Q3 2023 Griffon Corporation Earnings Call
Good morning, and welcome to the Griffin Corporation fiscal third quarter 20, twenty-three earnings conference call.
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Please note. This event is being recorded I would now like to turn the conference over to Brian Harris CFO . Please go ahead.
Thank you Debbie.
Everyone with me on the caller's wrong, Kramer, our chairman and Chief Executive Officer.
Recalls being recorded and will be available for playback the details of which are in our press release issued earlier today.
As in the past or comments will include forward looking statements about the company's performance based on our views of Griffin's businesses.
Environments in which they operate.
Such statements are subject to inherent risks and uncertainties that can change the world changes when you see the cautionary statements in today's press release, and then our various securities and Exchange Commission filings.
Finally someone today's remarks will just for those items that affect comparability between reporting periods. These items are explained in a non-GAAP reconciliations included in our press release that will turn the call over to Iraq.
Thanks, Brian Good morning, everyone and thank you for joining us as you can see from our third quarter results Griffins financial performance continues to exceed expectations are results were driven by the outstanding performance of our home and building products H B P segment, which continues to see year over year growth in commercial volley.
Entrail volume decrease as expected year over year is backlog levels normalized H B P. A favorable price and makes across all products and channels.
H P. P's performance is supported by increased investment and business development for both residential and commercial following two years of reduced sales and marketing activity due to elevated backlog and long lead times H B P continues to invest in productivity and innovation to further drive growth <unk>.
Low pay has fundamentally raise the bar for performance expectations.
Turning to the consumer and professional products segment C. P. P's results continue to reflect challenging market conditions, all channels and geographies were affected by reduced consumer demand and elevated customer inventory levels as we announced last quarter to address the impact that these market conditions uncertain U S product.
Lines C. P. P is expanding its global sourcing strategy to include long handled tools material handling and wood storage and organizational product lines that are currently manufactured and sold in the U S market by utilizing an asset light structure C. P. P. U S operations will be better position to serve.
Customers with a more flexible and cost effective global sourcing model. The global sourcing project is off to a solid start and remains on schedule and within budget, specifically, there's been significant progress on our higher profile works dreams around play enclosures and ramping up suppliers will provide more detail in our.
You're a year at an earnings call in November .
Turning to capital allocation during the quarter, we announced actions to enhance shareholder value that included a 25 per cent increase to a regular quarterly dividend raising it to 12 and a half cents and a 200 million dollar increase store share repurchase program that brought the total authorization to 258.
8 million.
Earlier today, the Griffin board authorized the 12 and a half cents per share dividend payable on September 14th 2023 to shareholders of record on August 23.
This marks the 48th consecutive quarterly dividend to shareholders, which has grown at an annualized compound rate of 17.6% since we initiated dividends in 2012.
During this quarter, we repurchased 2.5 million shares or approximately 4.4% of our outstanding shares for 85 million at an average price of $33.58 per share at June 30th of 173 million remained under the share repurchase author.
<unk>, we continue to believe there is a significant disconnect between Griffin share price and the intrinsic value of our businesses and we will remain active and opportunistic with our share repurchases.
Turning toward guidance for the year based on our third quarter performance and our expectations for the fourth quarter, where again raising our full year guidance. We now expect segment adjusted EBITDA to be 550 million compared to previous guidance of at least 525 million and.
In summary, these capital allocation acts gins in the fiscal 20 twenty-three guidance Reyes reflects the confidence Griffin's Board and management has in our strategic plan in outlook as well as demonstrate our commitment to enhancing both immediate and long term value to our shareholders I'll turn it over to Brian for the financial updates.
Thank you Ron.
Start by discussing our third quarter consolidated performance on a continuing basis revenue of 683 million decreased by 11% and adjusted EBITDA before and allocated amounts of 100, and 153 million increased by three per cent boasted comparisons with the prior year quarter with a margin of 22.3% an increase of three.
100 basis points.
Most profit on a gap basis for the quarter was 275 million compared to $261 million in the prior year quarter.
Excluding items that affect compatibility from occurring in prior period.
Gross profit was $276 million in the current quarter, increasing 4% over the prior year quarter gross margin increased by 580 basis points to 40.4%.
Third quarter gap, selling general and administrative expenses were $172 million compared to $157 million in the prior year, excluding adjusting items from both period so in general.
Afraid of expenses for $155 million, representing 22.7% of revenue compared to the prior year of $151 million or 19.6 per cent of revenue.
Third quarter cap income from continuing operations with $49 million.90 per share compared to the prior year period income of $53 million.98 per share.
Excluding all items that affect compatibility from both periods current quarter adjusted net income from continuing operations with $70 million or $1.29 per share compared to the prior year at $66 million or dollar twenty-three for sure.
Corporate amount allocated expenses, excluding depreciation were 14 million in the quarter compared to $13.4 million in the prior year.
Normalize effective tax rate, excluding adjusted items for the quarter was 28.1% and 28.6% for the year to date period.
Net capital expenditures were 8 million in the third quarter compared to $11 billion in the prior year quarter, depreciation and amortization totaled $15.7 million for the third quarter compared to 17.7 billion in the prior year.
Regarding our second performance revenue for home or building products decreased one per cent over the prior year quarter, driven by reduce residential volume, partially offset by increased commercial volume.
Favorable mixed in pricing for commercial commercial and residential products.
Adjusted EBITDA increased 12% compared to the prior year quarter, driven by reduced material cross, partially offset by increased costs for labor advertising and marketing.
Consumer professional products revenue decreased 22 per cent from the prior year. The reduction revenue is primarily attributable to reduce volume across all channels and geographies driven by soft consumer demand, an elevator customer inventory levels and customer supplier diversification in the U S.
C. P P. Adjusted EBITDA decrease from the prior year by 36%, primarily due to the unfavorable impact of reduced volume and revenue and it's related impact on manufacturing and overhead absorption.
These items are partially offset by reduced discretionary spending and approved Hunter fan performance.
And our second quarter earnings release on May 3rd we announced that CPP is expanding its scope of sourcing strategy for products manufactured and sold the rest of your dresser Bobby market conditions.
Utilizing an asset like model enable CPP to continue providing high quality product strengthening its competitive positioning and leveraging industry, leading services distribution that our customers and consumers expect.
Further these actions position CPP to achieve target EBITDA margin of 15% and generate substantial additional value to our shareholders.
There have been no changes unexpected charges and will continue to expect the project to be pleased by the end of the calendar 24.
In the quarter and did you in 30, CPP incur pretax cash charges of 3.9 million related to the expansion of the scope of sourcing strategy.
Regarding our balance sheet and liquidity as of June 32023, we had net debt of 1.4 billion in net debt to EBITDA leverage of 2.6 times as calculated based on a drive covenants compared to 1.3 billion of that dead and 2.5 times leverage in the previous quarter and 1.5 billion of net debt in 2.9 times leverage.
September 22 fiscal year and.
I want to highlight the remainder essentially leveraged unusual relative to the prior quarter, even after returning 100 million and shareholder capital will be a special dividend in may and $85 million in stock buybacks over the course of the third quarter.
Regarding our 2023 guidance given our strong year to date financial performance and our expectations for current segment trend to continue through the fourth quarter. We are raising our guidance for full year segment adjusted EBITDA to 550 million from the previous guidance of $525 million.
EBITDA guidance excludes unallocated costs of 56 million charges relate to the strategic review process of approximately 22 million and aims global sourcing expansion charges.
In addition, we now expect appreciation to be 45 million first prior guidance of $50 million and capital expenditures expenditures to be 40 million versus 50 million trial.
Other guidance remains unchanged for 2023, including revenue of 2.7 billion free cash flow to exceed net income amortization of 22 million interest expense of $103 million and then normalized tax rate of approximately 29%.
Now I'll turn the call back over to Ron.
Thanks, Brian before we turn to questions I want to highlight this morning, Griffin announced that it amended and restated its revolving credit facility to increase the size of that facility to 500 million from 400 million and extended the maturity to March of 2028 for March of 2025, the closing of our <unk>.
New credit facility continues to provide us with financial and operating flexibility that will support are working capital requirements and positions us to grow our company and further enhance shareholder value.
Also a one O acknowledged the effort and commitment the employees and management teams of our businesses continue to demonstrate it's because of them at we maintain industry, leading levels of product quality and customer service and our brands remain highly sought after and our leaders in their categories are home and building product segment.
Unused to perform well and sees longterm tailwinds for the business driven by a healthy demand for our commercial products and from the historically, a resilient residential repair and remodel market. We remain excited about the prospects for our consumer a professional product segment globally C. P. P as addressing the current consumer market environment.
<unk> my Rationalising its cost structure on leveraging its global sourcing capability to realize our goal of 15% EBITDA margins <unk>.
Griffin's Board and management remain very confident in our outlook and strategic plan. We will continue to use the strong operating performance of our business and it's free cash flow to deliver a longterm value to our shareholders even with our impressive results here today, we continue to believe the best is yet to come off.
<unk> will take any questions.
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At this time, we will pause momentarily to assemble our roster.
The first question is from Bob <unk> with C. J S Securities. Please go ahead.
Hi, Good morning, it's actually lead you go to for Bob This morning.
Morning late morning Wood.
So can we start with the the doors business and maybe talk about the visibility.
Men across the residential and commercial business and then just as a follow up to that maybe.
Talk about the progress with potential synergies you see integrating co pay to the existing commercial dealer network.
Sure so as far as visibility we continue to expect good commercial.
Demand, we have benefited greatly by converting historical cornellcookson dealers to use co pay commercial sectional product and I've just been very successful and will be ongoing for.
Foreseeable future.
On the residential side, we have.
From a unit sales standpoint, we have difficult comps until we get through the first half of fiscal 24 because of historical backlog during the prior period.
Period this year.
And going forward, we expect orders to improve as we have invested more in marketing to recapture the market share that was partially lost while we had high backlog.
Got it and then on the C. P P side maybe.
<unk> are there any initial findings from your global sourcing initiatives that you're trying to implement in the U S and and how does that how does your existing global sourcing infrastructure benefit the push towards the U S global sourcing.
Sure. So we're early in the process, but so far you know <unk>.
See this being as successful as we expected will teach you more in November as far as.
Our capability that we already have regarding Ah sourcing, we already source, partially in the U S to begin with and Australia, and the U K and we're leveraging that supplier network to use.
Not supplier network to source for the U S product lines that were converting.
Mmm.
Oh.
[noise] operator, operator next question please.
Excuse me. The next question is with Ah from Tim Leauges with Bird. Please go ahead.
10.
Maybe just on the on the H B P business. So I you know on on the pricing side.
Could you maybe talk to what you're seeing there I think there's a.
He was a worry out there that the industry needs to give back some level of pricing and it and it gets I'm. Just curious you know what you're seeing you know how you would kind of respond to that and and as we look at next year, just anything to think about pricing makes her or kind of raw materials and H P. P.
Sure Forest Raw materials, you know the market will dictate mostly how that occurs going forward. So I'm just sort of go on with your questions backwards.
As far as pricing we are priced in line with the market we.
We continue to expect good mix as we go forward, we are constantly coming up with new products innovative products and both commercial and residential side.
And I refer you to our margins year to date.
Regarding the strengths of the pricing in our business and Tim Thrawn, I'll, just add to it where the market leader and we have the premium product premium service.
Best dealer network, and we see ourselves taking market share and have no worries about pricing.
Okay, Okay very good and then just.
<unk> said longer term margin targets and home and building products that I think we're in the mid to high 20 per cent range, but.
The business is still operating you know really well at 33 per cent margins this quarter and last in the last couple of quarters and I just need to look at steel down you look at M. B I down and maybe maybe other inputs are actually you know a bit more favorable. So I just I guess could you maybe just kind of walk me through the difference there and if if I'm if I'm thinking of you know if there's anything there that that I should be.
[noise] differently about cause and if anything it almost think that merchants have scope to maybe even with higher.
So as far as those the outlet for margins that we posted that is a long term view and considers the cycle currently.
We aren't seeing pressure on margins and the business is doing very well.
We were just being perhaps a little conservative and considering.
What could potentially happen in the future, but nothing is visible yet.
The next question is from Hulio Romero with <unk> and company. Please go ahead.
Great. Thanks, good morning.
You wanted to piggyback on at least question earlier about H P. P and converting the Cornellcookson dealers you guys mentioned you've been successful with those conversions.
Could you expand on that a little bit maybe you know give us your what's what's the common pushback from those dealers are common rebuttal and and how do you kind of overcome that.
Sure. It's actually it's the opposite we have dealers lining up to be converted.
We are being thoughtful in the and bringing on new customers to make sure that we service and with a high level of service that they should and expect that we've been able to provide our other dealers. So this is really a matter of.
Thoughtfully and carefully converting dealers one by one training, making sure they understand our products, making sure. The systems are working and so far it's been successfully continued expected we continue to expect it will be successful.
Got it that's very helpful. And then on C. P. P. You mentioned, you've seen significant progress on ramping up suppliers for the global sourcing strategy.
<unk> what are the lead times turn into with the global sourcing strategy compared to previously.
I assume you mean getting things into our.
Distribution centres from wherever we're sourcing from exactly those three times will change, but we aren't used to dealing with back because we currently source roughly 20% to 30% of what we sell in the U S. So that will be in our calculus to make sure we have a inventory on hand adequate levels of service or.
Customers and the way they have been service before and B.
We understand that.
Timing that it'll take to get product and will be.
Ensuring that we have our orders in a timely basis to get the product.
The next question is from trade Grooms with Stephens Inc. Please go ahead.
Good morning, this is gnome or Costco on portraying good.
Good morning.
Good morning, maybe maybe switching gears here over CPP just under demand outlook.
I know you've called out you know there continues to be a week consumer it sounds like pretty globally, there in inventories remain high.
Again, just just any kind of forward looking expectations as we think about demand for that segment and when you believe inventory in the channel might be right.
Sure we expect it to take time, we're talking multiple quarters, it's hard to know exactly when there's other factors such.
Such as whether that could change the calculus, but we are looking you know 24 is going to look.
From a consumer standpoint, similar I think to twenty-three and it's gonna take most of 24 to normalize inventory at most for most products from locations and we view. This is positioning the company for the long run and there will be a recovery and those products will be a more efficient.
<unk>.
Manufacturer designer, a sorcerer and the 15% EBITDA target you know that we have out there we believe will achieve beyond the fiscal 2004 year.
Got it that makes sense.
Then on the the H B P business. You know you mentioned, you're a market leader can you help us understand with the market structure looks like how how many players there are and how concentrated it is at the top and and maybe you know you mentioned regaining market share in investing in and more marketing now maybe if you could.
Just help quantify what that looks like.
Sure so as far as the market. There's four large players that make up about 75% of the market approximately.
So pretty consolidated at that level as far as the marketing yeah. So why we have increased backlog you know some of our customers understandably if they wanted a door faster than we were able to provide it went to other providers.
That was a matter of not wanting to wait not necessarily that they wanted the other products. So now that our backlog said normalize and we can meet our customers demand typically in approximately two weeks.
We are regaining that market share in the investment in marketing to allow people to know about our new products and our capability to provide them those products timely as being helpful.
The next question is from Sam Dark catch with Raymond James. Please go ahead.
Good morning run two morning, Brian how are you.
Doing well how are you Sam.
Uhm terrific. Thank you just Ah most of my questions have been asked and answered just a couple of follow ups on on prior inquiries.
I think we talk a lot about garage doors with an H b P, but but could you talk a little bit more about.
What Cornell Cook, some specific profitability looks like today versus pre pandemic and where that is versus the overall H B P.
Margin level, just trying to get a sense of the sustainability there versus the garage door business.
Sure. So I'll I'll take you back from repurchase Cornell cooks and it was approximately.
9% business on $200 million of revenue. There was we knew we had a lot of opportunity there and a lot of work to get there.
Integrating that with copay and I mentioned the conversion of dealers two hour commercial sexual products. All those have contributed to a much stronger business.
Currently on balance our commercial margins are similar to a residential margins it varies by product, but on balance their similar.
And we continue to see.
Very nice growth and the commercial business and believe that that's going to continue.
So this is not my follow up questions that don't don't cut me off just yet, but do you think the sustainability <unk> do you think the sustainability of the Cornell Cookston margins are similar to that of garage doors I mean, there there's never to our knowledge ever been Ah.
This cut in <unk> garage doors, but you'd figure steel rolling steel doors might be a little bit more commodities sensitive with pricing. So could you give us a sense of how you compare and contrast, the the margins sensitivity or sustainability with commercial versus <unk>.
They're a bit of a different model. So on the commercial side is I'll call her job at a time, where you're going out.
And bidding with a full suite of products and services, along with dealers to get those jobs done.
Though the product itself is of excellent quality and sought after by.
Those who are are purchasing it.
It's our capability to not only build quality doors, but to get in there on time get them installed properly and having a full suite of products that gives us a leaving edge.
In getting those jobs. So it's more one at a time and those are big.
So the pricing may adjust as each paid goes but our overall capability gives us strength.
And then here's my my actual follow up questions. So this is Ah fine tuning what Tim was asking earlier around.
Pricing, both what you're seeing and prospectively in H B P. I guess it looks like.
And the court or the pricing for H B P. When a two year stack moderated a little bit sequentially from last quarter.
Now that's price mimics so I'm not sure if that's actually like for like the <unk> are you seeing price degradation or price pressure and H B P sequentially and if not what what might explain the the little bit of a softness on a two year stack.
Yeah, so year over year.
Price mix continues to be good what you're really seeing is less price more mix.
Pricing has remained relatively stable.
Always the next element to that but it has remained stable.
Oh by the way back on the commercial I forgot to mention that commercial products have a much higher component of labor than residential products.
Part of the consideration of what I was talking about.
Again, if you have a question. Please press Star then won the.
The next question is from Justin Burger with Gabelli funds. Please go ahead.
Good morning, Ryan Good morning, Brian Nice quarter.
<unk>.
One two part Ah just clarification question, then one follow up I noticed the Hunter margins you know, we're really strong this corner close to 30% any comment there and then the other clarification question was just regarding the repurchases. It was 85 million, but I think there's like a 98 million perk.
[noise] of shares for Treasury number and the cash flow statement. So just trying to reconcile those two.
Sure on the repurchases are there could be some element of.
Things that affect that number I believe that's the difference.
Between the report truer purchases and the best thing netting of shares when the best.
The Hunter margins last year.
Hunter is seasonal January two three in queue for generally the stronger times of the year last year was burdened with significant freight costs that we do not have this year as a major driver there.
Okay. So are those margins sort of sustainable at this level I mean that high twenties or something unusual that sort of help them. This quarter Ford's vision period of the year those margins are not abnormal over the entire year, you're talking you know plus the 20% give or take margin business.
Gotcha, and then I follow up just on the commercial H B P business, you know some companies and industrial space, we're talking about a weakening sort of market for you know warehouse related to me and are you seen that come through or maybe you know looking out a quarter to and are you in the later.
Innings of this you know dealers switch you know for Cornell cooks and dealers to pick up close pay sectional or you would say you're more early the middle innings.
No we're in the middle earnings for the switch.
Far as demand, we are continuing to see stronger demand for our products in the space.
This concludes the question and answer session I would like to turn the conference back over to Brian Kramer for any closing remarks.
Thank you be well, we look forward to speaking to you in November .
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.