Earnings Call Transcript - GFF Q2 2024

Operator, Operator

Good day, and welcome to the Griffon Corporation Fiscal Second Quarter 2024 Earnings Conference Call. All participants will be in a listen-only mode. 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 second quarter 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 www.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 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, 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. The second quarter 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 dip simply did not materialize. For our Consumer and Professional Products segment, second-quarter 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 U.S. manufacturing facilities and four wood mills. These actions have reduced our manufacturing footprint by over 1.2 million square feet. 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 second quarter, 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 second quarter of fiscal 2023. Also, yesterday, the Griffon Board authorized a regular quarterly dividend of $0.15 per share payable on June 20 to shareholders of record on May 29, marking the 51st consecutive quarterly dividend to shareholders. Our dividend has grown at an annualized compounded rate of 18% since we initiated 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 for our shareholders. I’ll turn it over to Brian for a little more financial detail.

Brian Harris, CFO

Thank you, Ron. Second quarter revenue of $673 million decreased by 5% and adjusted EBITDA before unallocated amounts of $149 million decreased by 2%, both compared to the 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%. Second quarter GAAP selling, general and administrative expenses were $157 million compared to $160 million in the prior year. Excluding adjusting items for 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. Second quarter 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 second quarter compared to $7.1 million in the prior year quarter. Depreciation and amortization totaled $15.1 million for the second quarter 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 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 decreased 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 $565 million of segment adjusted EBITDA, which excludes unallocated costs and certain other charges on a comparable basis. Further, we now expect corporate costs of $59 million, an increase versus prior year guidance of $54 million due to increased employee stock ownership plan expenses, driven by present stock price appreciation. Other guidance remains unchanged for 2024, including 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.

Ron Kramer, 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 margins. 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 the capital allocation strategy that delivers long-term value for our shareholders. Before we turn to questions, I want to acknowledge the effort and commitment of 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, Operator

Thank you. We will now begin the question-and-answer session. The first question is from Tim Wojs with Baird. Please go ahead.

Tim Wojs, Analyst

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

Ron Kramer, CEO

Thanks, Tim.

Tim Wojs, Analyst

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

Ron Kramer, CEO

No, we don’t see any change. The biggest takeaway is the seasonality of the second quarter and the expected residential volume decline that didn’t happen. So we’re quite optimistic about what we see going on for the balance of the year and the continued margin improvement story that we’ve got in the HBP side that’s maintaining and CPP which is improving.

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, Analyst

In the CPP business, EBITDA has grown year-over-year this quarter. There is often some fluctuation during transitions, but do you believe you have achieved significant improvements in that area, allowing for continued sequential growth? Or do you expect it to remain at that level for the latter half of the year, with a potential increase in 2025?

Brian Harris, CFO

Sure. If we’re looking at the second quarter to the third quarter, we would expect the margin to improve sequentially. However, the business does have seasonality, so we’ll likely see a dip in the fourth quarter, which is typically a low quarter for us. But we are seeing sustainable improvement in margins that will continue to grow into 2025 from the actions we’ve taken. Once we work through the inventory that we’re selling that was manufactured, then the margins will improve significantly.

Operator, Operator

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

Trey Grooms, Analyst

Good morning, Ron and Brian, nice work in the quarter.

Brian Harris, CFO

Thank you.

Trey Grooms, Analyst

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

Brian Harris, CFO

Sure. We expect residential to continue to be strong and volumes to be better than the prior year. On the 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. That market is moderating somewhat, but we still see pretty strong volume there.

Trey Grooms, Analyst

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

Brian Harris, CFO

We do expect the inventory to normalize in the channel. 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 type of product.

Operator, Operator

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

Bob Labick, Analyst

Good morning and congratulations on another strong quarter.

Ron Kramer, CEO

Thanks, Bob.

Brian Harris, CFO

Thank you, Bob.

Bob Labick, Analyst

I wanted to begin by mentioning that the gross margins were either at a record level or very close to it, which is quite impressive. Even though you don't provide breakdowns by segment, could you give us an idea of how they're trending in each segment? How sustainable is this at the 40% level based on revenue? Additionally, how do you expect them to change as global sourcing reaches completion?

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. We’re seeing the pricing in HBP maintaining. Therefore we expect margins to hold there as well.

Bob Labick, Analyst

Okay, that sounds good. Regarding global sourcing, I understand you're on track and within budget. Can you share what the next major steps are? Have you completed qualifying all the suppliers? Do you currently have sufficient capacity to fully transition? What challenges do you anticipate facing between now and the end of the year to complete this process?

Ron Kramer, CEO

Yeah. Let’s go back and remember that part of our confidence in doing this a year ago as market conditions changed. We have 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 a global business. Our Australia business is already sourcing hundreds of millions of dollars of product out of China and Vietnam, so this is about transitioning the U.S. capacity to our existing supply chain relationships. That was always our strategy, and a year later I’m very proud that we’ve been able to execute it flawlessly. As for 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 continue to be a U.S., Australia, Canada, U.K. business. We did this with the expectation that this was a long-term strategy to fix a problem around the core U.S. manufacturing business that we have.

Brian Harris, CFO

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

Operator, Operator

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

Sam Darkatsh, Analyst

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

Ron Kramer, CEO

Good morning, Sam.

Brian Harris, CFO

Doing well.

Sam Darkatsh, Analyst

Terrific quarter.

Brian Harris, CFO

Thank you.

Sam Darkatsh, Analyst

A couple of questions if I could sneak two in. First, the guidance, and I know you’ve typically crafted 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. 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. We’re still anticipating the 30% plus margin in the back half of the year. We’re not seeing any pricing pressure. What could occur is mix. Additionally, we had some steel costs that we know will be coming through in the third quarter, in particular, that will hurt margin a little bit sequentially.

Sam Darkatsh, Analyst

Got you. So that actually leads perfectly into my next question. I believe there was a price increase announced in the Residential Garage Door industry in March by one of your competitors, but it seems it hasn’t taken effect yet. Given that steel prices are putting some pressure on us and residential volumes are starting to turn positive, why hasn’t that price increase been matched? Or why is the market not supporting 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. We see a good market. We will continue to monitor costs and take actions if necessary.

Operator, Operator

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

Julio Romero, Analyst

Thanks. Good morning, Ron and Brian. On CPP, can we maybe talk about the inventory levels by geography 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 time frame in your view for inventory to normalize?

Brian Harris, CFO

Yes. So inventory positions at our customers are improving, though there is 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 since a lot sells in Q4, and our internal inventories should decrease. So the US inventory that applies to the US when those UK inventories still are a bit high. That may take longer. Their economy has been in a more difficult spot, but that part of our business is not so large, it’s not affecting us too much. Canada and Australia are fine.

Julio Romero, 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. Yes, no change in our service levels. We’re able to provide our customers everything we need.

Operator, Operator

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

Justin Bergner, Analyst

Good morning, Ron. Good morning, Brian, good quarter. 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 a couple of quarters ago?

Brian Harris, CFO

On the residential side, we have continued to come out with great products that people are taking to very well. We had the best service, the best lead times, the best dealer network, the best production. Overall, an investment in a residential garage door is a good investment. There was a recent survey done by Zonda that shows that the ROI on putting in a new garage door is about 200%.

Justin Bergner, Analyst

Okay. And any change to your capital allocation priorities? Are you going to continue to repurchase shares? You’re going to look at bolt-on M&A?

Ron Kramer, 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. While it’s clearly outperformed any index over any period of time in any peer group competitor, it’s still undervalued, and we have and we will continue to take advantage of that. Separately, the M&A 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 going to be able to do is always the uncertainty of looking at M&A. As far as capital, we can buy back stock and do M&A. We said that our leverage of 3.5 times is an outer limit of anything that we would ever consider doing on the M&A side. But we’re down to an investment-grade credit that is going to continue to improve as we generate free cash flow, especially if we don’t do M&A and find things that we can add to what we already have. So the ability for us to manage both stock buybacks and M&A is part of what we think the next year is going to look like.

Operator, Operator

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, 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, Operator

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