Griffon Corp (GFF) 2003 Q2 法說會逐字稿

Hello, everyone, and welcome to the Griffon Corporation's second quarter 2003 earnings call.

With us today we have Harvey Blau, Griffon's Chairman and Chief Executive Officer, and Robert Balemian, President and Chief Financial Officer.

After the prepared remarks there will be a question and answer session. All participants will be placed in a listen-only mode. This call is being recorded. Your participation implies consent to our recording this call. If you do not agree to these terms, simply drop off the line.

I would now like to turn the call over to Mr. Blau. Please go ahead, sir.

Good afternoon and welcome to a financial overview of our second quarter of fiscal 2003, which ended on March 31, 2003. I am Harvey Blau, Chairman of Griffon's and with me is Griffon's President, Bob Balemian.

I will discuss the overall results of the quarter and then Bob will provide some further details.

First I should like to point out that to the extent that matters to be discussed in this call include forward-looking statements. They involve certain risks and uncertainties that could cause the company's actual results to differ materially from those in the forward-looking statement.

Our second quarter was selected solid, operating performance. And we are very happy with the performance, with certain external factors that have had a negative impact. Our sales were 277 million, up from 267 million last year.

Our pre-tax income was 11.2 million, up from 10 million last year. And diluted earnings per share for the quarter was 14 cents, the same as last year.

In our films business, we had substantially increased sales with volume growth continuing strong in Europe. Sales in this segment increased to 92 million compared to 69 million last year. Operating income of nine point two million was impacted substantially increased resin prices, which we will discuss in further detail, last year's second quarter affected operating income of 10.1 million.

The operating profits of the garage doors reflected continued improvement and the strength of manufacturing efficiencies and effective cost control and was also positively impacted by the divesture of the Atlas unit.

Sales in garage doors were 83 million compared to 93 million last year. After considering the affect of closing Atlas, sales were four million lower than year but operating income increased three million up from 300 thousand last year.

Telephonics, our electronics information and communications systems segment, reflected lower sales and slightly low profits in the quarter due to delays in anticipated awards of new orders.

Telephonics sales were 41 million compared to 47 million last year and operating income was two point nine million compared to three point one million last year.

Cash flow in the quarter and existing cash balances, under capital expenditures of $12 million, debt reduction of nine million, and the continuation of our stock repurchase program. In the fiscal year to date, we have spent eight million dollars to acquire 600 thousand shares of common stock.

Our balance sheet remains strong with working capital of 200 million and total liability is down by 30 million during 2003 and total indebtedness representing 23 percent of capital.

Bob will now provide some details on the operations, the outlook, and then we'll answer your questions.

As Harvey said, we consider that our second quarter reflects operating, solid operating performance. Certain unusual factors, which I will discuss, kept it from being an outstanding quarter.

Sales in our films business increased by approximately $23 million, this represents a 33 percent increase, which breaks down as follows: 10 million from additional volume and product mix, three million from the addition of our Brazilian operation, eight million from exchange rates reflecting a weaker dollar, and two million dollars to reflect the pass through of resin price increases.

The impact on our business from resin price changes in this quarter requires further explanation. The increases were quite dramatic and were driven by unusual increases in the cost of natural gas. Resin price levels during the second quarter were approximately 70 to 80 percent above last year's second quarter. Resin prices have gone from approximately 30 cents per pound to above 50 cents per pound. In the second quarter alone, resin prices increased by more than 15 cents per pound.

The resin price trend had the affect of reducing our operating income in the quarter by approximately three point five million dollars as compared to last year's second quarter.

If we exclude the affect of resin changes, our operating margins in the film business were about the same as last year, approximately 14 percent.

The large store sales in the quarter were down slightly, which we believe had to do with weather conditions. As we previously indicated, over the past few years garage doors management has put a major focus on improving manufacturing efficiencies and cost controls. We have seen margins improve and this trend continued in our second quarter. We anticipate that increased margins can be maintained yielding further earnings gains.

In Telephonics, our operating results are about what we expected. We continue to believe that order input will improve and expect Telephonics operations to strengthen toward the end of the year.

I would like to now make a few comments regarding how, on how we see the rest of the year for Griffon.

In films, based on current order levels and new programs, we expect volume to remain strong. We also anticipate that resin prices have reached their peak, will level off for some period of time and will tend to come down toward the end of the year. Operating results will be impacted by start up costs associated with capacity growth, but this should be more than made up by additional volume.

It's an exciting time for us in films, with substantial long-term growth opportunities in Europe, North America, and in South America. We are making good progress in films' capital expenditure programs and anticipate that resulting revenues will commence in the latter part of this year and expand in 2004.

In Telephonics, there are a number of opportunities available to us including domestic communications programs and international rate off orders. We still expect the full year to be approximately the same as last year with substantial improvement coming toward the end of this year.

In garage doors, we are coming off the slowest part of our year. We anticipate continued solid performance in this business tied primarily to sales growth and improved manufacturing cost structure. We believe there is some pent up demand in this business caused by the difficult weather this winter. Our customers are quite optimistic regarding business conditions and our order input enables support that outlook.

In summary, overall business continues solid, we remain optimistic about 2003, not only with respect to operating results, but also relating to available opportunities, which should benefit future years.

At this time we'd like to take some questions.

Thank you. At this time we are ready to begin the formal question and answer session. If you would like to ask a question, you may press star, one and you'll be announced prior to asking your question. To withdraw your question, you may press star, two.

Once again, to ask a question please press star, one. One moment, please.

Our first question comes from

with CJ Securities.

Hi, good afternoon. It's actually

with CJF Securities.

Hello,

.

How are you, Harvey? How are you, Bob?

Hi,

.

Couple of questions, one you, at the very end of your prepared remarks you mentioned, I think you said something like available opportunities. I'm not sure I got the exact wording right. But one would normally conclude that that would imply some external opportunities that you're seeing. Could you expand a little bit on that?

Well, that's primarily, well it's the record toward all of our businesses, actually. We, you know, we're pretty optimistic about the films business. We've talked about the opportunities available. We've talked about our capital expenditure program, growth to some of our significant customers, and these opportunities relate to Europe, relate to South America, and relate to the North American market. So we're pretty optimistic about the entire business and there are very substantial opportunities that we, in the films business, that we should be able to take advantage of as we build capacity over the next few years.

I think we're relating specifically to two areas,

. One is, what Bob is alluding to, which is geographic expansion for the films business. And the other one is some customer expansion in the garage door business.

Got it.

Also in Telephonics, we're still looking for the Homeland Security business to come on stream. It has not been awarded yet.

Focusing for a second on Telephonics, I know you've invested a great deal of money trying to build a commercial application for wireless antennas. And I think we've all been very patiently waiting to hear some news on beta testing and how this has gone. Can you freshen that up little bit for us?

The system that's being developed down in Melbourne, Florida is proceeding. They believe they're going to have a working demonstration model some time in the next two months and then it's going to be tested by a number of the carriers and some of the people who put of the towers and, which we should then be getting some results of their desire of an interest in this program. And we'll know better in the next, I would say, three to four months how the acceptability of the concept is working out.

What have you spent so far on this and what do you ...

Approximately three and a half to four million dollars a year.

OK.

For the last ...

Two and a half years.

Two and a half years.

And how much more do you think you have to spend to finish the development?

Well I think that's number four million dollars for this year should finish off the development of the prototype models and of the samples. And now it's going to be a question as to whether we get orders.

If we get orders for the equipment that's going to then reduce our investment and our costs and cut down our losses that we've incurred, 'cause we've written off all these costs.

And that's going to determine whether or not we continue with the program, how successful we are in selling the equipment between now and I would say September.

OK. My final question you mentioned that your normalized margins in the quarter for films would have been about 14 percent, you also indicated that you felt that resin prices had peaked. To the extent they have, do you hope or expect to get back that 14 percent margin by the end of the current quarter or is this more by year end as a goal?

Well, remember,

, we're going to be comparing current numbers, which will remain high even if they're steady. They will remain high even if they're steady, they'll remain high. They will be compared to the prior year, which had relatively low numbers.

So on a comparison basis, we won't see the entire benefit of stable prices. When we'll start to it is as the prices start to come down, which we anticipate being in the fourth quarter. And the beginning of next year, which will, you know, be closer to, resin prices will be closer to where they were the prior year, which is the beginning of 2003.

So you won't see any immediate impact, any immediate benefit from resin. It should not have the same type of impact it had on us in the second quarter this year. But the true benefit in a comparison basis will come at the beginning of next year.

OK. Thank you.

Thank you. Our next question comes from

with NWC Assessment Management.

Yes. How you doing, guys? Very good quarter considering everything.

Just with regard to the resin price impact, looking at the next quarter, it would be the two-quarter. The year-to-year resin price comparison you mentioned, 30 cents for this period versus 50 I believe. What does that look like year-to-year for June? Do you have any idea?

Well firstly the big thing, the most important thing is, that we believe that the prices have peaked and there will not be anymore increases. So therefore there'll be some stability in this next quarter with respect to prices. We should not see the big price increases that we have been unable to pass on because we have, we're always one quarter late. So we should be able to pass on some of these costs that we expanded as of March as the next quarter unfolds.

But the real question is going to be when the prices start coming down. Because when the prices start coming down that should add a positive to our comparisons.

So you're not going to see that, we don't think, until the earliest the fourth quarter of this year. There's been no reduction in the price of resin, by the way. It has not gone up in the last couple of days or weeks but it does not come down and we're still waiting for it to come down.

Is it fair to say, though, that the largest sect, if you follow that through the entire fiscal year, that you will not capture an entire lag by the end of this year? Is that one way to think about in terms of trying to model what would be the fiscal year numbers this year? But there is essentially some penalty that is left on the table.

The key,

, is a comparison on resin prices this year versus last year in the same period. Now last year they were relatively low for most of the year. They started inching up toward the end of last year.

Yes.

But earlier in the year they were in the - relatively low. To put it in perspective, over the last 20 years the resin that we buy has been approximately at 32 cents. That's it. That's historical type of price. So you see the effect this quarter was very dramatic to us. And not only did it - did they go up a lot, they also went up a lot during the quarter and not - it hasn't been a gradual thing. So the impact of cost to us this quarter has been very substantial and we've not been able to pass any of it on because it really came during the quarter.

I see.

So that's the major issue. In addition to that, we have an element of our business where we can't pass the resin prices on.

Right.

The resin price changes on. And that part of the business, which probably amounts to about 75 to $80 million, that part of the business has been hurt by high resin prices. And resin prices, we think, will stay high for some period of time. But the key is that they will start to come down.

Could you use the following to do volume over offset some of that, you hope.

Yes. Of volumes you can see in even without the exchange rates and even without the affect of resin prices, has been quite dramatic. It's, we've done real well in the marketplace, our products have been accepted, we've maintained the margins. It's a very substantial time for us. We have a lot of opportunities to expand the business geographically and we're looking at different locations than we have now. And I would expect, certainly, within a four or five-year period of time, for instance, South America will be a substantial part of our business. We expect to be in other area in North America and we have some opportunities in the Near East also.

So there are, you know, there are very substantial opportunities for the plastic film business. You know I think - I think the results this quarter are pretty solid, even in that business after considering what's happened with resin. And this has been an unusual quarter, certainly.

Right. Just with regard to the installation services, you know, margins are weaker here. Sales are up. Would you just remind, I mean, again what's the dynamic here for the quarter? Obviously the year trend is similar year-to-year. The lower margin, if you would, what's the reason for that?

What's happened is our, the stronger parts of that business have remained strong and the weaker parts have gotten a little bit weaker and we're cleaning it up.

So these, the numbers that we've reported have some clean up costs related to some specific areas of our installation operation.

As I mentioned last time, we have - we have a couple locations that are not doing well, losing money, and the aim is to reduce other penance on them and essentially get out of those business areas. And what we're doing is contracting each one of them to make us less reliant on them and to reduce the overall impact on us and eventually we will be out of those areas.

One of them we will be out of this year and the second one we will be out of the beginning of next year. But it will take most of the first six months of next year to resolve that in the way that least disrupts the business.

So the numbers you see this quarter include some clean up costs with respect to one of the operations we're closing down.

Now the revenues associated with those operations that you might be closing down?

Well if you - if you go back, right now they're a little bit lower. If you go back to last year, we're talking about $30 million in total sales between the two locations.

One last question, if I may. On the free cash flow, we know your cap spending is going to be up as you've indicated, free cash flow will be lower because of that after cap ex. Still, you will generate free cash. What is the objective with that remaining free cash in terms of priorities?

We'll continue the same priorities we've always had. First of all, some of the equipment is going to be on lease line, so it will not have a direct effect on the cash flow that we generate.

What we're going to do with the excess cash is to continue to pay down some bank debt and continue to buy back stock. We're buying stock almost every day over the last couple of months. We stopped before we put out the earnings, because everything was stopped, and we're going to commence probably this week to be buying back stock again.

And that's what we're going to do with our cash, buy back stock and pay down debt.

What's the total size of the authorization that ...

We have 11 million and a half shares to go. We're going to get the Board to increase it.

OK. Thank you very much.

Once again, to ask a question please press star, one.

Our next question comes from

with

.

Gentlemen, good afternoon.

Hi,

.

Just curious, Bob or to whoever on the call, I guess, in terms of - in terms of the garage door segment you mentioned pent up demand being a function of the weather in the first quarter. Do you think that that is something that would allow you to show positive year - will the pent up demand allow you to maybe perhaps see positive year-over-year comparisons from a revenue perspective in the third quarter of that division?

The answer to your question is yes. What we've seen over the last four to six weeks is, you know, a customer base that's comfortable with market conditions. Our order input in April was strong. We had a good April. May looks like it's going to be very strong. We expect a quarter in the last half of the year to positive in terms of sales comparison.

And frankly, that's kind of exciting 'cause I want to see what happens with margins when the sales do increase.

OK. I'm just curious, I mean, could you share with us your basis for your comments in terms of, you know, what is the basis you've established to assume that resin price will decline over time?

Well, generally speaking resin doesn't stay still. It goes up or down. It's a very volatile - it has been very volatile, more so in this time frame.

We have seen it peak, it has not changed in the last few weeks. It's been about where it is now. There was a price increase. During the course of the quarter there was an increase, which was classified as a surcharge. That surcharge has now been basically replaced by a price increase. So, effectively, what's happened is that the latest price increase did not stick.

There is another posted price increase, but most people that we've spoken to in the industry believe that it will not - it will not happen.

The basis of what we're talking about basically is our people, the expertise they have in the market, what they've seen happen, conversations with customers, conversations with competitors, and suppliers. And it's on that basis that we expect, as I said, that they - the resin prices have peaked and by the way, they're at now what essentially is at all time highs.

So the fact that they've peaked frankly isn't surprising. We've seen natural gas prices come down. We've seen oil prices come down. And it's based on these, you know, reactions with people in the industry.

I mean, Harvey, could you get out of that $75 million of business that does not allow you to recover the resin price increases that you're seeing?

The answer is we would do - it was increased $100 million, of which 200 plus million is with Proctor and Gamble.

Yes, sir.

And we were doing a lot less of business with Proctor and Gamble a number of years back and what we did was we made a concerted effort to change over from the business that was, where we could not pass on resin price increases to do more and more business with Proctor. And we've been very, very successful. We basically dominate, you know, the U.S. and European markets for diaper film. And we're growing with them in other parts of the world.

So the answer is there's always going to be a piece of the business that's going to be non-Proctor that's going to be to people that we cannot pass on price increases.

But it's profitable business. I mean it just happens in this quarter it's not as profitable as it - as it has been. So it's still a very positive component of the films business.

And volume is very important in that business.

Yes. Yes.

You know, I mean you have an infrastructure, you have a certain operating level and it's very important to keep that equipment running, you know, 24 hours a day.

We're making a produce now for house wrap that competes with

, which is DuPont product, that has been growing very strong and we're also making products that go into one time use clothing that's used for spraying and other purposes where the person can breathe in the garment. Like surgical gowns and masks and things like that.

So that business is a good business. It's profitable. But and in normal times the passing on of the resin is not that meaningful. But in these kind of times when you're seeing a monster increase in the price of resin, 57 cents compared to 32, it has an effect. But that effect should lessen as the resin prices go down.

By the way, as to your question about why we think the resin prices are going down, we have a chart that shows resin prices for the last 20 years. And it has peaked before and now it's gone and then goes right back down. As a matter of fact, the sharpness of the peak is the sharpness of the decline.

We'd be surprised, we'd be very surprised if resin prices were not down by January of this year.

OK. And then I guess are we still thinking about a cap ex budget in the $40 million range for the year? Is that still in the ballpark?

Yes.

OK. Thanks very much.

Our next question comes from

of

.

Hi. Can you just give you cash and debt positions at quarter end please?

Yes. One second.

Our cash at March 31 is about $25 million and our debt is 80 million of long-term debt and $12 million of notes payable.

Twenty-six million cash?

Twenty-six million dollars, yes.

Thank you.

At this time we show no further questions, sir.

Thank you very much. Appreciate your listening in. If you have any questions please call us.