Griffon Q2 2023 Earnings Call Transcript

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May 3, 2023

Key Takeaways

  • Griffin’s board completed a comprehensive strategic alternatives review and unanimously determined that executing the existing strategic plan offers the best path to maximize shareholder value, while remaining open to future opportunities.
  • The Home and Building Products segment achieved an 8% revenue increase and 26% adjusted EBITDA growth in Q2, with normalized backlog and lead times enabling the team to focus on productivity and new business development, prompting a raise in full-year EBITDA guidance to $525 million.
  • The Consumer and Professional Products segment is shifting to an asset-light global sourcing model, closing four U.S. facilities and wood mills, incurring $120–130 million in charges, and positioning the business to reach targeted 15% EBITDA margins by end-2024.
  • Capital allocation steps include a 25% increase in the regular quarterly dividend, a $2.00 per share special dividend, and an expanded $258 million share repurchase authorization, reflecting strong free cash flow and confidence in the balance sheet.
  • Q2 results featured $711 million in revenue (down 9%), $152 million in adjusted EBITDA (down 1%), a 21% EBITDA margin (up 180 bps), net debt of $1.3 billion, and 2.5x leverage, with free cash flow expected to exceed net income for the year.
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Earnings Conference Call
Griffon Q2 2023
00:00 / 00:00

There are 7 speakers on the call.

Operator

Good morning, ladies and gentlemen, and welcome to the Griffin Corporation Fiscal Second Quarter of 2023 Earnings Conference Call. At this time, all lines are in a listen only mode. Following the presentation, we will conduct a question and answer session. This call is being recorded on Wednesday, May 3, 2023. I would now like to turn the conference over to Mr.

Operator

Brian Harris, Chief Financial Officer. Please go ahead, sir.

Speaker 1

Thank you, Ines. Good morning, everyone. With me on the call is Ron Kramer, our Chairman and Chief Executive Officer. Our call is being recorded and will be available for playback, the details of which are in our press release issued earlier today. As in the past, our comments will include forward looking statements about the company's performance based on our views of Groton's businesses and the environments in which they operate.

Speaker 1

Such statements are subject to inherent risks and uncertainties that can change as the world changes. Please see the cautionary statements in today's press release and in our various Thank you, Mr. Chairman. Finally, some

Speaker 2

of today's remarks will adjust for those items that affect comparability between reporting periods. These items are explained in our non GAAP reconciliations included in our press release. Now I'll turn the call over to Ron. Thanks, Brian. Good morning, everyone, and thanks for joining us.

Speaker 2

This is the first earnings call we've hosted since we initiated our strategic alternative review process, so we have a lot to discuss. Let me start by commenting on our strategic review process and its conclusion before reviewing our operating results, Expectations for the year and go forward strategy. We publicly announced the commencement of this process in May of 2022, But actually the process began even earlier in January of 2022 when we formed our committee on strategic considerations And members of our Board was given the mandate to work with our advisors to evaluate a comprehensive range of strategic alternatives To maximize shareholder value, including a possible sale, merger, divestiture or recapitalization. Over the remainder of 2022 and into 2023, Griffin and its advisors thoroughly explored many types of strategic alternatives and engage with a wide variety of potential counterparties with the goal of finding strategic alternatives that would provide compelling value for Griffin shareholders. After extensive review and deliberation, the Griffin Board unanimously concluded That none of these alternatives which we explored appropriately valued Griffin's strong operating performance and growth prospects.

Speaker 2

And as a result, the Board unanimously determined that continuing to focus on executing our strategic plan is the best approach for Our decision is a reflection of our Board's confidence in Griffin's outlook and strategy. Due to the confidential nature of the process, we cannot disclose specific details regarding options explored or negotiations conducted. What I can tell you, however, is that the duration of this process over a year from initiation to conclusion

Speaker 1

is an

Speaker 2

indicator of how comprehensive the process was during the period of rapidly changing economic and financing conditions. With the process now concluded, we continue to believe that there is a fundamental disconnect between our share price And the intrinsic value of our businesses, and we are committed to taking a series of actions to provide additional value to our shareholders. Further, I want to be clear that while we are no longer proactively exploring strategic alternatives, We will continue to be open to and will consider all opportunities to enhance shareholder value. Let me turn to the operating results. Griffin's performance through the first half of twenty twenty three has exceeded our expectations.

Speaker 2

Our results were driven by the performance of our Home and Building Products segment, HBP, which continue to see growth in commercial volume and favorable price And mix across all products and channels. Residential volume decreased year over year, but was better than expected. The HBB team led by Vic Welding has been able to address the sectional door backlog that built up over the past 2 years. The factory is now operating with normalized backlog and lead times. This is great news as it frees up the BP team to focus its attention on further improving productivity.

Speaker 2

It also allows the team to expand business Development efforts that were previously slowed down as a result of our larger backlog and longer lead times. The team is now intensifying their efforts to capture additional residential and commercial business by expanding marketing efforts and leveraging our leading positions in sectional And Rolling Steel product offerings. These efforts are complemented by a portfolio of innovative product offerings that are being positively received by customers. I want to thank the HBP team for their extraordinary performance and ongoing commitment to building this fabulous business. Performance of the Consumer and Professional Products business continues to reflect The difficult retail market conditions in which we are operating.

Speaker 2

All CPP channels and geographies are being affected by reduced consumer demand and elevated customer inventory levels. The situation has been particularly Challenging in the U. S. Lawn and garden and storage and organizational markets where we have seen customer supplier Diversification drives shifts in buying decisions, which in some instances has exacerbated weakness in consumer demand. The combination of reduced volumes and unfavorable manufacturing and overhead absorption has impacted operating leverage to the point that some of CPP's expanding its global sourcing strategy to include long handled tools, material handling and wood storage and organization product lines that are currently manufactured in the United States for sale in the United States.

Speaker 2

The CPP team will leverage its Expensive global sourcing experience and capability to effectively manage this transition by utilizing an asset light structure, CPP's U. S. Operations will be better positioned to serve customers with a more flexible and cost effective global sourcing model, enabling it to manage costs and efficiently meet variable demand and to enhance future profitability. These actions will enable CPP to continue providing high quality products, leveraging our iconic brands while Strengthening our competitive positioning with industry leading distribution and service that our customers and consumers expect. In addition, these actions are a continuation of the evolution of CPP, positioning the segment to achieve targeted EBITDA Margins of 15% and generating substantial additional value for our shareholders.

Speaker 2

Let's turn to guidance for the year. Our overall strong performance in the first half has exceeded our expectation. As a result, we are raising our full year segment EBITDA guidance to at least $525,000,000 from the previous guidance of $500,000,000 Also, earlier today, the Griffin Board announced a 25% increase to our regular quarterly dividend. This is in addition to the $2 per share special dividend And the increase in our share buyback authorization to $258,000,000 that was approved by our Board 2 weeks ago. These actions demonstrate our commitment to enhancing both immediate and long term value to our shareholders and reflect the Confidence Griffin's Board and management have in our strategic plan and outlook.

Speaker 2

Let me turn it over to Brian to go through some of the financials.

Speaker 1

Thank you, Ron. I'll start by discussing our 2nd quarter consolidated continuing basis performance. Revenue of $711,000,000 decreased by 9% Adjusted EBITDA before unallocated amounts of $152,000,000 decreased by 1% both in comparison to prior year quarter. Adjusted EBITDA margin was 21%, increasing approximately 180 basis points year over year. Gross Profit on a GAAP basis for the quarter was $194,000,000 compared to $261,000,000 in the prior year quarter.

Speaker 1

Excluding restructuring related charges and the acquisition write up of inventory as applicable from the current and prior periods. Gross profit was $269,000,000 in the current quarter, increasing 1% over the prior year quarter. Gross margin increased year over year by 275 basis points to 37.9%. 2nd quarter GAAP Selling, general and administrative expenses were $160,000,000 compared to $150,000,000 in the prior year. Excluding adjusting items from both periods, Selling, general and administrative expenses were $150,000,000 representing 21.1 percent of revenue compared to the prior year of $144,000,000 or 18.5 percent of 2nd quarter GAAP loss from continuing operations was $62,000,000 or $1.17 per share Compared to the prior year period income of $58,000,000 or $1.09 per share.

Speaker 1

This decline was primarily driven by charges related to CPP's intangible asset impairments and global sourcing expansion. Excluding all items that affect comparability from both periods, current quarter adjusted net income from the tenant operations was 60 In the quarter, we recorded a non cash impairment charge for indefinite lives intangible assets of $100,000,000 or $74,000,000 net of tax. The charge of results is a result of CPP's year to date expected 2023 results being below expectations. Corporate and unallocated expenses excluding depreciation were $14,600,000 in the quarter compared to $13,100,000 in the prior year. Our normalized effective tax rate excluding adjusted items for the quarter was 29.5% 29.4% for the year to date period.

Speaker 1

Capital spending was $7,100,000 in the 2nd quarter compared to $11,500,000 in the prior year quarter. Depreciation and And amortization totaled $17,300,000 for the 2nd quarter compared to $16,300,000 in the prior year. Regarding our Segment performance, revenue for consumer and professional products decreased 24% from the prior year with organic revenue decreasing 29%. The reduction in revenue is primarily attributable to reduced volume across all channels and geographies driven by soft consumer demand and elevated customer inventory levels. These items were partially offset by a full quarter of Hunter revenue as well as favorable price and mix.

Speaker 1

CPP adjusted EBITDA decreased from the prior year by 59%, primarily due to the unfavorable impact of reduced volume and revenue and its related impact on manufacturing and overhead absorption. These items were partially offset by reduced discretionary spending and a full quarter of Hunter contribution. Home and Building Products Revenue increased 8% over the prior year quarter, driven by favorable pricing and mix for both commercial and residential product. Total volume decreased due to decreased residential volume, Partially offset by increased commercial volume. Adjusted EBITDA increased 26% compared to the prior year quarter, driven by increased revenue and reduced material costs, Partially offset by increased costs for labor, transportation, advertising and marketing.

Speaker 1

As mentioned earlier and detailed in our press release, CTP is expanding its global sourcing strategy for products manufactured and sold in the U. S. The project includes the closure of 4 manufacturing facilities and 4 wood mills. We expect to complete this project by the end of calendar 2024. In that period, we will incur charges of $120,000,000 to $130,000,000 including $50,000,000 to $55,000,000 of cash charges for employee retention, severance, operational transition and facility costs and $70,000,000 to $75,000,000 of non cash charges, primarily related to asset write downs.

Speaker 1

We also expect capital expenditures in the range of $3,000,000 to 5,000,000 These charges exclude the benefit of cash proceeds from sale of owned real estate and equipment, which are expected to largely offset the cash charges and also exclude inefficiencies due to duplicative labor costs and absorption impacts during transition. In both quarter 6 months ended March 31, 2023, CPP incurred pretax charges of $78,300,000 related to the expansion of global sourcing strategy, consisting of cash charges of $19,200,000 and non cash asset related charges of 59,100,000 Regarding our balance sheet and liquidity, as of March 31, 2023, we had net debt of $1,300,000,000 and net GAAP to EBITDA leverage of 2.5 times is calculated based on our debt covenants compared to 1.4 $1,000,000,000 of net debt and 2.7 times leverage in the previous quarter. Regarding our 2023 guidance, we are updating our expectations for revenue and segment adjusted EBITDA. We now expect Set by increased HBP revenue. Adjusted EBITDA in 2023 is now expected to be at least $525,000,000 compared to our previous estimate of at least $500,000,000 Our EBITDA guidance excludes unallocated costs of $56,000,000 And charges related to the strategic review process of $22,000,000 which is an increase from our prior guidance of $16,000,000 as well as CPP's global sourcing expansion charges.

Speaker 1

Our increased adjusted EBITDA expectations reflect strong HPP results partially offset by the reduced CPP volume mentioned earlier. Guidance for other metrics remain unchanged for 2023, including free cash flow to exceed net income, Capital expenditures of $50,000,000 depreciation of $50,000,000 amortization of $22,000,000 interest expense of $103,000,000 and normalized tax rate approximating 20 As Ron mentioned earlier, Griffin's Board of Directors authorized a 25% increase to our quarterly dividend to $0.125 per share payable on June 15, 2023 to shareholders of record as of May 25. On April 20, the Griffin Board approved an increase to our share repurchase authorization of $200,000,000 bringing the total outstanding authorization to 258,000,000 Now I'll turn the call back over to Ron.

Speaker 2

Thanks, Brian. I want to highlight that despite our businesses continuing to navigate in an uncertain global growth 2023 earnings conference call. Our employees have maintained high levels of customer service and product quality. We thank each of them for their efforts. We are very confident about our future.

Speaker 2

Home and Building Products continues to perform well and with HPP's return to normal operations after the pandemic surge, the business is now able to focus on growth and productivity initiatives. We continue to see long term tailwinds for the business, Driven by healthy demand for our commercial products and the historically resilient repair and remodeling market for our residential products. We are also confident about the prospects for our Consumer and Professional Products segment. While CPP is currently working through challenging conditions, We expect the business environment will stabilize over time, allowing CPP to deliver significantly improved financial results. Griffin's Board and management has strong conviction in our outlook and strategic plan, as demonstrated by the significant increase in our dividends and expanded stock buyback authorization.

Speaker 2

We will continue to use the strong operating performance of our business and its free cash flow to deliver long term value to our shareholders. We believe our best days are ahead of us. Operator, we'll take any questions.

Operator

Thank you, Mr. Kramer. Ladies and gentlemen, we will now begin the question and answer session. You will hear 3 tone brand acknowledging your request and your questions will be followed in the order that we have received. We ask analysts to limit themselves to one question and a follow-up.

Operator

Your first question comes from Bob Labick with CJS Securities. Please go ahead.

Speaker 3

Good morning and it's nice to talk to you again.

Speaker 2

Good morning, Bob.

Speaker 3

Congratulations on continued strong performance. Obviously, so many questions. I'll follow the instructions and ask to Keep it brief and get back in queue. But maybe starting with HVP, obviously, the performance has just been Off the charts and hard to model in a good way. Clearly, margins have improved materially from Mix pricing and operating efficiencies that you've garnered over the last year plus, can you give us a sense of maybe what's the New normal range for Doors operating margins looking out, and how we can think about Has there been like an overbuild period where we are in the demand cycle?

Speaker 3

And what are normalized margins over the next Few years for this business.

Speaker 2

Let me start by saying that building the company, it gets Lost in moments in time and you have to go back and recognize that we have been on a 5 year journey Building the Clopay business, we bought CornellCookson going on 5 years ago. We had 3 years of COVID. We were doing well pre COVID. We had a plan of improving margins that was We've come out of COVID. We have grown our commercial business.

Speaker 2

Our team has done an Extraordinary job of managing the integration of the acquisition, the expansion of our commercial business To balance the already leading residential business that we have, we are positioned For residential and commercial growth, our business is not dependent on new home construction. It is a repair and remodel on the residential side. New home construction, which continues to be in a shortage in this country, will only benefit us. The commercial business has grown, will continue to grow. And while this quarter is clearly the best Margin quarter that we've ever had in HBP, we continue to see strength and sustainability of the business.

Speaker 2

Where that will shake out in terms of margin, only time will tell, but we have a business that Finished last year with $412,000,000 of EBITDA. We'll be better than that this year. That's why we have confidence in raising our guidance and we believe the sustainability and the resilience of the business going forward That this is a defendable business with higher margins than we've enjoyed over prior cycles. Brian, you want to add to that? I think you summarized it pretty well.

Speaker 2

Unless,

Speaker 1

Bob, you have an additional question to it.

Speaker 3

No, that's I think that's super helpful there. Maybe just because I do appreciate taking a step back and obviously we've been Watching this journey since CornellCookson and the integration and the expansion and everything. So Maybe give us a sense of the commercial market opportunity and where you've been growing and where you're targeting additional growth in commercial now that you're kind of fully integrated and ready to go after it?

Speaker 1

Sure. I'll start. The commercial market has been strong. We continue to see good results from that side of the market, from our historical legacy products as well as the new products that we've come up with over the last couple of years. In addition to that, we are getting great benefits Out of leveraging the historical or the legacy CornellCookson dealers and bringing on our sectional commercial product into those dealers And there's still much of that to capture in the future.

Speaker 1

Some of that was on pause over the last 2 years as our backlog was Elevated. And now that our backlog and our lead times are normalized, we are going to be back out there and getting after that business. Of course, things like warehouse space, institutional type operations is where we see most of our business.

Operator

Thank you. Your next question comes from Tim Wojs with Baird. Please go ahead.

Speaker 4

Hey, guys. Good morning. Good to hear from you again. Hi, Tim. Hello.

Speaker 4

Hello. Maybe Just the first one on maybe CPP, is there a way just to maybe level set us In terms of kind of where that business after all the changes kind of lands from a revenue perspective on a normalized basis?

Speaker 1

Sure. So as we go through this process and come out the other side at the end of 2024, We see this as a $1,000,000,000 plus size revenue business that will be generating 15% Level margins.

Speaker 4

Okay. Okay, good. And then maybe just on the cash flow, Kind of a 2 parter. I guess, first, like cash flow is supposed to be better than net income, but it's already kind of meaningfully better this year. So I guess is it possible that it's pretty meaningfully higher relative to net income?

Speaker 4

And then I guess where the stock is today, I mean How impressive would you be with the stock here just given the expanded buyback?

Speaker 1

Sure. Let me start by answering the cash flow question. Yes, we are seeing very good cash cash flow, especially in the first half of the year, where generally we don't have much cash flow in the first half of the year. So it And the meaningfully better than net income as you pointed out, but we stick with our stated better than net income, which falls under that category. And let me just add,

Speaker 2

start with our balance sheet. We don't have a debt maturity until 'twenty eight And we have substantial free cash flow. We've authorized $258,000,000 Stay tuned.

Operator

Thank you. Your next question comes from Noah Marckuska with Stephens. Please go ahead.

Speaker 5

Good morning and thanks for taking my questions.

Speaker 1

Good morning.

Speaker 5

First, I wanted to talk on HBP Can you just get an update on how you're seeing demand at least through the balance of the year, especially now that backlogs are normalized? I'd imagine that would limit your visibility somewhat. So I guess how do you get confidence in the demand there for commercial and res R and R?

Speaker 1

Sure. On the residential side, volume is below where we've seen it last year, but it's in the Resilient repair and remodel market. And actually, the volume has been a little better than we originally expected and Leads to raising our guidance. On the commercial side, we continue to see strong volume. Our products And I referenced back to us going after commercial sectional business leveraging our legacy CornellCookson relationship.

Speaker 2

And the other point I'll make is in our pricing has and we expect it to continue to hold.

Speaker 5

Got it. That's really helpful. And then maybe switching gears to the CPP side, you've announced that you're expanding Your global sourcing strategy and we should expect 15% EBITDA margins in 2024, but at what point 25%. Okay, 25. At what point would you expect this strategy to start bearing fruit or start becoming accretive to Segment margins.

Speaker 5

Yes.

Speaker 1

So 2024 will remain a transitional period as we Move over these particular product lines to a sourcing model and those benefits will come through in 2025. We expect it to take until roughly the end of

Operator

Your next question comes from Sam Darkatsh with Raymond James. Please go ahead.

Speaker 6

Good morning, Ron. Good morning, Brian. How are you?

Speaker 2

Doing well. How are you, Sam?

Speaker 6

I'm well as well and it's good to hear your voices certainly on a formal basis. So a Couple of questions and I actually have 3 or 4, maybe I'll get back into the queue if possible. So the $250,000,000 authorization, If you do it, at least by my math on the open market, that could take years depending on the Daily volume, why wouldn't you consider a tender or an ASR to put that money at work while the stock is at current levels?

Speaker 2

We don't think it will take years and we will consider any and all Possibilities, but we're not able to be in the market until we Put out our earnings, let 48 hours go by and I believe that means starting on Friday, Expect us to be in the

Speaker 6

market. Got you. And then the retention payouts, Brian, do they continue or how are they going to be accounted for now that the strategic review Process has concluded at least for the time being.

Speaker 1

Yes. So we'll continue to call those amounts out as they are Though they are over several years, they are a specific event. And those payments will continue Each Q3 for this year, next year and the year after.

Operator

Thank you. There are no further questions at this time. Mr. Kramer, back over to you.

Speaker 2

No, I think Sam has some more questions.

Speaker 6

Hello, am I on?

Speaker 1

Yes.

Speaker 6

Hello, am I on?

Speaker 2

Sam, you're on.

Speaker 6

Can you hear me okay?

Speaker 1

Yes.

Speaker 6

Okay, terrific. Sorry about that. My last question, again getting back to the CPP sourcing, which is fascinating. So where specifically are you contemplating moving the sourcing from a Geographic standpoint, is that going to be a kind of a sole contract OEM manufacturing Set up like you have with Hunter, how do you manage risk with that type of setup? If you could help us Put a little meat on the bone in terms of what the plans are at this point.

Speaker 2

Well, let me start by saying this is an evolution and a continuation What we do globally, we have a global sourcing office in China. We have facilities That we already work with, our Australian business is part of that global sourcing, our UK business As part of global sourcing, the evolution of our U. S. Operations and our aggressive approach To repositioning it based on what's changed in the consumer markets, you correctly point out our Hunter relationship And that is a design in the United States and manufactured elsewhere for distribution in the United States. So I view what we're doing to our CPP business is an evolution of what we've done Successfully at very attractive margins globally to be able to fix a business in the U.

Speaker 2

S. That has a very high manufacturing overhead that can't be supported Other than being on an outsourced global sourcing model. Yes, I would just add

Speaker 1

to that. Global sourcing truly means global Sourcing, that includes sourcing in South and Central America, the U. S. As well as Asia. And it's not going to be sole sourced to 1 person or one entity.

Speaker 1

And in fact, using entities over against themselves in further periods will give us even more advantage.

Speaker 6

Is there an issue around the potential for challenged lead times based on of some of these products, I thought that was one of the primary reasons why there was an appeal to a North American production footprint, especially around long handled tools whereby You're able to have high fill rates during the heavy selling season. How is that impacted? I'm guessing you might move that type of production to Mexico or is that also contemplated in Asia? I'm Or is that also contemplated in Asia? I'm just trying to get a sense of how to manage risk and especially knowing that You still may look to monetize the CPP business at some point, making it still palatable for a potential sooner?

Speaker 1

Sure. So you touched upon part of it. We'll be sourcing from possibly closer areas such as Central America. And further, we'll leverage our distribution footprint and keep enough inventory on hand to ensure that we Provide the same levels of service to our customers that we have been able to do in the past. Got you.

Speaker 6

And then if I'm still on.

Speaker 1

You are.

Speaker 6

Okay, terrific. They didn't cut us off yet. All right. So

Speaker 2

No, we're not we've been silent for a while. Keep going.

Speaker 6

It's terrific that you're able to speak publicly again. After the repo authorization has been completed, What do you anticipate the debt leverage either at that point or optimally for the business?

Speaker 1

So it will depend on when those buybacks occur. But generally, we don't expect leverage to get much above 3x type of level as we'll be generating cash flow as we're buying shares.

Speaker 2

And as we continue to generate cash, Yes, we're in a luxurious balance sheet position. We've got both undrawn bank capital. We've got no debt maturity, as I said earlier, till 28%. We've got free cash flow and we've got a very undervalued Stock that we have every intention of taking advantage of. We've always been in the acquisition business.

Speaker 2

We're going to be acquiring as much of us As we can with free cash flow for the foreseeable future.

Speaker 6

Terrific to hear. And again, terrific to hear your folks' voices and we will be in touch Thank

Speaker 1

you.

Operator

Thank you, Sam.

Speaker 1

Any other questions?

Speaker 2

Okay. Well, thank you all. Look forward to speaking to you after our next quarter in early August.

Operator

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Have a great day.

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