Good day, and welcome to the Griffin Corporation Second Quarter Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Brian Harris, Chief Financial Officer. Please go ahead.
Thank you, Kevin. Good afternoon, everyone. With me on the call is Ron Kramer, our Chairman and Chief Executive Officer. Our call is being recorded and will be available for playback, the details of which are in our press release issued earlier today. As in the past, our comments will include forward looking statements about the company's performance based on our views of 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 in our various Securities and Exchange Commission filings. Finally, some of today's remarks will adjust for those items that affect comparability between reporting periods. These items are explained in our non GAAP reconciliations included in our press release. Now I'll turn the call over to Ron.
Good afternoon, and thanks for joining us on today's call. A solid quarter, a strong outlook and an excellent strategic acquisition. We continue to build upon the transformational actions executed over the last 12 months. Our consolidated second quarter revenue increased 25% over the prior year quarter, driven by both acquisitions and organic growth in our Home and Building Products segment, which as expected was partially offset by reduced revenue in telephonics. We continue to expect defense orders and revenues to improve throughout the remainder of this year.
Our consolidated second quarter segment adjusted from continuing operations increased 11% to $43,800,000 compared to the prior year quarter of $39,400,000 dollars I'd like to provide some high level comments on our strategic actions and capital allocation. We've been busy. Today, we announced our subsidiary Clopay Building Products Company has entered into a definitive agreement to acquire CornellCookson, a leading manufacturer of rolling steel door and grill products designed for commercial, industrial, institutional and retail use for $180,000,000 After taking into account tax benefits resulting from the transaction, the effective purchase price is approximately $170,000,000 CornellCookson is expected to generate $200,000,000 of revenue and $0.15 of earnings per share during the 1st 12 months after the acquisition. The acquisition of CornellCookson broadens our commercial door offering and complements our premium residential and sectional commercial door business. Beyond the attractive financial aspects that bring immediate value to our shareholders, there is truly a strategic value to this transaction.
CornellCookson business is complementary to Clopay door business. Our companies have worked together over the years on bids that required each of our strengths in panel doors and rolling steel doors respectively. We believe that this history will facilitate integration and we are optimistic that the combined company will be a formidable competitor, increasing the value of each business. On February 6, we completed the sale of our plastics business to Berry Global for $475,000,000 in cash and we recorded a pre tax gain of $118,000,000 On February 13, we bought Kelke, a UK manufacturer and distributor of decorative outdoor landscaping products sold to leading garden centers, retailers and grocers in the UK and Ireland for $56,000,000 We expect $40,000,000 in revenue during the 1st full year of ownership and for it to be immediately accretive. On March 13, we bought the combination of ClosetMaid with AIMs.
We announced the combination of ClosetMaid with AIMs. Mike Serico will evaluate the management structure of the companies while identifying opportunities to improve profitability, efficiencies and growth. After we purchased ClosetMaid in October of 2017, we saw an opportunity to combine the 2 companies with their complementary customers, warehousing and distribution, manufacturing and sourcing capabilities. Mike is the former President of Aims and now the President of ClosetMaid, has demonstrated his ability to build strong leadership teams and improve operations and is uniquely qualified to lead the combined company. We continue to expect growth and profitability as we expand both products and geography.
Moving to capital allocation, during the second quarter, the one time special cash dividend of $1 per share. This special dividend was a way to return cash to our shareholders, which we seek to do through a variety of means and represents our persistence to drive shareholder value. Additionally, the special dividend provided 5 $700,000 of benefit to most of our Griffin U. S. Employees through our employee stock ownership plan, which currently holds approximately 5,700,000 shares.
Earlier today, we announced our regular quarterly dividend of $0.07 per share payable June 21 to shareholders of record as of May 25. And in addition, during the Q2, we repurchased 1,400,000 shares for $28,400,000 Since 2011, we've repurchased a total of $290,000,000 of our common stock, representing 21,800,000 shares at an average price of $13.26 per share. As of March 31, 2018, $21,000,000 of repurchase authority remains under the August 2016 Board authorization. Next, I'd like to provide an update by segment before I turn it over to Brian to go through in a little bit more detail. Home and Building Products, this segment sales increased 39% to $396,000,000 due to both the benefits from recent acquisitions and organic growth.
Segment adjusted EBITDA improved 44% to $40,000,000 driven by the increase in revenue. We continue to see underlying strength in the U. S. Housing market with the steady multiyear housing recovery. Our Doors and ClosetMaid businesses are well positioned to capture increased new construction and remodeling activity, while rising homeownership rates supports AIM's tool business.
As the global economy continues to improve, we see continued growth in both revenue and enhanced profitability. With our transactions over the past 12 months, Griffin has expanded its region and around the house, broadened its customer base and expanded its geographic footprint with ClosetMaid and AIM's bolt on acquisitions and will further broaden its customer base with the inclusion of CornellCook and Commercial Solutions. We're very pleased with our business portfolio, the demonstrated integration abilities of our team and we are poised for further growth and profitability as we build our global brands. Turning to Telephonics, fiscal 2nd quarter revenue was $82,000,000 though below the prior year of $98,000,000 revenue was up 24% over first quarter revenue of $66,000,000 2nd quarter orders were $108,000,000 for a 1.3:one book to bill ratio and contributing to our backlog of $358,000,000 compared to the last quarter backlog of $332,000,000 and fiscal year ended September backlog of $350,000,000 With better order rates, improving sequential trends and the recently signed defense budget, we remain optimistic in Telefonica's long term prospects. We continue to see opportunities from an expansion of the U.
S. Navy fleet, international opportunities, including foreign military sales and direct commercial sales to existing customers, as well as building on our market positions in electronic warfare, mobile border security and transit systems. We remain highly focused on integrating and expanding upon the foundation of all of our key strategic initiatives and we expect to see revenue and margin expansions across all our businesses over the coming quarters. I'll turn it over to Brian. Thank you, Ron.
2nd quarter 2018 revenue increased 25 percent to $479,000,000 compared to the prior year period of $384,000,000 Increased revenue in the quarter was driven by strong performance in our Home and Building Products segment with both acquisition and organic growth contributing to the increase. Higher HBP revenue was partially offset by lower telephonics revenue. 2nd quarter 2018 segment adjusted EBITDA from continuing operations was $43,800,000 an increase of 11% over the prior year. Looking at our segments, Home and Building Products 2nd quarter revenue increased 39 percent to $396,000,000 compared to the prior year period of $286,000,000 The revenue growth was attributable the acquisition of Cosamade, AIMS' acquisitions of La Hacienda, Tuscan Path, Harpura and Kelke as well as improved volume, favorable mix and price at CBP. Quarter results includes increase includes the impact of unfavorable winter and spring weather on our AIMS business.
Home and Building Products 2nd quarter segment adjusted EBITDA increased 44 percent to $39,800,000 compared to $27,600,000 in the prior year, primarily driven by higher revenue. Turning to Telephonics. As expected, 2nd quarter segment revenue decreased to $82,000,000 compared to $98,000,000 in the prior year 2nd quarter. Segment adjusted EBITDA of $4,000,000 decreased compared to the prior year of $11,800,000 At March 31, 2018, backlog was 3.58 $1,000,000 compared to $332,000,000 at December 31, 2017, and $350,000,000 at September 30, 2017. We continue to expect backlog and revenue to improve in the second half of the year.
On a consolidated basis, gross profit for the quarter was $121,500,000 dollars compared to the prior year of $98,900,000 Gross margin in the 2nd quarter decreased 40 basis points to 25.4% compared to the prior year period of 25.8%. 2nd quarter selling, general and administrative expenses, excluding items that affect comparability, were $104,000,000 or 21.8 percent of sales compared to the prior year period of $82,000,000 or 21.3 percent of sales. Current and prior year second quarter income from continuing operations were both $2,000,000 or $0.05 per diluted share. Excluding certain tax and other items that affect comparability from both periods, current quarter income from continuing operations was $2,700,000 or $0.06 per share compared to the prior year period of $2,400,000 or $0.06 a share. 2nd quarter capital spending was $10,800,000 compared to the prior year of $7,800,000 For fiscal 2018, we expect capital spending to be approximately $45,000,000 As of March 31, 2018, we had $236,000,000 in cash and total debt outstanding of $1,100,000,000 resulting in a net debt position of $855,000,000 We had $320,000,000 available for borrowing under our revolving credit facility, subject to certain loan covenants.
Last year, we continue to expect 2018 segment adjusted EBITDA of $205,000,000 We continue to expect higher EBITDA performance in the back half of fiscal twenty eighteen as a result of normal seasonality, particularly in our Home and Building Products segment and improvements in telephonics. Now I'll turn the call back over to Ron.
Thanks, Brian. We're pleased with our performance through the midpoint of our fiscal year and we're poised to grow our revenue and profitability in the second half. Our strategic initiatives have transformed our portfolio of businesses with a significantly higher free cash flow generation trajectory in the years ahead. I want to end by welcoming the 750 employees from CornellCookson to the Griffin family. We're very excited about continuing to build on our success.
With that, operator, we'll open it up for questions.
Thank We will take our first question from Bob Labick with CJS Securities. Please go ahead.
Hi, good afternoon. It's actually Lee Jagoda for Bob. Hi, Lee. So Ron, just to start, guys have done a really good job diversifying AIMs internationally. Can you talk about the seasonality of that business today versus what it was when you originally bought AIMs and how heavily weighted you are today to the U.
S. Spring season?
We've bought a number of businesses in Australia, which is obviously countercyclical to seasons in the Western Hemisphere. So today, I would say that we are 25% of our revenue is outside of North America.
Is that right? That's right. Yes.
Weather is a fact. It's not an excuse with us. We know how to navigate our way, set expectations properly and we're going to have volatility in weather that's not going to be a defining way that we look at managing the business. The international expansion in for us in both Australia and as we start now our expansion in the UK, we've now bought 2 businesses there, La Hacienda and Kelke. We continue to see AIM's strategy of being leading brands in markets Australia, the United States, Canada and the United Kingdom that are going to continue to be a growing part of our company.
So the weather issue is clearly going to have its variability. We think we know how to manage our way through both good cycles and bad.
And this has been an
extraordinary winter, so I couldn't be happier about how our team has been able to position ourselves and perform.
And I was going to touch on weather next, and I know you don't to use it as an excuse. That being said, is there do you want to quantify or try to quantify the amount of revenue that you might have either lost or just delayed till next quarter as a result of the pretty severe weather? No. So then turning towards the acquisition next, can you comment on whether the process was an auction or was it privately negotiated? And maybe give us a sense for the EBITDA margins in that business today and what they might be over time as you combine it with your Clopay business?
Look, we are always active in looking at acquisition opportunities. This is a wonderful serendipity moment for us that this was a privately sourced negotiated transaction. We think that this is a wonderful strategic relationship for us to be able to complement our leading residential door business with a leading commercial door business. So this fits out a footprint that we've talked about for a number of years as something that was desirous for us to be able to expand into. We had been in a conversation with Andrew Cornell, who has been running this business, which dates back through his family to 18/28.
And we are very pleased to be able to have done this in a manner that was private and sole sourced. In terms of its margins and profitability, as I said, this will be 200,000,000 dollars in revenue. We think this is a business that will be not less than blended margins that we operate in within Home and Building Products. So better than 10% is where we want it to be. And it's not there today, but we see room for improvement in their operations in the 1st fiscal year that we own it.
It's immediately accretive to us. Strategically, it's a direction that we've wanted to go in. And the ability for us to have sold the plastics business and having now bought Cornell, Kel Kay and the variety of smaller tuck in acquisitions, We've replaced both the revenue, the EBITDA, but most importantly, we've eliminated the high CapEx component and our free cash flow generation that's perspective has changed dramatically. And that's really what the story of what you're going to see in Griffin going forward. Home and Building Products is clearly a place we have scale.
We have both management capabilities, but the ability for us to continue to grow both our revenues and increase the EBITDA margins and ultimately the EPS margins for our company are quite dramatically improved.
And I assume the $0.15 of accretion doesn't include acquisition accounting and doesn't include any feature synergies. Is that correct? That's correct.
We always hope for synergies. We don't bake them into our forward guidance.
Perfect. Thank you.
Thank you. We will take our next question from Julio Romero with Sidoti and Company. Please go ahead.
Hey, good afternoon. Hi, Julio. Hey, Julio. So just wanted to start with Clopay garage doors. Just can you talk about what drove that 13% year over year growth?
I know you called out some price increases, and I assume that cost inflation is part of it. But what's driving the volumes? What's driving price? Any color you can give on that.
Sure. So it's
a mixture of volume, mix and price. We are seeing very good mix coming out of the business. We're seeing people stepping up to better doors, insulated doors. We call it Intellicore for certain of our products. And we're seeing less of what we'll call the simple or panel doors.
Just can you break out how much of the price increase is driven by cost inflation versus just strength from being customer? No, I can't. Okay. That's fair. And just moving on to the CornellCookson deal.
I know you called out in the press release how you expect it to strengthen your relationship with the dealer channel. But can you just talk about a big picture and how you see that leverage benefiting your other businesses and other building products?
This is really about the door business is how we see this. This is complementary and over time, our ability to both buy raw materials more efficiently, increase sales through both our dealers that are currently in residential and their ability to have a commercial offering. And from the Cornell side, we think that this is going to leverage off of our footprint to be able to continue to grow their business in both the commercial, industrial and retail channels. So this is about adding on to Clopay Doors within our Home and Building Products segment. ClosetMaid and AIMs are very much a separate branded consumer business.
Got it. Understood. And then just lastly, can you just remind us how you think about leverage in the long term? I know you're in the middle of a portfolio transformation, what would be a fair expectation for maybe a long term target leverage ratio? Look, Brian, why don't you Sure.
So currently, our leverage is a little higher than usual, but it's very manageable for us. Ultimately, with the cash flow that we're expecting from our current businesses, we expect that leverage to go down into the 3 something with a 3 in front of it, I'll call it 3.5 in a 3 to 5 year period. Perfect. Thanks for taking my questions, guys. Thank you.
Thank you.
Thank you. We will go next to Justin Bergner with Gabelli and Company. Please go ahead.
Good afternoon, Ron. Good afternoon, Brian.
How are you doing? Good. How are you? Good, Brian.
First question just on CornellCookson. Are you currently operating in any of the markets that they're in on the commercial side? And sort of how would you define that market size incremental to what I think you've called out in your 10 ks as the market size that's your addressable market today?
So the market size in totality is effectively the same. What this does for us is it gives us a rolling steel and grill offering that we don't currently have and gives us a more complete portfolio to go to market with. So currently, at times, we and Cookson go to market together because we don't have overlapping products, but together we have the complete product line for often commercial requirements. So we have commercial sales, but they're sectional doors. And CornellCookson has the rolling doors themselves.
But our existing commercial door business is relatively small.
Correct.
So this is really about filling out the strategic direction for Clopay by adding a leading commercial door business to complement the leading residential door business. And we think that, that will have enhanced revenues and enhanced profitability for the company going forward.
Okay. That makes sense. And then in terms of the $0.15 of accretion in the 1st full year, does that assume in that 1st full year that the margins are going to be above the homebuilding products average? And does that include amortization expense to the extent there is amortization expense?
It does include amortization related to the deal. So for things like customer list and things like that, yes.
Okay. And then does it surmise that you'll be above that 10% margin in the 1st full year?
Initially, we will be slightly below that, but we expect to be able to move towards that and towards our overall home and building product margins within a reasonably short period, we'll call it 2 years. Okay.
I guess switching gears to the existing Clopay business, are you seeing headwinds today from raw material prices?
Yes. Clearly, input costs are going up, steel, whether it's steel, whether it's labor, whether it's energy costs. In spite of that, we view this as what we expected going into this year. So we continue to see the housing markets recovering, but nowhere near the buoyancy and nowhere near the volumes that we would view as peak. So we still see a steady recovery.
We see the mix of our business improving, which has been able to offset higher commodity costs. But there's no question about it that steel has gone up, energy has gone up, labor costs have gone up.
Okay. That's helpful. And just remind me on Clopay, what is the accounting? Is it FIFO or LIFO or something in between?
We do not use LIFO.
It is FIFO. I'm sorry, you said FIFO?
That's correct, FIFO.
Okay. Great. That's it for me. Thanks.
Okay.
We will take our next question from Andrew Casella with Deutsche Bank. Please go ahead.
Hi, thanks for taking my questions. I just wanted to ask quickly about Closimade. I know you guys don't break out EBITDA by kind of like the brand, but I know you guys had said during the acquisition it would contribute about $20,000,000 $25,000,000 of EBITDA. Just curious like what the contribution was, if you could disclose it or if you've kind of reached that run rate on an annualized contribution basis? Thanks.
Sure. On the Crossamade business, we are seeing the business run at our expectations, Slightly above.
Okay. Fair enough. And then just when we think about free cash flow and funding and whatnot, so my math was if you have $240,000,000 of cash at the end of the quarter, the special dividend I think went out the door in April. And then when we think about funding for this asset, are you guys anticipating, I guess, drawing upon the revolver again? Or are you potentially looking at the capital markets to help replenish cash?
Just curious how you guys are thinking about liquidity and overall funding for this?
You still have ample liquidity and undrawn revolver and no use for the revolver, but we like to have it.
In addition sorry, Rob. No. In addition, in the second half of the year is when we generate the majority of our cash. The first half of the year, we use cash. Second half of the year, we generate cash well in excess of the first half of the year.
Okay, got it.
Thanks so much. I'll get back in the queue.
Thank you.
Next, we have a follow-up from Justin Bergner with Gabelli and Company. Please go ahead.
Thanks again. Yes. On the AIMS business, can you break out what the organic growth is versus the acquired growth in the quarter?
Sure. The organic growth was revenue wise and aims approximately 5%.
Okay. And then secondly, now that you've done Cornell Cook's hand, congratulations on the deal, I should have said earlier. Are you focused on sort of integrating that over the coming quarters? Or are you still sort of on the hunt for additional acquisitions?
We've got our plate full integrating, not just Cornell, Cookson, but Kelke, La Hacienda, Tuscan Path, Harper, all of which is going quite well. But we see our existing businesses as being the place that we're going to be spending our time. The ability for us to source opportunities is always unpredictable. So we we'll always continue to look. But right now, we're very pleased with what we've done in the last 12 months and we just want to continue to execute as well as we have.
And there's a significant room for improvement in both revenue and profitability, just running the businesses that we have increasingly well. So that's really our focus, certainly for the balance of 2018. And when then we'll see what opportunities present themselves in the future.
Okay. Thank you again.
There are no further questions at this time. I'd like to turn the conference back over to Ron Kramer for any additional or closing remarks.
Thanks for joining us. We're really excited about what we've achieved over the last year, and we'll be working hard to continue to deliver excellent results. Bye bye.
Ladies and gentlemen, this does conclude today's conference. Thank you for your participation. You may now disconnect.