Griffon Corporation (NYSE:GFF) Q2 2024 Earnings Call Transcript

Griffon Corporation (NYSE:GFF) Q2 2024 Earnings Call Transcript May 8, 2024

Griffon Corporation beats earnings expectations. Reported EPS is $1.28, expectations were $0.94. GFF isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

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. [Operator Instructions] 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: 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 adjusting 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: Good morning, everyone and thank you for joining us. First half of fiscal 2024 is off to a great start and has exceeded our expectations. 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 US 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 51 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 to our shareholders. I’ll turn it over to Brian for a little more financial detail.

Brian Harris: 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 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 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 the 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 deceased 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 at comparable. Further, we now expect corporate costs of $59 million, increasing 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 and $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: 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 margin.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, 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.

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Q&A Session

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

Tim Wojs: Hey, everybody. Good morning. Nice job on the results.

Ron Kramer: Thanks Tim.

Tim Wojs: 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’re thinking about the business? And maybe what’s kind of implied in the back half of the year from a guidance perspective?

Ron Kramer: 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 HBP side that’s maintaining and CPP which is improving.

Brian Harris: Yeah. I would just further clarify that we expect the back half of the year to be 30% or better.

Tim Wojs: 30% or better. Okay, good. 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 the back half of the year and then maybe taking another jump in 2025?

Brian Harris: Sure. So if we’re looking at 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 fourth quarter, which is normally a low quarter for us. But yeah, we are seeing improvement in margin that will be sustainable and continue to grow into 2025 from the actions we’ve taken. And once the inventory that we’re selling that was manufactured — once 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.

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

Brian Harris: Thank you.

Trey Grooms: So just touching on kind of the demand drivers here, kind of 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 two end markets kind of as we look through the balance of the year?

Brian Harris: Sure. We expect residential to continue to be strong and volumes 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 a particularly strong quarter for commercial. That market is moderating somewhat, but we still see pretty strong volume there.

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

Brian Harris: We do expect the inventory to normalize in the channel. We’re sort of in the early days here. Spring is 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: Thank you. The next question is from the line of Bob Labick with CJS Securities. Please go ahead.

Bob Labick: Good morning and congratulations on another strong quarter.

Ron Kramer: Thanks Bob.

Brian Harris: Thank you, Bob.

Bob Labick: Yeah. I wanted to start 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 — I 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?

Brian Harris: 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 the pricing in HBP maintaining. And therefore we expect margins to hold there as well.

Bob Labick: 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 like the next big steps? Are you done qualifying all the suppliers? Do you have enough capacity now to fully take over? 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.

Ron Kramer: 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 is — was always our strategy, a year later I’m very proud that we’ve been able to execute it flawlessly And 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. And 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: Yeah. I would just add to that that 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 are needed for CPP.

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

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

Ron Kramer: Good morning, Sam.

Brian Harris: Doing well.

Sam Darkatsh: Terrific quarter.

Brian Harris: Thank you.