Q2 2023 Griffon Corporation Earnings Call
Speaker 1: I.
Speaker 2: If at any time during this call you require immediate assistance, please press stars in the roof for the operator. This call is being recorded on Wednesday, May 3rd, 2023. I would like to turn the conference over to Mr. Brian Harris, Chief Financial Officer. Please go ahead, sir.
Speaker 3: Thank you, Eunice. Good morning, everyone. Whitney on the call is Ron Kramer, our Chairman and Chief Executive Officer. Our call is being recorded. It will be available for playback, the details of literature and our press release issued earlier today.
Speaker 3: As in the past, our comments will include following looking statements about the company's performance based on our views of Griffin's businesses and the environments in which they operate. Such statements are subject to inherent risks and uncertainties that can change as the world changes.
Speaker 3: Please see the cautionary statements and say press release and an evaluative security and exchange commission filing.
Speaker 3: Finally, some of the teenager marks will adjust for those items that affect comparability between word reporting periods. These items are explained in our non-gap reconciliation, including our press release. Now turn the call over to Ron. Thanks Brian . Good morning everyone and thanks for joining us. This is the first earnings call we've hosted since we initiated our strategic ultr...
Speaker 3: We publicly announced the commencement of this process in May of 2022, but actually the process began even earlier in January of 2022 when we formed our Committee on Strategic Considerations and engaged our advisors Goldman Sachs and Deckard.
Speaker 3: The Committee on Strategic Considerations, which was comprised solely of independent members of our board, was given the mandate to work with our advisors to evaluate a comprehensive range of strategic alternatives to maximize shareholder value, including a possible sale, merger, divestiture, or recapitalization.
Speaker 3: After extensive review and deliberation, the GRIFF and Board unanimously concluded that none of these alternatives, which we explored, appropriately valued GRIFF and strong operating performance and growth prospects. And as a result, the Board unanimously determined that continuing to focus on executing our strategic plan is the best approach for maximizing shareholder value at this time. Our decision is a reflection of our Board's confidence and GRIFF and outlook and strategy.
Speaker 3: Due to the confidential nature of the process, we cannot disclose specific details regarding options at sport or negotiations conducted. What I can tell you, however, is that the duration of this process over a year from initiation to conclusion is an indicator of how comprehensive the process was.
Speaker 3: during a period of rapidly changing economic and financing conditions.
Speaker 3: With the process now concluded, we continue to believe that there is a fundamental disconnect between our share price and the intrinsic value of our businesses. And we are committed to taking a series of actions to provide additional value to our shareholders.
Speaker 3: Further, I want to be clear that while we are no longer proactively exploring strategic alternatives, we will continue to be open to and will consider all opportunities to enhance shareholder value.
Speaker 3: Let me turn to the operating results. Griffin's performance through the first half of 2023 has exceeded our expectations. Our results are driven by the performance of our home and building product segment, HPP, which continue to see growth in commercial volume and favorable price.
Speaker 3: and mix across all products and channels. Residential volume decreased year over year, what was better than expected.
Speaker 3: The HBB team, led by Vic Welden, has been able to address the sectional door backlog that built up over the past two years.
Speaker 3: The factory is now operating with normalized backlog and lead times. This is great news as it frees up the HBP team to focus its attention on further improving productivity. It also allows the team to expand business development efforts that were previously slowed down as a result. The factory is now operating with the HBP team to focus its attention on further development.
Speaker 3: of our larger backlog and longer lead times.
Speaker 3: The team is now intensifying their efforts to capture additional residential and commercial business by expanding marketing efforts and leveraging our leading positions in sectional and rolling steel product offerings.
Speaker 3: These efforts are complemented by a portfolio of innovative product offerings that are being positively received by customers.
Speaker 3: I want to thank the HPP team for their extraordinary performance and ongoing commitment to building this fabulous business.
Speaker 3: Performance of the consumer and professional products business continues to reflect the difficult retail market conditions in which we are operating. All CPP channels and geographies are being affected by reduced consumer demand and elevated customer inventory levels.
Speaker 3: material handling and wood storage and organization product lines that are currently manufactured in the United States for sale in the United States. The CPP team will leverage its extensive global sourcing experience and capability to effectively manage this transition by utilizing an asset-like structure. CPP's US operations.
Speaker 3: leveraging our iconic brands while strengthening our competitive positioning with industry-leading distribution and service that our customers and consumers expect. In addition, these actions are a continuation of the evolution of CPP, positioning the segment to achieve targeted EBITDA margins of 15% and generating substantial additional value for our shareholders. Let's turn to guidance for the year. Our overall strong performance in the first half has exceeded our expectation. As a result, we are raising our full year segment EBITDA guidance.
Speaker 3: to at least 525 million from the previous guidance of 500 million.
Speaker 3: Also earlier today the Griffin board announced the 25% increase to our regular quarterly dividend This is in addition to the $2 per share special dividend and the increase in our share buyback authorization to $158 million that was approved by our board two weeks ago.
Speaker 3: These actions demonstrate our commitment to enhancing both immediate and long-term value to our shareholders and reflect the confidence, grip and board and management have in our strategic planning outlook. Let me turn it over to Brian to go through some of the financials. Thank you, Ron.
Speaker 3: I'll start by discussing our second quarter consolidate continuing basis performance. Revenue of 711 million decreased by 9%. It was just a deep job before on our time allocated amounts of 152 million decreased by 1% both in comparison to prior year quarter.
Speaker 3: Adjust the EBITDA margin was 21%, increasing approximately 180 basis points year over year.
Speaker 3: Gross profit on the gap basis for the quarter was $194 million compared to $261 million in the prior year quarter. Excluding destruction related charges and the acquisition right above inventory as applicable from the current and prior periods, gross profit was $269 million in the current quarter, increasing 1% over the prior year quarter. Gross margin increased year over year by 275 basis points, so 37.9%.
Speaker 3: Second quarter gap selling general and administrative expenses were 160 million compared to 150 million in the prior year. Excluding adjusting items from both periods selling general administrative expenses were 150 million representing 21.1% of revenue compared to the prior year of 144 million or 18.5% of revenue.
Speaker 3: The charge of results is the result of CTP's year-to-date expected 2023 results being below expectations. Corporate and unallocated expenses excluding depreciation were 14.6 million in the quarter compared to 13.1 million in the prior year. I normalize effective tax rate, excluding adjusted items for the quarter with 29.5% and 29.4% for the year-to-date period. Capital spending was 7.1 million in the second quarter compared to 11.5 million in the prior year quarter. Depreciation and amortization told 17.3 million for the second quarter compared to 16.3 million in the prior year. Regarding our study performance, revenue for consumer and professional products decreased 20%.
Speaker 3: Total volume decreased through the decreased residential volume, partial set by increased commercial volume. Adjusted EBITI increased 26% compared to the prior year quarter driven by increased revenue and reduced material cost, partial set by increased cost for labor transportation, advertising and marketing. As mentioned earlier, in detail, in our press release, CTTs expanding its global sourcing strategy for products manufactured in sold in the US. The project includes the closure of four manufacturing facilities and four woodmills. We expected the pleases project by the end of calendar 2024. In that period, we will include incur charges of $120-$130 million.
Speaker 3: including 50 to 55 million of cash charges for employee retention, severance, operational transition at the facility cost, and 70 to 75 million of non-cash charges, primarily related to asset write down.
Speaker 3: We also expect capital expenditures in the range of 3 to 5 million. These charges exclude the benefit of cash proceeds from sale of owned real estate and equipment which are expected to largely offset the cash charges and also exclude an efficiency to the two-clickative waiver costs and absorption impacts during transition.
Speaker 3: In both the quarter and six months ended March 31, 2023, CPP incurred pre-tax charges of $78.3 million related to the expansion of global sourcing strategy consisting of cash charges of $19.2 million and non-cash asset related charges of $59.1 million. Regarding our balance sheet and liquidity as of March 31, 2021, the CPP is currently in the top 10.
Speaker 3: We are updating our expectations for revenue and segment adjusted EBITDA. We now expect 2023 revenue of 2.7 billion compared to previous guidance of 2.95 billion as a result of decreased CPP revenue partially upset by increased HBP revenue.
Speaker 3: So, just to leave it on 2023, it's now expected to be at least $525 million compared to our previous estimate of at least $500 million.
Speaker 3: Our increase in justice eva expectations reflect strong HPP results partially affect by the reduced CPP volume mentioned earlier. Guidance for other metrics remain unchanged for 2023, including free cash flow to exceed net income. Capital expenditures are 50 million depreciation of 50 million, anniversation of 22 million, interest expense of 103 million, and normalized tax rate approximating 29%. As Ron mentioned earlier, Griffin's Board of Directors authorized a 25% increase to our quarterly dividend to $12.5 per share, cable on June 15, 2023 to shareholders of record as of May 25th.
Speaker 3: On April 20th, the Grypton Board approved an increase to our share of the purchase authorization of 200 million, bringing the total outstanding authorization to 2568 million.
Speaker 3: Now I'll turn the call back over to Ron. Thanks, Brian . I want to highlight that despite our businesses continuing to navigate an uncertain global macroeconomic environment, our employees have maintained high levels of customer service and product quality. We thank each of them for their efforts.
Speaker 3: We are very confident about our future. Home and building products continues to perform well, and with HBP's return to normal operations after the pandemic surge, the business is now able to focus on growth and productivity initiatives. We continue to see long-term tailwinds for the business.
Speaker 3: driven by healthy demand for our commercial products and the historically resilient repair and remodeling market for our residential products.
Speaker 3: We're also confident about the prospects for our consumer and professional product segment. While CPP is currently working through challenging conditions, we expect the business environment will stabilize over time, allowing CPP to deliver significantly improved financial results.
Speaker 3: Griffin's board and management has strong conviction in our outlook and strategic plan as demonstrated by the significant increase in our dividends and expanded stock buyback authorization. We will continue to use the strong operating performance of our business and its free cash flow to deliver long-term value to our shareholders.
Speaker 3: We believe our best days are ahead of us.
Speaker 3: Operator, we'll take any questions.
Speaker 2: Thank you Mr. Kramer. Ladies and gentlemen, will we now begin the question and answer session? Should you have a question, please press star for the by one on your touchtone phone. You will hear a three-tone brand, a commodity request, and your questions will be pulled in order that we receive. Should you wish to decline from the phone and press this, please press star for the by two. We ask analysts to limit themselves to one question and the follow-up. If you are using a speaker phone, please leave the answer before pressing any keys.
Speaker 2: One moment please for your first question. Your first question comes from Bob Labic with CGS Securities. Please go ahead.
Speaker 3: Good morning and it's nice to talk to you again. Good morning, Bob. Congratulations. I'm continued strong performance. Obviously, so many questions. I'll follow the instructions and ask to keep it brief and get back in queue. But maybe starting with HBP.
Speaker 4: Obviously, the performance has just been off the charts and hard to model in a good way. Clearly, margins have improved materially from mix, pricing, and operating efficiencies that you've garnered over the last year plus.
Speaker 4: Can you give us a sense of maybe what's the new normal range for doors operating margins looking out? And how we can think about has there been like a you know overbilled period where we are in the demand cycle and what are normalized margins over the next?
Speaker 4: few years for this business.
Speaker 5: Let me start by saying that building the company gets
Speaker 5: lost in moments in time and you have to go back and recognize that we have been on a five-year journey of building the Cloveay business. We bought Cornell Cooks in going on five years ago. We had three years of COVID. We were doing well pre-COVID. We had a plan of improving margins that...
Speaker 5: We are positioned for residential and commercial growth. Our business is not dependent on new home construction. It is a repair and remodel on the residential side. New home construction, which continues to be a shortage in this country, will only benefit us.
Speaker 5: The commercial business has grown, will continue to grow, and while this quarter is clearly the best margin quarter that we've ever had in HBP, we continue to see strength and sustainability of the business. Here that will shake out in terms of margin.
Speaker 5: Only time will tell, but we have a business that finished last year with 412 million of EBITDA will be better than that this year. That's why we have confidence in raising our guidance. And we believe the sustainability and the resilience of the business going forward that this is a defendable business.
Speaker 5: with higher margins than we've enjoyed over prior cycles. Brian , you want to add to that? Thank you for summarizing it pretty well. I am less.
Speaker 4: Bob, you have a additional question to it. I don't know. Oh, no, I think that's super helpful there. Maybe just because I do appreciate that, you know, taking a step back. And obviously we've been watching this journey since Cornell Cooks and the integration and the expansion and everything. So maybe give us a sense of the commercial...
Speaker 4: market opportunity and where you've been growing and where you're targeting additional growth in commercial now that you're kind of fully integrated and ready to go after it.
Speaker 3: Sure, I'll start. The commercial market has been strong. We continue to see good results from that side of the market, from our historical legacy products as well as the new products that we've come up with over the last couple of years. In addition to that, we are getting great benefits out of leveraging this.
Speaker 3: elevated and now that our backlog and our lead times are normalized we are going to be back out there and getting after that business. Of course you know things like warehouse space, institutional.
Speaker 2: type operations is where we see most of our business. Thank you. Your next question comes from Tim was with Baird. Please go ahead.
Speaker 3: Hey guys, good morning. Good to hear from you again. Hi Tim. Hello. Hello. Maybe just the first one on maybe CPP. Is there a way just to maybe level set us in terms of where that business after all the changes lands from a revenue perspective on a normalized basis?
Speaker 3: Sure, so as we go through this process and come out the other side at the end of 24, we see this as a billion plus size revenue business that will be generating 15% level margin. Okay, okay good. And then maybe just on the cash flow.
Speaker 3: kind of a two-paralyzed, I guess first, like, cash flow is supposed to be better than that income, but it's already kind of meaningfully better this year. So I guess if it's possible that it's in a pretty meaningfully higher relative to that income, and then, I guess, where the stock is today, I mean, how aggressive would you be with the stock here, just given the expanded buyback?
Speaker 3: Sure, let me start by answering the cash flow question. Yes, we are seeing very good cash flow, especially in the first half of the year, where generally we don't have much cash flow in the first half of the year. So, it can be meaningfully better than net income as you pointed out, but we stick with our stated better than net income, which falls under that category.
Speaker 5: And let me just, you know, add, you know, start with our balance sheet. We don't have a debt maturity until 28. And we have substantial free cash flow. We've authorized 258 million. Stay tuned.
Speaker 2: Thank you. Your next question comes from Noah Mercusker with Stevens. Please go ahead.
Speaker 2: Thank you. Your next go chickens from Noa, Mircusca with Steven, please go ahead. Good morning and thanks for taking my questions.
Speaker 6: First, I wanted to talk on HPP, just get an update on how you're seeing demand, at least through the balance of the year, especially now that backlogs are normalized. I'd imagine that.
Speaker 3: Sure, on the residential side, volume is below where we've seen it last year, but it's in the resilient repair and remodel market. Actually, the volume has been a little better than we originally expected and leads to us raising our guidance on the commercial side. We continue to see strong volume. Our products are doing well.
Speaker 6: And then maybe switching gears to the CPP side, you know, you've announced that you're expanding your global sourcing strategy and we should expect 15% EBITDA margins in 24. But at what point? 25.
Speaker 6: Okay, 25. At what point would you expect this strategy to start bearing fruit or start becoming accretive to segment margins?
Speaker 3: Yeah, so you know, 24 will remain a transitional period as we.
Speaker 3: move over these particular product lines to a sourcing model and those benefits will come through in 25. They expect it to take till roughly the end of calendar 24.
Speaker 2: Thank you. Ladies and gentlemen, as a reminder, if you have any questions, please press star one.
Speaker 5: Your next question comes from Sam Drakash with Raymond James. Please go ahead. Good morning, Ron. Good morning, Brian . How are you? Doing well. How are you, Sam? I'm well as well, and it's good to hear your voices certainly on a formal basis. So a couple of questions, and I actually have three or four. Maybe I'll get back into the queue if possible.
Speaker 5: So the $250 million authorization, if you do it, at least by my math on the open market, that could take years, depending on the daily volume. Why wouldn't you consider a tender or an ASR?
Speaker 5: to put that money at work while the stock is at current levels? We don't think it will take years and we will consider any and all possibilities, but we are not able to be in the market until we put out our earnings.
Speaker 5: 48 hours go by and I believe that means starting on Friday. Expect us to be in the market.
Speaker 6: Gotcha. And then the retention payouts, Brian , do they continue or how are they going to be accounted for now that the strategic review process has concluded at least for the time being?
Speaker 3: Yeah, so we'll continue to call those announced out as they are, though they are over several years that they are a specific event.
Speaker 3: and those payments will continue each third quarter for this year, next year and the year after. Here.
Speaker 2: Thank you. There are no further questions at this time. Mr. Kramer, back over to you. No, I think Sam has some more questions.
Speaker 7: Am I able to hello? Am I on? Yeah.
Speaker 7: Hello, my own. Yeah.
Speaker 6: Hello, my on Sam you're on. Can you hear me okay? Yeah, okay terrific sorry about that. My last question again getting back to the CPP sourcing which is fascinating. So where specifically are you contemplating?
Speaker 6: moving the sourcing from a geographic standpoint, is that gonna be a kind of a sole contract that we am manufacturing set up like you have with Hunter? How do you manage risk with that type of set up if you could help us put a little bit of a little meat on the bone in terms of what the plans are at this point? Come forward, Johnny.
Speaker 5: Well, let me start by saying this is an evolution and a continuation of what we do globally. We have a global sourcing office in China. We have facilities that we already work with. Our Australian business is part of that global sourcing, our UK business.
Speaker 5: is part of global sourcing. You know, the evolution of our U.S. operations and our aggressive approach to repositioning it based on what's changed in the consumer markets, you correctly point out our Hunter relationship, and that is a design in the United States.
Speaker 5: and manufactured elsewhere for distribution in the United States. So I view what we're doing to our CPP business is an evolution of what we've done successfully at very attractive margins globally to be able to fix.
Speaker 5: business in the US that has a very high manufacturing overhead that can't be supported other than being on an outsourced global sourcing model.
Speaker 3: Yeah, I would just add to that, you know, global sourcing truly means global sourcing. That includes sourcing in South and Central America, the U.S., as well as Asia. And it's not going to be sole source to one person or one entity. And in fact, using entities over against themselves in further periods will give us even more advantage.
Speaker 6: Is there an issue around the potential for challenge lead times based on some of the seasonality of some of these products? I thought that was one of the primary reasons why there was an appeal to a North American production footprint, especially around long-handled tools whereby you...
Speaker 6: you're able to have high fill rates during the heavy selling season. How is that impact that I'm guessing you might move that type of production to Mexico or is that also contemplated in Asia? I'm just trying to get a sense of how to manage risk and especially knowing that you still may look to monetize the CPP business at some point, making it still palatable for a potential suitor. That is one mix of wearing a mask is just not a normal unraph fit. That is sometimes the case that these sales cycle model is aasy just kg ask you to not have to say what you said there. However, you need to be able to make it team Astra storm
Speaker 3: Sure, so you touched upon part of it will be sourcing from possibly closer areas, such as Central America. And further, we'll leverage our distribution footprint and keep enough inventory on hand to ensure that we provide the same levels of service to our customers that we have been able to do in the past. Thank you.
Speaker 6: Gotcha. And then if I'm still on. You are. Okay, terrific. They didn't cut us off yet. So we've been silent for a while. Keep going. It's terrific that you're able to speak publicly again. Sure the.
Speaker 6: repo authorization has been completed. What do you anticipate the debt leverage, either at that point or optimally for the business?
Speaker 3: So it will depend on when those buybacks occur, but generally we don't expect leverage to get much above 3x type of level as we'll be generating cash flow as we're buying shares.
Speaker 5: And as we continue to generate cash, we're in a luxurious balance sheet position. We've got both undrawn bank capital. We've got no debt maturity, as I said earlier, till 28. We've got free cash flow, and we've got a very undervalued stock that we have every instance.
Speaker 8: Thank you. Thank you.
Speaker 2: Thank you, Sam. Any other questions?
Speaker 5: Okay, well thank you all. Look forward to speaking to you after our next quarter in early August .
Speaker 2: Ladies and gentlemen, this concludes your conference call for today. We thank your participating and ask that you please disconnect your lines. Have a great day.