Griffon - Q2 2024

Transcript

Operator (participant)

Please note, this event is being recorded. I would now like to turn the conference over to Brian Harris, CFO. Please go ahead.

Brian Harris (CFO)

Thank you, operator. Good morning. It's my pleasure to welcome everybody to Griffon Corporation's Q2 fiscal 2024 earnings call. Joining me for this morning's call is Ron Kramer, Griffon's Chairman and Chief Executive Officer. Our press release was issued earlier this morning and is available on our website at griffon.com. Today's call is being recorded, and replay instructions are included in our earnings release. Our comments will include forward-looking statements about Griffon's performance. These statements are subject to risks and uncertainties that can change as the world changes. Please see the cautionary statement in today's press release and in our SEC filing. Finally, some of today's remarks will be adjusting for items that affect comparability between periods. These items are explained in our non-GAAP reconciliations, included in our press release. With that, I'll turn the call over to Ron.

Ron Kramer (Chairman and CEO)

Good morning, everyone, and thank you for joining us. The first half of fiscal 2024 is off to a great start and has exceeded our expectations. Q2 was highlighted by continued solid operating performance from Home and Building products, and improved profitability at Consumer and Professional Products. For the quarter, Home and Building products, revenue and EBITDA came in better than expected, as the typical Q2 seasonal residential volume simply did not materialize. For our Consumer and Professional Product segment, Q2 revenue decreased 11%, primarily due to decreased volume, driven by reduced customer demand in North America and the UK, partially offset by increased volume in Australia. EBITDA improved 2% to $20 million in the quarter, with the EBITDA margin improving year-over-year, primarily as a result of decreased North American production costs.

I'm very pleased to tell you that our previously announced initiative to expand CPP's global sourcing strategy remains on schedule and within budget. We continue to expect the initiative to be complete by the end of calendar 2024. Since May 2023, when we announced the initiative, we have ceased operations at all four affected US manufacturing facilities and four wood mills. These actions have reduced our manufacturing footprint by over 1.2 million sq ft. As we've emphasized before, the global sourcing expansion at Ames is a key element of our strategy to improve the margins of CPP. Turning to our capital allocation. During the Q2, we repurchased 1.8 million shares, totaling $117 million, or an average of $65.09 per share. As of March 31, $120 million remains under the repurchase authorization.

Since April 2023 and through March of this year, we've repurchased 7.6 million shares at an average price of $44.56, for a total of $338 million. These repurchases have reduced Griffon's outstanding shares by 13.3%, relative to the total shares outstanding at the end of the Q2 of fiscal 2023. Also yesterday, the Griffon board authorized a regular quarterly dividend of $0.15 per share, payable on June 20th, to shareholders of record on May 29th, marking the 51st consecutive quarterly dividend to shareholders. Our dividend has grown at an annualized compounded rate of 18% since we initiated the dividends in 2012. Turning to our guidance for the year. Based on our first half robust performance and expectation for the remainder of the year, we're raising our full year guidance.

We now expect revenue of $2.65 billion, an increase from previous guidance of $2.6 billion, and we are increasing our segment-adjusted EBITDA by $30 million to $555 million. In summary, the increased fiscal 2024 guidance and capital allocation actions reflect Griffon’s board and management’s confidence in our strategic plan and outlook, as well as our commitment to enhancing long-term value to our shareholders. Turn it over to Brian for a little more financial detail.

Brian Harris (CFO)

Thank you, Ron. Q2 revenue of $673 million decreased by 5%, and adjusted EBITDA before unallocated amounts of $149 million decreased by 2%, both in comparison to prior-year quarter. EBITDA margin before unallocated was 19.9%, an increase of 60 basis points. Gross profit on a GAAP basis for the quarter was $271 million, compared to $194 million in the prior-year quarter. Excluding items that affect comparability from the current and prior periods, gross profit was $272 million in the current quarter, compared to $269 million in the prior year. Normalized gross margin increased year-over-year by 250 basis points to 40.4%.

Q2 GAAP Selling, General, and Administrative expenses were $157 million, compared to $160 million in the prior year. Excluding adjusting items from both periods, SG&A expenses were $153 million or 22.8% of revenue, compared to the prior year of $150 million or 21.1% of revenue. Q2 GAAP net income was $64 million or $1.28 per share, compared to a loss of $62 million in the prior year quarter or $1.17 per share. Excluding all items that affect comparability from both periods, current quarter adjusted net income was $68 million or $1.35 per share, compared to the prior year of $67 million or $1.22 per share....

Corporate and unallocated expenses, excluding depreciation in the quarter, were $14.8 million, consistent with the prior year. Net capital expenditures were $18.5 million in the Q2, compared to $7.1 million in the prior year quarter. Depreciation and amortization total were $15.1 million for the Q2, compared to $17.3 million in the prior year. Regarding our segment performance, Home and Building Products revenue declined 1% due to unfavorable product mix, partially offset by improved volume, reflecting increased residential orders in the current year, which more than offset prior year backlog benefit. HBP Adjusted EBITDA of $129 million decreased 2% from the prior year, driven by the reduced revenue and increased labor and distribution costs, partially offset by reduced material costs.

Consumer and Professional Products revenue of $281 million decreased 11% from the prior year quarter, primarily due to decreased volume, driven by reduced consumer demand in North America and the UK, partially offset by increased volume in Australia. For the current quarter, CPP adjusted EBITDA of $20 million increased 2% from the prior year quarter, primarily due to improved North American production costs and decreased discretionary spending, partially offset by the unfavorable impact of the reduced revenue. Regarding our balance sheet and liquidity, as of March 31, 2024, we had net debt of $1.46 billion and net debt to EBITDA leverage of 2.8 times, calculated based on our debt covenant. Regarding our fiscal 2024 guidance, our overall strong performance in the first half exceeded our expectations. As a result, we are raising guidance for revenue and segment EBITDA.

We now expect $2.65 billion of revenue and $555 million of segment adjusted EBITDA, which excludes unallocated costs and certain other charges that affect comparability. Further, we now expect corporate costs of $59 million, increasing versus prior year guidance of $54 million, due to increased employee stock ownership plan expenses, driven by Griffon's stock price appreciation. Other guidance remains unchanged for 2024, including amortization of $22 million, depreciation of $24.1 million, interest expense of $103 million, a normalized tax rate of 28%, and free cash flow to exceed net income. Now I'll turn the call back over to Ron.

Ron Kramer (Chairman and CEO)

Thanks, Brian. We had an excellent first half, driven by strong operating performance and better than expected residential door volume at HBP, establishing a solid foundation for the second half. As expected, CPP had lower volumes, but is making steady progress with its global sourcing initiative. We're seeing some of the early benefits of this strategy, as evidenced by CPP's improving margin. Given the performance of both of our segments, we are confident about raising our guidance for the full year. We will continue to use our strong operating performance and free cash flow to drive a capital allocation strategy that delivers long-term value for our shareholders. Before we turn to questions, I want to acknowledge the effort and commitment the employees and management teams of our businesses around the world continue to demonstrate. It's because of their dedication and effort that Griffon continues to see strong operating performance.

Operator, we'll take questions.

Operator (participant)

Thank you. We will now begin the question-and-answer session. To ask a question, you may press star, then one on a touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. The first question is from the line of Tim Wojs with Baird. Please go ahead.

Tim Wojs (Senior Research Analyst)

Hey, everybody. Good morning. Nice job on the results.

Ron Kramer (Chairman and CEO)

Thanks, Tim.

Tim Wojs (Senior Research Analyst)

Maybe just to start, you know, in the HBP business, you know, I know you have kind of talked about 30%+ EBITDA margins for the year. You're tracking kind of nicely above that kind of year to date. I guess, any changes there in kind of how you're thinking about the business, and maybe what's kind of implied in the back half of the year from a guidance perspective?

Ron Kramer (Chairman and CEO)

No, we, you know, don't see any change. And, you know, the biggest takeaway is the seasonality of the Q2 and the expected residential volume decline that didn't happen. And, you know, so we're quite optimistic about what we see going on for the balance of the year. And, you know, the continued margin improvement story that we've got in the HBP side is, you know, maintaining and CPP continuing.

Brian Harris (CFO)

Yeah, I would just further clarify that we expect the back half of the year to be 30% or better.

Tim Wojs (Senior Research Analyst)

30% or better. Okay, good. And then I guess just in the CPP business, I mean, you got back to actually. I mean, I think EBITDA grew year-over-year in the quarter. I know there's always choppiness with kind of a transition, but do you feel like you've made kind of step function improvements now in that business, and we can continue to see improvement kind of sequentially from here? Or do you kind of see it staying at that level, you know, in the back half of the year, and then maybe taking another jump in 2025?

Brian Harris (CFO)

Sure. So if we're looking Q2 to Q3, we would expect the margin to improve sequentially. But the business does have seasonality, so we'll see likely a dip in the Q4, which is normally our low quarter for us. But yeah, we are seeing improvement in margin that will be sustainable and continue to grow into 25 from the actions we've taken. And you know, once the inventory that we're selling, that was manufactured, that we're currently selling, we work through that, then the margins will improve significantly.

Operator (participant)

Thank you. The next question is on the line of Trey Grooms with Stephens. Please go ahead.

Trey Grooms (Equity Research Analyst)

Good morning, Ron and Brian. Nice working the quarter.

Ron Kramer (Chairman and CEO)

Good morning.

Brian Harris (CFO)

Thank you.

Trey Grooms (Equity Research Analyst)

So just touching on kind of the demand drivers here, circling back to that on HBP. So, you know, residential, still seeing some strong volume versus maybe some weaker demand in commercial. Can you talk about kind of, from where we sit today, how you're thinking about those two end markets, you know, kind of as we look through the balance of the year?

Brian Harris (CFO)

Sure. We expect, residential to continue to be strong and volume to be better than the prior year. On commercial side, we are seeing some moderation, though that business is lumpy, and I will point out that though commercial volume was down from the prior year quarter, the prior year quarter was a particularly strong quarter for commercial.

Trey Grooms (Equity Research Analyst)

Yep.

Brian Harris (CFO)

But, you know, that, that market is moderating somewhat, but we still see pretty strong volume there.

Trey Grooms (Equity Research Analyst)

Okay. And then on CPP, you know, inventory in the channel had been running high. Any thoughts to where, you know, that could kind of shake out, I guess? And I think the previously, we had kind of been expecting that it could take another selling season to kind of flush that out. So I guess it's, you know, how is that looking today, and do you still think that we could see, you know, the channel inventory kind of normalize this year?

Brian Harris (CFO)

We do expect the inventory to normalize in the channel. Yeah, we're sort of in the early days here. Spring has just started to spring. So we need to get through the next two quarters, of selling, which is the high season for that, that type of product.

Operator (participant)

Thank you. The next question is from the line of Bob Labick with CJS Securities. Please go ahead.

Bob Labick (President)

Good morning. Congratulations on another strong quarter.

Brian Harris (CFO)

Great.

Ron Kramer (Chairman and CEO)

Thanks, Bob.

Bob Labick (President)

Yeah, I wanted to start, you touched on it a little bit, but the, the gross margins were either record or, or near record or, you know, pretty darn close, but very impressive. And just I know you don't break them out by segment. Maybe give us a sense of how they're trending, you know, in each segment, how sustainable this, you know, based on the revenue level, but the 40% level is, and, and then I guess, how they'll shift going forward as the global sourcing, you know, comes to a conclusion as well.

Brian Harris (CFO)

Sure. We do expect those margins to be sustainable and actually growing, particularly into 2025, as the CPP action is taking hold. And we're seeing pricing in HBP maintaining, and therefore, we expect margins to hold there as well.

Bob Labick (President)

Okay. That's great. And then as it relates to the global sourcing, I know you said you're, you know, kind of on track and in budget and all that. Maybe just what are the, like, the next big steps? Are you done qualifying all the suppliers? Do you have enough capacity now to fully take over? Or, you know, kind of what are the next big steps that, and hurdles for you between now and the end of this year to complete the process?

Ron Kramer (Chairman and CEO)

Yeah. Let's go back and, you know, remember that part of our confidence in doing this a year ago is market conditions changed. We had an existing global sourcing capability that we're leveraging off of. This is not us going out, looking to find suppliers. We already have suppliers. We're, you know, a global business. You know, our Australia business is already sourcing $hundreds of millions of product, you know, out of China, Vietnam. So this is about transitioning the US capacity to our existing supply chain relationships. That was always our strategy. A year later, I'm very proud that we've been able to execute it flawlessly, and the opportunity in front of us, this is a 15% EBITDA margin business.

One or two years from now, when it gets there, it will, you know, continue to be a US, Australia, Canada, UK business. You know, we did this with the expectation that this was a long-term strategy to fix a problem around the core US manufacturing business that we have.

Brian Harris (CFO)

Yeah, I would just add to that, that we are. Our distribution is ready. Containers are starting to come in in Q3. And as far as the process, we're moving into real estate sale mode, selling the assets that no longer are needed for CPP.

Operator (participant)

Thank you. The next question is from the line of Sam Darkatsh with Raymond James. Please go ahead.

Sam Darkatsh (Managing Director)

Good morning, Ron. Good morning, Brian. How are you?

Ron Kramer (Chairman and CEO)

Good morning, Sam.

Brian Harris (CFO)

Good. Thank you.

Ron Kramer (Chairman and CEO)

Doing well.

Sam Darkatsh (Managing Director)

Terrific quarter.

Ron Kramer (Chairman and CEO)

Thank you.

Sam Darkatsh (Managing Director)

Couple questions, if I could sneak two in. First, the guidance, and I know you typically craft your guidance very conservatively, but the guidance seems to imply HBP margin degradation sequentially, despite the fact that I know you're coming into a little bit more of your selling season, seasonally. What sorts of things would have to occur for there to be margin degradation from where you're seeing margins now? And then I've got a follow-up question, too, if I could.

Brian Harris (CFO)

Sure. So, you know, we're still anticipating the 30%+ margin in the back half of the year. And we're not seeing any pricing pressure. What could occur is mix. And also we have some steel costs that we know will be coming through in the Q3, in particular, that will hurt margin a little bit from just sequentially.

Sam Darkatsh (Managing Director)

Gotcha. So that actually segues my next question perfectly. So I think there was at least an announced price increase in the residential garage door industry in March from one of your competitors, and it apparently didn't stick, or at least didn't stick yet. Knowing that the steel prices are a little bit of a pressure, Brian, and that volumes residentially are now turning positive, why didn't that price increase get matched? Or why doesn't the market bear that right now?

Brian Harris (CFO)

We focus on our structure of costs and what we feel is good value to our customers. I can't really comment on why someone else's price increase didn't stick. You know, we see a good market. We will continue to monitor costs and take actions, if necessary.

Operator (participant)

Thank you. The next question is from the line of Julio Romero with Sidoti & Company. Please go ahead.

Julio Romero (Equity Research Analyst)

Thanks. Hey, good morning, Ron and Brian.

Ron Kramer (Chairman and CEO)

Morning.

Julio Romero (Equity Research Analyst)

On CPP... Hey, good morning. Can we maybe talk about the inventory levels by geography? You know, across your UK and US customers, compared to three months ago, how are those levels doing right now? And do you think the spring/summer selling season kind of helps flush out the remaining inventory levels there, or is it more of a longer timeframe, in your view, for inventory to normalize?

Brian Harris (CFO)

Yeah. So, inventory positions at our customers are improving, though there's still some work to do. We do expect that to normalize by the end of our fiscal year as we get through the Q3 spring selling season and into Q4, particularly on the fan side, a lot of sales in Q4. Our internal inventories have decreased. So, the US inventory, that applies to US, when those UK inventory still is a bit high. That may take longer. Their economy is in a more difficult spot, but their, that side, that part of our business is not so large. It's not affecting us too much. Canada and Australia are fine.

Julio Romero (Equity Research Analyst)

Okay, that's very helpful. And then for my follow-up, just staying on CPP, curious how you guys are doing in regards to your distribution centers on the East and West Coasts. Are they still kind of maintaining those high service levels as you're getting further along in your global sourcing strategy?

Brian Harris (CFO)

Absolutely.

Ron Kramer (Chairman and CEO)

Yes.

Brian Harris (CFO)

We've seen no change in our service levels. We're able to provide our customers everything they need.

Operator (participant)

Thank you. Our next question is from the line of Justin Bergner with Gabelli Funds. Please go ahead.

Justin Bergner (Research Analyst)

Good morning, Ron. Good morning, Brian. Good quarter.

Ron Kramer (Chairman and CEO)

Thank you.

Brian Harris (CFO)

Thank you.

Justin Bergner (Research Analyst)

First question is just on the residential HBP volumes. What are the underlying drivers that you think are behind the more positive demand there? And is there any kind of offset from commercial being weaker than expected, or is that just softening as you expected, you know, a couple quarters ago?

Brian Harris (CFO)

On the residential side, you know, we have continued to come out with great products that people are taking to very well. We have the best service, the best lead times, the best dealer network, the best production. I might have skipped one or two, I don't know. Best quality. And those... You know, that's showing in the marketplace. Overall, an investment in a residential garage door is a good investment. There was a recent survey done by Zonda, a recent report done by Zonda, that shows that the ROI on putting a garage, a new garage door in, is about 200%.

Justin Bergner (Research Analyst)

Okay. Any change to your capital allocation priorities? Are you gonna continue to repurchase shares? Are you gonna look at bolt-on M&A?

Ron Kramer (Chairman and CEO)

I'd say that we're in a very luxurious position that our businesses are performing well, our cash flow gives us optionality. Our stock remains a compelling value. And while it's clearly outperformed any index over any period of time and any peer group competitor, it's still undervalued, and we have and will continue to take advantage of that. Separately, the M&A you know outlook for us is a robust pipeline of things that we think are value enhancing and possibly additive, particularly on the HBP side. But the predictability of what we're going to be able to do and when we're gonna be able to do is always you know the uncertainty of looking at M&A.

As far as, you know, capital, you know, we can buy back stock and do M&A. We've said that our leverage, you know, is 3.5 times is an outer limit of anything that we would ever consider doing, you know, on the M&A side. But, you know, we're down to an investment-grade credit that is going to continue to free cash flow if we don't do M&A and find things that we can add to what, you know, we already have. So the ability for us to manage both stock buybacks and M&A is, you know, part of what we think the next year is gonna look like.

Operator (participant)

Thank you. This concludes our question and answer session. I would like to turn the conference back over to Ron Kramer for closing remarks.

Ron Kramer (Chairman and CEO)

We had a great quarter. We're going to be hard at work to finish, the next and make it a great year. So look forward to speaking to you all in August.

Operator (participant)

Thank you. This conference has now concluded. Thank you for attending today's presentation. You may now disconnect.