thanks for taking my question. My first one is specifically on the AIMS business, the organic component. I know you talked about 2018 having 2% type volume growth. But if I look in the 4th yes, the Q4 in particular, it looks like organic growth was actually negative 3% to 4%. So I know you mentioned kind of weather and timing, assuming that that's kind of what went into the Q4.
Can you just extrapolate a little bit as to what caused that negative year on year decline?
Sure. So that was mostly driven by the U. S. Business, and it's related to Q3 weather, which then leads into Q4 with less restocking because they had stock. And then it also has to do with the timing of winter stocking, which can fluctuate from this year.
So last year, we had a little more winter in our Q4. This year, it looks like some of that will bleed into the Q1. But it's normal for that timing to fluctuate a bit. You're right roughly on your organic
number. Okay, great, great. That was helpful. And then on the kind of the raw inflation piece, the $25,000,000 versus $70,000,000 I
guess I just want to understand
a little bit better the cadence of that because especially if tariffs aside, if I'm actually looking at the raw material complex, things like steel, aluminum and wood, The incremental acceleration or growth in those underlying commodities was earlier in 2018. So I guess I'm just a little curious why the disproportionate impact is in 2019. Is it based on kind of how you source and the lag perhaps that the price increases kind of flow to you or perhaps something that I'm missing?
Well, you're generally correct on what you're saying. So there is a lag between the time a price actually goes up and the time that goes through our P and L, which one of the other questions touched upon. So yes, it did start earlier in the year on the commodity side. So once there was a whisper of tariffs plus there's some natural economic factors for pushing commodities up. And as the year went on, that starts to bleed actually into our P and Ls and then the tariffs came later in the year.
Okay, great. Thanks a
lot guys.
Thank you.
Our next question comes from Michael Rehaut, JPMorgan. Please proceed with your question.
Hi, good afternoon. Thanks for taking my question. I wanted to circle back to the acquisition synergies that you referred to and just getting a better sense of the cadence of that. You talked about, I believe, getting the acquisitions up to corporate average And but it seems like 2019 is still more of a transition year. So I just wanted to make sure I understood that.
And what you're expecting in terms of any particularly from the cost side, any cost synergies as you integrate Cornell into Clopay and Ames into I'm sorry, ClosetMaid into Ames?
First, I'll say that nothing has changed from the time that we made the acquisitions and the guidance we gave as part of that. We have always been looking at these acquisitions as being revenue enhancing and opportunities for cost reductions, which would improve margins over a multiyear period. So there is no surprise to us that this is going to take longer than a year. There's nothing that's changed. The environment that we've been operating in, particularly since we closed on CornellCookson in June, has changed quite dramatically and our outlook on our business is exactly the same.
No, understood. I guess the question was just more oriented in terms of the cadence of those savings and maybe a little more granularity as those are achieved. I guess second question just on 2019 and appreciate the detail around the raw material and tariff impact for this past year and the upcoming year. From a pricing standpoint, appreciate the lag there as well. But I was just hoping to get a sense of what the overall benefit you got from the price increases in 2018.
And I know that benefit will be more fully realized at the end of 2Q 2019, but what would that mean from a full year perspective in 2018 as well as what you expect in 2019?
So there's quite a bit there. So as I said, in 'eighteen, we had a combination of the price increases helping along with improved mix and sales. In 2019, we described the lag and we baked in the acceptance to our $230,000,000 plus guidance. Once we have completed our price increases and have completed our supply chain initiatives automation expense controls, which we expect to do during 'nineteen. We expect to completely mitigate the effects of the tariffs and commodity costs and other input cost increases.
I'm not sure if I answered your question, but that's how we do it.
Right. Okay. One last quick one, if I'm able to. Just on the Defense Electronics business, understanding how long of a tail that is, as you described the cycles of spending. But the 4th quarter revenue number was pretty well below what we were looking for.
I was just curious if it was a surprise to you in terms of the quarter results itself given the year over year drop, if there was anything behind that and any more detail around that would be helpful.
Timing of orders, things that could have happened in the Q4 that we expect to happen in the Q1. But the lag that we continue to see in defense spending, as it flows through from a budgetary standpoint is slower than we expected. And part of that is should be what you take away from it is the outperformance of our Home and Building Products businesses to be able to meet our $210,000,000 EBITDA guidance and exceed it to 213,000,000 dollars So we are very, very confident about what the long term prospects for Telephonics and being able to regain its revenue base as things flow through the Trump related budget increases. That's a 2020 and beyond story. And the near term performance of our Home and Building Products business was better than we even thought it was going to be over the period of time that the telephonics business was less than we thought it could be.
I would just add to that. Our products, we remain on all the platforms. We have not lost the platform. Everything is really about timing in this business and when orders come through. So we continue to have a very strong pipeline.
We expect backlog into 2019 improving, and that will ultimately roll itself into improved revenue and earnings in 2020 beyond.
And I'm sorry, could you give a backlog number and an order number for 4Q? I apologize if I missed it.
Yes. Backlog at the end of the quarter was 345,000,000 and we had to book the bill roughly 1 to 1.
Our next question comes from Justin Bergner, Gabelli and Company. Please proceed with your question.
Thanks for taking my follow ups. I was just curious, as you deal with these tariffs and input costs headwinds, is it possible to sort of bucket what percentage you expect to recover from price, what percentage you expect to recover from supply chain And what percent do you expect to recover from other drivers?
Justin, I'd go back. And each year, we try to take a look at the outlook in front of us. And if you remember last year, we talked about increasing commodity costs, increasing freight costs and increasing labor costs. And the tariffs suggest one more bit of what management teams like us spend our time navigating. This is this recovery in this economy is going on in spite of lots of different challenges.
We continue to believe that we can mitigate whatever we get gets thrown at us. We set our expectations properly. We have a group of businesses that we have put together. This is very much a growth by acquisition expertise at the corporate level and the operating level. And the ability to take the ClosetMaid acquisition and combine it with AIMS to be able to offset all of those things that are going to continue to be pressures for anyone who's a manufacturer, higher input costs, higher freight costs, higher labor costs is what defines whether you're able to be competitive.
We think we have a proven record. We think the opportunity in front of us on that side of our business is for us to execute. The result of that is much higher free cash flow, a natural way for us to delever. And on the Clopay CornellCookson side, the strategic positioning of the leading residential and the leading commercial business is we've owned the business since June. 2019 was never meant to be what we were shooting for.
Long term, we see ourselves as being able to combine the businesses that we've got. And the result of that is going to be a steady improvement of operating performance across each of the businesses that we have. And our longer term goals is clearly that we want to run and build a significantly bigger company based on the success of getting all of those things right. Near term, what you should expect of us is just to run the businesses increasingly better. 2019 is for us the year to prove that the acquisitions that we've made can perform in what very well may be an uneven economy.
We've dealt with a lot harder economic circumstances over the last 10 years. We feel really good about our ability to deal with each of those buckets of cost inflation, tariffs, of whatever else is going to come at us and run our businesses.
Okay. That's very helpful. And then just lastly, did I say at the beginning of the call that you said that going forward, the primary form of capital return would be the dividend?
Yes. That is correct.
Okay. So share repurchases are probably going to be less impactful going forward?
Depends on the price of the stock. Look, we didn't buy stock in this last quarter because it is clear that there is a negative sentiment that has nothing to do with the underlying intrinsic value of our business. We will sit back and we'll watch the markets. If you put in perspective, we have bought back over $300,000,000 worth stock over a multiyear period, and we've paid out $100,000,000 plus or minus in dividends. That's why our leverage is where it's at after buying 2 really good businesses.
Our choice is to grow this company, our ability to deal with rationalizing at times in irrational stock market. We have the capacity to buy back stock. We choose not to, not because we don't see value in our stock, but we clearly see a market that doesn't want to hear about our story relative to the home and building products, negative cloud that there are people suggesting. We're not suggesting that, that can't happen. We're simply telling you it hasn't happened to us.
Our performance quarter, our trends in our businesses remain strong.
Okay. Thanks and good luck. Thank you.
Thank you. Ladies and
gentlemen, we have reached the end of the question and answer session. And I would like to turn the call back to Lon
Kramer for closing remarks. Thank you. Griffin is in a strong position as we head into fiscal 2019. It's been a great year. We look forward to many more.
Thank you and goodbye.