Q2 2024 Griffon Corp Earnings Call
Operator: Good day, and welcome to the Griffon Corporation fiscal second quarter 2024 earnings conference call. All participants will be in the listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then 1 on your touchtone phone. To withdraw your question, please press star, then 2. Please note, this event is being recorded. I would now like to turn the conference over to Brian Harris, CFO. Please go ahead.
Good day and welcome to the Griffon Corporation fiscal second quarter 2024 earnings conference call at all.
All participants will be in the listen only mode.
Should you need assistance. Please signal a conference specialist by pressing the star key followed by zero after.
After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your Touchtone phone.
Withdraw your question. Please press Star then two.
Please note this event is being recorded.
I would now like to turn the conference over to Brian Harris CFO. Please go ahead.
Brian G. Harris: Thank you, operator. Good morning.
Brian G. Harris: Thank you operator, good morning, it's my pleasure to welcome everybody to Griffon Corporation's second quarter fiscal 2024 earnings call.
Brian G. Harris: It's my pleasure to welcome everybody to Griffon Corporation's second quarter fiscal 2024 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 griffin.com. Today's call is being recorded, and replay instructions are included in our earnings release.
Brian G. Harris: Joining me for this morning's call is Ron Kramer, Chairman and Chief Executive Officer.
Brian G. Harris: Our press release was issued earlier this morning and is available on our website at <unk> Dot com.
Brian G. Harris: Today's call is being recorded and replay instructions are included in our earnings release. Our comments will include forward looking statements about <unk> performance. These statements are subject to risks and uncertainties that can change as the world changes. Please.
Brian G. Harris: 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 filing. Finally, some of today's remarks will be adjusting 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
Brian G. Harris: Please see the cautionary statement in today's press release and in our SEC filings.
Brian G. Harris: Finally, some of today's remarks will be adjusting for items that 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 Laura.
Ronald J. Kramer: Good morning, everyone, and thank you for joining us. The first half of fiscal 2024 is off to a great start and has exceeded our expectations. The second quarter was highlighted by continued solid operating performance from home and building products and improved profitability at consumer and professional products. For the quarter, home and building products revenue and EBITDA came in better than expected as the typical Q2 seasonal residential volume simply did not materialize. For our consumer and professional product segment, second quarter revenue decreased 11 percent primarily due to decreased volume driven by reduced customer demand in North America and the U.K., partially offset by increased volume in Australia.
Laura: Good morning, everyone and thank you for joining US first half of fiscal 2024 is off to a great start and has exceeded our expectations second quarter was highlighted by continued solid operating performance from home and building products and improved profitability in consumer and professional products.
Laura: For the quarter home and building products revenue and EBITDA came in better than expected as the typical Q2 seasonal residential volume simply did not materialize.
Laura: For our consumer and professional products segment second quarter revenue decreased 11%, primarily due to decreased volume driven by reduced customer demand in North America, and the UK, partially offset by increased volume in Australia.
Ronald J. Kramer: EBITDA improved 2 percent to $20 million in the quarter, with the EBITDA margin improving year over year primarily as a result of 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. We continue to expect the initiative to be complete by the end of calendar 2024. Since May 2023, when we announced the initiative, we have ceased operations at all four affected U.S. manufacturing facilities and four wood mills. These actions have reduced our manufacturing footprint by over 1.2 million square feet.
Laura: EBITDA improved 2% to $20 million in the quarter with EBITDA margin improving year over year, primarily as a result of decreased North American production costs.
Laura: I'm very pleased to tell you that our previously announced initiative to expand <unk> global sourcing strategy remains on schedule and within budget. We continue to expect the initiatives to be complete by the end of calendar 2024.
Laura: Since may 2023, when we announced the initiative we have ceased operations at all for affected U S manufacturing facilities and for Wood Mills. These actions have reduced our manufacturing footprint by over $1 2 million square feet.
Ronald J. Kramer: As we've emphasized before, the global sourcing expansion at Ames is a key element of our strategy to improve the margins of CPP. Turning to our capital allocation, during the second quarter, we repurchased 1.8 million shares, totaling $117 million, or an average of $65.09 per share. As of March 31, $120 million remains under the repurchase authorization. Since April 2023 and through March of this year, we've repurchased 7.6 million shares at an average price of $44.56 for a total of $338 million.
Laura: As we've emphasized before the global sourcing expansion at Ames is a key element of our strategy to improve the margins of C. P. P.
Ronald J. Kramer: These repurchases have reduced Griffon's outstanding shares by 13.3% relative to the total shares outstanding at the end of the second quarter of fiscal 2023. Also yesterday, the Griffon board authorized a regular quarterly dividend of 15 cents per share payable on June 20th to shareholders of record on May 29th, marking the 51st consecutive quarterly dividend to shareholders. Our dividend has grown at an annualized compounded rate of 18% since we initiated dividends in 2012. Now, turning toward guidance for the year.
Laura: Turning to our capital allocation during the second quarter, we repurchased one 8 million shares totaling $117 million or an average of $65 90 per share as of March 31, 120 million remains under the repurchase authorization.
Laura: Since April 2023, and through March of this year, we've repurchased seven 6 million shares at an average price of $44 56 for a total of $338 million.
Laura: Repurchases have reduced Griffin's outstanding shares by 13, 3% relative to the total shares outstanding at the end of the second quarter of fiscal 2023 also yesterday. The Griffin Board authorized a regular quarterly dividend of <unk> 15 per share payable on June 20th to Sheryl.
Laura: <unk> of record on May 29th marking the 51st consecutive quarterly dividend to shareholders. Our dividend has grown at an annualized compounded rate of 18% since we initially dividends in 2012.
Ronald J. Kramer: Based on our first-half robust performance and expectations for the remainder of the year, we're raising our full-year guidance. We now expect revenue of $2.65 billion, an increase from previous guidance of $2.6 billion, and we are increasing our segment-adjusted EBITDA by $30 million to $555 million. In summary, the increased fiscal 2024 guidance and capital allocation actions reflect Griffon's board and management's confidence in our strategic plan and outlook, as well as our commitment to enhancing long-term value to our shareholders. Now, I turn it over to Brian for a little more financial detail.
Laura: Turning to our guidance for the year.
Laura: Based on our first half robust performance and expectation for the remainder of the year, we're raising our full year guidance. We now expect revenue of $2. Six 5 billion an increase from previous guidance of $2 6 billion and we are increasing our segment adjusted EBITDA by 30 million to 500.
Laura: $55 million.
Laura: In summary, the increase fiscal 2020 for guidance and capital allocation actions reflect Griffin's board and management's confidence in our strategic plan and outlook as well as our commitment to enhancing long term value to our shareholders turn it over to Brian for a little more financial detail. Thank.
Brian G. Harris: Thank you Ron. Second quarter revenue of $673 million decreased by 5% and adjusted EBITDA before unallocated amounts. A $149 million decrease by 2%, both in comparison to the prior year quarter. EBITDA margin before unallocated was 19.9%, an increase of 60 basis points. Gross profit on a gap basis for the quarter was $271 million compared to $194 million in the prior year quarter. Excluding items that affect comparability from the current and prior periods, gross profit was $272 million in the current quarter compared to $269 million in the prior year. Normalized gross margin increased year-over-year by 250 basis points to 40.4%.
Brian G. Harris: Thank you Ron.
Brian G. Harris: Second quarter revenue of $673 million decreased by 5% and adjusted EBITDA before unallocated amounts.
Brian G. Harris: $449 million decreased by 2% both in comparison to prior year quarter EBITDA margin before unallocated with 19, 9% an increase of 60 basis points.
Brian G. Harris: Profit on a GAAP basis for the quarter was $271 million compared to $194 million in the prior year quarter.
Brian G. Harris: Excluding items that affect comparability from the current and prior periods gross profit was $272 million in the current quarter compared to $269 million in the prior year.
Brian G. Harris: Normalized gross margin increased year over year by 250 basis points to 44%.
Brian G. Harris: Second quarter gap, so general administrative expenses were $157 million compared to $160 million in the prior year, excluding adjusting items in both periods as G&A expenses were $153 million or 22.8% of revenue compared to the prior year of $150 million or 21.1% of revenue. Second quarter gap net income was $64 million, or $1.28 per share, compared to a loss of $62 million in the prior year quarter, or $1.17 per share.
Brian G. Harris: Second quarter, GAAP, selling general and administrative expenses were $157 million compared to $160 million in the prior year, excluding adjusting items from both periods SG&A expenses were $163 million or 22, 8% of revenue compared to the prior year of $150 million or 21, 1% of revenue.
Brian G. Harris: Second quarter GAAP net income was $64 million 28 per share compared to a loss of $62 million in the prior year quarter or $1 17 per share.
Brian G. Harris: Including all items that affect comparabilities in both periods, current quarter adjusted net income is $68 million, or $1.35 per share, compared to the prior year of $67 million, or $1.22 per share. Corporate and unallocated expenses, excluding depreciation in the quarter, were $14.8 million, consistent with the prior year. Net capital expenditures were $18.5 million in the second quarter compared to $7.1 million in the prior year quarter. Depreciation and amortization totaled $15.1 million for the second quarter compared to $17.3 million in the prior year.
Brian G. Harris: Excluding all items that affect comparability from both periods current quarter. Adjusted net income was $68 million or $1 35 per share compared to the prior year of $67 million or $1 22 per share.
Brian G. Harris: Corporate and unallocated expenses, excluding depreciation in the quarter were $14 8 million consistent with the prior year.
Brian G. Harris: Capital expenditures were $18 5 million in the second quarter compared to $7 1 million in the prior year quarter.
Brian G. Harris: Depreciation and amortization totaled $15 1 million for the second quarter compared to $17 3 million in the prior year.
Brian G. Harris: Regarding our segment performance, home and building products revenue declined 1% due to an unfavorable product mix, partially offset by improved volume reflecting increased residential orders in the current year, which more than offset prior year backlog benefits. HBP adjusted EBITDA of $129 million decreased 2% from the prior year, driven by the reduced revenue and increased labor and distribution costs partially offset by reduced material costs. Consumer and professional products revenue of $281 million decreased 11% from the prior quarter, primarily due to decreased volume driven by reduced consumer demand in North America and the UK, partially offset by increased volume in Australia.
Brian G. Harris: Regarding our segment performance home and building products revenue declined 1% due to unfavorable product mix, partially offset by improved volume, reflecting increased residential orders in the current year, which more than offset prior year backlog benefit.
Brian G. Harris: <unk> adjusted EBITDA of $129 million decreased 2% from the prior year driven by the reduced revenue and increased labor and distribution costs, partially offset by reduced material costs.
Brian G. Harris: Consumer and professional products revenue of $281 million decreased 11% from the prior year quarter, primarily due to decreased volume driven by reduced consumer demand in North America, and the UK, partially offset by increased volume in Australia.
Brian G. Harris: The current quarter CPP adjusted EBITDA of $20 million increased 2% from the prior year quarter primarily due to improved North American production costs and decreased discretionary spending, partially offset by the unfavorable impact of the reduced revenue. Regarding our balance sheet and liquidity as of March 31, 2024, we had net debt of $1.46 billion and net debt to EBITDA leverage of 2.8 times calculated based on our debt coverage.
Brian G. Harris: For the current quarter CPD adjusted EBITDA of $20 million increased 2% from the prior year quarter, primarily due to improved north American production costs and decreased discretionary spending partially offset by the unfavorable impact of the reduced revenue.
Brian G. Harris: Regarding our balance sheet and liquidity as of March 31, 2024, we had net debt of $1 $4 6 billion and net debt to EBITDA leverage of two eight times as calculated based on our debt covenant.
Ronald J. Kramer: Regarding our fiscal 2024 guidance, our overall strong performance in the first half exceeded our expectations. As a result, we are raising guidance for revenue and segmented EBITDA. We now expect $2.65 billion of revenue and $555 million of segmented adjusted EBITDA, which excludes unallocated costs and certain other charges that affect comparability. Additionally, we now expect corporate costs of $59 million, increasing versus prior year guidance of $54 million, due to increased employee stock ownership plan expenses driven by Griffon's stock price appreciation.
Brian G. Harris: Regarding our fiscal 2024 guidance, our overall strong performance in the first half exceeded our expectations. As a result, we are raising guidance for revenue and segment EBITDA. We now expect to six 5 billion of revenue and $555 million of segment, adjusted EBITDA, which excludes on allocated costs and certain other charges by sector.
Brian G. Harris: Parabolic further we now expect corporate cost of $59 million, increasing versus prior year guidance of $54 million due to increased employee stock ownership plan expenses, driven by Clifton stock price appreciation.
Ronald J. Kramer: Other guidance remains unchanged for 2024, including amortization of $22 million, depreciation of $41 million, interest expense of $103 million, a normalized tax rate of 28 percent, and free cash flow to exceed net income. Now, I'll turn the call back over to Ron. Thanks, Brian.
Brian G. Harris: Our guidance remains unchanged for 2024, including amortization of 22 million depreciation of $41 million interest expense of $103 million, a normalized tax rate of 28% and free cash flow to exceed net income now I'll turn the call back over to Rob Thanks, Brian.
Ronald J. Kramer: We had an excellent first half, driven by strong operating performance and better than expected residential door volume at HVP, establishing a solid foundation for the second half. As expected, CPP had lower volumes but is making steady progress with its global sourcing initiative. We're seeing some of the early benefits of this strategy, as evidenced by CPP's improving margin. Given the performance of both of our segments, we are confident about raising our guidance for the full year.
Rob: We had an excellent first half driven by strong operating performance and better than expected residential door volume at H B P. Establishing a solid foundation for the second half.
Rob: As expected C. P P at lower volumes, but is making steady progress with its global sourcing initiative, we're seeing some of the early benefits of this strategy as evidenced by <unk> improving margin.
Rob: Given the performance of both of our segments. We are confident about raising our guidance for the full year. We will continue to use our strong operating performance and free cash flow to drive our capital allocation strategy that delivers long term value for our shareholders before we turn to questions I want to acknowledge the effort and commitment.
Ronald J. Kramer: We will 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. Before we turn to questions, I want to acknowledge the effort and commitment the employees and management teams of our businesses around the world continue to demonstrate. It's because of their dedication and hard work that Griffon continues to see strong operating performance.
Rob: The employees and management teams of our businesses around the world continue to demonstrate its because of their dedication and effort that Griffin continues to see strong operating performance operator, we'll take questions.
Operator: Operator, we'll take questions. Thank you. We will now begin the question and answer session.
Speaker Change: Thank you.
Operator: We will now begin the question-and-answer session. To ask a question, you may press star, then 1 on a touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the key. If at any time your question has been answered and you would like to withdraw your question, please press star then to vote. At this time, we will pause momentarily to assemble our rostrum. The first question is from the line of Tim Wojs. With that said, please go ahead.
Speaker Change: We will now begin the question and answer session to ask a question you May Press Star then one on it that's unfolding.
Speaker Change: If youre using a speakerphone please pick up your handset before pressing the keys.
Speaker Change: If at any time no question has been addressed and you would like to withdraw your question. Please press Star then two.
Speaker Change: At this time, we will pause momentarily to assemble our roster.
Speaker Change: Yeah.
Speaker Change: Yeah.
Speaker Change: Yeah.
Speaker Change: The first question is from the line of Tim Glitches.
Timothy Ronald Wojs: With Baird. Please go ahead.
Timothy Ronald Wojs: Yes.
Timothy Ronald Wojs: Hey, everybody. Good morning. Nice job on the results. Thanks, John. Maybe just to start, in the HPP business, I know you've kind of talked about 30% plus. We've got the margins for the year, you're tracking kind of nicely above that kind of year-to-date. I guess any changes there in kind of how you're thinking about the business and maybe what's kind of implied in the back half of the year from a guidance perspective?
Timothy Ronald Wojs: Hey, everybody good morning, nice job on the results.
Timothy Ronald Wojs: Thanks, Tom.
Timothy Ronald Wojs: Maybe just to start you know in the H B P business, you know I know you have kind of talked about 30% plus EBITDA.
Baird: EBITDA margins for the year.
Timothy Ronald Wojs: We're tracking kind of nicely above that kind of year to date, I guess any changes there and kind of how you're thinking about the business and maybe what's kind of implied in the back half of the year from a guidance perspective.
Ronald J. Kramer: No, we don't see any change. And, you know, the biggest takeaway is the seasonality of the second quarter and the expected residential volume decline that didn't happen. And, you know, so we're quite optimistic about what we see going on for the balance of the year. And, you know, the continued margin improvement story that we've got on the HPP side is, you know, maintaining and CPP continuing.
Speaker Change: No we don't see any change in the the.
Speaker Change: The biggest takeaway is the seasonality of the second quarter and the expected residential.
Speaker Change: Volume declined that didn't happen.
Speaker Change: So we're quite optimistic about what we see going on for the balance of the year and the continued.
Speaker Change: Margin improvement story that we've got in the <unk> side is maintaining and CPP continuing.
Ronald J. Kramer: Yeah, I would just further clarify that we expect the second half of the year to be 30% or better.
Speaker Change: Yeah, I would just further clarify that we expect the back half of the year to be 30% or better.
Ronald J. Kramer: 30% or better. Okay, good.
Speaker Change: 30% or better okay.
Speaker Change: And then I guess just in the in the CPP business. I mean, you got back to actually I mean, I think EBITDA grew year over year in the quarter.
Ronald J. Kramer: And then I guess just in the CPP business, I mean, you got back to actually, I think EBITDA grew year over year in the quarter. I know there's always choppiness with with kind of a transition, but do you feel like you've made kind of step function improvements now in that business? And can we continue to see improvement, kind of sequentially from here? Or do you kind of see it staying at that level? You know, the back half of the year and then maybe taking another jump in the 25th?
Speaker Change: I know, there's always choppiness with with kind of a transition, but do you feel like you've made kind of step function improvements now in that business and we continue to see improvement.
Speaker Change: Sequentially from here or do you kind of see it staying at that level.
Speaker Change: The back half of the year and then maybe taken another jumping 25.
Ronald J. Kramer: Sure, so if we're looking at Q2 to Q3, we would expect the margin to improve sequentially. But the business does have seasonality, so we'll likely see a dip in the fourth quarter, which is normally a low quarter for us. But yeah, we are seeing improvement in margin that will be sustainable and continue to grow into 25, from the actions we've taken and, you know, once the inventory that was manufactured, that we're currently selling, we work through that, then the margins will improve significantly.
Speaker Change: Sure. So if we're looking at Q2 Q2 to Q3, we would expect the margin to improve sequentially, but the business does have seasonality. So we will see likely.
Speaker Change: A dip in the fourth quarter, which is normally our a low quarter for us.
Speaker Change: But yes, we are seeing improvement in.
Speaker Change: And margin.
Speaker Change: That will be sustainable and continue to grow into 'twenty five.
Speaker Change: From the actions we've taken and.
Speaker Change: Once the inventory that we're selling that was manufactured that we're currently selling we've worked through that and the margins will improve significantly.
Trey Grooms: Thank you. The next question is on the line between Trey Grooms and Stephens.
Speaker Change: Thank you. The next question is from the line of Great rooms with Stephens. Please go ahead.
Ronald J. Kramer: Good morning, Ron and Brian. That's working the quarter. Morning. Thank you. So just touching on kind of the demand drivers here, circling back on that on HBP, so residential is still seeing some strong volume versus maybe some weaker demand in commercial. Can you talk about, from where we sit today, how you're thinking about those two end markets, you know, kind of as we look through the balance of the year?
Great rooms: Good morning, Ron and Brian that's work in the quarter. Good morning. Thank you.
Great rooms: So just touching on kind of the demand drivers here.
Great rooms: Circling back to that on H B P.
Great rooms: Residential still seeing some strong volume versus maybe some weaker demand in commercial.
Great rooms: Talk about kind of from where we sit today, how you're thinking about those two end markets you know kind of as we look through the balance of the year.
Ronald J. Kramer: Sure, we expect residential to continue to be strong and volume to be better than the prior year. On the commercial side, we are seeing some moderation, though that business is lumpy, and I will point out that though commercial volume was down from the prior year quarter, the prior year quarter was a particularly strong quarter for commercial. But that market is moderating somewhat, but we still see pretty strong volume there.
Speaker Change: Sure, we expect residential to continue to be strong and volume to be better than the prior year on commercial side. We are seeing some moderation, though that business is lumpy and I will point out that the commercial volume was down from the prior year quarter. The prior year quarter was particularly strong quarter for commercial.
Ronald J. Kramer: Yep.
Ronald J. Kramer: You know that that market is moderating somewhat but we still see pretty strong volume there.
Ronald J. Kramer: Okay, and then on CPP, you know, inventory in the channel had been running high. Any thoughts on where, you know, that could kind of shake out, I guess, and I think the Previously, we had kind of been expecting that it could take another selling season to kind of flush that out. So I guess it's, you know, how is that looking today? And do you still think that we could see, you know, the channel inventory kind of normalized this year? We do expect the immature.
Great rooms: Okay.
Great rooms: And then on C. P P M.
Ronald J. Kramer: Inventory in the channel had been running high.
Great rooms: Any any thoughts to where you know that could kind of shake out I guess and I think the.
Ronald J. Kramer: Previously, we had kind of been expecting that it could take another selling season to kind of flush that out.
Great rooms: So I guess is how is that looking today and do you still think that we could see the channel inventory kind of normalize this year.
Ronald J. Kramer: We do expect the inventory to normalize in the channel. We're sort of in the early days here. Spring has just started to come, so we need to get through the next two quarters of selling, which is the high season for that type of product.
Ronald J. Kramer: We do expect the inventory to normalize in the channel were sort of in the early days here Spring has just started to spring.
Ronald J. Kramer: So we need to get through the next two quarters of selling which is the high season for that type of product.
Ronald J. Kramer: Yeah.
Speaker Change: Thank you.
Robert James Labick: The next question is from the line of Bob Labick with CJS Securities. Please go ahead.
Ronald J. Kramer: The next question is from the line of Bob lumpy.
Robert James Labick: C. J S Securities. Please go ahead.
Ronald J. Kramer: Good morning. Congratulations on another strong quarter. Yeah, I wanted to start, you touched on it a little bit, but the gross margins were either record or near record, or pretty darn close, but very impressive. And just, I know you don't break them out by segment, but maybe give us a sense of how they're trending in each segment, how sustainable, based on the revenue level, but the 40% level is, and then I guess how they'll shift going forward as the global sourcing comes to a conclusion as well.
Robert James Labick: Good morning, congratulations on another strong quarter, great. Thanks al.
Ronald J. Kramer: Yeah I wanted to start you touched on it a little bit, but the gross margins were either record or near record or you know pretty darn close, but very impressive and just I know you don't break them out by segment, maybe give us a sense of how they're trending you know in each segment and how sustainable you know based on the revenue level, but the 40% level.
Ronald J. Kramer: It is and and then I guess, how they'll shift going forward as the global sourcing comes to a conclusion as well.
Ronald J. Kramer: We do expect those margins to be sustainable and actually growing, particularly into 2025 as the CPP action is taking hold. And we're seeing pricing in HBP stable, and therefore we expect margins to hold.
Ronald J. Kramer: Sure.
Ronald J. Kramer: We do expect those margins to be sustainable and actually growing particularly into 'twenty five.
Ronald J. Kramer: The CPP action is taking hold.
Ronald J. Kramer: And we're seeing pricing in HPT maintaining.
Ronald J. Kramer: And therefore, the month, we expect margins to hold there as well.
Ronald J. Kramer: Okay, that's great. And then as it relates to global sourcing, I know you said you're, you know, kind of on track and in budget and all that, maybe What are the next big steps? Are you done qualifying all the suppliers? Do you have enough capacity now to fully take over, or what are the next big steps and hurdles for you between now and the end of this year to complete those?
Speaker Change: Okay, that's great.
Speaker Change: And then as it relates to the global sourcing and I, you said, you're kind of on track and on budget and all that maybe just what are the like the next big steps are you done qualifying all the suppliers do you have enough capacity now to fully take over or you know kind of what are the next big steps that and hurdles for you.
Ronald J. Kramer: Between now and the end of this year or two to complete the process Yeah, Let's go back and remember that part of our confidence in doing this a year ago as market conditions changed we had an existing global sourcing capability that we're leveraging off of them.
Ronald J. Kramer: Yeah, let's go back and remember that part of our confidence in doing this a year ago was that market conditions had changed. We had an existing global sourcing capability that we're leveraging off of. This is not us going out looking to find suppliers. We already have suppliers. We're, you know, a global business; our Australia business is already sourcing hundreds of millions of dollars of products, you know, out of China and Vietnam.
Ronald J. Kramer: This is not us.
Ronald J. Kramer: Going out looking to find suppliers, we already have suppliers, where we're a global business.
Ronald J. Kramer: Australia business is already sourcing hundreds of millions of dollars of products.
Ronald J. Kramer: Out of China, Vietnam. So this is about transitioning the U S capacity to our existing.
Ronald J. Kramer: Supply chain relationships.
Ronald J. Kramer: So this is about transitioning US capacity to our existing supply chain relationship. That is, and has always been, our strategy. A year later, I'm very proud that we've been able to execute it flawlessly. And the opportunity in front of us, this is a 15% EBITDA margin business one or two years from now. When it gets there, it will, you know, continue to be a U.S., Australia, Canada, and U.K. business. And, you know, we did this with the expectation that this was a long-term strategy to fix a problem around the core U.S. manufacturing business that we have. Yeah, I was just wondering.
Ronald J. Kramer: That.
Ronald J. Kramer: It was always our strategy a year later.
Ronald J. Kramer: Proud that we've been able to executed flawlessly.
Ronald J. Kramer: The opportunity in front of US this is a 15% EBITDA margin business.
Ronald J. Kramer: One or two years from now when it gets there.
Ronald J. Kramer: We'll continue to be a U S, Australia, Canada U K business and we did this with the expectation that this was a long term strategy to fix a problem around the core U S manufacturer.
Ronald J. Kramer: Written business that we have.
Ronald J. Kramer: I would just add to that that our distribution is ready. Containers are starting to come in in Q3. And as far as the process goes, we're moving into real estate sale mode, selling the assets that no longer are needed for CPP.
Speaker Change: Yeah, I would just add to that that we are our distribution is ready.
Ronald J. Kramer: Painters are starting to come in in Q3.
Ronald J. Kramer: And as far as the process, we're moving into real estate sale mode.
Ronald J. Kramer: Selling the assets that no longer needed.
Ronald J. Kramer: For.
Ronald J. Kramer: Okay.
Samuel John Darkatsh: Thank you. The next question is from the line of Sam Darkatsh with Raymond James. Please go ahead.
Speaker Change: Thank you.
Ronald J. Kramer: Next question is from the line of Sam Zell catch with Raymond James. Please go ahead.
Samuel John Darkatsh: Good morning, Ron. Good morning, Brian. How are you?
Samuel John Darkatsh: Good morning, Ron Good morning, Brian how are you doing well.
Ronald J. Kramer: Good morning, Sam. Doing well?
Samuel John Darkatsh: A terrific quarter. Thank you. A couple of questions if I could sneak two in. First, the...
Samuel John Darkatsh: Terrific quarter.
Samuel John Darkatsh: Thank you couple questions couple of questions if I could sneak two in.
Samuel John Darkatsh: First.
Ronald J. Kramer: Guidance, and I know you typically craft your guidance very conservatively, but the guidance seems to imply HBP margin degradation sequentially, despite the fact that I know you're coming into a little bit more of your selling season seasonally. What sorts of things would have to occur for there to be margin degradation from where you're seeing margins now?
Samuel John Darkatsh: Guidance and I know you typically.
Ronald J. Kramer: After your guidance very conservatively, but the guidance seems to imply.
Ronald J. Kramer: H P. P margin degradation sequentially. Despite the fact that I know you're coming into a little bit more of your selling season seasonally.
Ronald J. Kramer: What sorts of things would have to occur for there to be margin degradation from from where you are seeing margins now and then I've got a follow up question two if I could.
Ronald J. Kramer: Sure. So, you know, we're still anticipating the 30% plus margin in the back half of the year, and we're not seeing any pricing pressure. What could occur is mixed. And also, we have some steel costs that we know will be coming through in the third quarter, in particular, that will hurt margin a little bit from a sequential standpoint.
Speaker Change: Sure. So you know, we're still anticipating the 30% plus margin in the back half of the year.
Ronald J. Kramer: And we're.
Ronald J. Kramer: We're not seeing any pricing pressure what could occur is mix.
Ronald J. Kramer: And also we had some steel costs.
Ronald J. Kramer: That will be we know will be coming through in the third quarter in particular.
Ronald J. Kramer: That will hurt margin a little bit from there.
Ronald J. Kramer: Sequentially.
Ronald J. Kramer: Gotcha, so that actually segues my next question perfectly. So, I think there was an, at least there was an announced price increase in the residential garage store industry in March from one of your competitors, and it apparently didn't stick, or at least it hasn't stuck yet. Knowing that steel prices are a little bit of a pressure, Brian, and that volumes residential are now turning positive, what, what, why didn't that price increase get matched, or why doesn't the market bear that right now?
Speaker Change: Gotcha, so that actually segue into my next question perfectly. So I think there was a at least there was an announced price increase.
Ronald J. Kramer: In the residential garage door industry in March from one of your competitors in it.
Ronald J. Kramer: Apparently didn't stick or at least didn't stick yet knowing that the steel prices are a little bit of a pressure, Brian and that volume is residential you're now turning positive.
Ronald J. Kramer: What what why didn't that that price increase.
Ronald J. Kramer: Matched or why doesn't the market bear that right now.
Ronald J. Kramer: We focus on our cost structure and what we feel is good value for our customers. I can't really comment on why someone else's price increase didn't stick. You know, we see a good market; we will continue to monitor costs and take action if necessary.
Ronald J. Kramer: We focus on our structure of costs and we feel as good value to our customers.
Brian: Can't really comment on why someone elses price increase didn't stick.
Ronald J. Kramer:
Ronald J. Kramer: We see a good market, we will continue to monitor costs and take actions if necessary.
Speaker Change: Thank you.
Julio Alberto Romero: The next question is from the line of Julio Romero with Sidoti and Company. Please go ahead.
Ronald J. Kramer: The next question is from the line of Neil Romero with Sidoti and company. Please go ahead.
Julio Alberto Romero: Yeah.
Julio Alberto Romero: Thanks. Hey, good morning, Ron and Brian. On CPP, hey, good morning.
Julio Alberto Romero: Thanks, Hey, good morning, Brian good.
Julio Alberto Romero: On CPP Hey, good morning can we maybe talk about the inventory levels by geography.
Ronald J. Kramer: Can we maybe talk about the inventory levels by geography? You know, across your UK and US customers, compared to three months ago, how are those levels doing right now? And do you think the spring and summer selling season kind of helps flush out the remaining inventory levels there? Or is it more of a longer timeframe, in your view, for inventory to normalize? Yeah, so...
Ronald J. Kramer: You know across your U K and U S customers compared to three months ago. How are those levels doing right now and do you think the spring summer selling season kind of helps flush out the remaining inventory levels, there or is it more of a longer timeframe in your view for inventory to normalize yes. So.
Ronald J. Kramer: Yeah, inventory positions at our customers are improving, though there's still some work to do. We do expect that to normalize by the end of our fiscal year as we get through the Q3 spring selling season and into Q4, particularly on the fan side. We sell a lot in Q4, and our internal inventories have decreased. So that applies to the U.S. But the U.K. inventory still is a bit high, so that may take longer. Their economy is in a more difficult spot, but that part of our business is not so large, so it's not affecting us too much. And Canada and Australia are fine.
Ronald J. Kramer: Inventory positions at our customers are improving though there's still some work to do but we do expect that to normalize by the end of our fiscal year as we get through the Q3 spring selling season and into Q4.
Ronald J. Kramer: Particularly on the van side, a lot sales in Q4.
Ronald J. Kramer: And our internal inventories have decreased so the U S inventory that applies to the U S.
Ronald J. Kramer: Those U K inventory so it was a bit high.
Ronald J. Kramer: That may take longer their economies and more difficult spot, but there that that part of our business is not so large it's not affecting us too much and Canada and Australia are fine.
Ronald J. Kramer: Okay, that's very helpful. And then for my follow-up, just staying on CPP, curious how you guys are doing in regards to your distribution centers on the east and west coasts. Are they still kind of maintaining those high service levels as you're getting further along in your global sourcing strategy? Absolutely.
Speaker Change: Okay. That's very helpful. And then for my follow up just staying on CPP curious how you guys are doing in regards to your distribution centers on the east and west coasts are they still kind of maintaining those high service levels as you're getting further along in your global sourcing strategy.
Ronald J. Kramer: Absolutely. We see no change in service levels. We're able to provide our customers with everything they need.
Speaker Change: Absolutely, yes, no change in your service levels, we are able to provide our customers.
Ronald J. Kramer: Everything maybe.
Speaker Change: Thank you.
Ronald J. Kramer: Thank you.
Ronald J. Kramer: Our next question is from the line of Justin Bergner with Gabelli funds. Please go ahead.
Ronald J. Kramer: Good morning, Ron. Good morning, Brian. Good quarter. Thank you. First question is just on the residential HPP volumes. What are the underlying drivers that you think are behind the more positive demand there, and is there any kind of offset from commercial being weaker than expected, or is that just softening as you expected a couple quarters ago?
Speaker Change: Good morning, Brian good quarter.
Speaker Change: Thank you.
Ronald J. Kramer: First question is just on the residential H B P volumes what are the underlying drivers that you think are behind us.
Ronald J. Kramer: More positive demand there and is there any kind of offset from commercial being weaker than expected or is that just softening as you expected you know a couple of quarters ago.
Ronald J. Kramer: On the residential side, we have continued to come out with great products that people are taking to very well. Service, The Best Lead Times, The Best Dealer Network, The Best Production, um, I might have skipped one or two, I don't know, Best Quality, uh, and those, you know, that are showing in the marketplace. Uh, overall, an investment in a residential garage is a good investment. There was a recent survey done by Zonda, a recent report done by Zonda, that shows that the ROI on putting in a new garage door is about 200%.
Ronald J. Kramer: On the residential side, we have continued to come out with great products that people are.
Ronald J. Kramer: Taking two very well.
Ronald J. Kramer: We have the best.
Ronald J. Kramer: Service the best lead times, the best dealer network the best production.
Ronald J. Kramer: I might have skipped one or two I don't know best quality.
Ronald J. Kramer: And those that's showing in the marketplace, our overall and investment.
Ronald J. Kramer: Residential garage door is.
Ronald J. Kramer: He is a good investment there was a recent survey done by Gandara original reports on <unk> that shows that the ROI on putting a garage and a new garage door and there's about 200%.
Ronald J. Kramer: Okay, and any change to your capital allocation priorities? Are you going to continue to repurchase shares? Are you going to look at Bulletin and M&A?
Ronald J. Kramer: Okay, and any change to your capital allocation priorities are going to continue to repurchase shares you're going to look at bolt on M&A.
Ronald J. Kramer: I'd say that we're in a very luxurious position where our businesses are performing well, our cash flow gives us optionality, our stock remains a compelling value, and while it's clearly outperformed any index over any period of time and any peer group competitor, it's still undervalued, and we have and will continue to take advantage of that. Separately, the M&A outlook for us is a robust pipeline of things that we think are value-enhancing and possibly additive, particularly on the HBP side.
Ronald J. Kramer: I would say that.
Ronald J. Kramer: We're in a very luxurious position that our businesses are performing well our cash flow gives us optionality.
Ronald J. Kramer: Our stock remains a compelling value.
Ronald J. Kramer: And while it's clearly outperformed any index over any period of time than any peer group competitor, it's still undervalued and we have and will continue to take advantage of that.
Ronald J. Kramer: Separately the M&A.
Ronald J. Kramer: The outlook for US is a robust pipeline of things that we think are Val.
Ronald J. Kramer: <unk> enhancing and.
Ronald J. Kramer: Possibly additive, particularly on the HB P side, but the predictability.
Ronald J. Kramer: But the predictability of what we're going to be able to do and when we're going to be able to do it is always the uncertainty of looking at M&A. As far as capital is concerned, we can buy back stock and do M&A. We've said that our leverage is three and a half times the outer limit of anything that we would ever consider doing on the M&A side, but we're down to an investment-grade credit that is going to continue to free cash flow if we don't do M&A and find things that we can add to what we already have. So the ability for us to manage both stock buybacks and M&A is part of what we think
Ronald J. Kramer: What we're going to be able to do and when we're going to be able to do.
Ronald J. Kramer: As always.
Ronald J. Kramer: The uncertainty of.
Ronald J. Kramer: Looking at M&A.
Ronald J. Kramer: As far as capital.
Ronald J. Kramer: We can buy back stock and do M&A, we've said that our leverage.
Ronald J. Kramer: It was a three.
Ronald J. Kramer: Three and a half times as an outer limit of anything that we would ever consider doing.
Ronald J. Kramer: On the M&A side, but.
Ronald J. Kramer: We're down to an investment grade credit.
Ronald J. Kramer: That is going to continue to free cash flow. If we don't do M&A and find things that we can add to what we already have.
Ronald J. Kramer: The ability for us to manage both stock buybacks and M&A.
Ronald J. Kramer: Is part of what we think the next year is going to look like.
Ronald J. Kramer: Yeah.
Ronald J. Kramer: Thank you. This concludes our question and answer session. I would like to turn the conference back over to Ron Kramer for closing remarks. We had a great quarter.
Speaker Change: Thank you.
Ronald J. Kramer: Includes a question and answer session I would like to turn the conference back over to Ron Kramer for closing remarks.
Ronald J. Kramer: We had a great quarter. We're going to be hard at work to finish the next and make it a great year. So, I look forward to speaking to you all in August. Thank you. This conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Ronald J. Kramer: We had a great quarter, we're going to be hard at work to finish.
Ronald J. Kramer: Next and make it a great year. So look forward to speaking to you all in August.
Ronald J. Kramer: Yeah.
Speaker Change: Thank you. This conference has now concluded thank you for attending today's presentation.
Speaker Change: I'll disconnect.
Ronald J. Kramer: Okay.
Ronald J. Kramer: [music].
Ronald J. Kramer: Yeah.
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Ronald J. Kramer: Uh huh.
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Ronald J. Kramer: Yes.
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Ronald J. Kramer: [music].
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Ronald J. Kramer: Yes.
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Ronald J. Kramer: [music].
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Ronald J. Kramer: Okay.
Ronald J. Kramer: [music].
Operator: Yes.
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Operator: