Griffon Corporation

Good morning and welcome to the Griffin Corporation Fiscal Third Quarter 2024 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. If anyone should require operator assistance during the conference, please press star and zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Brian Harris, Chief Financial Officer. Please go ahead, sir.

Thank you. Good morning. It's my pleasure to welcome everyone to Griffin Corporation's third quarter 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 www.griffin.com. Today's call is being recorded, and the 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 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 will turn the call over to Ron.

Good morning, everyone, and thanks for joining us. Our third quarter results were highlighted by strong operating performance from both of our segments, with home and building products generating EBITDA margin of 30.1%, and consumer and professional products improving its EBITDA margin by 230 basis points to 8.8%. With third quarter performance in line with our expectations and both segments performing well as we approach the end of fiscal 2024, we are reiterating our previously provided segment-adjusted EBITDA guidance of $555 million for the full year. Free cash flow in the quarter was also strong at $120 million and continues to support our capital allocation strategy. During the quarter, we paid down $80 million in debt, repurchased $19 million in stock, and paid a $7 million regular quarterly dividend. Yesterday, our board authorized a regular quarterly dividend of 15 cents per share, payable on September 19th to shareholders of record, on August 28th, 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 7.9 million shares at an average price of $45.38 a share for a total of $357 million. These repurchases have reduced Griffin's outstanding shares by 13.7% relative to the total shares outstanding at the end of the second quarter 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. I'll turn it over to Brian for a little more financial detail. Brian.

Thank you, Ron. Third quarter revenue of $648 million decreased by 5% in adjusted EBITDA before unallocated amounts of $141 million decreased by 8%, both in comparison to the prior year quarter. EBITDA margin before unallocated was 21.7%. Gross profit on a gap basis for the quarter was $249 million compared to $275 million in the prior year quarter. Excluding items that affect comparability from the current and prior period, gross profit was $265 million in the current quarter compared to $276 million in the prior year. Normalized gross profit increased year-over-year margin by 50 basis points to 40.9%. Third quarter gap selling general and administrative expenses were $160 million compared to $172 million in the prior year, excluding adjusting items from both periods. SG&A expenses were $155 million or 23.9% of revenue compared to the prior year of also $155 million or 22.7% of revenue. Third quarter gap net income was $41 million or $0.84 per share compared to $49 million 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 million or $1.24 per share compared to the prior year of $70 million or $1.29 per share. Corporate unallocated expenses excluding depreciation in the quarter were $15 million compared to $14 million in the prior year quarter with the increase primarily due to increased ESOP expense driven by the rise in Griffin stock prices. Net capital expenditures were $2.3 million in the third quarter compared to $8.3 million in the prior year quarter. Depreciation and amortization totaled $15.2 million for the third quarter compared to $15.7 million 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. HPP adjusted EBITDA of $119 million, decreased 12 percent from the prior year, driven by reduced revenue, as noted above, and increased steel, labor, and distribution costs. EBITDA margin for the quarter was 30.1 percent. Consumer professional products revenue of $254 million decreased 10 percent 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 million, 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 third quarter. Our global sourcing expansion initiative remains on time and on budget. Also of note, on July 1st, 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 million in annual sales to Ames Australia. Regarding our balance sheet and liquidity, As of June 30, 2024, we had net debt of $1.37 billion and net debt to EBITDA leverage of 2.7 times 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. As Ron touched on earlier, given that our third quarter performance was in line with our expectations, we are reiterating our 2024 guidance, including revenue of $2.65 billion and segment adjusted EBITDA of $555 million, which excludes unallocated costs and certain other charges that affect comparability. Our other expectations for 2024 also remain unchanged, including corporate costs of $59 million, 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.

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 markets. 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. 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.

Thank you. Ladies and gentlemen, we will now be conducting a question and answer session. If you would like to ask a question, please press star and one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star and two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Ladies and gentlemen, a reminder, We request you to restrict to one question and one follow-up question per participant. Our first question comes from the line of Tim Voges with Baird. Please go ahead.

Hey, everybody. Good morning. Good morning. 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, um, it seems like the residential business kind of continues to, to, to kind of be a little bit better. Um, you know, commercial, I think it's still down year over year, just, just trying to understand if anything's kind of incrementally getting, you know, better or worse. And then maybe if you can add a little bit of color around what the mixed headwinds, uh, where that'd be helpful.

I think, you know, the big takeaway is things are steady. And, you know, the margin story for us has, you know, shown its resiliency. The residential business repair and remodel for us continues, you know, 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. And as interest rates come down, as new home construction picks up, part of the growth on residential I still think is, you know, ahead of us. Brian, you want to add to that? I think you summarized it well.

Maybe just the mix piece, Brian?

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

I got you. Okay. And then just my follow-up on free cash flow and kind of the capital allocation strategy. You know, I noticed you did a little bit more debt reduction this quarter than what you've done in the prior few quarters. Any change in kind of the philosophy of buybacks versus debt paydown on a go-forward basis?

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

Okay. Yeah, I was just going to point out that we had 200 million of buybacks during the year. And then this quarter with cash flow, we just chose to reduce debt a bit.

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

Good morning. Thanks for taking our questions. Good morning, Bob. 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? 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% and your time frame?

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

I'll just add to that. Right now, we're selling inventory that we manufactured that will continue into early next year, fiscal 25, and over the course of 25, that shift will occur from manufactured inventory to sourced inventory, and our margins will improve with it.

Okay, super. And then on doors, just taking kind of a step back, obviously I think you guys, you know, I've 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-ups. your house, pricing, demand, et cetera. But you guys, both on the commercial side and on the residential side, have been gaining share. So the question is, talk about how Clopay and Cornell Cooks are differentiated in the industry now, the changes over the past four or five years, and how they're positioned to continue to grow and gain share in this market.

Sure. So I'll start with the fact that we have come up with many, many innovative products. Purchasing Cornell Cookson 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. 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

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

Good morning, Ron. Good morning, Brian. How are you? Good. Thank you. Good morning, Sam. Good morning. Doing well. A couple questions. First, as it relates to HBP and your steel-related costs, I'm guessing because of the lag between what we see in the prevailing markets and when it hits your P&L, I'm guessing the third quarter you just reported had steel headwinds, and then I'm guessing beginning in the fourth quarter and into the first quarter 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-up. Thanks.

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

As far as the impact, you know, we saw a couple hundred basis points impact from this deal. We knew it was coming and actually discussed it last quarter.

Gotcha. And then my follow-up, you made the Pope acquisition. I know it's relatively small, but strategic. Ron, what was the... 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&A targets that you continually look at, but what's the likelihood of further M&A over the near to intermediate term versus, let's say, continued share repurchase? Thanks.

We are very attuned to looking for things that are value enhancing and, and add to our portfolio. So, um, transactions like Pope, um, are, you know, the kinds of deals that are carve outs. Um, you know, we've got a long history of, um, buying and improving, um, businesses that have come into our broader portfolio in both HBP and in CPP. So things that, um, allow us to expand product and geography, and that are financially, you know, accretive to us are things that we want to be doing. Nothing is as cheap as our own stock right now. And we have, you know, to your point about what to expect from us, we like the position of our business's the free cash flow getting generated, our ability to both buy back stock and deliver, 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.

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

This is Alex Hantman on Julio. Thanks for taking questions. Good morning, Alex. First question, just following up on HPP, do you think there was any pull forward from last quarter or deferrals to the fourth quarter?

Nothing that I'm aware of. Demand on the residential side continues to be very strong, and as we mentioned earlier, there's some softness on the commercial side, but overall the business is in very good position.

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

Sure. So, The inventory situation in the UK, we still see high inventory in the channel there. Australia and Canada are reasonably normal. And in the US, there is somewhat higher inventory than usual, but the stocking over the quarter, and we expect it to continue in the fourth quarter, is bringing that level to a more normalized level.

Thank you.

Ladies and gentlemen, a reminder, If you wish to ask a question, please press star and one. Our next question is from the line of Justin Bergner with Gabelli Funds. Please go ahead.

Good morning, Ron. Good morning, Brian.

Good morning.

Good morning, Justin.

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

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

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 changed How much of that is in demand versus further destocking? Any sense?

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.

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.

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.

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