Griffon Corp
NYSE:GFF
Earnings Call Analysis
Q1-2024 Analysis
Griffon Corp
The fiscal year 2024 has begun on a positive note as the company produced a robust free cash flow of $133 million and showed solid performance in their Home & Building Products (HBP) division alongside improved profitability in Consumer and Professional Products (CPP). They announced an increased quarterly dividend as a sign of their resilience and confidence, marking the 50th consecutive payout.
Despite a slight revenue dip of 1% to $643 million, the adjusted EBITDA grew by 6%, reaching $130 million. The company achieved an enhanced EBITDA margin of 20.3%, increasing approximately 140 basis points from the previous year. Earnings also highlighted the disciplined capital allocation with substantial share repurchases, reducing outstanding shares by 10.1% since April of the previous fiscal year.
The company is navigating well through notable operational and strategic shifts. Although their CPP segment witnessed a 2% decline in revenue due to softer North American demand, EBITDA saw a $7.3 million increase. This is aided by a global expansion strategy aiming to improve margins through reducing the manufacturing footprint and a methodical reduction in production costs which is progressing as planned.
As of December 31, 2023, the company's net debt stood at $1.3 billion with a net debt-to-EBITDA leverage of 2.5x, showing a slight improvement from the 2.7x leverage reported in the previous year's corresponding quarter. They are maintaining unchanged 2024 fiscal guidance with $2.6 billion in revenue, segment-adjusted EBITDA of $525 million, and expectations for free cash flow to exceed net income.
Management remains confident in meeting the 30% margin target set for the year. In addition, the company continues its opportunistic approach towards stock buybacks, reinforcing the belief that its stock presents a compelling value.
The company is anticipating that input costs will be flat for the fiscal year, with expectations adjusted to the ongoing market conditions. This cautious approach aligns with the reported stability in their pricing structure except for minor increases in a smaller segment of their business.
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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.
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.
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.
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.
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.
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 Instructions] Our first questions come from the line of Joe Ahlersmeyer with Deutsche Bank.
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?
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.
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?
We're still comfortable in looking at this and confirming that 30% margins or target for the year.
Our next questions come from the line of Bob Labick with CJS Securities.
Congratulations on a good start to the year. I just want to kind of stick with doors for a second. And you're showing success in share gains. You just mentioned the share gains in residential as you now can fulfill the backlog down a little bit. But you're also showing gains in commercial as you're expanding the Clopay sectional doors into CornellCookson dealers. Just give us an update on how far along you are with that process and where you think that can go going forward? .
So we're still in relatively early days in that process, and that will continue for quite some time. We're getting very good take and our dealers are pleased with the product and having more expanded offering through us.
Okay. Great. And then on CPP, noted, I guess, a little softness in North American demand. Can you just expand on that? What areas were soft? And was it sell-in? Or is it sell-through from the consumer? And what are you hearing from your large customers in CPP for their outlook for the spring season that we're coming into?
Sure. So for the spring season, as of now, we're just assuming normalized weather compared to last year, which wasn't very -- the weather was not very good. The consumer still seems to be weak and there's still elevated inventory at most of our customers, which is the main driver for the reduced demand.
Our next questions come from the line of Robert Schultz with Baird.
I was just thinking about HBP and the cadence for the rest of the year. How should we think about lapping the rest of the backlog conversion as we look through '24?
Sure. So we normalize at the end of last year's second quarter, that would be March 23. So the second half of the year will be more of an apples-to-apples comparison. We've made investments in marketing, as I mentioned earlier, and we expect volume to improve year-over-year in the second half. .
Got it. And then how are we thinking about buybacks for the rest of the year?
We'll continue to be opportunistic, and we continue to think our stock is a compelling value.
Our next questions come from the line of Trey Grooms with Stephens.
Congrats on the really nice results. So first, I guess on -- I want to touch on the free cash flow. I mean you guys are putting up very strong free cash flow. And Brian, could you maybe touch on how you're thinking about free cash flow for the year. I think the current guide is for it to exceed net income, but any update there? And anything for us to be aware of as far as unusual items or any changes to the cadence in what we typically see for -- as far as free cash flow is concerned?
Sure. So generally, our second quarter will be a cash usage period. We still believe that will be better than net income for the year. It does include all our CapEx, including the Troy expansion project and any CapEx related to the expansion into global sourcing as well as any other costs related to the expansion to global sourcing. So cash flow will pretty much be in the cadence that we've seen historically with the second half being strong.
But even with those investments you're talking about here, your -- the expectation for free cash flow to be -- to exceed net income is -- it includes those unique items. Is that correct?
That is correct.
Great. Great. And I guess on CPP. The improved profitability there was pretty impressive, and it sounds like your global sourcing strategy is on track and within budget. It's clearly moving along nicely. Is there any update on how we should think about kind of the cadence of getting to your targets in the coming quarters in your goals around the sourcing and what that could mean for margins?
Yes. So for this year, we still expect modest improvement in CPP's EBITDA. Keep in mind that this year, most of the products we're selling in North America is product that we built and is still at that higher cost as well as the fact that our customers' current inventory that we expect it to be normalizing somewhat into the back half of the year is still elevated. So the cadence remains, we'll see improved margin in '25. And by the time we get to '26, we expect to be across all of CPP at our 15% EBITDA margin goal.
Our next questions come from the line of Julio Romero with Sidoti.
I wanted to ask about CPP, if you could speak to price mix in the quarter and if that was flat or up or down year-over-year?
Yes. There really was no significant impact from price and mix, pretty much flat. That's right.
Okay. Understood. And then as Troy mentioned earlier, it sounds like CPP is going well, the cost outs are going well. Are the benefits of those cost-outs kind of flowing through the P&L a little bit earlier than you expected? Or are they kind of right on track to your expectations?
They're generally on track. We started to see some benefit as we close some of the facilities, and that will continue to bleed at modest levels through the remainder of this year, and we'll really see the step up next year as we're more into the project and have more sourced inventory as part of our sales.
Our next questions come from the line of Sam Darkatsh with Raymond James.
Terrific start to the year, especially with the difficult operating environment. My first would be, I mean, I guess, virtually all of the major residential window and door manufacturers have recently announced low to mid-single-digit price increases earlier this year for the first time in a little while. And I guess, dealers in the channel are also indicating the same for the garage door industry as well. What's prompting the move? Is it more sticky like labor and conversion rates? Or is it more cyclical like input cost inflation? And when do you see this hitting the HBP P&L? And I've got a follow-up also.
Sure. So as far as our own business, we have had no real change in our pricing structure, except for some minor price increases on operators, which is a small part of our business. In general, we're seeing -- our expectations for the year is that input costs will be roughly flat. And if that's the case, our prices will remain steady. However, if we see increased input costs, we will react accordingly.
Got you. And then my last question. There's obviously lots of increased attention on potential new tariffs on Chinese sourced products. Have you determined yet your new contract manufacturer partners within CPP? And how much exposure do you ultimately think that you'll have to China once the conversion is complete?
Go ahead, Ron, sorry.
So initially, we are going with partners that we have in China. We've been working with them for years, supporting our Australian and U.K. geographies, which are already asset-light models. Ultimately, we'll react to any changes in tariffs by considering other providers and sources across the world. And last, all our competition is generally making product in the same location.
[Operator Instructions] Our next questions come from the line of Justin Bergner with Gabelli Funds.
Very nice quarter. The capital allocation going forward, the statements seem to change a bit in the press release to one of driving a capital allocation that will deliver long-term value for our shareholders versus one that is prioritizing repurchases from the press release a quarter ago. Maybe just can you elaborate if there's been any small change in your priorities there?
No. No change.
Okay. Great. And then my follow-up question or second question. In Home & Building Products, can you comment on how the backlog developed over the quarter? And any trends in the backlog? I know you said that orders improved.
Generally, backlog remains at normal levels or said another way, our lead times are generally normal.
Thank you. We have now reached the end of our question-and-answer session. I would now like to turn the floor back over to Ron Kramer for closing remarks.
Thank you all for joining us, and we look forward to speaking to you in May.
Thank you. This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.