Griffon - Q3 2024
August 7, 2024
Transcript
Operator (participant)
Ladies and gentlemen, good morning and welcome to the Griffon Corporation Fiscal Third Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star and zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Brian Harris, Chief Financial Officer. Please go ahead, sir.
Brian Harris (EVP and CFO)
Thank you. Good morning. It's my pleasure to welcome everyone to Griffon Corporation's, excuse me. Good morning. Welcome to Griffon Corporation's Third Quarter 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 www.griffon.com. Today's call is being recorded, and the 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 statements in today's press release and in our SEC filings. Finally, some of today's remarks will adjust for items that affect comparability between periods. These items are explained in our non-GAAP reconciliations included in our press release. With that, I will turn the call over to Ron.
Ronald Kramer (Chairman and CEO)
Good morning, everyone, and thanks for joining us. Our third-quarter results were highlighted by strong operating performance from both of our segments, with Home and Building Products generating EBITDA margin of 30.1% and Consumer and Professional Products improving its EBITDA margin by 230 basis points to 8.8%. With third-quarter performance in line with our expectations and both segments performing well as we approach the end of fiscal 2024, we are reiterating our previously provided segment-adjusted EBITDA guidance of $555 million for the full year. Free cash flow in the quarter was also strong at $120 million and continues to support our capital allocation strategy. During the quarter, we paid down $80 million in debt, repurchased $19 million in stock, and paid a $7 million regular quarterly dividend.
Yesterday, our board authorized a regular quarterly dividend of $0.15 per share, payable on September 19th to shareholders of record on August 28th, marking the 52nd consecutive quarterly dividend to shareholders. Our dividend has grown at an annualized compounded rate of 18% since we initiated dividends in 2012. Looking at our share buyback program, since April 2023 and through June of this year, we've repurchased $7.9 million shares at an average price of $45.38 a share for a total of $357 million. These repurchases have reduced Griffon's outstanding shares by 13.7% relative to the total shares outstanding at the end of the second quarter of fiscal 2023. These actions underscore our commitment to Capital Allocation Strategy that delivers value to our shareholders. We continue to believe that our stock is a compelling value. I'll turn it over to Brian for a little more financial detail. Brian.
Brian Harris (EVP and CFO)
Thank you, Ron.
Third-quarter revenue of $648 million decreased by 5% and adjusted EBITDA before unallocated amount of $141 million decreased by 8%, both in comparison to the prior year quarter. EBITDA margin before unallocated was 21.7%. Gross profit on a GAAP basis for the quarter was $249 million compared to $275 million in the prior year quarter. Excluding items that affect comparability from the current and prior periods, gross profit was $265 million in the current quarter compared to $276 million in the prior year. Normalized gross profit increased year-over-year margin by 50 basis points to 40.9%. Third-quarter GAAP selling, general, and administrative expenses were $160 million compared to $172 million in the prior year. Excluding adjusting items from both periods, SG&A expenses were $155 million, or 23.9% of revenue, compared to the prior year of also $155 million, or 22.7% of revenue.
Third-quarter GAAP net income was $41 million, or $0.84 per share, compared to $49 million in the prior year quarter, or $0.90 per share. Excluding items that affect comparability from both periods, current quarter adjusted net income was $61 million, or $1.24 per share, compared to the prior year of $70 million, or $1.29 per share. Corporate unallocated expenses, excluding depreciation in the quarter, were $15 million compared to $14 million in the prior year quarter, with the increase primarily due to increased ESOP expense driven by the rise in Griffon's stock price. Net capital expenditures were $2.3 million in the third quarter compared to $8.3 million in the prior year quarter. Depreciation and amortization totaled $15.2 million for the third quarter compared to $15.7 million in the prior year.
Regarding our segment performance, Home and Building Products revenue declined 2% due to unfavorable product mix, with increased residential volume being offset by decreased commercial volume. HBP adjusted EBITDA of $119 million decreased 12% from the prior year, driven by reduced revenue as noted above and increased steel, labor, and distribution costs. EBITDA margin for the quarter was 30.1%. Consumer and Professional Products revenue of $254 million decreased 10% from the prior year quarter, primarily due to reduced consumer demand in North America, partially offset by increased volume in Australia. For the current quarter, CPP adjusted EBITDA of $22 million, increased 22% from the prior year quarter due to improved North American production costs and decreased discretionary spending, partially offset by the unfavorable impact of the reduced volume noted above. CPP EBITDA margin improved 230 basis points to 8.8% compared to the prior year third quarter.
Our global sourcing expansion initiative remains on time and on budget. Also of note, on July 1st, we completed the acquisition of Pope, an Australian provider of residential watering products from the Toro Company. Pope is an extremely well-regarded Australian brand with a 100-year history, and we are excited to add Pope to our portfolio of iconic products in the Australian market. We expect Pope to contribute approximately $25 million in annual sales to AMES Australia. Regarding our balance sheet and liquidity, as of June 30, 2024, we had net debt of $1.37 billion and net debt to EBITDA leverage of 2.7 times, calculated based on our debt covenants. Regarding our guidance, I'd like to remind everyone we raised our expectations for fiscal 2024 last quarter and after our strong performance in the first half.
As Ron touched on earlier, given that our third-quarter performance was in line with our expectations, we are reiterating our 2024 guidance, including revenue of $2.65 billion and segment-adjusted EBITDA of $555 million, which excludes unallocated costs and certain other charges that affect comparability. Our other expectations for 2024 also remain unchanged, including corporate costs of $59 million, amortization of $22 million, depreciation of $41 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.
Ronald Kramer (Chairman and CEO)
Thank you, Brian. Our year-to-date results have been driven by strong operating performance from both of our segments despite a challenging macroeconomic backdrop. HBP has sustained 30%+ EBITDA margins and has increased residential door volume, which has offset some of the softness we're seeing in the commercial market.
At CPP, we are realizing the early benefits from our global sourcing expansion strategy, as evidenced by CPP's improving margin profile. Profitability continues to improve despite a backdrop of persistently weak consumer demand, which has resulted in reduced sales volumes. I want to reiterate that we will continue to use our strong operating performance and free cash flow to drive a capital allocation strategy that's focused on delivering long-term value for our shareholders. Before we start taking questions, I also want to acknowledge the effort and commitment our employees and management teams of all the businesses around the world continue to demonstrate. It's because of their dedication and effort that Griffon continues to see such strong operating performance. Operator, we're ready for questions.
Operator (participant)
Thank you. Ladies and gentlemen, we will now be conducting a question-and-answer session. If you would like to ask a question, please press star and one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star and two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Ladies and gentlemen, a reminder, we request you to restrict to one question and one follow-up question per participant. Our first question comes from the line of Tim Wojs with Baird. Please go ahead.
Timothy Wojs (Senior Research Analyst)
Hey, everybody. Good morning.
Ronald Kramer (Chairman and CEO)
Good morning.
Timothy Wojs (Senior Research Analyst)
Maybe just to start off with Home and Building Products, just kind of curious sequentially if you've seen much change in kind of the demand environment. It seems like the residential business kind of continues to kind of be a little bit better. Commercial, I think, is still down year-over-year. Just trying to understand if anything's kind of incrementally getting better or worse. And then maybe if you can add a little bit of color around what the mixed headwinds were, that'd be helpful.
Ronald Kramer (Chairman and CEO)
I think the big takeaway is things are steady, and the margin story for us has shown its resiliency. The residential business repair and remodel for us continues to be excellent. The commercial business is always a lumpy business. We saw a trend going from May to June of slowing down back to things looking better in July. The outlook for the year remains the same, and the outlook for the future of the business remains excellent, as I think the housing market recovery is still in front of us. And as interest rates come down, as new home construction picks up, part of the growth on residential, I still think, is ahead of us. Brian, you want to add to that?
Brian Harris (EVP and CFO)
I think you summarized it well.
Timothy Wojs (Senior Research Analyst)
Maybe just the mix piece, Brian?
Brian Harris (EVP and CFO)
Yeah. So the mix you're seeing is the commercial versus residential mix, with commercial down slightly and residential improving. So that's that mix dynamic.
Timothy Wojs (Senior Research Analyst)
I gotcha. Okay. And then just my follow-up on free cash flow and kind of the capital allocation strategy. I noticed you did a little bit more debt reduction this quarter than what you've done in the prior few quarters. Any change in kind of the philosophy of buybacks versus debt paydown on a go-forward basis?
Ronald Kramer (Chairman and CEO)
No, I think we have the flexibility to do both buybacks, debt reduction, and acquisitions are always in our pipeline. During this quarter, we didn't do any.
Timothy Wojs (Senior Research Analyst)
Okay.
Brian Harris (EVP and CFO)
Yeah. I was just going to point out that we had $200 million of buybacks during the year, and then this quarter, with cash flow, we just chose to reduce debt a bit.
Operator (participant)
Thank you. Our next question is from the line of Bob Labick with CJS Securities. Please go ahead.
Bob Labick (Senior Equity Research Analyst)
Good morning. Thanks for taking our questions.
Ronald Kramer (Chairman and CEO)
Morning, Bob.
Bob Labick (Senior Equity Research Analyst)
Hey. So I wanted to start with CPP and the global sourcing. Continued steady progress on margins sequentially and year-over-year. So it's working as executed. Any heavy lifting left, or is this more a gradual transition over the next few to several quarters to get to the full benefits? And any changes in your thoughts on that end goal of 15% for the end-year timeframe?
Ronald Kramer (Chairman and CEO)
There's no change in our 15% long-term target for the business, and the heavy lifting has been done. We've shut the facilities. We've right-sized the business. This really is very encouraging for us. We announced this over a year ago. The execution of our team has been excellent. The performance is pointing in the direction that we're going. The asset light model for the U.S. business to follow the global sourcing business that we already have in place for both our Australian business and our Hunter business in the U.S. was the right direction for us. The performance metrics that we laid out, we're going down the path as we expect it. We continue to believe this is a 15% margin business in the future.
Brian Harris (EVP and CFO)
I would just add to that. Right now, we're selling inventory that we manufactured. That will continue into early next year, fiscal 2025. And over the course of 2025, that shift will occur from manufactured inventory to sourced inventory, and our margins will improve with it.
Bob Labick (Senior Equity Research Analyst)
Okay. Super. And then on doors, just taking kind of a step back, obviously, I think you guys had said this, but you've continued to stay above 30% and outperform. There's been a ton of change in the industry since COVID. There was the supply disruption, stay-at-home fix-up, your house, pricing, demand, etc. But you guys, both on the commercial side and on the residential side, have been gaining share. So the question is, talk about how Clopay and CornellCookson are differentiated in the industry now, the changes over the past four or five years, and how they're positioned to continue to grow and gain share in this market?
Ronald Kramer (Chairman and CEO)
Sure. So I'll start with the fact that we have come up with many, many innovative products. Purchasing CornellCookson and integrating it with Clopay has made us much stronger in the commercial market. We continue to have excellent execution in our operations, and we have industry-leading lead times. We have our own freight to deliver products to ensure they get to their dealers and our customers safely and in proper form. We have an excellent dealer network that is able to execute on installations. And all these things together have put us in a very strong position.
Operator (participant)
Thank you. Our next question is from the line of Sam Darkatsh with Raymond James. Please go ahead.
Sam Darkatsh (Managing Director and Senior Equity Research Analyst)
Good morning, Ron. Good morning, Brian. How are you?
Brian Harris (EVP and CFO)
Good. Thank you. Morning, Sam.
Ronald Kramer (Chairman and CEO)
Good morning. Doing well.
Sam Darkatsh (Managing Director and Senior Equity Research Analyst)
A couple of questions. First, as it relates to HBP and your steel-related costs, I'm guessing because of the lag between what we see in the prevailing markets and when it hits your P&L, I'm guessing the third quarter you just reported had steel headwinds. And then I'm guessing beginning in the fourth quarter and into the first quarter, there are steel tailwinds. First off, is that accurate? And secondly, can you quantify or put a little bit of meat on the bone in terms of the impacts of steel? And then I've got a follow-up. Thanks.
Ronald Kramer (Chairman and CEO)
I'll start by saying, yes, that's entirely accurate. Right?
Brian Harris (EVP and CFO)
Yeah. As far as the impact, we saw 200 basis points impact from the steel. We knew it was coming and actually discussed it last quarter.
Sam Darkatsh (Managing Director and Senior Equity Research Analyst)
Gotcha. Then my follow-up, you made the Pope acquisition. I know it's relatively small, but strategic. Ron, what was the genesis of how that deal came together? What I'm getting at with the question is, I know you mentioned that you have a pipeline of M&A targets that you continually look at, but what's the likelihood of further M&A over the near to intermediate term versus, let's say, continued share repurchase? Thanks.
Ronald Kramer (Chairman and CEO)
We are very attuned to looking for things that are value-enhancing and add to our portfolio. So transactions like Pope are the kinds of deals that are carve-outs. We've got a long history of buying and improving businesses that have come into our broader portfolio in both HBP and in CPP. So things that allow us to expand product and geography and that are financially accretive to us are things that we want to be doing. Nothing is as cheap as our own stock right now. And to your point about what to expect from us, we like the position of our businesses, the free cash flow getting generated, our ability to both buy back stock and deliver. And with things that are immediately accretive and value-enhancing like Pope, we're not afraid to add to the portfolio.
The cheapest thing we see right now is the price of our own stock.
Operator (participant)
Thank you. Our next question is from the line of Julio Romero with Sidoti & Company. Please go ahead.
Alex Hammond (Equity Research Analyst)
Good morning. This is Alex Hammond on for Julio. Thanks for taking questions.
Brian Harris (EVP and CFO)
Morning, Alex.
Alex Hammond (Equity Research Analyst)
First question, just following up on HBP, do you think there was any pull forward from last quarter or deferrals to the fourth quarter?
Brian Harris (EVP and CFO)
Nothing that I'm aware of. Demand on the residential side continues to be very strong. As we mentioned earlier, there's some softness on the commercial side, but overall, the business is in very good position.
Alex Hammond (Equity Research Analyst)
Great context. Thank you. Then my follow-up on CPP, could you provide an update in the inventory destocking across channels and geographies?
Brian Harris (EVP and CFO)
Sure. So the inventory situation in the U.K., we still see high inventory in the channel there. Australia and Canada are reasonably normal. In the U.S., there is somewhat higher inventory than usual, but the destocking over the quarter, and we expect it to continue in the fourth quarter, is bringing that level to a more normalized level.
Operator (participant)
Thank you. Ladies and gentlemen, a reminder, if you wish to ask a question, please press star and one. Our next question is from the line of Justin Bergner with Gabelli Funds. Please go ahead.
Justin Bergner (Portfolio Manager and Research Analyst)
Good morning, Ron. Good morning, Brian.
Brian Harris (EVP and CFO)
Morning.
Ronald Kramer (Chairman and CEO)
Morning, Justin.
Justin Bergner (Portfolio Manager and Research Analyst)
Two questions. With respect to mix, are you seeing any mixed headwinds within residential customers trading down more in the portfolio?
Brian Harris (EVP and CFO)
On balance, no, but between dealers, the dealer channel continues to be good mix, and we see slight buy down in the retail channel.
Justin Bergner (Portfolio Manager and Research Analyst)
Got it. And then with respect to CPP, you mentioned that the results were in line with your expectations. Does that hold true for the sales in CPP? Because it seemed like they were fairly light. And then that lightness, how much of that is in demand versus further destocking? Any sense?
Brian Harris (EVP and CFO)
On balance, our overall revenue met our expectations. CPP was a little lighter than we originally expected as the consumer continues to be weak. And it's really a combination of that inventory and the consumer that's causing that weakness.
Operator (participant)
Thank you. Ladies and gentlemen, this concludes our question and answer session. I will now hand the conference over to Ron Kramer, CEO, for closing comments.
Ronald Kramer (Chairman and CEO)
We're very pleased with the quarter, our performance year-to-date, and our outlook for the future. Thank you, and we look forward to speaking to you in November.
Operator (participant)
Thank you. The conference of Griffon Corporation has now concluded.