Griffon - Q4 2023

Transcript

Operator (participant)

Greetings, and welcome to the Griffon Corporation Fiscal Fourth Quarter 2023 Earnings Conference. At this time, 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 zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, our Chief Financial Officer. Thank you. You may begin.

Brian Harris (CFO)

Thank you. Good morning. It's my pleasure to welcome everybody to Griffon's fourth quarter and fiscal 2023 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'll turn the call over to Ron.

Ron Kramer (Chairman and CEO)

Good morning, everyone. Thank you for joining us. We're pleased with our results for the fourth quarter and the fiscal year. The record performance of our Home and Building Products, HBP segment, drove our results as Clopay and CornellCookson continue to deliver strong free cash flow and operating margins. Our Consumer and Professional Products, or CPP segment, improved in the fourth quarter, and we're optimistic about its repositioning for the future. For the year, HBP revenue increased 5% to $1.6 billion, growth in commercial volume. As expected, residential volume backlog levels normalized. HBP had favorable price and mix across all products and channels. HBP's fourth-quarter performance benefited from increased investment in marketing and sales for both residential and commercial channels, following two years of reduced activity due to elevated backlog and extended lead times.

HBP also continues to invest in productivity and innovation to further drive growth, including expanding Clopay's Troy, Ohio, sectional door manufacturing capacity and adding advanced manufacturing equipment to better satisfy customer demand for premium products. Turning to Consumer and Professional Products segment, CPP's results for the year continue to reflect challenging market conditions, with revenue decreasing 18% to $1.1 billion. All channels and geographies were affected by reduced consumer demand and elevated customer inventory levels. As we announced previously, to address the impact of these market conditions on certain US product lines, CPP is expanding its global sourcing strategy. By utilizing an asset-light structure, CPP's US operations will be better positioned to serve customers with a more flexible and cost-effective global sourcing model. The global sourcing expansion plan remains on schedule and within budget. Operations, two manufacturing facilities, and four wood mills, representing over space will cease.

The remaining affected Ames locations will be transitioned during calendar 2024. Global sourcing expansion at Ames has improved margins the CPP segment, and we are pleased by the progress made so far. We will continue to provide... update on process. Turning to capital allocation. 2023, we took significant actions to deliver shareholder value and strengthen our balance sheet through cash dividends, stock buybacks, and debt repayment. Quarterly dividend by 25%, $0.125 per share, paid a $2 per share special dividend, and announced a $200 million increase to our share repurchase authorization, total then to $258 million. At the end of fiscal year, September 30th, we've repurchased more than 4.1 million shares, million dollars. During fiscal, we returned $485 million dividend payments and share repurchases.

It's also important to note we were able to deliver this value while maintaining our leverage at 2.6x. Since September 30th, we've purchased an additional 1.1 million shares. The Griffon board announced a $200 million increase to its share repurchase authorization, bringing the current authorization to a total of $262 million. Since April, Griffon has repurchased 3 million shares for a total of $96 million, or $37.15 per share through yesterday, November 14th, 2023. These share repurchases represent 9.2% of the shares outstanding as of March 31st, 2023. During fiscal 2023, we also took action to improve our financial flexibility and strengthen our balance sheet.

We increased the size of our revolving credit facility from $400 million-$500 million and extended the maturity of the revolver to August 1st, 2028. Also, in the fourth quarter, we repaid $25 million of our Term Loan B facility. In fiscal 2024 we will free cash flow to support our capital allocation strategy, with a focus on opportunistically repurchasing shares, reducing debt, and supporting our regular quarterly dividend. Also, this morning, the Griffon board dividend of $0.15 per share, payable on December 14th, to shareholders of record on November 28th, marking the 49th consecutive quarterly dividend to shareholders. This is a 20% increase over our last quarterly dividend and a 50% increase compared to November 2022 dividend. Has grown at an annualized compounded rate of 18% since we initiated dividends in 2012.

These actions reflect the strength of our business as well as our confidence in our strategic plan and outlook. I'll turn it back to Brian for the financial update and to provide details about our 2024 guidance.

Brian Harris (CFO)

Thank you, Ron. I'll start with our fourth quarter performance and then review our guidance for fiscal 2024. Fourth quarter revenue of $641 million decreased by 10%, and Adjusted EBITDA before unallocated amount of $135 million decreased by 3%, both in comparison to the prior year. The related EBITDA margin was 21%, an increase of 140 basis points over the prior year fourth quarter. Gross profit on a GAAP basis for the quarter was $246 million, compared to $250 million in the prior year quarter. Excluding items that affect comparability from the current and prior year periods, gross profit was $250 million in the current quarter, compared to $253 million in the prior year. 60 basis points to 39.2%.

Fourth quarter GAAP selling, general, and administrative expenses were $157 million, compared to $166 million in the prior year quarter. Excluding adjusting items from both periods, SG&A expenses were $146 million, or 22.8% of revenue, compared to the prior year of $148 million or 20.8% of revenue. Fourth quarter GAAP income from continuing operations was $42 million, or $0.79 per share, compared to prior year loss of $115 million by CPP charge. Excluding all items that affect comparability from both periods, current quarter or $1.19 per share, compared to the prior year of $60 million or $1.09 per share. Corporate unallocated expenses, excluding depreciation, were $13.5 million in the quarter, compared to $14.2 million in the prior year.

Net capital expenditures compared to $9 million in the prior quarter. The increase was primarily driven by net $20 million acquisition of the HBP headquarters facility in Ohio, manufacturing facility for ClosetMaid in Ocala, Florida, as we capitalized on the opportunity to buy facilities below market value. Depreciation and amortization totaled $15.4 million for the fourth quarter, compared to $17.6 million in the prior year. Regarding our segment performance, revenue for home and building products decreased 7% over the prior year quarter, driven by residential volume, partially offset by increased commercial volume. Adjusted EBITDA decreased 9% compared to the prior quarter, driven by the decreased revenue, coupled with labor, marketing and advertising costs, partially offset by reduced material costs. Consumer and Professional Products revenue from the prior year quarter to $247 million.

The reduction in revenue was primarily attributable to reduced volume across all channels and geographies, driven by soft consumer demand, elevated customer and customer supplier diversification in the U.S. Increase to $14 million from the prior year of $7 million, driven by reduced material costs, partially offset by the impact of reduced revenue noted above. In May, we announced that CPP is a strategy for products manufactured and sold in the U.S. to address the evolving market conditions. Utilizing model enables CPP to continue providing high quality products, positioning and leverage industry-leading service and distribution that our customers and consumers expect. Further, these actions position CPP to achieve target EBITDA margins of 15% and generate substantial additional value for our shareholders. The project remains on time and on budget, with completion expected by the end of calendar 2024.

In the quarter ended September 30th, CPP incurred pre-tax cash charges of $10 million related to the expansion of its global sourcing strategy. Regarding our balance sheet and liquidity, as of September 30th, 2023, we had $1.4 billion in net debt to EBITDA leverage of 2.6x, as calculated based on our debt covenants. We remain net debt and leverage neutral with the prior quarter, ending June 30th, 2023, even after returning approximately $72 million to shareholders. The prior year-end net debt was $1.5 billion and leverage was 2.9x. Regarding our 2024 guidance, we expect revenue of $2.6 billion and segment Adjusted EBITDA of $525 million-$550 million, which excludes unallocated costs of $54 million, charges of $5 million and strategic review retention expenses of approximately $10 million.

We anticipate 2024 HBP revenue will decrease by 3%-5% YoY, due to the first half of 2024 being compared to the prior year, which included volume from significant residential door backlog and the return to normal seasonal demand patterns, which historically have less demand in our second quarter, ended March. These factors will be partially offset by market share gains in both residential and commercial. HBP EBITDA margin for 2024, the phasing of the EBITDA performance will follow the same general trends as discussed with revenue, with an unfavorable comparison to the prior year in the first half, followed by a stronger second half. With respect to CPP, we expect 2024 revenue decrease 3%-5% YoY, due to continued soft demand and high customer inventory levels, partially offset by normalized weather.

The first half is expected to compare unfavorably YoY as customer destocking continues, with gradual improvement during the second half as inventory levels return to normal. CPP EBITDA margin is expected to see modest improvement YoY, particularly in the second half as the Ames US operations transition to an asset-light operating model. Total capital expenditures for fiscal year 2024 are expected to be $70 million. This amount includes the capital required to complete the 100,000 sq ft expansion and equipment upgrades at Clopay's sectional door manufacturing facility in Troy, Ohio. Depreciation and amortization is expected to be a total of $63 million, of which $22 million is amortization. We expect to generate free cash flow for the full year in excess of net income, inclusive of the capital investments.

As we have seen historically, we expect a seasonal pattern with cash usage in the first half, followed by second half cash generation. This includes the impact of cash outflows related to the global sourcing initiative. Million for fiscal 2024. Our expected normalized tax rate will be approximately 28%. As is always the case, geographic earnings mix and any legislative action, including new guidance on tax reform matters, may impact rates. Now I'll turn over the call back over to Ron.

Ron Kramer (Chairman and CEO)

Thanks, Brian. We enter 2024 with a proven strategy, skilled team and strong balance sheet, positioning us for future growth while remaining flexible in an uncertain macroeconomic environment. Before we turn to questions, I want to acknowledge and thank the employee management teams of our businesses. Because of their dedication and effort, continues to see such great performance. We'll continue to use the strong operating performance and free cash flow from our business to drive our capital allocation strategy to deliver long-term value for our shareholders. This strategy will continue to include investing in our businesses, opportunistically repurchasing shares, and reducing debt. These actions underscore the confidence of Griffon's board and management in our outlook and strategic plan. Operator, we're happy to take any questions.

Operator (participant)

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 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. At this time, we are limiting everyone to one question and one follow-up question. One moment, please, while we pull for questions. Our first question comes from Joe Ahlersmeyer from Deutsche Bank. Please proceed.

Joe Ahlersmeyer (Research Analyst)

Hey, everybody. Good morning, and thanks for taking the question.

Ron Kramer (Chairman and CEO)

Good morning.

Brian Harris (CFO)

Good morning.

Joe Ahlersmeyer (Research Analyst)

And congrats on the results and the favorable outlook. I certainly appreciate also the, the detail around the cash flow. Maybe just to start on the HBP business. Regarding the outlook, I think it makes sense a lot of it depends or, or is hinging on sort of the comparison versus the first half of prior year. Sequentially, what you're seeing, between your two kind of residential and commercial businesses, within there, just sequentially, what the momentum in the business looks like?

Brian Harris (CFO)

Sure. We continue to see reduced residential volume, though we expect some market share gains in that in 2024. On the commercial side, we had benefits increased volume in 2023, and we expect 2024 to continue that trend. We continue to have good order volume in that area.

Joe Ahlersmeyer (Research Analyst)

Sounds good. And then just thinking about the margin guidance in excess of 30%, certainly that's above the long-term guide. Wondering if there's something to kind of call out there to bridge between that and the guidance, but also if you're willing to sort of put an upper bound on that, on that guidance, rather than just 30%+.

Brian Harris (CFO)

Sure. So we do have long-term expectations out there of 25%-28%, even though HBP continues to operate at 30%+, and we expect it. We were seeing nothing that is gonna change that. We have that guidance out there, perhaps a little conservatism and also considering downturns in the market, and that's what we think is the bottom of for our business, those types of margins.

Ron Kramer (Chairman and CEO)

2024, we're off to an excellent start, and we see the 30% being well within our capabilities and sustainability. The business has proven itself to be resilient. The positioning that is commercial business. We have an excellent team doing the best in this industry, and we continue to be the leader, and we expect to both grow the business, take market share and maintain our for 2024.

Operator (participant)

Our next question comes from Bob Labick with CJS Securities. Please proceed.

Bob Labick (President)

Good morning, and congratulations on a great quarter and a really great fiscal year as well.

Ron Kramer (Chairman and CEO)

Thanks, Bob.

Brian Harris (CFO)

Thanks. Good morning.

Bob Labick (President)

So maybe my question was gonna be, before you mentioned Troy, you know, where do you stand in terms of your capacity in Troy? So maybe you could elaborate on expansion in Troy, what you're using it for, and how it'll change your, you know, throughput and your opportunity. You know, how much you can grow revenue from this, et cetera, please.

Brian Harris (CFO)

Sure. So the project in Troy is to look at the higher end of what we, the products that we have, and which we can continue to get value. It also gives us a chance to make sure we have equipment operational in the future and spread out and maintain our equipment and get away from running plants, you know, 24/7. It gives us a much more normalized cadence to ensure that we can avoid late shifts and weekend shifts and, you know, continues to keep us in a position where we can grow our share.

Bob Labick (President)

Okay, that sounds great. And I guess just on the last question as well, you know, changes at HBP that have enabled you to drive margins so high and up to this, you know, strong and now obviously impressive and sustainable level. Just give us kind of elaborate on the changes from, you know, then and have a strong vision for that division.

Ron Kramer (Chairman and CEO)

So let's start with the king. So back in 2008 and the global financial crisis, in 2009, we consolidated plants, we invested in the business, and we, you know, what, invested in technology at both the plant level, created software for our dealers to be able to showcase our products for consumers to make ease of order. We've expanded our relationship over the years with Home Depot and Menards, and we bought CornellCookson five years ago and expanded our commercial business. So the margin improvement story is a function of getting the strategy right, getting the operating footprint of this business modernized, building the brand at the consumer level, and Clopay represents, you know, the leading brand in residential garage doors.

We went and expanded our business by buying CornellCookson. So between Clopay, CornellCookson, and the brands that we have, Clopay, and Ideal, we have become, you know, the leader in both residential and in commercial. The growth in our business, which we said five years ago, we saw the business as being both a way for us to diversify, and we always understood that it was going to be something that was going to be a margin enhancing. We went through COVID. We positioned the company to be not just able to get through, but to continue to gain market share. So, you know, the margin improvement story has been happening over a very long period of time. It's now at a level that we believe we're a, you know, in an elite class of manufacturers.

We don't necessarily get valued that way in the public market, and we've been taking advantage of it. We think this is a very valuable business. We think commercial side, the residential side, continues to be strong for us. Our dealer network, our big box positioning, makes us the leader in the space, and we expect to gain more share and maintain our margins going forward.

Operator (participant)

Our next question comes from Tim Wojs, from Baird. Please proceed.

Timothy Wojs (Senior Research Analyst)

Hey, guys. Good morning. Nice job.

Ron Kramer (Chairman and CEO)

Thank you. Morning. How you doing?

Timothy Wojs (Senior Research Analyst)

I'm well, thanks. Maybe just on CPP, just kind of curious how we should think about, you know, I know you gave guidance for fiscal 2024, and you expect EBITDA to be a little bit up above, you know, this past year. But, how would you kind of think of the cadence there, Brian? And then I'm trying to really kind of dive into, like, what the exit rate kind of looks like as you think about fiscal 2025. Just how we should kind of sequence the margin improvement in CPP over the next couple of years.

Brian Harris (CFO)

Sure. So in the first half of 2024, we expect to be behind the first half of 2023 as being high at our customers and the consumer remains soft. In the second half, we expect, we have in our numbers the benefit of normalized weather. It's hard to expect it necessarily. And some benefits from the initiative, the global sourcing expansion initiative will begin as we get into the second half of 2024. Exiting 2024, we expect inventory levels to be at a more normalized level at our customers, and entering into 2025, we will start selling sourced material opposed to the manufactured material, which will be 2024. As we get through 2025, exiting 2025, investment run rate and 2026 being fully there.

Timothy Wojs (Senior Research Analyst)

Okay. Okay, that's very helpful. Thank you. And then, I guess, just on the cash side of things, you guys have been, you know, really good on the capital deployment. How are you thinking about buybacks, you know, through fiscal 2024? Just you've been pretty active here the last few quarters. Is it, you know, fair for us to expect that to continue through the year?

Ron Kramer (Chairman and CEO)

We continue to believe our stock is a compelling value, and we'll take of it.

Timothy Wojs (Senior Research Analyst)

Thank you, guys.

Operator (participant)

Our next question comes from Julio Romero from Sidoti & Company. Please proceed.

Julio Romero (Equity Research Analyst)

Good morning. On home products, I appreciate the revenue kind of guidance you guys gave for both segments. Does the 3%-5% expected sales decline for HBP kind of embed any price degradation there? And just maybe speak to how price is holding up within the segment.

Brian Harris (CFO)

Sure. It does not assume any price degradation. Price is holding up well, you know, pretty disciplined, and that is led by four large players.

Julio Romero (Equity Research Analyst)

Okay, that's helpful. And then just, you know, you guys talked about the CPP global sourcing is doing there. Maybe just talk about the competitive landscape within the channels that CPP sells into, specifically larger ones of repair, remodel, retail and international, and maybe just talk about how each channel is doing, if you could.

Brian Harris (CFO)

Sure. Australia, I'll just start with Australia, is continuing to perform very well. Canada continues to perform well. Those marketplaces are seeing reasonably good demand. The U.S. and the U.K. are in the same bucket, where there's higher inventory levels and the consumer is soft. In the U.K., they haven't lost any market share. This is a matter of time. They're already an asset-light model. And in the U.S., we are transitioning to the asset-light model, which will help our margins going forward. And we continue to serve the pro with high-quality products that are sought after by them, and that will continue.

Operator (participant)

Our next question comes from Sam Darkatsh from Raymond James. Please proceed.

Sam Darkatsh (Managing Director of Equity Research)

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

Ron Kramer (Chairman and CEO)

Morning, well. How are you, Sam?

Sam Darkatsh (Managing Director of Equity Research)

I'm well, as well. Thanks for asking. I've got a bunch of questions, but I'll be mindful of time, and maybe I'll get back into the queue. First one, I wanted to clarify, maybe rephrase a question Tim asked earlier. From the $103 million interest expense guidance for fiscal 2024, how much repo does that specifically assume beyond what you've already done in October here?

Brian Harris (CFO)

Free cash flow.

Sam Darkatsh (Managing Director of Equity Research)

Gotcha. And then, as it relates to your free cash flow guide, for next year being in excess of net income, first, does that include or exclude the prospective asset sales from CPP? And then related, the $70 million in CapEx, is that the new normal run rate going forward, or is that a continuation of some of the outsized CapEx that we're seeing tail end of this year?

Brian Harris (CFO)

Sure. A few things there. The cash flow does not assume the sale of any real estate. It does assume the full $70 million of CapEx. The outsized CapEx we saw in the fourth quarter related to us purchasing real estate. Opportunistically, we bought two facilities, so we, you know, that will not continue. The $70 million in 2024 includes the cost for Troy expansion that we described, and for that matter, any CapEx related to the global expansion for CPP. We do not expect that trend to necessarily continue, and it'll come down as we get into future years on the HBP side, roughly 2%, and over time, on the CPP side less than 2%.

Operator (participant)

Our next question comes from Justin Bergner from Gabelli Funds. Please proceed.

Justin Bergner (Portfolio Manager and Research Analyst)

Good morning, Ron. Good morning, Brian.

Brian Harris (CFO)

Morning.

Ron Kramer (Chairman and CEO)

Morning, Justin. We're well. How are you?

Justin Bergner (Portfolio Manager and Research Analyst)

Good, thanks. Thanks for taking my questions. Just some cleanup questions. On the free cash flow, does that include the costs of the supplier initiative, the cash costs, the free cash flow being greater than net income?

Brian Harris (CFO)

Yes.

Ron Kramer (Chairman and CEO)

Yes.

Justin Bergner (Portfolio Manager and Research Analyst)

Okay. And then, secondly, just help me understand, I think you made some earlier prepared comments on the volume trajectory in HBP over the course of fiscal year 2024, and just any comments on the margin trajectory as well would be helpful.

Brian Harris (CFO)

Sure. So in the first half of the year, we have a difficult comparative to the first half of last year because it was elevated by backlog. Volume was elevated by backlog. We also expect this year to be back to seasonal norms, where Q2 is a low point for the business, and then going into Q3 and Q4, it gets back to a higher volume in the second half of the year. We expect the second half of the year to be a better comparative and be better results than the second half of this year, this past year.

Operator (participant)

This concludes our question and answer session. I would like to turn the floor back over to Ron Kramer for closing comments.

Ron Kramer (Chairman and CEO)

It's been an excellent year, and we're very excited about our future. Thank you.

Operator (participant)

This concludes today's teleconference. You may disconnect your lines at this time.