Griffon Corporation (GFF) Q4 FY2025 Earnings Call Transcript & Summary

Greetings, and welcome to the Griffon Corporation Fiscal Fourth Quarter 2025 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. I'd now like to turn the conference over to your host, Mr. Brian Harris, Chief Financial Officer. Thank you. You may begin.

Thank you, Melissa. Good morning, and welcome to Griffon Corporation's fourth quarter fiscal 2025 earnings call. Joining me for this morning's call is Ron Kramer, Griffon's Chairman and Chief Executive Officer. Our press release was issued earlier this morning and is available on our website at www.griffon.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 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 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.

Thanks, Brian. Good morning, everyone, and thank you for joining us. We're very pleased with our results for the fourth quarter and fiscal year, particularly in light of the challenging macroeconomic environment. The continued strong performance from our Home & Building Products, or HBP segment, combined with the meaningful profitability improvements in our Consumer and Professional Products segment, CPP, underscores the strength of our portfolio and the operational discipline. It was a very good year. For the year, HBP revenue of $1.6 billion was consistent with the prior year and profitability was strong with an EBITDA margin of 31.2%. The continued investments in innovation and productivity at HBP, it resulted in notable recognition from our peers and customers. At the International Builders Show earlier this year, Clopay won the Best in Show award for its groundbreaking VertiStack Avante garage door. VertiStack revolutionizes how doors are incorporated into commercial and residential projects, thanks to its unique patented design, which features glass panels that stack compactly above the door opening, eliminating the need for overhead tracks. This is the first of what we expect to be many new product innovations in the coming years. In addition, earlier this month, Clopay received a 2025 Partner of the Year Award from the Home Depot in the millwork category. Clopay was recognized for its commitment to delivering high-quality products, innovative solutions, exceptional value and outstanding service to Home Depot customers. We're honored to receive this award, which recognizes our successful 40-year partnership. Turning to Consumer and Professional Products segment. CPP's results for the year continue to reflect challenging market conditions with revenues decreasing 10% to $936 million. Revenues declined year-over-year due to persistently weak consumer demand in North America in the United Kingdom, along with disrupted U.S. customer ordering patterns due to increased tariffs. This volume reduction was partially offset by increased organic volume in Australia and the contribution from the Pope acquisition there. For the second year in a row, profitability improved significantly at CPP with segment EBITDA increasing 18% and EBITDA margin increasing over 200 basis points despite the lower sales volume in North America and in the U.K. This profit improvement was principally driven by the benefits of our global sourcing expansion, which transitioned most of our U.S. manufacturing to an asset-light business model, leveraging our global supply chain. Turning to our capital allocation. In fiscal 2025, we continue to take significant actions to deliver shareholder value through stock buybacks and cash dividends, while also paying down debt and maintaining a strong balance sheet. During the year, we repurchased 1.9 million shares at an average price of $70.99. Since April 2023 and through September 30, 2025, our share repurchases totaled 10.8 million shares of common stock or 18.9% of the April of 2023 outstanding shares for a total of $560 million or an average of $51.79 per share. Also this morning, we announced that the Griffon Board authorized a regular quarterly dividend of $0.22 per share payable on December 16th to shareholders of record on November 28th, marking the 57th consecutive quarterly dividend to our shareholders. This dividend represents a 22% increase over the prior quarter dividend and since we began paying dividends in 2012, reflects growth at an annualized compound rate of 19%. Utilizing our $323 million of fiscal 2025 free cash flow, Griffon returned a total of $174 million to shareholders through dividends and share repurchases and reduced debt by $116 million, while also reducing our leverage to 2.4x from 2.6x, while making substantial investments in all of our businesses. These actions reflect the ongoing strength of our business as well as our confidence in our strategic plan and bright outlook. I'll now turn it back to Brian for a little more information on the financials and provide details about our 2026 guidance. Brian?

Thank you, Ron. I'll start with our fourth quarter performance and then review our guidance for fiscal 2026. Fourth quarter revenue of $662 million and adjusted EBITDA of $138 million were both consistent with the prior year. Segment adjusted EBITDA and EBITDA margin for the quarter was $154 million and 23.2%, respectively, both consistent with the prior year. Gross profit on GAAP basis for the quarter was $276 million compared to $263 million in the prior year quarter. Excluding items that affect comparability from the prior period, gross profit of $276 million in the current quarter compared to $271 million in the prior year. Normalized gross margin increased by 60 basis points to 41.7%. Fourth quarter GAAP selling, general and administrative expenses were $157 million compared to $152 million in the prior year. Excluding items -- adjusting items from both periods, SG&A expenses were $155 million or 23.4% of revenue compared to prior year of $149 million or 22.6% of revenue. Fourth quarter GAAP net income was $44 million or $0.95 per share compared to the prior year of $62 million or $1.29 per share, excluding all items that affect comparability from both periods. Current quarter adjusted net income was $71 million or $1.54 per share compared to the prior year of $71 million or $1.47 per share. Corporate and unallocated expenses, excluding depreciation, were $16 million in the quarter, consistent with the prior year. Net capital expenditures were $12 million in the fourth quarter compared to $20 million in the prior year quarter. Depreciation and amortization totaled $15.9 million for the fourth quarter compared to $15.6 million in the prior year. Regarding our segment performance, revenue for Home and Building Product increased 3% over the prior year quarter, driven by a 3% of favorable price and mix. Volume overall was consistent with the prior year with increased commercial volume offset by decreased residential volume. Adjusted EBITDA was consistent with the prior year quarter, with the benefit of increased revenue in the quarter being offset by increased material, labor and administrative costs. Consumer and Professional Products revenue decreased 4% from the prior year quarter, driven by decreased volume of 8%, which was partially offset by a benefit from price and mix of 4%. Decreased volume resulted from reduced consumer demand in the U.S. and the U.K. and disrupted U.S. historical customer order patterns due to increased tariffs. This decrease was partially offset by increased organic volume in Australia and Canada. CPP adjusted EBITDA of $24 million decreased 1% from the prior year period, primarily due to the decreased volume, which was offset from the benefits of our global sourcing initiative in the U.S. and reduced administrative expenses. Foreign currency was unfavorable by 1%. Regarding our balance sheet and liquidity, as of September 30, 2025, we had net debt of $1.3 billion and net debt-to-EBITDA leverage of 2.4x as calculated based on our debt covenants. During the year, we generated $323 million of free cash flow and paid down $116 million of debt, which contributes to reducing leverage 0.2 turn compared to the prior year ending September '24. In terms of share repurchases. For the full year, we bought 1.9 million shares of common stock for a total of $135 million or $70.99 per share, and we have $298 million remaining on our share repurchase authorization as of September 30. Regarding our 2026 guidance. We expect Griffon fiscal year 2026 revenue to be consistent with 2025 at $2.5 billion and adjusted EBITDA in the range of $580 million to $600 million, excluding unallocated costs of $58 million. From a segment perspective, we anticipate 2026 HBP and CPP revenue will both be in line with 2025. EBITDA margin at HBP is expected to be -- continue to be in excess of 30% and CPP margin is expected to be approximately 10%. Free cash flow for 2026, including capital expenditures of $60 million is expected to exceed net income with depreciation of $42 million and amortization of $24 million. Fiscal year 2026 interest expense is expected to be $93 million, and Griffon's normalized tax rate is expected to be 28%. Now I'll turn the call back over to Ron.

Thanks, Brian. Our team's performance was outstanding in 2025, especially given the challenging macroeconomic environment. HBP continued its strong all-around performance, being recognized as an innovation leader across all of building products and by our largest customer for superior service and solid financial results. CPP continues to realize the benefits of their successful transition to an asset-light globally sourced operating model for the U.S. market, which has allowed them to focus resources on new product innovation, market capture, while realizing the benefits of improving profit margin. Fundamentally, we are well positioned as we enter fiscal 2026 and are confident in our ability to continue to generate strong financial performance. We are bullish about the long-term outlook related to repair and remodel activity, commercial and industrial construction project activity and the recovery of the residential housing market. We expect to leverage improving market conditions and a pipeline of product innovations to increase our long-term volume and profit margin. In terms of capital allocation, we'll continue to use our strong operating performance and free cash flow to drive the strategy that delivers long-term value for our shareholders. Last year, we said we expect it to generate over $1 billion of free cash flow during the next 3 years, and we intended to use this cash to execute our ongoing share repurchase program, pay down debt and make high-return investments in our businesses. During 2025, we generated $323 million of free cash flow, putting us on track for $1 million 3-year target. This strategy underscores the confidence Griffon's Board and management has in our outlook and strategic plan. Before we turn to questions, I want to acknowledge the employees and management teams of our businesses. It's their dedication effort that enables Griffon to deliver consistently strong operating results. Operator, we're now ready for questions.

[Operator Instructions] Our first question comes from the line of Collin Verron with Deutsche Bank.

I just wanted to start off on the HBP margin performance in the quarter. Can you just talk about the drivers of the sequential EBITDA margin decline? And how you sort of anticipate offsetting these incremental headwinds as you move into fiscal year '26, just giving you the robust guide here for 30% plus being maintained?

Yes. I wouldn't view the quarter-on-quarter as any headwind. We have varying mix in product from time to time. That was just the mix that happened at the quarter. Generally, in the quarter, we saw favorable price and mix. Volume was relatively flat with commercial being slightly up and residential being slightly down. And going into the next year, we expect a similar trend that we saw in '25 with favorable price/mix in residential and commercial for the full year. Commercial volume for the year likely will be -- we expect it to be flat and lower residential volume.

And Collin, it's Ron, good morning. I'll simply say that as we're halfway through our first quarter, our trends continue to be on track.

Okay. That's really helpful color. And I guess on the shape of the year, does the guide have any greater weighting toward the back half, just more so than normal just given the near-term softness in the consumer confidence and affordability, or are you anticipating things to be pretty steady? It sounds like it could be just given your comments just there, Ron, that things are on track already through the first part of the quarter here.

Yes. So I would expect a slight 1% or 2% decrease in the first half of the year and the opposite pickup in the second half of the year.

Which is our normal seasonality.

Our next question comes from the line of Tim Wojs with Baird.

Maybe just on CPP. I guess what was better versus your expectations in the quarter? I think the implied guidance from last quarter suggested kind of weaker sequential EBITDA, and you actually saw it up. So what was the biggest variance specifically in the CPP business versus your expectations?

Yes, we did see favorable pricing mix for the quarter and a little bit better volume than we originally anticipated.

Okay, okay. And then can you just give us an update on kind of where you stand on just kind of tariffs and some of the sourcing chases that you're making? And if you look at 2026, I mean we've got I think, $5 million to $10 million of implied EBITDA growth and kind of flat sales in CPP. So just what are the kind of specific drivers to that EBITDA growth on flat sales and just kind of absorbing the tariffs and things like that.

Sure. So for tariffs, the current tariff policy is reflected in our guidance, and we expect to be able to continue mitigating tariff impacts or the other changes in cost inputs by leveraging the global supply chain, continuing cost management, supply negotiations and price as we have before. And our asset-light model enables us to leverage the global supply chain to continue to produce high-quality products with good value. So -- sorry, I forgot the back part of your question.

Just if you look -- I mean you're kind of absorbing tariffs, but you're still able to kind of grow EBITDA. So I'm just kind of curious what the bridge is there. Is it just base pricing is completely offsetting tariffs in 2026, and you're getting the benefits of sourcing, or is there just anything else there?

Yes, I'm sorry. Thanks for orienting me. Yes, it is the continuing use and leveraging of our global supply chain, will help us with 100 basis point improvement in margin year-over-year. And everything else you said is correct. We'll continue to be able to use that to manage tariff costs and other costs.

And as the consumer starts to normalize at some point, volume has leveraged and our long-term target for this business remains 15%. That's not a '26 conversation, but we're on our way towards a 10% margin in that business in '26 and the long-term target when the consumer ultimately recovers. And the one other point that I want to emphasize again how tariffs is 85% of our business has nothing to do with tariffs.

Our next question comes from the line of Bob Labick with CJS Securities.

Congrats on another strong quarter and year.

Thank you.

Thank you. Good morning.

So I want to start on doors. So kind of given the just overall macro environment, commodity prices, consumer weakness, et cetera. And the fact that a lot of your competitors are either private or much smaller entities and bigger entities, it's hard to see. Have there been any competitive changes or outlook changes in either commercial or residential? And how do you feel these markets should play out over the next 3 to 5 years?

I'll start by saying a year ago, we thought that this year would play out with a recovery in the housing market and a significant increase in new home construction, which is a very small percentage of our both HBP business and overall Griffon. The reality is, is that our performance has been in spite of a weak consumer, a difficult housing market. Interest rates have been stubbornly high, inflation that is still causing an affordability problem. So the crosscurrents of the macro environment make our performance in the business that much more exceptional. So why did that happen? I think the underlying strength, there's pockets of strength in the U.S. economy. And where we play within the housing market and particularly in the garage door competitive category, we're the premium, better best. We have the most diversified channels to the market through both big-box retailers, Home Depot and Menards and 2,500 dealers and the largest commercial dealer business. So it's not any one thing, it's the evolution of the business over what's been a 15-year pivot from being entirely new home construction oriented to today within HBP, new home construction is less than 10% of our business. So there's been nothing that we have seen of pricing but discipline among the peer group. We consider ourselves the industry leader, and we conduct ourselves that way. We have new product. We have innovations that our competition simply can't match. In a recovering housing market, which we still see ahead of us in the future, whether that's in '26 or beyond, we're nowhere near the peak earnings for our HBP business. Our margin improvement story has been both expanded and driven over a number of different categories. The commercial business has helped grow the margins on our residential business. So sitting here today, we see a very balanced, a very strong business that continues to gain market share. And at the same time, we see a housing market that when it recovers, will get unit growth.

Okay. Great. And then just switching over to CPP. Obviously, kind of a fluid dynamic in pricing. You've, I think, passed through your pricing, retailers kind of have or haven't yet and then some consumers are reacting to that. Where do you see as it relates to your CPP products in the U.S., the pricing, the consumer acceptance? And how should we think about that for next year?

I'm going to start by saying brands matter and quality matters. We have the best brands and the highest quality products serving particularly the pro channel and the ability for us to compete in the consumer channel. So our business within CPP is multiple products from shovels to wheel barrels to storage and organization to ceiling fans through Hunter. Consumer has been weak. Our expectation is, is that there's no immediate recovery, '26 is going to look a lot like '25. And with that, inventory levels, destocking has already happened. So any incremental improvement will give us volume and our ability to maintain margins with the global sourcing initiative that we started 3 years ago has served us well into these turbulent consumer environment. But ultimately, we believe brands matter and our logistical capability to be able to be a large-scale supplier to where volume in these products is what gives us an edge.

Our next question comes from the line of Sam Darkatsh with Raymond James.

Two questions. One is the follow-up on what you were just mentioning about CPP, Ron. Obviously, been a lot of retailer inventory drawdowns this year. What's the status of the retailer inventories in your category? And what I guess I'm getting at is, do you expect sell-in and sell-through to be roughly at parity in '26? Do you think that the retailers need to add some inventory, whereby perhaps there may be some reloading in '26? What are your thoughts in terms of the purchasing patterns that are expected in CPP in '26? And then I've got a follow-up.

I would say that the weak consumer has left people with more inventory. So I don't see any immediate repurchasing. Look, we have navigated through a very difficult 2025 in the consumer space. We've said and we expect '26 is going to look a lot like '25. There's no immediate relief. I believe interest rates will come down in '26. I believe that, that could lead to an incremental better spring season, but a lot's going to happen before we get there. The tariff uncertainty is going to be affected by wherever the Supreme Court comes out in January. So we're prepared for more of the same. And if things improve, you'll see the reorder and restocking going into the second half of the year.

Got you. And my second question, the -- you're raising the dividend and at the same time, share repurchase sequentially stepped lower. I'm trying to determine what the Board is signaling regarding both business prospects and the equity value given what could be perceived as conflicting messages there. How would you reconcile the two items?

Yes. I would say just the opposite. There's nothing conflicting. We can do all three and intend to continue. Buying back shares, we bought back $560 million worth of stock over the last few years. That's nearly 19% of the outstanding. We're going to continue to buy our stock. We consider deleveraging valuable as buying back stock, and we've done that. We're down to 2.4x leverage. We have significant free cash flow in the next few years, as we've laid out. Our ability to buy back our shares, delever the balance sheet and increase our dividend is, for us, the trifecta that we want to keep playing.

[Operator Instructions] Our next question comes from the line of Julio Romero with Sidoti & Company.

Very nice sequential performance here, particularly with CPP on the margin front. Can you maybe level set for us how the different product lines between fans and tools are doing? And then secondly, you mentioned just a question or two ago with regards to inventory levels at some of your customers might still be a little bit not in a rush to buy immediately, but maybe help us think about what you're hearing from them with regards to how normal of a loading season to expect for fans and tools specifically?

Sure. So across our businesses, Australia continues to perform well and has seen good volume increases and also the benefits from the Pope acquisition. U.K. and Canada are performing more or less in line with where they were in the prior year. And in the U.S., our tools business has seen benefits from the supply chain initiative -- continuing to see the benefits from the supply chain initiative. And the Hunter Fan business has been hurt by decreased demand and hurt by customer ordering patterns related to tariffs. So their volume has been down in the quarter. As far as inventory levels at our customers, it varies by product, of course, and varies by customer. But generally, we consider the weak consumer to be really the driver here. And then our guidance, of course, we're expecting a normalized weather spring where last year was a bit of a wet spring. So we don't expect any really different patterns of ordering certainly in the initial stages of the year. And then hopefully, we'll see better POS in the back stages with normalized weather.

Very helpful. And then that weak consumer point kind of segues into my second question here. And it also goes into, Ron, your comment earlier about leverage in the CPP business model. When the consumer ultimately recovers and given the changes you've made with regards to your sourcing strategy and improving profitability on an underlying basis, you're putting up 10% margins now on weak consumer demand. How much headroom is there for margins may potentially above that 15% long-term target once the consumer ultimately normalizes, whether it be 2, 3, 4 years out, however you want to frame it?

We're very comfortable with our 15% target. And let's get there before we talk about what got us there. Look, increased economic activity, GDP growth will flow through to our CPP business. The tariff chaos that we've dealt with is going to get clearer as we get into calendar year '26. We feel like we're very well positioned. We're doing well in a very difficult consumer environment, getting to our 15% target in a better consumer environment is our goal.

Our next question comes from the line of Jeffrey Stevenson with Loop Capital Markets.

Have you seen any slowdown in mid- to high-end residential garage doors during the back half of your fiscal year? Is that market remain largely resilient despite the ongoing macro uncertainties we've seen.

Yes. On the high end of the range, we're seeing consistent volume. It's the low end that we're seeing weakness.

Okay. Got it. That's helpful. And then previously, you estimated roughly 1/3 of your annualized CPP revenues would be impacted by China-based tariffs. And at a high level, is that still a good way to think about your exposure to China and the segment. And have you made any adjustments to your sourcing strategy, particularly in lawn and garden or your residential fan business during the back half of the year?

Yes. We have, over the last several months, establish alternate suppliers outside of China for our products. Currently, with the current tariff policy, we see China still being a substantial part of our sourcing. However, it's really our global supply chain and our ability to move things and leverage that supply chain need be, and we do have alternative suppliers now in place, and we could exercise those as needed.

Ladies and gentlemen, this concludes our question-and-answer session. I'll now turn the floor back to Mr. Kramer for any final comments.

Thank you. We're very proud of what we've accomplished. We're very well positioned, and we're hard at work to unlock value every day. Look forward to speaking to you after our first quarter.

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.