Griffon Corp (GFF) 2002 Q2 法說會逐字稿

At this time I would like to turn

this call over to Mr. Harvey Blau and sir, you may

again.

Thank you. Good morning. I'm

Harvey Blau, chairman of the board of Griffon

corporation and with me is Griffon's president, Bob

Balemian. First I should like to point out to the

extent that matters to be discussed in this call

include forward-looking statements, they involve

certain risks and uncertainties that could cause differ

materially from those in forward-looking statements.

Now on to our performance. I will not

repeat all of the amounts and matters that were

contained in our news release, I presume that each of

you has seen the release, but I will cover the

highlights and our prospects. Our second quarter of fiscal 2002 reflected a continuation of strong earnings growth and cash flow. Operating income was the highest of any second quarter in our history. Our sales increased to 267 million up from 264 million last year. Income before income taxes increased from 7.8 million to 10.4 million last year's second quarter included a pension determined gain of approximately 3.1 million.

Excluding the effect of this gain, our pretax income

for the second quarter was almost $6 million higher

than last year, a 125 percent increase. All amounts

and comparisons discussed in this call will be based on

excluding the effect of the pension determined gain. Diluted earnings share quarter was 14 cents. Up substantially from last year's 3 cents per share. For the last 12 months earnings per share increased from 68 cents to $1.05 per share. Each of our segments continues to contract to our second quarter performance. In fiscal 2001 the garage door segment reflected improved performance based primarily on cost controls and efficient production. As we progress into

2002, we have continued to focus on cost controls and

have also experienced solid top line growth. Sales in garage doors in what is their weakest quarter increased by in excess of six percent, operating results went from a loss last year of $3 million to a profit of 300,000. We've continued to be optimistic about the outlook for building products operations, our customers who are the majors in the industry are upbeat about our markets and coupled with our improved garage door product efficiencies, this should result in a continued tread of improved return. I would like to comment on

steel prices, as you all know there have been an

increase or will be an increase in steel prices because

of certain acts in Congress by the president.

Considering the reduction in steel prices over the last

few years we anticipate these increases to be

significant. Our customers understand the situation

and expect the prices of garage doors to increase. And

we have so notified them. We are dealing with the

issue, we do not believe it will have a significant

impact on us. Our specialty plastics film business had earnings in the quarter at approximately the same levels as last year which reflected outstanding margins. Return on assets and cash flows. Sales in plastics were lower in last year principally due to selling price adjustments to pass through lower raw material costs to customers and the effect of a stronger U.S. dollar on translated foreign sales which affected our German operations. We have experienced dramatic sales in March margin growth over the last few years. There are a number of growth opportunities available to us in our plastics operation, including additional product opportunities with existing customers and global expansion initially in south America which we anticipate happening this year. We

have excellent technology and production capabilities,

probably the best in the industry upon which success in

this business is based. We believe this is going to lead us to many new product opportunities. We may not

win every job that we bid on but we expect to win a

substantial number.

Telephonics. Electronics operation operating income in the second quarter increased to 3.1 million from 1.8 million last year based on a 10 percent sales increase. Telephonics remained strong

with volume and order bookings at acceptable levels. The improved earnings were achieved after an increased expenditures in connection with the segments previously announced technology initiatives. Based on existing

market conditions and prospects, we anticipate

Telephonics growth to come from military, homeland

defense and domestic transit programs. I would like to

spend a moment just to go through rather swiftly some

of the things that we're working on.

Homeland security. We have achieved contracts with Israel for radars and Norway also, and we're now proposing radar contracts for the New York border with Canada, power plants, airports and the U.S. border with Mexico. In the Coast Guard area, the Coast

Guard is now going into deepwater navy situation. They

will be upgrading all of our platforms and we will be

bidding on the maritime radar and communications. This

is the first time in memory that the Coast Guard has

been getting substantial money for upgrades.

The J-STARSprogram which is the

look-down radar program, there has been an increase in

a number of planes and a new plane proposal which will

be a combination of a wax and J-STARS. Each

of these new planes will have 64 stations in which we

will be bidding to provide the IFF communication and

voice data systems. In our secured digital intercom

business, we have one contract on the C-130, Black Hawk

helicopter and there are many other platforms that will

we'll be retrofitting using the secure digital intercom

system. The C-17, which we have a contract for 120

planes using our communications equipment, we now have

a contract for 60 new updates on a new system with 42

more to come. In addition there will be a contract for

100 retrofits on the C-17, which is approximately

$750,000 per plane. These are some of the things we

believe are coming out of the world situation.

We're hopeful that the R & D program in

Telephonics over the past few years will yield

substantial results in 2003. Now I would like to turn

this talk over to Bob Balemian, the president of the

company.

Griffon continued strong. Cash generated from operations, about $19 million for the second quarter, a portion of which was used to further reduce bank debt by $15 million. Over the past 18 months we have reduced bank debt by $80 million from operating cash flow. Our financial position is healthy with debt representing a very conservative 25 percent of capital. Inventory and receivables have been maintained at very acceptable levels with essentially no growth over the past couple of years, even with a substantial revenue expansion. In addition to improving our financial position, recent debt reductions have also resulted in earnings improvement by reducing borrowing costs. Interest expansion in the quarter was $900,000, down by 1.8 million compared to last year's second quarter. Our strong balance sheet and operational performance enables Griffon to take advantage of available opportunities including product development, acquisitions, joint venture investments and stock repurchases. As previously mentioned we are contemplating an investment in South America for our specially plastics film operation. This will likely be

in the form of a joint venture with the initial outlay

being between 15 and $20 million. Our objective is to bring our proven plastics technology which has driven sales gains domestically and in Europe to a new and substantial market. Total capital expenditures for Griffon for the 12 months ended -- six months ended March 31 were $12 million. We expect the total for the

year to be in the range of 25 to $30 million. Our expectations are that operating cash flows will provide for investments for additional debt reductions and for purchases of common stock. During the second quarter

we used approximately $5 million for stock purchases.

While the timing and amounts of future purchases will

be based on market opportunities, we expect the stock

purchase program to continue at least during the

balance of this year. Acquisitions are also a

possibility. Although we have nothing under

consideration at the current time, we continue to

explore opportunities related to each of our

businesses. This is a summary of some of the

highlights of a very successful quarter. At this time

we'd like to take questions.

Thank you. At this time if you

would like to ask a question, please press star and

then one on your touch tone phone. Once again at this

time if you would like to ask a question, please press

star one on your touch tone phone. Our first question

comes from Richard Leader. Please state your

company name.

Burn ham

securities. Good morning, gentlemen. One number I was

missing on the financial release unless I overlooked it

was the SGNA in the quarter. Can you give us that?

SGNA for three months ended

was $63 million compared to 57 million last year.

Could you just

comment in general, I know this is a seasonly slow

quarter for garage doors. But generally there's been a

fairly robust housing market. And I think overall

throughout most of the country winter was pretty mild. Were you satisfied with a six percent increase in sales? Could there have been factors that limited that

beyond what the market was really calling for?

I think we're pleased overall

with the garage door business. We've accomplished a lot in the last couple of years and certainly made a change in direction and the operating results in the margins. In terms of volume I think six percent for

this quarter was pretty much our plan. I think it is a

good, solid quarter. We expect those increases to be a

little bit higher than six percent going forward. So

we're looking for further improvement during the

balance of the year. But I think we did have some

impact, some minor impact in new construction affected

by, you know, what happened on September 11th and that

affected the garage door business somewhat in the

March, April time frame. But overall I think it was a

successful quarter and I think six percent for this

quarter was certainly acceptable.

We have a factory that opened up in Tempe that is making a new line of garage doors with certain safety features, that went on-line in this quarter and we expect to have substantial improved sales out of that factory in the 13 western states in the coming months.

So you did

actually generate revenues from the new factory?

Yes. Very small. It went

on-line in I think it was somewhere around March.

Do you know what

the startup costs were and were they amortized over a

period or were they expensed all at once, upfront

opening expenses?

Richard, this is not a new

plant. It is a new line. We modified the line in an

existing facility.

So there were no

unusual expenses to opening it?

Nothing very substantial, no.

And finally in regards to the margins in garage doors, and perhaps you could just comment generally on the installation side too. Do you have some targets? I know you have got

some new management in there and they have done a

remarkably good job here lately, but there's probably

still substantial room for marketing expansion in

garage doors. Do you have any goals or targets of what you think that business can ultimately generate in terms of operating margins?

If you go back to '96

approximate '97 time frame they were substantially more

than we are now. We've made a lot of progress. We can

get back to the '97 margin. That would be certainly

substantially higher than we are now.

Ballpark what was

that number? I could look back, but can you give me a

ballpark number?

We were in the range of 10

percent, maybe even a little bit higher than that.

Next question comes from Larry

Baker. Please state your company name.

Legg Mason. Can you talk a

little bit about the specialty plastic film business,

just in terms of units, shipments in this quarter and

prospects for increased raw material prices going

forward?

Units were down slightly this

quarter compared to last quarter in terms of dollars

that was, I think, less than a million dollars. The major impact on our top line in the film business this quarter was the reduced selling prices which frankly increased margins. We passed selling prices on, it doesn't have a big reduction in volume but none in earnings. We're quite optimistic about the film

business. We have some very substantial programs in

the works with our major customer and other customers.

There's obviously nothing we can talk about right now.

But, you know, we did mention that we have very

substantial production capacity, very substantial

technical ability and that's driven the growth of the

business over the past couple of years. That's going to lead to additional products. We've been given more

opportunities now than ever before and I would expect

that some time during the beginning of 2003 we can be a

little more specific about these things, and I think

they will evolve into very substantial programs for us

next year.

Just a follow-up. On the

outlook for resin prices over the rest of this year?

We anticipate they are going to

increase, Larry. We have seen an increase in April.

They have been very relatively low levels, lower than,

I think than the industry would like. We have seen an

increase in April, first increase, three cents per

pound. There's been another increase posted. Whether

it's fixed or not remains to be seen, but I would

anticipate that the resin prices will continue to

increase. Increasing resin prices are slightly

negative to us, not a dramatic number. Most of the

resin price increases we can pass on. The effect to us

is that there's a lag. As prices go up, we can raise

the prices but there's a difference in timing. So

there's some cost as they are going up and there's some

benefit as they are going down but it is not a very

dramatic number for us.

Our next question comes from

Arnie Ersaner. Please state your company

name.

This is Kevin Casey

for C. J. S. Securities. Can you expand on this? In

this case initiative in Telephonics, kind of the

projects, how much you spent in the last six months,

kind of when we can expect some sort of rollout?

Rollout on R & D in

Telephonics, these new technology initiatives is about

1.6 million to 1.7 million per quarter. So this quarter we spent about $1 million more than we did in the second quarter of last year and that impacted our numbers somewhat and we showed excellent results in Telephonics good bit of that increase in expense we'll have to delay a little bit reporting on the progress of some of these ventures. We have a very significant amount being spent on a venture in -- headquartered in Florida. It is a new operation for us. It is a product that's directed toward the wireless communications market. We think it is a very -- it is

going to be a very significant benefit to our

customers. Making wireless communication networks much

more efficient than they are now. We do see a need for towers and we're in the process now of developing a product. We have a prototype being tested by an

independent laboratory and that process will go on for

a number of months. We will continue development and hopefully in the first or second quarter of 2003 we will have a product that's marketable and we'll know more about at that time. But we're very, very optimistic about the direction of that business and we think it can add a very substantial amount of sales to Telephonics business.

Is that a lab or

one of your customers?

It is Bechtel. It was an infrastructure provider, has an independent laboratory, an R & D facility that test products and reports to their customers on the effect and impact of products like Telephonics is producing will have on their system.

Next question comes from Arnold

Brief. Please state your company.

Bow, Smith and

Harris. Some months back Home Depot central might have had buying procedures for some of its various products.

Has that been a factor at all in the garage door

business? Are they centralizing buying? Are you

getting any benefit from that, etc.? Secondly, could you elaborate a little bit on the garage door business, how sales in the commercial market did vis-a-vis residential? Finally, could you give us some idea of that wireless communications product that you are working on, what markets is it aimed at? Is it all

military? Is there other markets?

Let me talk about the wireless.

Wireless market is not military. It is aimed at the

commercial market. What we're talking about is coming

up with a device which we are developing and have a

prototype that will enhance the use of cellular towers

so you will not need as many cellular towers and you

will not have dropoff of calls. It is called a nano

cell and it is a device that will be planted around the

towers on top of lamp posts, they are a small-sized

box. This then will enhance the tower's ability to

pick up, retain and rebroadcast calls. So it will

reduce the costs to the companies of having to put up

the towers and also reduce -- instead of going on all

around the country of people don't want towers around.

Advantage is lower costs obviously and also lower use

of radioactive cell systems. So this will reduce the

amount of objection that you are going from

communities. It is being tested now by Bechtel, which

is one of the largest manufacturers of cell towers in

the country and we'll await the results of their tests.

Bob, do you want to talk about Home Depot buy?

We have an outstanding

relationship with Home Depot people. It has continued

to improve over the course of our program with them.

We have essentially all the garage door business at

home depot. That business continues to expand. We're

very pleased with the results and I believe home depot

is. The shift to the major buyer has not had a major

impact on us. We have excellent relationships with the

regional people and with the staff in Atlanta, so we

expect that relationship to continue to grow. We are

now doing somewhere north of $100 million in business

with Home Depot. As I said, I expect that will

continue to grow as they continue to grow their

business. With respect to the commercial steel

business I think you are referring to Atlas. Atlas is a commercial rolling steel door business within the commercial building products business. We've struggled

with the Atlas over the past few years. We made some

improvement last year. This year the market for

commercial doors is not as strong as residential

business. Atlas is not doing as well as it did last

year. We're quite disappointed about that. We will

continue to make steps to improve it and hopefully at

the end of next quarter he'll have some more to say

about Atlas which will go a long way to improving the

garage door business results. So Atlas has had an

impact on us in the second quarter. It's reflected in

the numbers in garage doors and the garage door numbers

we've reported have been up dramatically in spite of

the increased loss of Atlas.

Our next question comes from

Steve Murphy. Please state your company.

Steve Murphy, CABC World

Markets. I have a question too about Telephonics

business. I apologize if you covered this earlier. I

got on the call a little bit late. You had some very

nice contract wins in the quarter, Black Hawk deal and

Sikorsky came through and some other programs, F/A-18

upgrades. Can you give a general outlook on that

business? Are you seeing spending pushouts, pull-ins

given the war on terrorism and also comment maybe how

the book bill is trending and how you think it will

trend over the course of the year in that business?

On the homeland security we've

developed a couple of systems. 1 principally which is

a handheld ground ray. We have won a contract with Israel to provide them with radars for borders and with Norway. We're now bidding for contracts that are for the power plants, airports and for the New York state border. Actually there's going to be a demonstration down at Washington, D.C.'s airport and LaGuardia airport for this ground-based radar. As far as other

proposals that we're going after, the Coast Guard is

going into deepwater status and they will be upgrading

their platforms. So we're bidding on maritime radar

and our communications to the Coast Guard. Those are

really the homeland security initiatives that we see at

the present time. Now, frankly, there's been a lot of

talk about homeland security. We have high hopes that

homeland security is going to come to fruition but at

the present time there's not been a lot of funding for

the homeland security. As far as the terrorist war and

what's going on in the world, we believe that we've

been benefitted to some extent by acceleration of C-17.

We have 120 communications platforms on the C-17. We

got a new contract to update the system for 60 and we

will get another 42 and then we will get 100 -- a

contract for 100 updates to retrofit the entire fleet.

So we think C-17 is being accelerated because of the

need for that kind of a vehicle worldwide. And the

same thing with J-STARS. We've seen new

airplanes have been ordered and we're on the J-STARS

with a new plane this is going to combine AWAX

between the two voice and data systems and

communications and we're looking forward to getting

expanded contracts there. There's a whole series of

other ones. Our SDI system which is on Black Hawk

update for 1,200 planes, we probably have two systems

which are like the premier in the industry that people

look to for us. One is maritime radar and one is the

secured digital intercom systems. We have a contract

on C-130 for $7 million plus the upgrades and on the

Black Hawk. We're now bidding on numerous other

platforms that we think the FEI is going to be used on.

As the program gets funded and more money gets leaked

down into the primes and down to us we should be seeing

a number of expansions in that area.

That sounds good. Second question is regarding margins. You described that you

had made some investment in that unit in some firms

that really hadn't (inaudible). I think it was over

100 bases points sequentially and 300 bases points year

over other. Was there a positive mix shift? What's

driving the margin improvement in that business?

I think margins are slightly higher, volume is higher and that results in higher margins. There's no dramatic number one the Telephonics business that's caused any increase in margins. It is basically driven by sales. We're pleased with the margins in the company. We do have an

integrated circuit design business frankly that has

suffered somewhat in the business. Their volume was

down and it's down primarily because their market is

directed towards telecommunications and the computer

market. And as you all know, that market has been

tough for us. So the IC design business which is a high margin product for Telephonics is down in sales and that's hurt our margin and what. We think we have

some upside potential in Telephonics business. Part of your question had to do with backlog and orders compared to sales. Our backlog is actually growing.

We should be somewhere above where we were last year.

At the current time our backlog is approximately

$176,000,000.

Next question comes from Nelson

Ovus. Please state your company.

Winfield. I might

be wrong, but I'm under the impression that the company

is not providing at this point forward looking guidance

under regular FD. What are your thoughts going

forward.

We do not provide guidance on a good forward basis as far as sales, earnings given numbers, percentages, things like that. Our position on

it is as follows. If the economy holds together as it

has, if the business goes along in the manner as it's

been going, which we have no reason to expect it will

not, then we think that the company will continue to

grow at the rates we have been growing over the last

six months. We think the balance should be excellent

but again we're always concerned about where the

economy is going, where the world is going. So that's

why we don't like to give specific estimates.

Nelson, if you call later. I

will let you know what the number is (laughter).

You can't do that.

You wouldn't want to do that.

As you know us, we run the company on the tight side so our goal has been to use our positive cash to reduce debt, to buy back stock. We've bought back about $5 million in this quarter plus we've reduced the debt by 15 million in the quarter. Actually if we didn't do too much over the next year we would probably be almost debt free at the parent.

Look, the purpose of

the call is you are obviously communicating more with

Wall Street. I think you had a conference call before.

But this is the first conference call with Q and A and

reg. FD is another tool to consider going forward.

I understand. Probably what we'll do at the next conference call as we feel our way is we will have one or more of our operational people who run our divisions be available to answer questions with respect to their division to get more dimension to the call?

Next question comes from Michael

Stein. Please state your company name.

Shareholder of

Griffon. First of all to congratulate you on your fine

results. The stock obviously has reflected over the past year the growth of the company sales earnings and your consistency. Also on a lighter note I had seen in

the papers that Bob Lemmy'sson had gotten

married, so I wanted to congratulate him.

Thank you.

Most of my

questions have been answered. The only couple I have is the -- you indicated that the long-term debt has been reduced by 80 million so far?

Over the last 18 months. Over

the last quarter was down by 15 million and I believe

what did we reduce it in the first quarter?

We reduced $26 million.

What is the level

at March end?

70 million. Total debt is in the $95 million range. We have some above the bank debt.

How long do you

think it will be if you pay completely off, if that's

your objective?

I don't think that's our

objective. I think what our objective is to keep paying down the debt and our balance and buy back stock on the balance and make investments in each of the divisions so they can grow. I don't think, you know, it makes sense for a company with our size net worth and sales to have no bank debt. We should be using it to lever the company so we can make more earnings per share for the stockholders. So that I would say that we will continue to try to pay down debt. If we pay down another $20 million of debt this year, we would be comfortable with that and use the balance of it to buy back stock and make further investments in business lines, new plants and new equipment.

It sounds like you

have a good handle on things. I have one final comment

and question. That deals with the fact that you

apparently, I mean Bob Balemian and Harvey have sold

some stock, a small amount of their stock during March,

which is fair. Obviously you need funds for other

areas. Relative to your compensation, as indicated in the proxy statement, it indicated that approximately 10 percent of pretax earnings are allotted total to Bob and Harvey and my question is basically has the board or Harvey and Bob considered eliminating that part of the compensation considering the company is well on its way? If that amount was allotted to earnings, I would think to me it would cause the stock to rise that much more and probably the compensation that they would get as a result of continuing selling some of their stock might exceed that amount.

I don't know how to answer that

question. What you are saying is give up your salary,

the stock will go up, you will sell stock. I don't

know many people who run companies who do that.

Nevertheless, let me answer you. A number of years ago

we had the stockholders approve a vote in which the

compensation was somewhat modified in that the first

$500,000 for each of us paid in our bonus would be paid

in stock at market in which we would not get that stock

until we retired. So that has gone going on for the

last five years and we intend to go back to the

stockholders and ask them to continue that program next

February so that we will be getting -- a significant

amount of our compensation in stock. The other thing

is that if you will note, a substantial portion of our

compensation is geared to the company making money. So

that if the company had a bad year or didn't make

money, we would not be making money. We would just be

getting our base salary to run the company. So this

has been reviewed many times over the years and the

board has approved it. We've had independent people

come in to analyze it and we've submitted it to the

stockholders and it's been approved. So I don't think

it's really much of an issue at this point.

Thank you for your

answer. Good luck.

Our final question this morning

comes from Jack Salzman. Please state your

company.

Jack Salzman

Can you just give us a quick update on where you think

inventories sit both at retail and at your company

level?

Jack, you see how honorable I

am. I had lunch with you and I never told you

anything.

You double

surprised me because this has been a great conference

call.

Thank you. Our inventory

levels in March are down slightly from last year, last

September. They are well under control. We're real

comfortable with the inventory balance. About 96

million dollars at March 31. The garage door people

and plastic have done an excellent job in controlling

inventory levels. Our inventory in garage doors are

about seven and-a-half times per time. Inventory turns

in film business about 13 times per year. We have had

some growth in Telephonics in inventory and that's

geared really toward some of the radar programs we have

where we have to build inventory in order to receive

orders and deliver them on a short-term basis. It is a

little change for Telephonics business but we do have a

line of radars that are delivered in a very short

period of time and have to have inventory for that.

We're real pleased with the inventory levels. We have

some levels to improvement but not dramatically. The

levels we have now are quite attractive. In terms of

inventory in the channels, you know, I think -- I don't

sense any major problem. Garage doors and dealers have

sold -- install them when they pretty much receive

them. They don't have a big inventory of garage doors

around. We ship as orders are received. We don't have

a lot of inventory in the retail stores.

I guess you guys

indicated earlier there was going to be a price

increase in doors?

Yes, because of the rise in

the prices of steel. Our competitors have announced a

major price increase. I won't call it major. 20, 30,

$40 a door but our competitors have announced a price

increase. We've advised our customers that there is

going to be a price increase. That's due to the trade

barrier for steel. Hopefully it won't last long and it

will come down, but we think that's going to be passed

on and people understand it. It is not a significant

number of dollars per door.

Is there a chance

that the bigger guys like Home Depot may be

aggressively buying in front of the price increase? Is

it is that going to be con stained?

Jack, I don't believe they are

doing that at all. We have not seen a major spike in

Home Depot's business just prior to an increase. I

don't expect that will happen. They don't keep a big

inventory of doors around. It takes up a lot of room

and frankly they would refer to have Clopay keep the

inventory and deliver as they need it.

Thank you. That does conclude

the question/answer segmented of the call, sir.