Griffon Corp (GFF) 2003 Q3 法說會逐字稿

Hello, everybody and welcome to the first quarter first quarter 2003 earns call. With used to we have Harvey Blau and Rob, president and Chief Financial Officer. After the prepared remarks, there will be a question and answer session. If you would like to ask a question, press star one. You will be announced -- to withdraw a question, press star one. Once again, if you would like to ask a question. Press star one. This call is being recorded. Your participating implies consent to recording to this call. If you do not agree, drop off the line. Sir, you may go ahead.

Good afternoon. And welcome to a financial overview of third quarter of fiscal 2003 which ended on June 30, 2003. I'm Harvey Blau chairman of Griffon Corporation. I'll discuss the over all results of the quarter. And Bob will provide further detail. 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 statements. Our third quarter reflected continued and solid operating performance. Net sales were 313 million up from 297 million last year. And pre-tax income was 19.2 million up from 17.1 million last year. Diluted earnings per share for the quarter were 33 cents compared to 32 cents last year. (inaudible) increased sales continued throughout the business. Sales in segment increase to 98 million for the quarter compared to the 75 million last year and operating income was 9.6 million compared to 8.7 million. The operating of garage doors continue to improve on higher unit volume and manufacturing efficiencies and effective cost control. Was also positively impacted by 2002 divestiture of the Atlas unit. (inaudible) and Garage doors 106 million compared to 110 million last year. After considering the effect of Atlas sales, a 3.7 million higher than last year a 3.6% increase . Operating income increased to 9 million up from 6.4 million last year. Operating margins in garage doors increased substantially 8.5% of sales. Telephonic's or electronics information and communications systems segment reflected most sales and profits in the quarter due to lower anticipated awards of new orders. Telephonic's sales were 43 million compared to 48 million last year. An operating income of 1.8 million compared to 3.4 million. Our operating cash flow in the quarter increased to 28 million dollars which funded CAPEX of 13 million and further reduced debt by 4 million. Our balance sheet at June 30th remained strong with working capital at 200 million and totaling debt representing 22% of capital. In July of 2003, we completed the sales of 130 million dollars principle amount of 4% convertible debentures. The notes are convertible under certain circumstances at $24.13 cents per share. Which represented a 48% premium above marketplace of stock. 15 million dollars of the proceeds was used to purchase 3.1 million shares of common stock concurrently with the sale of the notes the purchase of the stock was 16.30 per share. 49 million of the proceeds was used to repay essentially all of our domestic bank debt and the balance will be used for general corporate purposes including additional share repurchases under your existing stock purchase program. The primary purpose of the sale of the notes was the finance purpose of the substantial number of the share of the common stock what we consider an attractive price. We believe this transaction further strengthens balance sheet by converted 49 million of bank debt into fixed rate subordinate debt which was does not require any principle payments for at least 7 years. Based on comments from interested parties, movement of stock price, we believe this transaction has been positively received the marketplace. Bob will now provide details on operations and outlook.

Our third quarter was a period of substantial operational progress. While Telephonic struggled with volume we reflected strong operating performance in building products and films. Sales in our films business increased by approximately 23 million dollars this represents a 30% increase broken down as follows. 6 million from additional volume. 4 million from the addition of Brazilian operation. 9 million from exchange rates reflecting a weaker dollar. And 4 million to reflect the past due of recent price increases. Sales increased in each of films operations with growth especially strong? Europe. The quarter includes approximately 1 million dollars in costs associated with capital expansion program. Our margin percentage in films is down slightly in the quarter. With respect to resin which you may recall have had a significant impact on us in the second quarter, it seems that the worse is -- worst is behind us Operating results in the quarter had some minor impact on resin, just a few 100 thousand dollars. While still high, resin prices have leveled off and declined slightly since peak in March.

Garage door sales in the quarter after excluding they versed Atlas operation increased 3.6%. We have continued to experience improved manufacturing efficiencies and cost controls the result is improvement in garage doors operating margin in the quarter to 8.5% of sales. We anticipate that increased margins can be maintained resulting the further earnings gains. In Telephonic’s, although we anticipate operating results to be down compared to last year, they have been lower than expected. We have seen some positive signs in the business and based upon current orders, we expect operations to show substantial improvement in the fourth quarter. I would like to make a few comments now regarding how we see the rest of the year for the company. In films, based on current order levels and new programs, we expect volume to remain strong. Rating will result will continue to be impacted by start-up costs associated with the capacity growth. This should be off set by additional volume. Our expectation that resin prices will decline slightly, remain at relatively high levels, but not have the significant impact on operates results. We continue to make good progress in film capital expenditure programs which relate to additional capacity and new products. Included in this capital expenditure program is significant -- Europe manufacturer printed products for baby diapers for largest customers this multi-year project builds on films (inaudible) gained from a 1998 acquisition and substantially expanded printing capacity. This investment is consistent with film strategy to provide value added products we are now beginning to supply this new product. In Telephonic’s, as I previously stated, we anticipate the fourth quarter to be a substantial improvement over what we have recently experienced. Telephonic’s is an operation that has excellent longer term prospects based on existing and new program opportunities that are available to us. Telephonic’s has outstanding technology which will lead to new business some of this we expect to share with you in the fourth quarter. In garage doors we continued to see solid performance. Our customers remain quite optimistic regarding business conditions and our current order inputs for that out look. We anticipate additional sales growth and improved margins. In summary, we are optimistic about our business for 2003 and over longer term. Our technology, financial condition and operating management allow us to capitalize on available opportunities at this time, we would like to take questions.

Thank you. Once again you may press star one if you would like to ask a question. You will be announced prior to your question. To withdraw, press star two. Our first questions comes from Bob Lilac of CJF securities You may ask your question.

Hi. First question, you alluded to new product in Europe for printed materials. Can you give us a little more color on that and tell us what effect if that had on revenues in the quarter and what you expect going forward

No impact on us yet. We have recently started to deliver a new product. We are printing product for baby diaper in Europe

Are you putting pictures on the diapers.

We are printing products that will go in to diapers, yes

What do you think the potential -- you know, impact for next year could be from this new line?

Well, as we thought out in the past, it's very difficult to cover that area specifically. We have a lot of areas that will effect film's business. We talked about being very positive about it. Currently and with respect to next year. That still holds. We have this equipment being installed, we have a number of other projects being implemented. There will be a number of changes that go in to the product that we're making now. The we expect to business to be very strong for us. With the specific impact of this project, our numbers is very give cult to talk about. And I think generally speaking we have to be satisfied with the direction that we've indicated that the films in this business has gone and will continue to go in.

You said there was a charge for capital equipment going in or an impact of about a $1 million. Do we expect that same impact for the next few quarters or how should we look at that

We've experienced these types of expenses over the past number of quarters. We still have a lot of things going on in the business. There are very substantial opportunities. We are, as you know, makes substantial investments to grow general capacity and some of these new products. You should expect that we will have some costs associated with it as equipment is installed.

Okay. Great. Just switching over to Telephonic’s. Were there additional charges for the BETA testing of the NANO cell -- what accounted for the lower in the quarter?

Basically volume down quite a bit. More than we expected. We struggled with volume. In terms of the current quarter, it's pretty much remitted to strictly to the top line. As we've said, we are -- you know, we have a little bit of a different outlook with respect to the fourth quarter. What we said in the past that we expect it to be down in the beginning of the year. We expected that the fourth quarter would be strong. Our hope was that we would be flat for the year the Telephonic’s. We won't get there. We will be down a little bit in Telephonic’s compared to last year. But we will have a strong fourth quarter still.

Okay. And what is the status of the nanno cell technology testing

That is being tested now in a company in the west being put on to their system to determine whether or not it can enhance the utilization oaf towers where there's a dead spot between in powers and no cell services available. We believe the tests have indicated that the nanno test was able to -- where previously no cell service was available. We are continuing to test.

Okay. Great. We look forward to seeing you guys at our conference, thanks very much.

Rudy Kneelar with Winchester group.

How far forward do you typically by your resin the first question.

We're generally pro-- protected for the very short periods of time. Price increases or decreases can be reflected within a 30-day period of time. The generally rule is about 30 days

It takes longer than that to recover

Takes one quarter.

Second question, on Telephonic’s, how much of that business is now military and how much is municipal?

I would say approximately 80% is military. And 20% is non-military.

Okay. Thank you.

Marty Pollick with NWQ Investment Management -- you may ask your question.

Yes. Gentlemen, just a question. Year to year the revenues are up nicely 23 million. Combination of things, you mentioned the exchange rate is one. I'm just wondering what impact -- what profitability do you see on that exchange rate in terms of contribution to income as well as when you look through that and look at is variable profit margins avenue getting past pricing it seems a little low. I'm just wondering if there are other things moving in there that would explain why the variable profit margins were weak.

You have to two do two things. We have resin price increases included in 98 million dollars in sales and films of about 4 to 4.5 million dollars. Those (inaudible). If you basically take out of sales that 4, 4.5 million dollars and you add back million or million more relating to the start-up costs, that earnings -- that operating income percentage is probably what we did last year. That's the major part of it. In other words, if you take 9.6 million dollars of earnings in films and you had back a million one you get 10.8 million dollars you get 11.6% of sales if you deduct the 4 million dollars from the 98 million dollars the 4 million dollars of resin past through.

And foreign exchange, did that generate -- you say the 9 million, the did you say there's no profits associated with that

Not a negative. That would not have -- that business is basically a higher margin business.

Uh-huh.

Than the overall films business. So that contribution of 9 million dollars is actually is little bit above the plastics overall earnings level. That would be low 20% range. The major items are the resin pass through that contributes no earnings but has 4.5 million dollars in sales. And the million dollars of start up costs associated with our capacity (inaudible).

The residence resin past pass through I would think would be tantamount to a price increase

You have cost associated with that -- the resin pass through contributes no earnings.

I see.

Just covers cost increase.

Okay.

Once again, if you would like to ask a question, press star one. Dan Lobe. With Jefferies and Company.

In garage doors, historically in fiscal fourth quarter is your strongest quarter. Operating profit margins are usually up to 200 basis points over where they were in the third quarter. Do you see similar type of progression this year

That's a sneaky question.

Please.

The fourth quarter is strongest in our garage door business. We expect that that will be true this year. Our people are -- our management in the business is very optimistic about the near term results in garage doors. I would expect that the type of growth we seen in margins historically in this fourth quarter should be mirrored in this quarter.

Great. And typically if in a particular quarter resin prices drop, there should be some operating income benefit to you for the lag, just like it costs you money going up, you get some benefit for that particular quarter until the catch-up while they're dropping; is that correct?

Yes. Generally speaking, that's correct.

Okay. And with the start up of the printing operation, which I'm assuming is being done at the end of the line, meaning the specialty film is made and then the next step is printing on it?

I prefer not to be mysterious about it, but that's an area we cannot go in to.

So now that you're starting that up, one can assume that the start-up costs for that kind of disappear or do they ramp down, ramp up? How would one look at that ?

We're really in a lot of ways in the beginning of this program. We're talking about capital expenditure that relate not only one to the specific one we're talking about now but a number of other projects that are substantial in nature that will continue. This is a multi year program will go on through most of next year. We will have a contribution based on additional products, new products that we can make from this equipment. At the same time, we have continued to have costs associated with this growth.

Okay.

But the start of the program which is just about starting now and as it ramps up from quarter to quarter will have a contribution to our sales and earnings which will mitigate against the expenses that we're having for additional implementation throughout the program.

Okay. And lastly, on the convertible deal that was done, I'm assuming you will have some accretion to earnings for the fourth quarter for that deal

That will be minor the numbers show out stands on a number basis for the year will be effected for a small amount. It should have some effect going forward

Okay. And did you purchase stock -- purchase stock in this quarter?

No stock in this third quarter other than very small amount actually. Very insignificant amount other than the stock buy-back in the note offering.

Once we decided that we were considering the note offering, we sort of had to get out of the market.

Okay. And no offering is complete, you back in the market?

I think we have a time lag legally that we have top wait to get back in. But then we will get back in

Thank you very much. You're.

You're welcome

Winfield, you may ask your --

Capital that we are spending to increase our value to Proctor in to film area, is any of that shared by our joint -- minority partner in Europe or are we footing the bill for it all?

Actually, the significant part of the capital expenditures that have throw through the fund statement this year and in the this quarter are in the joint venture. It's a 100% of the investment reflected in the joint venture and the joint venture is paying for it. Effectively we consolidate the whole thing. We its paid for 60% by us and 40% by our partner

So in the sources and uses the CAPEX number we see is our part of it?

That's the format. No.

Okay. And where -- I mean, just as a point, if I'm reading the sources and uses in front of me, how do I determine what the split is between you and your partner?

You cannot do that from our financial statements. What we do basically is consolidate the venture because we own more than 50% of it our income statements, plans sheets income states reflect that entity in total. Then in the income state, we have a charge for the portion of the earnings that apply to the minority interest. In the balance sleet, we have a credit on above equity that relates to the book value basic I -- basically of the minority equity in that joint venture. In terms of actually identifying how much of, for instance, capital expenditure -- that is not disclosed.

But that is -- and that is not money we're laying out, right? It's coming out of the joint venture.

Yes.

Okay. Thanks

Once again, if you would like to ask a question, press star one. Marty Pollick?

Just a clarification. If you are consolidating the number and reflecting that, then presumably you consolidated on the source day tire -- joint venture profitability. On a cash flow basis you're saying both sides?

That's correct.

And then you have a minority interest deducted from that.

Yes

Okay.

The money is funded by the minority interest. That investment if it were not made, would be available to the investors and 50% would be able to full pay.

Okay. Thank you.

(inaudible) woodland partners.

Good afternoon, I wanted to talk to you about the instillation services and you're closing down some locations. Can you talk about the progress that you're seeing with their business and the outlook for margins and are you happy with the progress of that division?

We closed down Florida. And we're going to be closing down another area which is in Texas. And we are -- we have seen very good results in that division in this current quarter. So we see the outlook as being very good.

Beth, we've reflected in the current year numbers, nine-month numbers, yes with approximately 600,000 - 700,000 dollars of expense related to what ewe closed down this year. We have not highlighted that. Effectively that is in the financial statements in the earnings of the service company currently about 2 to 300,000 in the third quarter. That should begin -- that will go away with respect to the Florida operation. As Harvey said, we have one more to take care of which will go through the next year. The business (inaudible) is quite strong. We're pretty comfortable with the. July was very strong. And the management that our customer base feels that the near term is going to be very positive for us

So on a year-over-year basis in the current quarter operating profits are basically flat? Is that right?

In the current -- you mean if we deduct the --

If you added back the charges?

That's correct.

Okay. Okay. And so technically for the nine months, installation -- if we add back to 6 to 700,000 really that number is 4.8 to 4.9 million --

In yes. In addition to that, those operations lost money in this year.

U hu

We not only have to take out the 6 to 700,000 dollars. We should back out of the operating results of that goes to operations for the nine months also.

That's very helpful.

The answer is we are showing progress in (inaudible) company and we are expecting it top continue.

Thank you.

Once again, if you want to ask a question, press star one. At this time, there are no further questions.

Thank you for joining us. See you at the next quarter.