Griffon Corporation (NYSE:GFF) Q1 2024 Earnings Call Transcript

Griffon Corporation (NYSE:GFF) Q1 2024 Earnings Call Transcript February 7, 2024

Griffon Corporation beats earnings expectations. Reported EPS is $1.19, expectations were $0.78. 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: Greetings. Welcome to the Griffon Corporation Fiscal First Quarter 2024 Earnings Conference Call. [Operator Instructions]. Please note, this conference is being recorded. I would now like to turn the conference over to Brian Harris, Chief Financial Officer. Thank you. You may begin.

Brian Harris: Thank you. Good morning. It’s my pleasure to welcome everybody to Griffon Corporation’s First 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. Today’s call is being recorded, and the 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, 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’ll turn the call over to Rob.

Ronald Kramer: Thanks, Brian. Good morning, everyone, and thanks for joining us. Fiscal 2024 is off to a good start with the first quarter highlighted by strong free cash flow of $133 million, continued solid operating performance at Home & Building Products and improved profitability at Consumer and Professional Products. we are well positioned to meet our financial targets for the year. For the quarter, Home & Building Products or HBP, revenue and EBITDA were consistent with the prior year. Revenue benefited from favorable price and mix and increased customer orders, offset by reduced year-over-year volume due to the elevated sectional door backlog we had in the prior year. Turning to the Consumer and Professional Products segment, or CPP.

First quarter revenue decreased 2%, primarily due to decreased volume, driven by reduced customer demand in North America. CPP improved EBITDA by $7 million in the quarter, driven by 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. Since May 2023, when we announced the initiative, operations have ceased at the 4 identified wood mills and all of the affected U.S. manufacturing facilities, except one. We expect operations at the remaining affected manufacturing facility in Grantsville, Maryland to conclude by March 2024. These actions will reduce our manufacturing footprint by over 1.2 million square feet.

As we’ve emphasized before, the global sourcing expansion with AMES is a key element of our strategy to improve the margins of CPP. We will continue to provide updates throughout the year as we achieve additional milestones. Turning to our capital allocation. In November, we announced a $200 million increase to our share repurchase authorization, bringing the total authorization to $262 million at that time. During the first quarter, we repurchased 1.6 million shares totaling $70 million or an average of $42.61 per share. At December 31, $238 million remained under the repurchase authorization. Since April 2023 and through December, we’ve repurchased 5.8 million shares at an average price of $38.15 for a total of $220 million. These repurchases have reduced Griffon’s outstanding shares by 10.1% relative to total shares outstanding at the end of the second quarter of fiscal 2023.

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Q&A Session

Also yesterday, the Griffon Board authorized a regularly quarterly dividend of $0.15 per share payable on March 21 to shareholders of record on February 29, marking the 50th consecutive quarterly dividend to our shareholders. Our dividend has grown at an annualized compounded rate of 18% since we initiated dividends in 2012. These actions reflect the strength and the resiliency of our businesses as well as continued confidence in our strategic plan and outlook. I’ll turn it over to Brian for more details on the financials.

Brian Harris: Thank you, Ron. First quarter revenue of $643 million decreased by 1% and adjusted EBITDA before unallocated amounts of $130 million increased by 6%, both in comparison to the prior year quarter. EBITDA margin before unallocated was 20.3%, an increase of approximately 140 basis points. Gross profit on a GAAP basis for the quarter was $237 million compared to $234 million in the prior year quarter, excluding items that affect comparability from the current to prior year period. Gross profit was $248 million in the current quarter compared to $234 million in the prior year. Normalized gross margin increased year-over-year by 260 basis points to 38.6%. First quarter GAAP selling, general and administrative expenses were $153 million, consistent with the prior year.

Excluding adjusting items from both periods, SG&A expenses were $147 million or 22.9% of revenue compared to the prior year of $143 million or 22% of revenue. First quarter GAAP net income was $42 million or $0.82 per share compared to $49 million in the prior year quarter or $0.88 per share. Again, excluding all items that affect comparability from both periods, current quarter adjusted net income was $55 million or $1.07 per share compared to the prior year of $47 million or $0.86 per share. Corporate and unallocated expenses, excluding depreciation in the quarter were $13.9 million, consistent with the prior year. Net capital expenditures were $13.5 million in the first quarter compared to a benefit of $7.1 million in the prior year quarter.

Depreciation and amortization totaled $14.8 million for the first quarter compared to $17.1 million in the prior year quarter. Regarding our segment performance. As Ron mentioned earlier, revenue for Home & Building Products was consistent with the prior year quarter, reflecting improved customer orders as well as favorable pricing and mix of 4%, offset by the prior year volume benefit from elevated backlog. Adjusted EBITDA was consistent with the prior year quarter with the effects of reduced volume and increased labor and distribution costs being offset by reduced material costs and favorable price and mix. Consumer and Professional Products revenue decreased 2% from the prior year quarter to $247 million due to decreased volume driven by reduced customer demand in North America and CPP’s adjusted EBITDA increased by $7.3 million from the prior year quarter to $5.5 million, primarily due to the smaller North American manufacturing footprint and reduced production costs, which will more than offset the effects of reduced revenue.

Regarding our balance sheet liquidity as of December 31, 2023, we had net debt of $1.3 billion and net debt-to-EBITDA leverage of 2.5x as calculated based on our debt covenants, which is 2/10 of a turn better than the 2.7x leverage at the end of last year’s first quarter. Our net debt and leverage decreased slightly from our year-end September 2023, even after returning $70 million to shareholders via stock buybacks in the quarter. In fiscal 2024 — our fiscal 2024 guidance provided in November 2023 remains unchanged at $2.6 billion of revenue and $525 million in segment adjusted EBITDA, which excludes unallocated costs and certain other charges that affect comparability and free cash flow exceeding net income for the year. Now I’ll turn the call back over to Ron.

Ronald Kramer: Thanks, Brian. As I said upfront, 2024 is off to a good start with strong free cash flow, continued solid operating performance at HBP and improved profitability at CPP. These results reinforce the confidence of Griffon’s Board and management in our outlook and strategic plan. We’ll 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. This strategy will continue to include investing in our businesses, opportunistically repurchasing shares and reducing debt. Before we turn to Q&A, I’d like to recognize the dedication and efforts of our management and employees around the world and their contributions to our success. Operator, we’ll take any questions.

Operator: [Operator Instructions] Our first questions come from the line of Joe Ahlersmeyer with Deutsche Bank.

Joe Ahlersmeyer: Great update. Congratulations on the strong start here. Yes. I wonder if we could dig into the improvement in the customer orders within HBP for a bit. Just any color you can offer between residential and commercial trends? And then any thoughts maybe on the second quarter HBP sales potential if those order trends give you just a little bit more visibility into the quarter ahead here?

Ronald Kramer: Sure. So the order trends are being driven mostly by the residential side. We don’t have the prior year backlog overhang, which allows our lead times to be normalized and it helped us with our orders, plus we have been investing in marketing and believe we are taking market share. As far as the second quarter, we still have the backlog — elevated backlog overhang from the prior year. And we are now expecting to be back to normal seasonality which our second quarter is our low point of the year, basically driven by Midwest and Northeast weather. And we expect this year’s volume to be down for those 2 reasons.

Joe Ahlersmeyer: Understood. Also it kind of looks like in the quarter, maybe price mix is where you came in a little bit ahead of your sales expectations for HBP, seems to have also aided the margin here. Just maybe an update on your thinking around the 30% plus for the year, maybe more of an emphasis on the plus now the way I’m thinking about it?