Griffon Q2 2024 Earnings Call Transcript

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May 8, 2024

There are 9 speakers on the call.

Operator

Please note this event is being recorded. I would now like to turn the conference over to Brian Harris, CFO. Please go ahead.

Speaker 1

Thank you, operator. Good morning. It's my pleasure to welcome everybody to Griffin Corporation's Q2 fiscal 2024 earnings call. Joining me for this morning's call 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 griffin.com.

Speaker 1

Today's call is being recorded and replay instructions are included in our earnings release. 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 statement in today's press release and in our SEC filings. Finally, some of today's remarks will be adjusting for items that affect comparability between periods.

Speaker 1

These items are explained in our non GAAP reconciliations included in our press release. With that, I'll turn the call over to Rob.

Speaker 2

Good morning, everyone, and thank you for joining us. The first half of fiscal twenty twenty four is off to a great start and has exceeded our expectations. 2nd 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 simply did not materialize. For our Consumer and Professional Products segment, 2nd 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.

Speaker 2

EBITDA improved 2% to $20,000,000 in the quarter with the EBITDA margin improving year over year primarily as a result of decreased North American production costs. I am 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 4 affected U. S.

Speaker 2

Manufacturing facilities and 4 woodmills. These actions have reduced our manufacturing footprint by over 1,200,000 square feet. As we've emphasized before, the global sourcing expansion at AIMS is a key element of our strategy to improve the margins of CPP. Turning to our capital allocation, during the Q2, we repurchased 1,800,000 shares totaling $117,000,000 or an average of $65.09 per share. As of March 31, dollars 120,000,000 remains under the repurchase authorization.

Speaker 2

Since April 2023 and through March of this year, we have repurchased 7,600,000 shares at an average price of $44.56 for a total of $338,000,000 These repurchases have reduced Griffin's outstanding shares by 13.3% relative to the total shares outstanding at the end of the Q2 of fiscal 2023. Also yesterday, the Griffin 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 are raising our full year guidance.

Speaker 2

We now expect revenue of $2,650,000,000 an increase from previous guidance of $2,600,000,000 and we are increasing our segment adjusted EBITDA by $30,000,000 to $555,000,000 In summary, the increased fiscal 2024 guidance and capital allocation actions reflect Griffin's Board and management's confidence in our strategic plan and outlook, as well as our commitment to enhancing long term value to our shareholders. I'll turn it over to Brian for a

Speaker 1

little more financial detail. Thank you, Ron. 2nd quarter revenue of $673,000,000 decreased by 5% and adjusted EBITDA before unallocated amounts of $449,000,000 decreased by 2%, both in comparison to 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 $271,000,000 compared to $194,000,000 in the prior year quarter.

Speaker 1

Excluding items that affect comparability from the current and prior periods, gross profit was $272,000,000 in the current quarter compared to $269,000,000 in the prior year. Normalized gross margin increased year over year by 250 basis points to 40.4%. 2nd quarter GAAP selling, general and administrative expenses were $157,000,000 compared to $160,000,000 in the prior year. Excluding adjusting items from both periods, SG and A expenses were $153,000,000 or 22.8 percent of revenue compared to the prior year of $150,000,000 or 21.1 percent of revenue. 2nd quarter GAAP net income was $64,000,000 or $1.28 per share compared to a loss of $62,000,000 in the prior year quarter or $1.17 per share.

Speaker 1

Excluding all items that affect comparability from both periods, current quarter adjusted net income was $68,000,000 or $1.35 per share compared to the prior year of $67,000,000 or $1.22 per share. Corporate and unallocated expenses excluding depreciation in the quarter were 14,800,000 dollars consistent with the prior year. Net capital expenditures were $18,500,000 in the 2nd quarter compared to $7,100,000 in the prior year quarter. Depreciation and amortization totaled $15,100,000 for the 2nd quarter compared to $17,300,000 in the prior year. Regarding our segment performance, homebuilding 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 benefits.

Speaker 1

HBP adjusted EBITDA of $129,000,000 decreased 2% from the prior year driven by the reduced revenue and increased labor and distribution costs partially offset by reduced material costs. Consumer and Professional Products revenue of $281,000,000 decreased 11% from the prior year quarter, primarily due to decreased volume driven by reduced consumer demand America and the UK, partially offset by increased volume in Australia. For the current quarter, CPP adjusted EBITDA of $20,000,000 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 reduced revenue. Regarding our balance sheet and liquidity, as of March 31, 2024, we had net debt of 1.4 $6,000,000,000 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.

Speaker 1

As a result, we are raising guidance for revenue and segmented EBITDA. We now expect $2,650,000,000 of revenue $555,000,000 of segment adjusted EBITDA, which excludes unallocated costs and certain other charges affect comparability. Further, we now expect corporate costs of $59,000,000 increasing versus prior year guidance of $54,000,000 due to increased employee stock ownership plan expenses driven by Griffin's stock price appreciation. Other guidance remains unchanged for 2024, including amortization of $22,000,000 depreciation of $41,000,000 interest expense of $103,000,000 a normalized tax rate of 28% and free cash flow to exceed net income. Now, I'll turn the call back over

Speaker 2

to Ron. 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 are seeing some of the early benefits of this strategy as evidenced by CPP's improving margin.

Speaker 2

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 a capital allocation strategy that delivers long term value for our shareholders. Before we turn to questions, I want to acknowledge the effort and commitment the employees and management teams of our businesses around the world continue to demonstrate it's because of their dedication and effort that Griffin continues to see strong operating performance. Operator, we will take questions.

Operator

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

Speaker 3

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

Speaker 2

No, we don't see any change. And the biggest takeaway is the seasonality of the second quarter and the expected residential volume decline that didn't happen. And 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 HPP side that is maintaining and CPP

Speaker 1

continuing. Yes. I would just further clarify that we expect the back half of the year to be 30% or better. 30% or better. Okay, good.

Speaker 3

And then, I guess just in the CPP business, I mean, you got back to actually I mean, I think EBITDA grew year over year in the quarter. I know there's always choppiness with kind of a transition, but do you feel like you've made kind of step function improvements now in that business and we can continue to see improvement kind of sequentially from here? Or do you kind of see it staying at that level in the back half of the year and then maybe taking another jump in 25?

Speaker 1

Sure. So if we look in Q2 to Q3, we would expect the margin to improve sequentially. But the business does have seasonality, so we'll see likely a dip in the Q4, which is normally a low quarter for us. But yes, we are seeing improvement from in margin that will be sustainable and continue to grow into 25 from the actions we've taken. And once the inventory that we're selling that was manufactured that we're currently selling, we work through that, then the margins will improve significantly.

Operator

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

Speaker 4

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

Speaker 2

morning. Thank you.

Speaker 4

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 kind of from where we sit today, how you're thinking about those 2 end markets kind of as we look through the balance of the year?

Speaker 1

Sure. We expect residential to continue to be strong and volume to be better than the prior year. On 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 particularly strong quarter for Commercial.

Operator

Yes.

Speaker 1

But that market is moderating somewhat, but we still see pretty strong volume there.

Speaker 4

Okay. And then on CPP, inventory in the channel had been running high. Any thoughts to 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?

Speaker 4

And do you still think that we could see the channel inventory kind of normalize this year?

Speaker 1

We do expect the inventory to normalize in the channel. We're sort of in the early days here. Spring is just starting 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

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

Speaker 5

Good morning. Congratulations on another strong quarter.

Speaker 2

Great. Thanks, Bob.

Speaker 5

Yes, I wanted to you touched on it a little bit, but the gross margins were either record or near record or pretty darn close, but very impressive. And just know you don't break them out by segment, maybe give us a sense of how they're trending in each segment, how sustainable this based on the revenue level, but the 40% level is? And then I guess how they'll shift going forward as the global sourcing comes to a conclusion as well?

Speaker 1

Sure. We do expect those margins to be sustainable and actually growing particularly into 2025 as the CPP action is taking hold. And we're seeing pricing in HBP maintaining and therefore, we expect margins to hold there as well.

Speaker 5

Okay, that's great. And then as it relates to the global sourcing, I know you said you're kind of on track and in budget and all that. Maybe just what are the like the next big steps? Are you done qualifying all the suppliers? Do you have enough capacity now to fully take over?

Speaker 5

Or kind of what are the next big steps that and hurdles for you between now and the end of this year to complete the process?

Speaker 2

Yes. Let's go back and remember that part of our confidence in doing this a year ago is market conditions change. We had an existing global sourcing capability that we are leveraging off of. This is not us going out looking to find suppliers. We already have suppliers.

Speaker 2

We are a global business. Our Australia business is already sourcing 100 of 1,000,000 of dollars of products out of China, Vietnam. So, this is about transitioning the U. S. Capacity to our existing supply chain relationships.

Speaker 2

That is was always our strategy. A year later, I am very proud that we have been able to execute it flawlessly and the opportunity in front of us, this is a 15% EBITDA margin business 1 or 2 years from now. When it gets there, it will continue to be a U. S, Australia, Canada, UK business and we did this with the expectation that this was a long term strategy to fix a problem around the core U. S.

Speaker 2

Manufacturing business that we have.

Speaker 1

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

Operator

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

Speaker 6

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

Speaker 2

Good morning, Sam.

Speaker 6

Doing well. Terrific quarter. Thank you. Couple of questions if I could sneak 2 in. First, the guidance, and I know you typically craft 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 seasonally.

Speaker 6

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.

Speaker 1

Sure. So, we're still anticipating the 30% plus margin in the back half of the year. And we're not seeing any pricing pressure. What could occur is mix. And also, we have some steel costs that will be we know will be coming through in the Q3 in particular that will hurt margin a little bit from sequentially.

Speaker 6

Got you. So, that actually segues my next question perfectly. So, I think there was a at least there was an announced price increase in the residential garage door industry in March from one of your competitors and it apparently didn't stick or at least didn't stick yet. Knowing that the steel prices are a little bit of a pressure, Brian, and that volumes residentially are now turning positive, why didn't that price increase get matched? Or why doesn't the market bear that right now?

Speaker 1

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

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

Speaker 7

Thanks. Hey, good morning, Ron and Brian. Good morning. On CPP, hey, good morning. Can we maybe talk about the inventory levels by geography across your U.

Speaker 7

K. And U. S. Customers compared to 3 months ago? How are those levels doing right now?

Speaker 7

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 timeframe, in your view for inventory to normalize?

Speaker 1

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 of our sales in Q4. And our internal inventories have decreased. So, the U.

Speaker 1

S. Inventory that applies to U. S. When those U. K.

Speaker 1

Inventory still is a bit high. That may take longer. Their economy is in more difficult spot, but there that side that part of our business is not so large. It's not affecting us too much. And Canada and Australia are fine.

Speaker 7

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 Coast. Are they still kind of maintaining those high service levels as you're getting further along in your global sourcing strategy?

Speaker 1

Absolutely. We see no change in our service levels. We're able to provide our customers everything they need. Thank you. Our next

Operator

question is from the line of Justin Bergner with Gabelli Funds. Please go ahead.

Speaker 8

Good morning, Ron. Good morning, Brian. Good quarter.

Speaker 2

Good morning.

Speaker 8

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?

Speaker 1

On the residential side, we have continued to come out with great products that people are taking to very well. We have the best service, the best lead times, the best dealer network, the best production. I might have skipped 1 or 2, I don't know, best quality. And those that's showing in the marketplace. Overall, an investment in a residential garage store is a good investment.

Speaker 1

There was a recent survey done by Zonda or recent reports done by Zonda that shows that the ROI on putting a new garage store in is about 200%.

Speaker 3

Okay. And any change to

Speaker 8

your capital allocation priorities? Are you going to continue to repurchase shares? Are you going to look at bolt on M and A?

Speaker 2

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. And 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 and 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 are going to be able to do and when we are going to be able to do is always the uncertainty of looking at M and A.

Speaker 2

As far as capital, we can buy back stock and do M and A. We've said that our leverage was 3.5 times is an outer limit of anything that we would ever consider doing on the M and A side. But we are down to an investment grade credit that is going to continue to free cash flow if we don't do M and 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 and A is part of what we think the next year is going to look like.

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.

Speaker 2

We had a great quarter. We are 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

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

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