Griffon Q3 2024 Earnings Call Transcript

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August 7, 2024

There are 8 speakers on the call.

Operator

Ladies and gentlemen, good morning, and welcome to the Griffin Corporation Fiscal Third Quarter 20 24 Earnings 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, sir.

Speaker 1

Thank you. Good morning. It's my pleasure to welcome everyone to Griffin Corporation's good morning. Welcome to Griffin Corporation's Q3 2024 Earnings Call. Joining me for this morning's call is Ron Kramer, Griffin's Chairman and Chief Executive Officer.

Speaker 1

A press release was issued earlier this morning and is available on our website at ww w.gryphon.com. Today's call is being recorded and the replay instructions are included in our earnings release. Our comments will be included 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.

Speaker 1

Finally, from today's remarks, we'll 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 will turn the call over to Ron.

Speaker 2

Good morning, everyone, and thanks for joining us. Our Q3 results were highlighted by strong operating performance from both of our segments with Home and Building Products generating EBITDA margin of 30.1 percent and Consumer and Professional Products improving its EBITDA margin by 230 basis points to 8.8%. With 3rd quarter performance in line with our expectations and both segments performing well as we approach the end of 2024, we are reiterating our previously provided segment adjusted EBITDA guidance of $555,000,000 for the full year. Free cash flow in the quarter was also strong at $120,000,000 and continues to support our capital allocation strategy. During the quarter, we paid down $80,000,000 in debt, repurchased $19,000,000 in stock and paid a $7,000,000 regular quarterly dividend.

Speaker 2

Yesterday, our Board authorized a regular quarterly dividend of $0.15 per share payable on September 19 to shareholders of record on August 28 marking the 52nd consecutive quarterly dividend to shareholders. Our dividend has grown at an annualized compounded rate of 18% since we initiated dividends in 2012. Looking at our share buyback program since April 2023 and through June of this year, we've repurchased 7,900,000 shares at an average price of $45.38 a share for a total of $357,000,000 These repurchases have reduced Griffin's outstanding shares by 13.7% relative to the total shares outstanding at the end of the Q2 of fiscal 2023. These actions underscore our commitment to capital allocation strategy that delivers value to our shareholders. We continue to believe that our stock is a compelling value.

Speaker 2

I'll turn it over to Brian for a little more financial detail. Brian?

Speaker 1

Thank you, Ron. 3rd quarter revenue of $648,000,000 decreased by 5% and adjusted EBITDA before unallocated amounts of $141,000,000 decreased by 8%, both in comparison to the prior year quarter. EBITDA margin before unallocated was 21.7%. Gross profit on a GAAP basis for the quarter was $249,000,000 compared to $275,000,000 in the prior year quarter. Excluding items that affect comparability from the current and prior period, gross profit was $265,000,000 in the current quarter compared to $276,000,000 in the prior year.

Speaker 1

Normalized gross profit increased year over year margin by 50 basis points to 40.9%. 3rd quarter GAAP selling, general and administrative expenses were $160,000,000 compared to $172,000,000 in the prior year. Excluding adjusting items from both periods, SG and A expenses were 155,000,000 dollars or 23.9 percent of revenue compared to the prior year of also $155,000,000 or 22.7 percent of revenue. 3rd quarter GAAP net income was $41,000,000 or $0.84 per share compared to $49,000,000 in the prior year quarter or $0.90 per share. Excluding items that affect comparability from both periods, current quarter adjusted net income was $61,000,000 or 1 point $2.4 per share compared to the prior year of $70,000,000 or $1.29 per share.

Speaker 1

Corporate and unallocated expenses, excluding depreciation in the quarter, were $15,000,000 compared to $14,000,000 in the prior year quarter, with the increase primarily due to increased ESOP expense driven by the rise in Griffin stock price. Net capital expenditures were $2,300,000 in the 3rd quarter compared to $8,300,000 in the prior year quarter. Depreciation and amortization totaled $15,200,000 for the 3rd quarter compared to $15,700,000 in the prior year. Regarding our segment performance, Home and Building Products revenue declined 2% due to unfavorable product mix, with increased residential volume being offset by decreased commercial volume. HBP adjusted EBITDA of $119,000,000 decreased 12% from the prior year driven by reduced revenue as noted above and increased steel, labor and distribution costs.

Speaker 1

EBITDA margin for the quarter was 30.1%. Consumer and Professional Products revenue of $254,000,000 decreased 10% from the prior year quarter, primarily due to reduced consumer demand in North America, partially offset by increased volume in Australia. For the current quarter, CPP adjusted EBITDA of $22,000,000 increased 22% from the prior year quarter due to improved North American production costs and decreased discretionary spending, partially offset by the unfavorable impact of the reduced volume noted above. CPP EBITDA margin improved 230 basis points to 8.8% compared to the prior year Q3. Our global sourcing expansion initiative remains on time and on budget.

Speaker 1

Also of note, on July 1, we completed the acquisition of Pope, an Australian provider of residential watering products from the Toro Company. Pope is an extremely well regarded Australian brand with a 100 year history, and we are excited to add Pope to our portfolio of iconic products in the Australian market. We expect Pope to contribute approximately $25,000,000 in annual sales to AIMS Australia. Regarding our balance sheet and liquidity, as of June 30, 2024, we had net debt of 1,370,000,000 and net debt to EBITDA leverage of 2.7x calculated based on our debt covenants. Regarding our guidance, I'd like to remind everyone we raised our expectations for fiscal 2024 last quarter and after our strong performance in the first half.

Speaker 1

As Ron touched on earlier, given that our Q3 performance was in line with our expectations, we are reiterating our 2024 guidance, including revenue of $2,650,000,000 and segment adjusted EBITDA of $555,000,000 which excludes unallocated costs and certain other charges that affect comparability. Our other expectations for 2024 also remain unchanged, including corporate costs of $59,000,000 amortization of $22,000,000 depreciation of 41,000,000 dollars 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 to Ron.

Speaker 2

Thank you, Brian. Our year to date results have been driven by strong operating performance from both of our segments despite a challenging macroeconomic backdrop. HBP has sustained 30% plus EBITDA margins and has increased residential door volume, which has offset some of the softness we're seeing in the commercial market. At CPP, we are realizing the early benefits from our global sourcing expansion strategy as evidenced by CPP's improving margin profile. Profitability continues to improve despite a backdrop of persistently weak consumer demand, which has resulted in reduced sales volumes.

Speaker 2

I want to reiterate that we will continue to use our strong operating performance and free cash flow to drive a capital allocation strategy that's focused on delivering long term value for our shareholders. Before we start taking questions, I also want to acknowledge the effort and commitment our employees and management teams of all the businesses around the world continue to demonstrate it's because of their dedication and effort that Griffin continues to see such strong operating performance. Operator, we're ready for questions.

Operator

Thank you. Ladies and gentlemen, we will now be conducting a question and answer session. Our first question comes from the line of Tim Wojs with Baird. Please go ahead.

Speaker 3

Hey, everybody. Good morning.

Speaker 1

Good morning.

Speaker 3

Maybe just to start off with Home and Building Products, Just kind of curious sequentially if you've seen much change in kind of the demand environment. It seems like the residential business kind of continues to kind of be a little bit better. Commercial, I think, is still down year over year. Just trying to understand if anything's kind of incrementally getting better or worse. And then maybe if you can add a little bit color around what the mix headwinds were, that'd be helpful.

Speaker 2

I think the big takeaway is things are steady, and the margin story for us has shown its resiliency. The residential business repair and remodel for us continues to be excellent. The commercial business is always a lumpy business. We saw a trend going from May to June of slowing down, back to things looking better in July. The outlook for the year remains the same and the outlook for the future of the business remains excellent as I think the housing market recovery is still in front of us.

Speaker 2

And as interest rates come down, as new home construction picks up, part of the growth on residential, I still think is ahead of us. Brian, you want to add to that?

Speaker 1

I think you summarized it well.

Speaker 3

Maybe just the mix piece, Brian?

Speaker 1

Yes. So the mix you're seeing is the commercial versus residential mix with commercial down slightly and residential improving. So that's that dynamic.

Speaker 3

Okay. I got you. Okay. And then just my follow-up on free cash flow and kind of the capital allocation strategy. I noticed you did a little bit more debt reduction this quarter than what you've done in the prior few quarters.

Speaker 3

Any change in kind of the philosophy of buybacks versus debt pay down on a go forward basis?

Speaker 2

No, I think we have the flexibility to do both buybacks, debt reduction and acquisitions are always in our pipeline. And during this quarter, we didn't do any.

Speaker 1

Okay.

Speaker 4

Yes. I was just going

Speaker 1

to point out that we had $200,000,000 of buybacks during the year. And then this quarter with cash flow, we just chose to reduce debt a bit.

Operator

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

Speaker 5

Good morning. Thanks for taking our questions.

Speaker 1

Good morning, Bob.

Speaker 5

Hi. So I wanted to start with CPP and the global sourcing. Continued steady progress on margins sequentially and year over year. So it's working as executed. Any heavy lifting left?

Speaker 5

Or is this more a gradual transition over the next few several quarters to get to the full benefits? And any changes in your thoughts on that end goal of 15% for the and your timeframe?

Speaker 2

There's no change in our 15% long term target for the business and the heavy lifting has been done. We've shut the facilities. We've right sized the business. This really is very encouraging for us. We announced this over a year ago.

Speaker 2

The execution of our team has been excellent. The performance is pointing in the direction that we're going. The asset light model for the U. S. Business to follow the global sourcing business that we already have in place for both our Australian business and our Hunter business in the U.

Speaker 2

S. Was the right direction for us. The performance metrics that we laid out, We're going down the path as we expected, and we continue to believe this is a 15% margin business in the future.

Speaker 1

I would just add to that. Right now, we're selling inventory that we've manufactured. That will continue into early next year, fiscal 'twenty five. And over the course of 'twenty five, that shift will occur from manufactured inventory to sourced inventory and our margins will improve with it.

Speaker 5

Okay, super. And then on doors, just taking kind of a step back, obviously, I think you guys had said this, but you've continued to stay above 30% and outperform. There's been a ton of change in the industry since COVID. There was the supply disruption, stay at home, fix up your house, pricing, demand, etcetera. But you guys, both on the commercial side and on the residential side, have been gaining share.

Speaker 5

So the question is talk about how Clopay and CornellCookson are differentiated in the industry now, the changes over the past 4, 5 years and how they're positioned to continue to grow and gain share in this market?

Speaker 1

Sure. So, I'll start with the fact that we have come up with many, many innovative products. Purchasing CornellCookson and integrating it with Clopay has made us much stronger in the commercial market. We continue to have excellent execution in our operations. We have industry leading lead times.

Speaker 1

We have our own freight to deliver products to ensure they get to their dealers and our customers safely and in proper form. We have an excellent dealer network that is able to execute on installations. And all these things together have put us in a very strong position.

Operator

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

Speaker 4

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

Speaker 1

Good. Thank you. Good morning, John. Good morning.

Speaker 2

Good morning.

Speaker 4

Couple of questions. First, as it relates to HBP and your steel related costs, I'm guessing because of the lag between when what we see in the prevailing markets and when it hits your P and L, I'm guessing the Q3 you just reported had steel headwinds and then I'm guessing beginning in Q4 and into Q1 there are steel tailwinds. First off, is that accurate? And secondly, can you quantify or put a little bit of meat on the bone in terms of the impacts of steel? And then I've got a follow Thanks.

Speaker 2

I'll start by saying, yes, that's entirely accurate.

Speaker 1

Brian? Yes. As far as the impact, we saw a couple of 100 basis points impact from this deal. We knew it was coming and actually discussed it last quarter.

Speaker 4

Got you. And then my follow-up, you made the pulp acquisition. I know it's relatively small, but strategic. Ron, what was the genesis of how that deal came together? What I'm getting at with the question is, I know you mentioned that you have a pipeline of M and A targets that you continually look at.

Speaker 4

But what's the likelihood of further M and A over the near to intermediate term versus, let's say, continued share repurchase? Thanks.

Speaker 2

We are very attuned to looking for things that are value enhancing and add to our portfolio. So transactions like Pope are the kinds of deals that are carve outs. We've

Speaker 1

got a

Speaker 2

long history of buying and improving businesses that have come into our broader portfolio in both HBP and in CPP. So things that allow us to expand product and geography and that are financially accretive to us are things that we want to be doing. Nothing is as cheap as our own stock right now. And we have to your point about what to expect from us, We like the position of our businesses, the free cash flow getting generated, our ability to both buy back stock and delever, and with things that are immediately accretive and value enhancing, like Pope, we're not afraid to add to the portfolio. But the cheapest thing we see right now is the price of our own stock.

Operator

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

Speaker 6

Good morning. This is Alex Hamman on for Julio. Thanks for taking questions.

Speaker 1

Good morning, Alex.

Speaker 6

First question, just following up on HBP, do you think there was any pull forward from last quarter or deferrals to the 4th quarter?

Speaker 1

Nothing that I'm aware of. Demand on the residential very good position.

Speaker 6

Great context. Thank you. And then my follow-up on CPP, could you provide an update in the inventory destocking across channels and geographies?

Speaker 1

Sure. So the inventory situation in the U. K, we still see high inventory in the channel there. Australia and Canada are reasonably normal. And in the U.

Speaker 1

S, there is somewhat higher inventory than usual, but the destocking over the quarter and we expect it to continue in the 4th quarter is bringing that level to a more normalized level.

Operator

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

Speaker 4

Good morning, Ron. Good morning, Brian.

Speaker 2

Good morning. Good morning, Justin.

Speaker 7

Two questions. With respect to mix, are you seeing any mix headwinds within residential customers trading down more in the portfolio?

Speaker 1

On balance, no. But between dealers, the dealer channel continues to be good mix and we see slight buy down in the retail channel.

Speaker 7

Got it. And then with respect to CPP, you mentioned that the results were in line with your expectations. Does that hold true for the sales in CPP because it seemed like they were fairly light? And then that lightness, how much of that is end demand versus further destocking, any sense?

Speaker 1

On balance, our overall revenue met our expectations. CPP was a little lighter than we originally expected as the consumer continues to be weak. And it's really a combination of that inventory and the consumer that's causing that weakness.

Operator

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

Speaker 2

We're very pleased with the quarter, our performance here to date and our outlook for the future. Thank you, and we look forward to speaking to you in November.

Operator

Thank you. The conference of Griffin Corporation has now

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