Q4 2023 Griffon Corp Earnings Call
Greetings and welcome to the Griffon Corporation fiscal fourth quarter 2023 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 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.
Mr. Harris you may begin.
Thank you.
Good morning, It's my pleasure to welcome everybody to Griffin's fourth quarter and fiscal 2023 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 Dot Griffin Dot 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 bookings performance. These statements are subject to risks and uncertainties that can change as the world changes. Please see the cautionary statements 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'll turn the call over to Ron.
Good morning, everyone and thank you for joining US we're pleased with our results for the fourth quarter and the fiscal year. The record performance of our home and building products H B P segment drove our results as Clos paying Cornell Cookson continued to deliver strong free cash flow and operating margins are consume.
Professional products or C. P. P segment improved in the fourth quarter and we're optimistic about its repositioning for the future.
For the year H B P revenue increased 5% to $1 6 billion driven by continued growth in commercial volume as expected residential volume decreased as backlog levels normalized H B P had favorable price and mix across all products and channels H B piece fourth quarter perf.
<unk> benefited from increased investment in marketing and sales for both residential and commercial channels. Following two years of reduced activity due to elevated backlog and extended lead times H B P. Also continues to invest in productivity and innovation to further drive growth, including expanding.
<unk> pays Troy, Ohio, sectional door manufacturing capacity, and adding advanced manufacturing equipment to better satisfy customer demand for premium products, turning to consumer and professional products segment C. P. Pes results for the year continue to reflect challenging market condition.
As with revenue decreasing 18% to $1 1 billion.
All channels and geographies were affected by reduced consumer demand and elevated customer inventory levels.
As we announced previously to address the impact of these market conditions and certain U S product lines C. P. P is expanding its global sourcing strategy by utilizing an asset light structure C. P. Pes U S operations will be better positioned to serve customers with a more flexible and cost effective global sourcing.
Model the.
The global sourcing expansion project remains on schedule and within budget by the end of December 2023 operations had two manufacturing facilities in four would mills will representing over 1 million square feet of space will cease the remaining effect that aims locations will be transitioned during calendar <unk>.
Year 'twenty 'twenty four the global sourcing expansion at Ames is a key element of our strategy to improve the margins of the C. P. P segment and we were pleased by the progress made so far we will continue to provide updates throughout the year as we achieve additional milestones in the process.
Turning to capital allocation in fiscal 'twenty, three we took significant actions to deliver shareholder value and strengthen our balance sheet through cash dividends stock buybacks and debt repayment in may we increased our regular quarterly dividend by 25% to 12.5 cents.
Per share paid a $2 per share special dividend and announced the 200 million dollar increase to our share repurchase authorization, bringing the total then to 258 million.
At the end of fiscal year of September 30th we've repurchased more than $4 1 million shares for $151 million in total during fiscal 'twenty, three we returned $285 million to shareholders through dividend payments and share repurchases. It's also important.
To note, we were able to deliver this value while maintaining our leverage at 2.6 times <unk>.
Since September 30, yet we purchased an additional 1.1 million shares and this morning, the Griffin Board announced the 200 million dollar increase to its share repurchase authorization, bringing the current authorization to a total of $262 million since April Griffin has repurchased five.
3 million shares for a total of 196 million or $37.15 per share through yesterday November 14th 20 twenty-three these share repurchases.
Repurchases represent 9.2% of the shares outstanding as of March 31, 2023.
During fiscal 'twenty three we also took action to improve our financial flexibility and strengthen our balance sheet. We increased the size of our revolving credit facility from 400 million to 500 million and extended the maturity of the revolver. So August 120 28.
So in the fourth quarter, we repaid 25 million of our term loan B facility.
In fiscal 'twenty four we will continue to use our free cash flow to support our capital allocation strategy with a focus on opportunistically repurchasing shares reducing debt and supporting our regular quarterly dividend.
Also this morning, the Gryphon board authorized a regular quarterly dividend of 15 cents per share payable on December 14th to shareholders of record on November 28, marking the 49th consecutive quarterly dividend to shareholders. This is a 20% increase over our last quarterly dividend and our fifth.
The percent increase compared to our November 2022 dividend our dividend has grown at an annualized compounded rate of 18% since we initiated a initiated dividends in 2012. These actions reflect the strength of our business as well as our confidence in our strategic plan and outlook.
I'll turn it back to Brian for the financial update and to provide details about our 'twenty 'twenty four guidance. Thank.
Thank you Ron I'll start with our fourth quarter performance and then review our guidance for fiscal 'twenty four.
Fourth quarter revenue of 641 million decreased by 10% and adjusted EBITA before an allocated amount of 135 million decreased by 3%.
Both in comparison to the prior year the related EBITDA margin was 21% an increase of 140 basis points over the prior year fourth quarter.
Gross profit on a GAAP basis for the quarter was 246 million compared to $250 million in the prior year quarter.
Excluding items that affect comparability from the current and prior year periods gross profit was $250 million in the current quarter compared to 253 million in the prior year.
Normalized gross margin increased year over year by 260 basis points to $39 two per cent.
Fourth quarter, GAAP, selling general and administrative expenses were 157 million compared to 166 million in the prior year quarter, excluding adjusting items from both periods SG&A expenses were $146 million or 22, 8% of revenue compared to the prior year of $148 million or 28% of revenue.
Fourth quarter GAAP income from continuing operations was 42 million or 79 cents per share compared to the prior year loss of $415 million, which was driven by a C. P. P impairment charges.
Excluding all items that affect comparability from both periods current quarter adjusted net income from continuing operations was $63 million or $1 19 per share.
Compared to the prior year of $60 million or $1 nine per share.
Corporate and unallocated expenses, excluding depreciation were $13 5 million in the quarter compared to $14 2 million in the prior year.
Net capital expenditures were $34 million in the fourth quarter compared to 9 million in the prior year quarter. The increase was primarily driven by a net $20 million related to the acquisition of the H B P headquarters facility in Mason, Ohio, and the manufacturing facility for a closet made in Ocala, Florida as we capitalize on the opportunity to acquire these critical.
So these below market value.
Depreciation and amortization totaled $15 4 million for the fourth quarter compared to $17 6 million in the prior year.
Regarding our segment performance revenue for home and building products decreased 7% over the prior year quarter, driven by residential volume, partially offset by increased commercial volume.
Adjusted EBITDA decreased 9% compared to the prior year quarter, driven by the decreased revenue coupled with increased labor marketing and advertising costs, partially offset by reduced material costs.
Consumer professional products revenue decreased 13% from the prior year quieter for 247 million.
The reduction in revenue was primarily attributable to reduced volume across all channels and geographies driven by soft consumer demand elevated customer inventory levels and customer supplier diversification in the U S.
C. P. P. Adjusted EBITDA increased to 14 million from the prior year $7 million driven by reduced material costs, partially offset by the impact of reduced revenue noted above.
In May we announced that Cpp's expanding its global sourcing strategy for products manufactured and sold in the U S to address evolving market conditions.
Rising asset like model enables P. P. P to continue providing high quality products strengthen our competitive positioning and leverage industry, leading service and distribution that our customers and consumers expect.
Further these actions position C. P P to achieve target EBITDA margins of 15% and generate substantial additional value for our shareholders.
The project remains on time and on budget with completion expected by the end of calendar 2024.
In the quarter ended September 30.
C. P P incurred pre cat pretax cash charges of $10 million related to the expansion of its global sourcing strategy.
Regarding our balance sheet and liquidity as of September 32023, we had net debt of $1 4 billion and net debt to EBITDA leverage of two six times as calculated based on our debt covenants, we remain net debt and leverage neutral with the prior quarter ending June 23, even after returning approximately $72 million to shareholders via stock buybacks.
And dividends in the quarter the prior year and net debt was $1 5 billion and leverage was $2 Nymex.
Regarding our 'twenty 'twenty four guidance, we expect revenue of $2 6 billion and segment adjusted EBITDA of 525 million for fiscal 2024.
Which excludes on allocated cost of 54 million charges related to the Ames global sourcing expansion of approximately $25 million and strategic review retention expenses of approximately $10 million.
We anticipate 2024, H B P revenue will decrease by 3% to 5% year over year due to the first half of 'twenty four being compared to the prior year, which included volume from significant residential door backlog and returned to normal seasonal demand patterns, which historically has less demand in our second quarter ended March.
These factors will be partially offset by market share gains in both residential and commercial.
H P. P EBITA margin for 'twenty 'twenty four is expected to remain in excess of 30%.
The phasing of EBITDA performance will follow the same general trends as discussed with revenue with an unfavorable comparison to the prior year in the first half followed by a stronger second half.
With respect to C. P. P. We expect 2021 'twenty 'twenty four revenue decreased 3% to 5% year over year due to continued soft demand and high customer inventory levels, partially offset by normalized weather. The first half is expected to compare favorably year over year as customer Destocking continues with gradual improvement during the second half.
As inventory levels return to normal.
C. P. P. EBITA margin is expected to see modest improvement year over year, particularly in the second half as the Ames U S operations transitioned to an asset light operating model.
Total capital expenditures for fiscal year, 'twenty four are expected to be $70 million.
This amount includes the capital required to complete the 100000 square foot expansion and equipment upgrades at co pays sexual door manufacturing facility in Troy, Ohio.
Depreciation and amortization is expected to be a total of $63 million of which 22 million is a amortization.
We expect to generate free cash flow for the full year in excess of net income inclusive of the capital investments as we have seen historically, we expect a seasonal pattern with cash usage in the first half followed by a strong second half cash generation. This includes the impact of cash outflows related to the global sourcing initiatives.
We expect interest expense of approximately 103 million for fiscal 'twenty four.
Our expected normalized tax rate will be approximately 28% as is always the case geographic earnings mix and any legislative action, including new guidance on tax reform matters may impact right now.
Now I'll turn it over the call back over to Ron Thanks, Brian We enter 2024 with a proven strategy skilled team and strong balance sheet positioning us for future growth, while remaining flexible and in an uncertain macroeconomic environment.
We turn to questions I want to acknowledge and thank the employees and management teams of our businesses, it's because of their dedication and effort that Griffin continues to see such strong operating performance will continue to use the strong operating performance and free cash flow from our business to drive our capital allocation.
Strategy to deliver long term value for our shareholders. This strategy will continue to include investing in our businesses Opportunistically repurchasing shares and reducing debt. These actions underscore the confidence of Griffin's board and management and our outlook and strategic plan operator, we're happy to take any questions.
Yeah.
Okay.
Thank you we will now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad a.
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At this time, we are limiting everyone to one question and one follow up question.
One moment, please while we poll for questions.
Our first question comes from Joe <unk> from Deutsche Bank. Please proceed.
Hey, everybody good morning, and thanks for taking the question.
Morning.
And congrats on the results and the favorable outlook. Certainly appreciate also the detail around the cash flow maybe just to start on the H B P business regarding the outlook I think it makes sense a lot of it.
Our ore hinging on sort of the comparison versus the first half of the prior year, but I was wondering if you could just talk about sequentially, what you're seeing between your two kind of residential and commercial businesses within there just sequentially, what's the momentum in the business looks like.
Right.
We continue to see a reduce residential volume, although we expect some market share gains in that in 24 on the commercial side we had.
Volume benefits increased volume in 2023, and we expect 2024 to continue that trend.
We continue to have a good order volume in that area.
It sounds good and then just thinking about the margin guidance in excess of 30%.
Certainly that's above the long term guide wondering if theres something to kind of call out there to bridge between that and the guidance, but also after you're willing to sort of put an upper bound on that on that guidance rather than just 30% plus.
Sure. So we do have our long term expectations out there of 25% to 28%, even though H B P continues to operate at 30% plus and we expect that we were seeing nothing that is going to change that we have that guidance out there.
A little conservatism and also considering a downturn in the market and that's what we think is the bottom of our for our business those types of margins.
But 'twenty 'twenty four we're off to an excellent start and we see the 30% are being well within our capabilities and sustainability. So that the business has proven itself.
To be resilient the positioning that has happened over a period of years.
Spanning the residential business the development of our commercial business.
We have an excellent team doing the best.
In this industry and we continue to be the leader and we expect to both grow the business to take market share and maintain our margins for 'twenty four.
Our next question comes from Bob at the Bank.
C. J S Securities. Please proceed.
Good morning, and congratulations on a great quarter, and a really great fiscal year as well.
Thanks, Bob Thanks, Good morning.
Yeah. So I wanted to start I am just sticking with H B P. Because it's obviously doing so well its been operating at full tilt.
You've gotten a lot of stuff out of backlog and then you just talked a little bit about adding capacity. So maybe my question was going to be before you had mentioned Troy you know where do you stand in terms of your capacity and where is it going and then you mentioned the expansion of Troy. So maybe you could elaborate on the expansion of Troy, what you're using it for and how it'll change your you know through.
Put in your opportunity and you know how much.
You can grow revenue from from this et cetera et cetera. Please.
Sure. So the project and Troy is to expand our capacity.
Looking at the higher end of what we the project I'm sorry, the products that we have and to make sure. We can continue to get that in the marketplace.
It also gives us a chance.
To make sure we have equipment.
Operational in the future and spread out so we can maintain older equipment and get away from running the plant.
24, seven it gives us a much more normalized.
Normalized cadence to ensure that we can properly maintained equipment avoids made shifts and weekend shifts and.
<unk> continues to keep us in a position where we can grow our share.
Okay that sounds great and I guess just for my follow up you you started to answer this on the last question as well, but could you you know elaborate on the structural changes at H B P that have enabled you to drive margins, so high and up to this.
And now obviously impressive and sustainable level, just give us kind of just elaborate on the changes from then.
Then till now and why are we you know you obviously have a strong vision for revenues and margins going forward.
So, let's let's start with this is 15 years in the making so.
Go back to 2000 and aid in the.
A global financial crisis in 2009, we consolidated plants, we invested in the business.
And we.
Took what was a weeding business and made it better invested in technology at both the plant level created software for our dealers to be able to showcase our products for consumers to make ease of that order.
We've expanded our relationship over the years with home depot and minorities.
And we bought Cornell cooks in five years ago and expanded our commercial business. So the margin improvement story is a function of getting the strategy right getting the operating footprint of this business modernized building the brand.
At the consumer level and Clos pay represents the leading brand in.
Residential garage doors, we went and expanded our business by buying Cornell Cookson, so between copay, Cornell cooks and and the brands that we have Clos pay an ideal we have become the leader in both.
Residential.
And in commercial the growth in bar business, which we set five years ago, we saw the pivot on the commercial business as being both a way for us to diversify and we always understood that it was going to be something that was going to be a margin enhancing we went through COVID-19 we.
<unk> the company.
To be not just able to get through but to continue to gain market share. So the margin improvement story has been happening overall very long period of time, it's now at a level that we believe were.
In an elite class of manufacturers.
Don't necessarily get value that way in the public market and we've been taking advantage of it. We think this is a very valuable business. We think its growth is still in front of it on the commercial side. The residential side continues to be strong for us our dealer network.
Big box positioning makes us the leader in this space and we expect to gain market share and maintain our margins going forward.
Yeah.
Our next question comes from Tim Weiss from Baird. Please proceed.
Hey, guys good morning, nice job.
Thank you good morning, How're you doing.
I'm well thanks.
Maybe just on CPP.
Just kind of curious how we should think about I know you gave guidance for fiscal 'twenty four and do you expect EBITDA to be a little bit above.
This past year, but how would you kind of think of the cadence there Brian and then.
I'm trying to really kind of dive into like what the exit rate kind of looks like as you think about fiscal 'twenty five just how we should kind of sequence to margin improvement and CPP over the next couple of years.
Sure. So in the first half of 'twenty four we expect to be behind the first half of 'twenty three as inventory levels remained high at our customers and their consumer remained soft.
In the second half we expect.
We have in our numbers the benefit of normalized weather, it's hard to expect it necessarily.
And some benefits from the initiatives the global sourcing expansion initiatives will begin as we get into the second half of 'twenty four.
Exiting 'twenty four we expect inventory levels to be at a more normalized level at our customers.
And entering into 25.
We will start selling.
Source material it posted a manufactured material, which will be selling in 'twenty four.
As we get through 25, we expect to be exiting 'twenty five at a 15% run rate and 2016 fully there.
Okay. Okay. That's very helpful. Thank you.
And then I guess just on the cash side of things.
You guys have been really good on the capital deployment.
How are you thinking about buybacks through fiscal 'twenty four just you've been pretty active here last few quarters.
Fair for us to expect that to continue through the year.
We continue to believe our stock is a compelling value and we will take advantage of it.
Thank you guys.
Our next question comes from Julio Romero from Sidoti <unk> Co. Please proceed.
Hey, good morning, guys.
Right on.
On home and building products.
I appreciate the revenue kind of guidance you guys gave for both segments is it 3% to 5% expected sales decline for H B P.
Kind of embed any price degradation, there and just maybe speak to how prices holding up within the segment.
Sure.
Does not assume any price degradation in pricing is holding up well.
The marketplace is disciplined.
Led by four large players.
Okay. That's helpful and then just.
Yes, you guys talked about.
The.
CPP and how global sourcing is doing there.
Maybe just talk about the competitive landscape within the channels that CPP sells into specifically the larger ones of.
Repair remodel over.
Retail and international and maybe just talk about how each.
Channel is doing if you could.
Sure.
Australia.
I'll start with Australia is continuing to perform very well, Canada continues to perform well.
Those marketplaces are seeing reasonably good demand the U S and the U K or in the same bucket, where theres high inventory levels and the consumer is soft.
In the U K they.
We haven't lost any market share this.
This is a matter of time, there already an asset light model and in the U S. We are.
Transitioning to the asset light model, which will help our margins going forward.
And we continue to serve the pro with high quality products.
That are sought after by them and that that will continue.
Our next question comes from Sam Dark cash from of Raymond James. Please proceed.
Good morning, Ron Good morning, Brian how are you.
How are you Sam.
Well as well thanks for asking I've got a bunch of questions, but I'll I'll be mindful of time, and maybe I'll get back into the queue.
First one I wanted to clarify maybe I'll rephrase the question Tim asked earlier.
Brian the $103 million interest expense guidance for fiscal 'twenty four.
Much repo does that specifically assume beyond what you've already done in October here.
It does not assume additional.
Repurchases, but keep in mind, we expect free cash flow to cover <unk>.
Repurchases.
Gotcha and then.
As it relates to your free cash flow guide.
For next year.
Being in excess of net income.
First does that include or exclude the perspective asset sales from C. P. P. And then related the $70 million in Capex is that the new normal run rate going forward or is that a continuation of some of the outsized capex.
That was seeing tail end of this year.
Sure a few things there.
The cash flow does not assume the sale of any real estate it does assume.
The full $70 million of Capex.
The outsized Capex, we saw in the fourth quarter related to us purchasing real estate.
Opportunistically, we bought to our facilities.
So.
That will not continue the.
The $70 million in 24 includes the costs for Troy.
Our expansion that we described and for that matter any capex related to the global expansion for CPP.
We do not expect that trends necessarily continue and it will come down as we get into future years.
On the HCP side, roughly 2% and over time on the CPP side less than 2%.
Yeah.
Yeah.
Okay.
Our next question comes from Justin Bergner from Gabelli funds. Please proceed.
Good morning, Ron Good morning, Brian.
Good morning, Justin.
We're well how are you.
Good. Thanks, Thanks for taking my questions just some cleanup questions on the free cash flow does that include the costs of the supplier initiatives the cash costs, the free cash flow being greater than net income.
Yes, yes, Okay, and then secondly, just help me understand I think you made some earlier prepared comments on the volume trajectory in H B P. Over the course of fiscal year 'twenty four and just any comments on the margin trajectory as well would be helpful.
Sure. So in the first half of the year we have.
Difficult comparative to the first half of last year, because it was elevated by backlog.
<unk> was elevated by backlog, we also expect this year to be.
Back to seasonal norms, where Q2 is the low point.
For the business and then.
Going into Q3 and Q4 it gets back to.
A higher volume in the second half of the year and we expect the second half year to be a better comparative and be better results in the second half of this year.
This past year.
This concludes our question and answer session I would like to turn the floor back over to Ron Kramer for closing comments.
It's been an excellent year and we're very excited about our future. Thank you.
Yes.
This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
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