Griffon Q4 2024 Earnings Call Transcript

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November 13, 2024

There are 5 speakers on the call.

Operator

Ladies and gentlemen, good morning, and welcome to the Griffin Corporation Annual and Fiscal 4th Quarter Financial Results Conference Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Brian Harris, Chief Financial Officer.

Operator

Please go ahead.

Speaker 1

Thank you. Good morning, and welcome to Griffin Corporation's Q4 fiscal 2024 earnings call. Joining me this morning is Ron Kramer, Griffin's Chairman and Chief Executive Officer. Our press release was issued earlier this morning and is available on our website at www.griffin.com. Today's call is being recorded and the replay instructions are included in our earnings release.

Speaker 1

Our comments will include forward looking statements about Griffin'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.

Speaker 1

With that, I will turn the call over to Ron. Good morning, everyone and thanks for joining us. We are very pleased with our results for the Q4 and the fiscal year, which were driven by a consistently strong performance from our Home and Building Products segment and improved profitability at our Consumer and Professional Products segment. For the year, Home and Building Products, HBP revenue of $1,600,000,000 was consistent with the prior year, driven by increased residential volume, which was offset by reduced demand for commercial projects. HBP sustained strong EBITDA margin performance throughout the year, ending with an EBITDA margin of 31.5%.

Speaker 1

HBP's 4th quarter results confirm the trends we saw throughout the year with growth in residential volume more than offsetting reduced commercial volume. At HBP, we are continuing to invest in productivity and innovation to further drive growth. These investments include expanding Clopay's Troy, Ohio sectional door manufacturing capacity and adding advanced manufacturing equipment to better satisfy customer demand for premium products. We plan to make further investments in capacity expansion and technology in 2025. Turning to Consumer and Professional Products segment, CPP's results for the year continue to reflect challenging market conditions with revenues decreasing 6% to $1,000,000,000 Reduced consumer demand in North America drove most of the revenue year over year, offset by increased volume in the Australian market.

Speaker 1

Volume in the UK increased year over year indicating a potential market recovery for a region that has endured a significant drop off in consumer demand over the last several years. CPP profitability significantly improved year over year despite the reduced consumer demand in North America. This was driven by improved North American production costs and increased profit from the additional volume in Australia. EBITDA increased 44% to $73,000,000 which represented a margin improvement of 2 40 basis points to 7%. CPP successfully concluded its global sourcing expansion project ahead of schedule as of the end of September 2024.

Speaker 1

The positive effects of this initiative are already improving the profitability of CPP's U. S. Operations and the completion of the global sourcing initiative establishes a foundation for CPP to achieve its target of 15% EBITDA margin. Turning to capital allocation. In fiscal 2024, we took significant actions to deliver shareholder value through stock buybacks and cash dividends, while maintaining a strong balance sheet.

Speaker 1

During the year, we repurchased 4,800,000 shares at an average price of $57.52 Since September 30, we repurchased approximately 500,000 shares at an average price of $67.91 which used the remaining authorization available under our share repurchase program. Since April 2023 and through November 12, 2024, our share repurchases totaled 9,400,000 shares of common stock or 16.4 percent of the April 2023 outstanding shares for a total of $458,000,000 or an average of $48.74 per share. We continue to believe that our shares are a compelling value, trading well below intrinsic value and as a result, Griffin's Board of Directors has authorized an additional $400,000,000 of share repurchases. Also this morning, we announced that the Griffin Board authorized a regular quarterly dividend of $0.18 per share payable on December 18 to shareholders of record on November 25, marking the 53rd consecutive quarterly dividend to shareholders. This dividend represents a 20% increase over the prior quarter dividend and since we began paying dividends in 2012, reflects growth at an annualized compound rate of 18%.

Speaker 1

During fiscal 2024, we also took action to improve our financial flexibility with the repricing of our $459,000,000 Term Loan B facility, which matures in 2029, thus reducing the cost of this financing. Utilizing our $326,000,000 of fiscal 2024 free cash flow, Griffin returned a total of $310,000,000 to shareholders in 2024 through dividends and share repurchases, while also maintaining our year over year leverage at 2.6 times, improving our financial flexibility and making substantial investments in our businesses. These actions reflect the strength of our business as well as our confidence in our strategic plan and outlook. I will turn it over to Brian for the financial update and to provide some details about our 2025 guidance. Thank you, Ron.

Speaker 1

I'll start with our Q4 performance and then review our guidance for fiscal 2025. 4th quarter revenue of $660,000,000 increased by 3% and adjusted EBITDA increased 13% to 138,000,000 dollars both in comparison to the prior year. EBITDA margin was 20.8 percent, an increase of 190 basis points over the prior year Q4. Gross profit on a GAAP basis for the quarter was 2 $63,000,000 compared to $246,000,000 in the prior year quarter. Excluding items that affect comparability from the current and prior periods, gross profit was $271,000,000 in the current quarter compared to $251,000,000 in the prior year quarter.

Speaker 1

Normalized gross margin increased year over year by 190 basis points to 41.1 percent. 4th quarter GAAP selling, general and administrative expenses were $152,000,000 compared to $157,000,000 in the prior year quarter. Excluding adjusting items from both periods, SG and A expenses were $149,000,000 or 22.6 percent of revenue compared to the prior year of $146,000,000 or 22.8 percent of revenue. 4th quarter GAAP net income was $62,000,000 or $1.29 per share compared to the prior year of $42,000,000 or $0.79 per share. Excluding all items that affect comparability from both periods, current quarter adjusted net income was 71,000,000 dollars or $1.47 per share compared to prior year of $63,000,000 or $1.19 per share.

Speaker 1

Corporate and unallocated expenses, excluding depreciation, were $16,000,000 in the quarter compared to $13,500,000 in the prior year, primarily due to increased destock expense driven by the increase in Griffin share price. Net capital expenditures were $20,000,000 in the 4th quarter compared to $33,000,000 in the prior year quarter. Depreciation and amortization totaled $15,600,000 for the Q4 compared to $15,400,000 in the prior year. Regarding our segment performance, revenue for homebuilding products increased 3% over the prior year quarter, driven by 2% of favorable mix and 1% from increased residential volume, partially offset by decreased commercial volume. Adjusted EBITDA increased 7% compared to the prior year quarter, driven by the increased revenue and reduced material costs, partially offset by increased labor and distribution costs.

Speaker 1

Consumer and professional products revenue increased 2% from the prior year quarter to $253,000,000 The increase in revenue was due to increased volume in Australia, including a 3% contribution from the Pope acquisition, as well as increased volume in the UK, which was partially offset by decreased volume in North America due to reduced consumer demand. CPP adjusted EBITDA of $25,000,000 increased $10,000,000 from prior year, driven by reduced North American production cost and increased revenue. The global sourcing strategy expansion has been successfully completed as of September 30, 2024, ahead of the previously announced date of December 31, 2024. As a result, manufacturing operations have concluded at all effective sites with CPP reducing its facility footprint by approximately 1,200,000 square feet or approximately 15% of CPP square footage and its headcount by approximately 600. These actions will be essential for CPP to achieve its target of 15% EBITDA margin while enhancing free cash flow through improved working capital and significant reduced capital expenditures.

Speaker 1

Given a more challenged macroeconomic environment, since we commenced this initiative in May of 2023, we now expect the full margin benefits to be realized in fiscal 2027. Regarding our balance sheet and liquidity, as of September 30, 2024, we had net debt of 1,400,000,000 dollars and net debt to EBITDA leverage of 2.6 times as calculated based on our debt covenant. Our leverage was consistent with the prior year ending September 2023 even after returning approximately $310,000,000 to shareholders via stock buyback and dividends during the year. Regarding our guidance, we expect fiscal year 2025 revenue to be consistent with 2024 at $2,600,000,000 and adjusted EBITDA in a range of $575,000,000 to 600,000,000 dollars excluding unallocated costs of $55,000,000 and charges related to strategic review retention costs of approximately $5,000,000 From a segment perspective, we anticipate 2025 HBP and CPP revenue will both be in line with 2024. HPP sales are expected to benefit from increased residential volume, but will be offset by reduced demand for commercial projects and we expect to return to normal seasonal patterns, which includes reduced volume during winter months.

Speaker 1

CPP sales are expected to reflect continued growth in Australia, but offset by weakness in North America, which is expected to persist through the first half of twenty twenty five. Regarding segment profitability, we anticipate continued strong performance at HBP with EBITDA margins in excess of 30%. CPP EBITDA margin should continue to reflect the ongoing incremental benefits of the completed global sourcing initiative and it is expected to be in excess of 9%. Free cash flow for 2025, including capital expenditures of $65,000,000 is expected to exceed net income with depreciation of $42,000,000 and amortization of $23,000,000 Fiscal year 2025 interest expense is expected to be $102,000,000 and Griffin's normalized tax rate is expected to be 28%. Now, I'll turn the call back over to Ron.

Speaker 1

Thanks, Brian. We are extremely pleased with our team's performance in 2024, especially given the uncertain macroeconomic environment. The CPP team continue to capture market share and grow volume in residential products, offsetting weaker demand in commercial projects and did so while maintaining strong profitability. The CPP team has successfully completed their global sourcing expansion ahead of schedule and these efforts are already contributing to CPP's profit margin, which will continue to improve in the coming years. I cannot say enough about how well our teams have positioned our company for 2025 and beyond.

Speaker 1

We firmly believe that we are in an excellent position as we enter fiscal 2025 with a proven strategy, skilled team, robust balance sheet giving us the ability to continue to generate strong financial performance. We will continue to use our strong operating performance and free cash flow to drive a capital allocation strategy that delivers long term value for our shareholders. To put our cash generation capabilities into perspective, over the next 3 years, we expect to generate over $1,000,000,000 of free cash flow. We intend to use this cash to execute our ongoing share repurchase program, pay down debt, complete tuck in acquisitions and make high return investments in our business. This strategy underscores the confidence Griffin's Board and management has in our outlook and strategic plan.

Speaker 1

Before we take any questions, I will also ask you to take a look at our new refreshed website, www.griffin.com. And with that, operator, we are happy to take questions.

Operator

Thank you. Ladies and gentlemen, we will now begin the question and answer The first question comes from Bob Labick from CJS Securities. Please go ahead.

Speaker 1

Hi, good morning. It's actually Lee Jagoda for Bob this morning. Good morning, Lee. Good morning. Good morning.

Speaker 1

So just I guess starting with the door side, can you talk about the successes you've seen on the commercial door side cross selling through dealer network and how much room there is to run there from here? And then on the resi side, maybe just talk about some of the key factors your customers look for when they're choosing a door and why you win versus your competition? Sure. On the commercial side and regarding selling co pay sectional commercial product to our commercial dealers. That is an ongoing process that will continue for likely years to come.

Speaker 1

We're seeing general some softness in commercial this past year and expect that to continue through 2025 and we expect it to generally turn in 26. But as far as that project goes, there's a lot of runway ahead of us. On the residential side of the business, we're able to win on many points. We have consistently come up with new designs that consumers are attracted to. We have for our direct customers, our dealers, we have the best selling tools, the best distribution that supports them.

Speaker 1

And all these factors together really help our products succeed in the marketplace. Great. And then, I guess, I'll given what's going on in the macro environment, I'll ask the obligatory tariff question. Maybe just speak to how you would be impacted directly from tariffs and then from a competitive standpoint, whether it's a benefit or a headwind to you if we do see tariffs here? Look, Amit, I'll start by saying we're not going to speculate or assume.

Speaker 1

What I will say is that our HBP business is an American made business, but not subject to foreign competition and tariffs are relevant for that side of our business. For the CPP side, we've been here before and we know how to deal with the ability to pass along tariff increased costs. We have a global sourcing model that allows us the flexibility to move our manufacturing to wherever the cheapest cost and whatever the best way to deliver product to our customers in the United States. So, we are very optimistic about the impact of the broader bullish business trends that we think are going to be emerging in 2025 and beyond. And the ongoing ability for us to navigate through a very foggy economic environment over the last several years, we see rays of sunshine ahead and we think we'll be able to position our company regardless of what tariffs may or may not do to be able to improve both volume and profitability.

Operator

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

Speaker 2

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

Speaker 1

Good morning. How are you, Sam?

Speaker 2

I'm well as well. Thank you for asking. First question, as it relates to steel, as I recall in the June quarter, Brian, I think you had a couple of 100 basis points of headwind specific to the HBP segment, because of your the lag between when what happens in the spot markets versus when it hits your P and L. Can you help us with what the headwind, tailwind was in the September quarter and what you're anticipating for steel up or down and the effects of which in fiscal 'twenty five? And then I've got a follow-up.

Speaker 1

Sure. So for the Q4, we saw a reversal in the trend we saw in the Q3, but not a complete reversal. So, there was a little bit of overhang into the early month and then steel prices normalized. As for 2025, we expect the current levels to be maintained through that's our assumption for the year.

Speaker 2

Maintain, meaning it will be a tailwind, 2025 versus 2024 when you look at the entire fiscal year? No.

Speaker 1

24 was about flat with 23 for the whole fiscal year, and we expect 25 to roughly be flat with 24.

Speaker 2

Terrific. And then my follow-up question actually is a follow-up to the prior question around the tariffs. If I could ask you to be a little bit more specific, if we do see 60% tariffs from Chinese product, as it stands now, what would be the approximate dollar impact to CPP and how quickly could you move from China if such a development were to occur? Thanks.

Speaker 1

Sure. Savi, I appreciate the question. The potential new tariff regime has a lot more questions than answers at this point. So we don't think it's appropriate to speculate on which products or geographies will be impacted or what those amounts will be. We have benefited from successfully managing tariffs in the past, as Ron mentioned, and believe this experience will serve us well going forward.

Speaker 1

We work with our suppliers and customers as we have done in the past to mitigate the impact of the tariffs. And we expect to manage through any tariff policy and meet our long term guidance for CPP of 15%.

Operator

Thank you. The next question comes from the line of Craig Grooms from Stephens. Please go ahead.

Speaker 3

Hey, good morning, everyone. Congrats and well done in the quarter.

Speaker 1

Thanks. Good morning. Thanks. Good morning. So

Speaker 3

I wanted to touch on just CPP profitability next year, EBITDA margins to be in excess of 9%. And tariffs aside, how should we be thinking about the trajectory there? Maybe any update on how we could think about an exit rate in 2025 for CPP?

Speaker 1

Sure. Yes, we expect the first half for CPP to continue to be muted, I would say, from the soft demand in the North America, the U. S. Specifically. And we'll be selling more manufactured inventory as the year starts.

Speaker 1

As we go through the year, that will transition to sourced inventory. So, we expect the margins to follow and improve as the year continues.

Speaker 3

Okay, got it. And just kind of along those lines, on HBP, as we think about, I mean, you guys have put up great margins there. You're projecting these strong margins to continue into next year. But what are you thinking on kind of the cost or price cost outlook for 'twenty five? Is there any expectation that you have there for any adjustments or foresee any kind of need to make any changes there?

Speaker 1

Yes. So we expect generally pricing costs to remain similar to 2024. We will make any adjustments if that changes, if there is any changes in input costs. But at the moment, we expect that to be stable and price to remain stable. And I'll just add, we've proven ourselves to be a resilient business throughout the development from residential to the inclusion of commercial.

Speaker 1

Clopay, the management team has done an outstanding job of building this and we think there is an enormous amount of both market share gains and volume gains, particularly on the commercial side in the years ahead. This is a sustainable business, a 30% margin business has developed over a period of 15 years of investment and building, and we're clearly the leader in the garage door, rolling steel door, commercial door business and we intend to grow it.

Operator

Thank you. The next question comes from the line of Julio Romero from Sidoti and Company. Please go ahead.

Speaker 4

Hey, good morning, Ron and Brian. Maybe to start on hey, good morning to CPP. When the shift to sourced inventory does kind of kick in, how would you have us think about the pace of the margin improvement that you should see when that happens? Would they improve gradually or you kind of expect a more pronounced step up?

Speaker 1

Yes, it really will happen gradually because the changeover from manufacturer to source will happen gradually, as we work down 1 and ramp up the other. Generally, looking into 'twenty five percent from 'twenty four percent and then for the successive years beyond as we march to 15%, we would expect to see a similar type increase that we saw in 'twenty four, in 2025 and then again in 2026.

Speaker 4

Excellent. And for my follow-up, Ron, you mentioned a long term goal to generate over $1,000,000,000 of free cash flow over the next 3 years. Could you kind of just talk about the assumptions that are embedded in that expectation and if you're going to be doing anything different over the next 3 years? Thank you.

Speaker 1

The assumption is we're just going to continue to run the company on the trajectory that it's on that does not have any acquisitions built into it. That is an organic story about continued growth and improvement on the businesses that we already own and it's assuming our ability to maintain the margins that we've built on the HBP side and enjoy the success of the global sourcing initiative on the CPP side. We are in a very strong position. We don't have a debt maturity until 'twenty eight and we expect to generate a significant amount of free cash flow. That cash flow will go to either buyback stock or delever the company.

Speaker 1

We think our stock is materially undervalued and we'll continue to close the value gap from free cash flow.

Operator

Thank you. Ladies and gentlemen, this concludes the question and answer session. I would now hand the conference over to Ron Kramer, CEO for closing comments.

Speaker 1

Thank you, everyone. And again, I want to thank all of our 5,300 employees around the world for making this such a successful year and here's to making 25 better.

Operator

Thank you. The conference of Griffin Corporation has now concluded. Thank you for your participation. You may now disconnect your lines.

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