Greetings and welcome to Griffon Corporation Second Quarter 2022, Earnings Conference Call. As a reminder our participants are on listen-only mode. A question and answer session will follow the formal presentation. [Operator Instructions] I would like to turn the conference over to your host, Brian Harris, Chief Financial Officer Griffon Corporation. Please go ahead.

Thank you, Bickrum Good morning everyone. With me on the call is Ron Kramer, our Chairman and Chief Executive Officer. Our call is being recorded and will be available for playback, the details of which are in our press release issued earlier today. As in the past, our comments will include forward-looking statements about the company's performance based on our views of Griffon'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. We 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.

Thank you and good morning everyone. We had record sales, adjusted EBITDA, and adjusted EPS in the second quarter. Our performance was driven by pricing and product mix, led by our home and Building Products segment and the contribution from the January 24th, 2022 acquisition of Hunter Fan. We've made significant progress with price realization during this quarter. These pricing actions, along with fixed cost leverage, have resulted in increases in sales and profitability. Revenue has increased by 36%, adjusted EBITDA more than doubled, and adjusted EPS is almost tripled on a year-over-year basis. Our businesses and the global economy continue to navigate a challenging environment with regard to labor, supply chain, transportation issues and inflation. Our employees have worked tirelessly to manage through these obstacles and have generated outstanding results. We thank all of them for their efforts. From a strategic perspective, we closed the acquisition of Hunter Fan this quarter. There was strong demand in our new Term Loan B facility. And as a result, we were able to finance the acquisition on favorable terms. We're in the early stages of integrating Hunter into the rest of the CPP segment and we're pleased with the Hunter team's performance. The business is been performing as expected, and we continue to be enthusiastic about the strategic fit of Hunter. Last week, we announced that we entered into a definitive agreement to sell Telephonics to TTM Technologies for $330 million or approximately $300 million after-tax. Pending regulatory approvals and certain closing conditions, we expect to close the transaction by June 30th. The sale of Telephonics will increase long-term value for our shareholders by strengthening our balance sheet. Turning to our segments, during the quarter, Consumer and Professional products made progress in reaching price cost parity. These efforts, coupled with our focus…

Thank you, Ron. I'll start by highlighting our second quarter consolidated performance on a continuing basis. Revenue increased by 36% to $780 million, and adjusted EBITDA more than doubled to a $140 million, both in comparison to the prior year quarter. Adjusted EBITDA margin with 17.9%. Gross profit on a GAAP basis for the quarter was $261 million compared to a $161 million in the prior-year quarter. Excluding restructuring-related charges and acquisition write-up of inventory, as applicable, from both years, gross profit was $266 million in the current quarter, increasing 62% over the prior-year quarter, with a gross margin of 34.1%. Second quarter GAAP selling, general, and administrative expenses were a $158 million compared to a $118 million in the prior-year. Excluding adjusting items from both periods, selling general and administrative expenses were a $144 million, or 18.5% of revenue compared to $113 million or 19.7% in the prior-year quarter. Second quarter GAAP income from continuing operations was $59 million or a $1.10 per share, compared to the prior year period of $18 million or $0.34 per share. Excluding adjusting items from both periods, current quarter adjusted net income was $73 million or a $1.37 per share compared to the prior year of $25 million or $0.47 per share on a continuing basis. Corporate and unallocated expenses excluding depreciation were $12.8 million in the quarter compared to $12.1 million in the prior-year. Our normalized effective tax rate, excluding adjusting items for the quarter, was 28.3%, and for the year-to-date period was 29%. Capital spending was $11.5 million in the second quarter compared to $8.8 million in the prior year. Depreciation and amortization totaled $16.3 million for the second quarter compared to $13.1 million in the prior year. Regarding our segment performance, revenue for CPP increased over the prior year by…

Thanks, Brian. The Griffon team continues to be extremely active executing on our strategic actions to build shareholder value. At the halfway point in the year, we have already completed the largest acquisition in Griffon's history with the Hunter Fan Company, a highly complementary business to our CPP segment, financed the Hunter acquisition with new debt security at attractive terms, accelerated the AMES strategic initiative to fundamentally strengthen the CPP business, and signed a definitive agreement to divest Telephonics for $330 million, which will strengthen our balance sheet and allow us to focus our resources. In closing, our management teams continue to successfully navigate an unprecedented set of challenges in the current environment, and despite these challenges, we're raising our guidance as a direct result of the efforts of our talented teams. Our performance this quarter is confirmation of the strength of our strategic plan, resilience of our businesses, and excellence of our operating management. Operator, we'll take any questions.

Thank you very much, sir. At this time we'll be conducting our question-and-answer session. [Operator Instructions] A confirmation tone will indicate your line is in the question queue. [Operator Instructions] For participants using speaker equipment it maybe necessary to pick up your handset before pressing the star key. One moment, please, while we pause for questions. As a reminder, we ask that you limit to one question and one follow-up. We have a first question from the line of Bob Labick with CJS Securities. Please go ahead.

Good morning. Congratulations on outstanding results.

Thanks, Bob. Good morning.

I'm still trying to wrap my head around all this. It's fantastic, but maybe we can start with HBP. And -- could you dig in a little on the primary strength in commercial and the outlook there and you're kind of the drivers and -- this is such a huge increase. What changed and how sustainable is this outlook because obviously the guidance is materially higher, including in the second half as well. So maybe just dig in a little on HBP, commercial, and residential view, please.

Sure. So I would start by saying this quarter reflects price cost benefit after multiple quarters of price cost lag. The commercial business continues to see very good demand. Look at the landscape with increasing warehouse space being built, that of course will also lead to future replacements in those types of facilities. Our manufacturing facilities that we expanded back in 2019, have definitely paid off and put us in a position to meet the demand that we're seeing.

Got it. Okay. Great. And then obviously with the strong results, the cash flow and the favorable proceeds from Telephonics, the targeted leverage at the end of this year is, I guess you said below three times. It's remarkable how fast you're paying down the debt and reducing leverage. Are there other target for M&A on your horizon right now? Is share repurchase obviously given evaluation or consideration? Or how are you thinking about capital allocation going forward with the rapid deleveraging that's occurring right now?

We've always looked at building long-term value and the acceleration of our cash flow generation is part of what we viewed as a series of acquisitions that were meant to grow the company de-lever and position us for future growth. What's clear is that the price of our stock bears no relationship to the value of our business. We closed on Telephonics in this quarter and everything's on the table. We'll take a look at where our cash is and stock buybacks, dividends, we see ourselves as being the cheapest alternative. M&A is always topical for us, but we look at ourselves as being far more opportunistic.

Okay, super, thank you.

Thank you. We have next question from the line of Julio Romero from Sidoti. Please go ahead.

Hey, good morning, everyone.

Morning Julio.

Morning.

Obviously, HBP was very strong performance, but maybe on CPP, if you could talk about what you're seeing in terms of demand by product line and maybe talk a little bit about interest rates and how they're -- if they're having any effect on current demand at this time.

Sure. We are seeing a little softness in the demand, the season -- the spring season is off to a slow start with weather, particularly in the North East the demand is definitely softened a bit, but we do feel that -- that's something that's more seasonal this year and temporary. And we look forward to the balance of the year and what will happen there. As far as interest rates, interest rates though higher are still historically low. Housing demand continues to be strong. There's still a significant shortage of housing. So, the longer-term outlook or the future outlook of the business still is very strong. And I'd add to that that our strategy has been built around leading brands and essential products. So the long-term ability for us to grow with the U.S. economy is improving. This cycle that we're in remains unclear what's going to happen with both monetary policy, the impact of interest rates, but if you look at our housing business, as a reflection, we've seen no drop-off in demand, we continue to believe that the housing market is constructive from a shortage of housing and the things that go in and around the house that our CPP business is been built around have long-term demand drivers. We continue to be very optimistic about the long-term view of the CPP segment. Hunter in particular, there has been no change in our view of what that business looks like both near-term and long-term, and these are, again, products that go into the home, that go into commercial use that have essential positioning and we're always the leading brand in every product that we sell.

Okay, very helpful. And then, I guess my follow-up back to the HBP business, you did see increased commercial volume, reduced residential volume due to labor in some supply chain, but I'm just curious if on the resi side, despite the supply chain issues, if you're seeing more inquiries from the new construction channel and would that be a potential opportunity for Griffon? Thank you.

Sure. Yes, new construction certainly is an opportunity for the business. Though we are primarily repair and remodel, we certainly do serve the new construction space and as well as we don't always actually know where our doors go, particularly from smaller builders. They buy doors from dealers and we don't know where they ultimately end up, but a strong housing market is certainly a positive for the overall HBP residential side of the business.

Thank you. [Operator Instructions] We have next question from the line of Justin Bergner with Gabelli Funds, please go ahead.

Good morning, Ron. Good morning, Brian.

Good morning.

Morning Justin.

Congratulations on the good quarter and improved outlook. I guess to start, I just want to make sure I heard a couple of numbers correctly. So the after-tax proceeds defense electronics sale, that's about $300 million?

That's correct.

Okay. And then the new segment adjusted EBITDA guide is $475 million and there's a $55 million contribution from the eight months of Hunter?

The $55 million is included in the $475 million.

Okay. Got it. So now onto the substantive questions. With respect to your new segment adjusted EBITDA guide, I guess you did $150 million -- a little over a $150 million in the first quarter, that puts the remaining three quarters at about $325 million. Should I think of the step-down from the $150 million this quarter to the implied call at a $105 million, $110 million in each of the next few quarters as demand driven, or is this just a function of the short-term price cost dynamics and inventory accounting sort of getting sorted out and the 105 to 110 is more representative of segment EBITDA at current demand levels?

Sure. So on the AMES business, we've taken a more conservative posture for the second half of the year on demand on the HBP business. We expect continued good revenue and EBITDA with margin looking like the first half of the year.

Got it. So look at the first half margins rather than the second quarter as representative for the go-forward.

Yes. First half margins.

Okay. And just one last question on the HBP side. Obviously you are unable to fully deliver on the residential demand. Do you effectively have a backlog there that priced a few quarters out? At this point, given the strong demand, or how does the next couple of quarters look in terms of catching up to demand that both from a volume point of view and a price cost point of view?

Sure. Yes, we do have significant backlog that we expect to make progress against as we go through the balance of this year and into next year, fiscal 2023. Price is -- there is some lag in price in that backlog but it is mostly priced at the right level.

Got it. So the price in margin for HBP is pretty visible for the next couple of quarters? It's only when you get to the next fiscal year that you're going to be filling material, new backlog, and I guess pricing that a new?

You're thinking about it correctly.

Great thank you.

Thank you. Ladies and gentlemen, we have reached the end of the question-and-answer session, and I'd like to turn the call back to Ron Kramer, CEO for closing remarks over to you, sir.

We're doing very well and we expect to continue to do better and we're all hard at work to continue to build shareholder value. Thank you.

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.