Earnings Call Transcript - GFF Q1 2026

Operator, Operator

Greetings and welcome to the Griffon Corporation Fiscal First Quarter 2026 Earnings Conference Call. Please note this conference is being recorded. I will now turn the conference over to your host, Mr. Brian Harris, CFO. Please go ahead, sir.

Brian Harris, CFO

Thank you. Good morning, and welcome to Griffon Corporation's first quarter fiscal 2026 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.

Ronald Kramer, CEO

Thanks, Brian. Good morning, everyone, and thanks for joining us today. Earlier this morning, we announced exciting news regarding the creation of a joint venture, including AMES North America and Venanpri Tools, along with other strategic actions related to Griffon. Allow me first to summarize our results for the quarter, then I'll comment further about the strategic actions that are underway. We are pleased with our first quarter results, highlighted by free cash flow of $99 million, continued solid operating performance at Home and Building Products and improved profitability at Consumer and Professional Products. We're off to a good start and are on track to meet our updated financial targets for the year. For the quarter, Home and Building Products, HBP, revenue increased 3% compared to the prior year, and EBITDA margin was 30.1%. Revenue benefited 7% from strong price and mix across both residential and commercial products, which was partially offset by reduced residential volumes. Consumer and Professional Products, or CPP, first quarter revenue increased 2%, driven by price and mix with increased volume in Australia and Canada, offset by reduced volume in the U.S. as consumer demand remains soft. CPP EBITDA in the quarter increased by 19% to $22 million, driven by the increase in revenue. We're pleased to continue to see year-over-year improvement in CPP EBITDA despite persistently weak demand in the U.S. Turning to capital allocation. During the first quarter, we repurchased $18 million of our stock or 247,000 shares at an average of $73.21 per share. At December 31, $280 million remained under the repurchase authorization. Since April 2023 and through December, we've repurchased $578 million of stock or 11.1 million shares at an average price of $52.27 per share. These repurchases have reduced Griffon's outstanding shares by 19.3% relative to total shares outstanding at the end of the second quarter of fiscal 2023. Also yesterday, the Griffon Board authorized a regular quarterly dividend of $0.22 per share payable on March 18 to shareholders of record on February 27, which marks the 58th consecutive quarterly dividend to shareholders. Our dividend has grown at an annualized compounded rate of 19% since we initiated dividends in 2012. These actions reflect the strength and resiliency of our businesses as well as our continued confidence in our strategic plan and outlook. Let me comment on our strategic actions. Earlier this morning, we announced the formation of a joint venture with ONCAP, the middle market private equity platform of ONEX Corporation, which will create a leading global provider of hand tools, home organizational solutions and lawn and garden products for professionals and consumers. The joint venture will combine Griffon's AMES businesses in the United States and Canada with ONCAP's global portfolio of hand tool businesses, including Corona in the United States, Burgon & Ball in the United Kingdom and Bellota hand tools operating in Europe and Central and South America. Through this transaction, we are creating a global leader in professional and consumer hand tools, home organizational solutions and lawn and garden products with sufficient scale and scope to compete in the global marketplace. The joint venture is comprised of leading professional and consumer brands, including AMES, Bellota, Burgon & Ball, ClosetMaid, Corona, Garant, Razor-Back and True Temper. ONCAP and Griffon both recognize the benefits created by merging leading diversified professional tool brands with global reach. We are very excited about this business combination and the prospects for the joint venture. We see significant opportunities to streamline operations across the businesses and capture the benefits of economies of scale. For Griffon, the formation of the joint venture will generate immediate shareholder value and additional liquidity as well as provide a path for realizing more value in the longer term through the second lien debt from the joint venture and our significant equity interest. We're looking forward to working with ONCAP to make this joint venture a success. In addition to the joint venture, we also announced three other strategic actions that, once completed, will transform Griffon into a pure-play building products company, positioning us as the leading provider in North America of residential and commercial garage doors, rolling steel doors and grill products as well as a leading brand of residential and commercial ceiling fans. So our actions, a comprehensive review of strategic alternatives for AMES Australia, a review of strategic alternatives for the AMES United Kingdom and the combination of Hunter Fan with our Home and Building Products segment. To offer a bit more detail, our AMES Australia business has grown from a small operation that was part of our original AMES acquisition into a category leader in Australia. This business is led by an exceptional team with a demonstrated track record of growing both organically and through acquisition, while consistently generating solid operating performance. We're confident there are a number of strategic alternatives available for AMES Australia that will position the business for continued growth, while providing value to Griffon shareholders. We'll report back regarding our progress. Finally, we're combining Hunter Fan with our Home and Building Products segment. Both Clopay and Hunter maintain exceptional positions with industry-leading brands and best-in-class technology and innovation. We see many opportunities for the two businesses to leverage their complementary sales channels across residential and commercial building products. The two teams already know each other well, have collaborated over the past three years and are excited about bringing them together.

Brian Harris, CFO

Thank you, Ron. First quarter revenue of $649 million increased 3% in comparison to the prior year quarter and adjusted EBITDA before unallocated amount of $145 million was in line with the prior year. EBITDA margin before unallocated amounts was 22.3%. Gross profit on a GAAP basis for the quarter was $267 million compared to $264 million in the prior year quarter. Gross margin was 41.1%. First quarter GAAP selling, general and administrative expenses were $153 million compared to the prior year of $152 million. Excluding adjusting items from the prior period, SG&A expenses were $153 million or 23.6% of revenue compared to the prior year of $151 million or 23.8% of revenue. First quarter GAAP net income was $64 million or $1.41 per share compared to $71 million in the prior year quarter or $1.49 per share. Excluding items that affect comparability from both periods, current quarter adjusted net income was $66 million or $1.45 per share compared to the prior year of $66 million or $1.39 per share. Corporate and unallocated expenses, excluding depreciation in the quarter were $15 million compared with $14 million in the prior year. During the quarter, we had capital expenditures of $8 million compared with the prior year gross capital expenditures of $17 million and de minimis prior year net capital expenditures as proceeds from asset sales offset the capital investment made in that quarter. Regarding our segment performance, as Ron mentioned earlier, revenue for Home and Building Products increased 3% from the prior year quarter, reflecting strong price and mix of 7% for both residential and commercial, which was partially offset by reduced volume of 4% driven by residential. Home and Building Products adjusted EBITDA decreased 3% compared to the prior year quarter, resulting in an EBITDA margin of 30.1%. The positive effect of increased revenue in the quarter was more than offset by unfavorable material costs, labor costs and operating expenses, along with the adverse impact of reduced volume on absorption. Consumer and Professional Products revenue increased 2% from the prior year quarter to $241 million. Favorable price and mix during the quarter, along with increased volume in Australia and Canada was partially offset by the impact of reduced volume in the U.S. CPP adjusted EBITDA increased 19% from the prior year quarter to $22 million, primarily due to the increase in revenue. Regarding our balance sheet and liquidity, as of December 31, 2025, we had net debt of $1.26 billion and net debt-to-EBITDA leverage of 2.3x as calculated based on our debt covenants compared to 2.4x leverage at the end of last year's first quarter and the end of fiscal year 2025. We paid down $60 million of term loan B during the quarter. Our net debt and leverage decreased from our year ended September 25 and the prior year quarter, even with returning $29 million of capital to shareholders via stock repurchases and dividends during the quarter. Regarding our strategic actions, under the terms of our master transaction agreement, ONCAP will own 57% of the joint venture, and the joint venture will be operated as an ONCAP portfolio company. Griffon will receive $100 million of cash proceeds at closing, along with $160 million of second lien debt from the joint venture. Griffon will have a 43% ownership stake. As a result of our strategic actions, starting in our second quarter 2026, we will report AMES U.S., Canada, Australia and U.K. as discontinued operations. Hunter Fan's financial results, which historically have been included in CPP segment will be reported as part of the Home and Building Products segment. The expected fiscal year 2026 EBITDA for discontinued businesses is $60 million, comprised of $25 million for AMES North America, $40 million for Australia and with U.K. operating with negative EBITDA. In terms of our updated outlook for our continuing operations, we now expect full year fiscal 2026 revenue from continuing operations to be $1.8 billion and adjusted EBITDA to be $520 million, excluding unallocated costs of $62 million. Free cash flow from continuing operations, including capital expenditures of $50 million, is expected to exceed net income. Depreciation will be $27 million and amortization will be $15 million. Fiscal year 2026 interest expense is expected to be $93 million, and Griffon's normalized tax rate is expected to be 28%. This guidance, as stated, is consistent with our expectations for legacy Home and Building Products and Hunter Fan as we originally outlined in November. Now I'll turn the call back over to Ron.

Ronald Kramer, CEO

Thanks, Brian. From a financial and operational perspective, 2026 is off to a good start with strong free cash flow and continued solid operating performance. Our results continue to reinforce our confidence in our outlook for the year and beyond, especially given our resiliency to what continues to be a mixed and uncertain market backdrop. We remain optimistic about a turnaround in the residential and commercial markets and believe that we will realize substantial leverage as activity improves. Our capital allocation priorities remain unchanged. We'll continue to use the strong operating performance and free cash flow of our businesses to drive a capital allocation strategy that delivers long-term value for our shareholders. This strategy includes continuing to focus our resources on growing organically, while opportunistically repurchasing shares, paying dividends and reducing debt. This is an exciting time for Griffon. Our strategic actions taken together will streamline the company's portfolio and enhance shareholder value. When completed, Griffon will be a premier pure-play North American residential and commercial building products company with a very exciting future. In closing, I'd like to express my sincere gratitude to our Griffon employees around the world whose dedication and effort have driven our financial success. Our strategic activities have created additional challenges for our global teams. And as usual, they've stepped up to make it happen. Operator, we're now ready for questions.

Operator, Operator

And our first question will come from Tim Wojs with Baird.

Timothy Wojs, Analyst

Congrats on all the announcements. Maybe just to start, bigger picture, Ron, I'm just kind of curious in terms of kind of the timing and the thought process and kind of why now? Maybe some of the alternatives that you were kind of considering in this and kind of how this JV kind of came together?

Ronald Kramer, CEO

Well, we have always said that we thought there was a disconnect between the market value of our stock and the intrinsic value of our businesses. We've been looking at two very different segments. Our Home and Building Products business is a 30% EBITDA margin business, and our consumer businesses have been operating at a 9% margin. We see the performance of our businesses as being differentiated and the ability for us to take our consumer businesses and strengthen them by combining it with a leading global provider of tools, brands, giving us the leverage to be able to take the AMES companies and its footprint in North America and Canada and fit it in with the partner who's able to scale that business. So we continue to be a significant investor in the consumer business at 43%. We have a very strong belief that ONCAP and the Venanpri businesses fit hand in glove with the AMES business, and that we'll be able to continue to create value in that business as a separate investment for Griffon. Now what that does is this is an ability for us to unlock value. And the consumer side of our business, we believe, has been mispriced in our sum of the parts. By doing this, we are putting a spotlight on the value in the AMES, U.S. and Canada. The value of the $40 million EBITDA business that we have in Australia. And Hunter is a synergistic combination with our Home and Building Products business, and we have high expectations that the development of the industrial fan business can grow faster under the Home and Building Products Clopay umbrella. So for us, this is a set of moves that we believe significantly improves our valuation. And that's, again, without any growth coming out of the HBP side of the business as we believe we're getting closer to a recovery in the housing market in the U.S. So we've got a very strong HBP business with growth, and we believe that these actions strengthen the consumer businesses that we own and positions us to unlock meaningful value to our shareholders.

Timothy Wojs, Analyst

Okay, okay. Great. Yes. No, that's very helpful. And then, Brian, just maybe on like some of the details. So the go-forward financials of this go away, what would you guys kind of expect minority interest contribution to be from an earnings perspective? And then any sense on the rate on the second lien debt because I would assume that's effectively income for you.

Brian Harris, CFO

Correct. So that second lien debt is at a 10% PIK rate. And as far as our portion, our minority interest of the net income of the JV, I do not expect a significant impact from that as it's a private company with debt on it and amortization. So net income will not be material.

Operator, Operator

Our next question will come from Bob Labick with CJS Securities.

Lee Jagoda, Analyst

It's actually Lee Jagoda for Bob. So I guess starting with the JV, can you give us a sense for the EBITDA that's being contributed from ONCAP or maybe the expected fiscal '26 EBITDA for the combined entity?

Brian Harris, CFO

Yes, the combined entity results are not something we're disclosing at this time, but they are slightly smaller than we are.

Lee Jagoda, Analyst

Okay. Can you provide some insight into the revenue that Hunter was contributing? Also, once it is incorporated into the HBP segment, how should we view your margins in that segment compared to the 30% or above that you've maintained over the past several years?

Brian Harris, CFO

Sure. So in fiscal '25, Hunter Fan had $211 million of revenue rather. And as far as margin, you just heard the guidance, which is roughly 29%. But ultimately, this is still a 30% plus business going forward.

Operator, Operator

And our next question will come from Collin Verron with Deutsche Bank.

Collin Verron, Analyst

Congratulations on all the announcements. I guess just following up on that, any sense of just like maybe the EV to EBITDA multiple that the proceeds and the second lien debt imply for the business? And then any sense on sort of the timeline to sort of establish the JV and for the sale or other strategic action for Australia and U.K.

Brian Harris, CFO

Sure. So as far as a multiple, it's on the cash, just the cash, $100 million of cash, it's roughly a 4x multiple. And of course, larger if you include the second lien debt. As far as timing, we expect the JV to close by the end of June. And timing for the rest of the actions for Australia and U.K., we'll have to keep you posted, and we'll update you as they progress.

Collin Verron, Analyst

Okay. Understood. Do you have any thoughts on capital allocation moving forward?

Ronald Kramer, CEO

Well, I've said it, and I'll continue to underline, we believe that our stock is the best acquisition we can make. Our balance sheet has never been stronger. We finished the quarter at 2.3x. We've got a significant amount of liquidity, and we will have more as a result of these transactions, and you should expect us to continue to be an active buyer of our stock, deleveraging from free cash flow and being an increased dividend payer in the future.

Operator, Operator

Moving next to Trey Grooms with Stephens Incorporated.

Trey Grooms, Analyst

Congrats on the announcements, pretty exciting stuff. So we've talked a lot about the portfolio actions. But shifting gears here just a little bit on to the kind of the HBP business, the remaining business. You mentioned, Ron, I think, twice that '26 is off to a good start. But if you could maybe talk about, volume was down a little bit, which you mentioned lower res, no surprise there. But maybe you could update us on kind of the demand outlook here for the HBP business, kind of the remaining business here as we go into calendar '26, maybe looking across both the res with remodel and then also commercial.

Ronald Kramer, CEO

I want to begin by noting that the overall environment for housing and the political backing for the sector is much improved compared to the start of this fiscal year. Our performance in the first quarter showed a decrease in residential improvements alongside commercial, but the pricing and product mix indicate that there remains a strong segment for repairs and renovations in the premium market, where we operate. Clopay and our management team have excelled in introducing new products and leveraging technology through our dealer network, paving the way even before we entered 2026 and began to see signs of an improving housing market. We are quite hopeful that the housing recovery is still forthcoming. Our performance is strong and expected to improve regarding both units and volume as the U.S. housing market rebounds. Interest rates are likely to decrease, and the mortgage sector will need to recover, facilitating new home construction and increased activity. All these factors will contribute to making Clopay, already an efficient and highly profitable company, even larger. Additionally, our commercial sector, which stems from the acquisition of CornellCookson seven years ago, is balancing our business effectively. We anticipate that over the coming years, our commercial operations could match our residential division in size. With the ongoing infrastructure investments, we remain confident that Clopay has promising growth opportunities ahead.

Trey Grooms, Analyst

Okay, that's all very helpful. You mentioned the price mix was quite positive in the quarter. I know you implemented a price increase in '25. Could you clarify if that reflects the impact of the price increase along with some advantages from the mix? Is that the correct way to view it?

Brian Harris, CFO

Yes, that is correct.

Operator, Operator

And we'll go next to Sam Darkatsh with Raymond James.

Sam Darkatsh, Analyst

So most of my questions have been asked and answered. I just got two or three quickies. So why a JV and not an outright sale would be the first question. Second question, I know you're mentioning that Hunter has some connectivity with HBP, but I don't know if it's immediately intuitive externally for us. So if you could be more specific in terms of why you did not include Hunter in the JV contribution. And then finally, you mentioned, Ron, that you're putting a spotlight on the HBP under evaluation. Why not do a strategic review then on the whole shoot and match as opposed to just looking at the European and Aussie businesses at this point?

Brian Harris, CFO

Sure. I'll begin by outlining that the joint venture structure for Griffon allows us to realize significant value now and even more in the future since we still hold a minority stake in it. The current market conditions for consumer companies are challenging, and this approach enables us to merge two businesses, enhance economies of scale, and continue to benefit our shareholders as the joint venture evolves. Regarding Hunter, we see a greater strategic fit and potential with HBP, and we believe that integrating these businesses is the optimal way to enhance shareholder value. Hunter is a well-known consumer brand with a strong management team and an asset-light business model. Despite the recent years being tough for consumers, it still achieves double-digit EBITDA, indicating substantial potential for growth. Selling it off in this weak consumer climate would be ill-timed.

Ronald Kramer, CEO

And as far as your comment about the whole shooting match, we like our company, and we believe that we're going to stay and run this and build it for the foreseeable future.

Operator, Operator

Moving on to Julio Romero with Sidoti & Company.

Julio Romero, Analyst

Congratulations on the exciting announcements. I wanted to also ask about the RemainCo going forward. And I know you talked a little bit about Hunter and HBP combined. But I believe in the prepared, you mentioned that they've worked together in the past. Can you maybe cite an example or two of Hunter and HBP working together? And then also speak to any potential cross-selling opportunities or any opportunities as a combined go-to-market entity?

Brian Harris, CFO

Sure. I’ll start with the commercial side of the business. We frequently work with large warehouses and industrial facilities that use commercial fans sold by Hunter, and there’s a mutual sharing of information between Hunter and the Clopay legacy HBP side. On the residential front, Hunter has introduced an innovative product that allows fans to be installed in garages, accommodating the placement of outlets. These are just a couple of early examples.

Julio Romero, Analyst

Okay. Perfect. And then as we think about the RemainCo, you've always historically been a very strong free cash flow generator. How should we think about the cash conversion cycle of RemainCo relative to the historical portfolio? And should we expect your business to flow cash at a faster or slower rate going forward?

Brian Harris, CFO

Yes. So overall, we'll still be a very highly cash flow generative company. The cash flow, if you're looking at it over the course of the year, the first half will be more positive than in the past under the new construct, but still a little weaker than the second half.

Operator, Operator

And we'll take a follow-up from Collin Verron with Deutsche Bank.

Collin Verron, Analyst

I just wanted to touch on the HBP business a little bit more. I know you called out mix being a good guide. I was just curious how sustainable you think that is going forward, just given the trend in commercial and residential. And then maybe just talk about the margin pressure a little bit, like the order of magnitude of inflation in material costs versus labor costs just so we can get a sense of how that's tracking? And then my last question is just on the legacy HBP guidance. Was there any change to that, or was the guidance change only related to the announced strategic actions?

Brian Harris, CFO

Sure. The guidance change is only related to the legacy guidance we provided, which remains the same for HBP as we mentioned today. There are many questions surrounding this topic. Regarding our outlook for HBP, our guidance is unchanged. We are still experiencing pressure on residential volume, primarily at the lower end of the market, while the high end of the residential market remains strong and robust. For commercial, we previously indicated that we would have flat volume this year, and we still expect that to hold true based on what we observed in the first quarter. What was the last question? I'm sorry, Collin, could you repeat it? I seem to have lost him. If there are more questions, please let me know.

Operator, Operator

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

Ronald Kramer, CEO

We're very proud of the track record that this management team has created over a long period of time. And with the actions that we've taken today, we look forward to continuing to deliver superior shareholder value in the future. So thank you, all, and we'll be speaking to you soon.

Operator, Operator

And ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines, and have a wonderful day.