Griffon Corp (GFF) 2003 Q4 法說會逐字稿

Hello, everyone and welcome to Griffon Corporations fourth quarter and full year 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 speakers remark there will be a question-and-answer session. If you would like to ask a question, please press star, 1. 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, drop off the line.

I will turn the call over to Mr. Blau. Please go ahead, sir.

Good afternoon and welcome to a financial overview of the fourth quarter and year ended of Griffon Corporation's September 30th, 2003. I am Harvey Blau, Chairman of Griffon Corporation and with me is Griffon's President Robert Balemian.

I will discuss the overall results for the quarter and then Robert will provide some further detail. First thing I would point out to the extent of matters 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.

Now, to the quarter, our fourth quarter, brought fiscal 2003 to a very successful conclusion. We reflected record sales, earnings and earnings per share. With each of our businesses making a positive contribution. Net sales for the quarter were $363 million up from $326 million last year. Pre-tax income was 31.6, up from $16.6 million last year, which included a $10.2 million charge for Atlas divestiture.

Diluted earnings per share for the quarter was 50 cents compared to 21 cents last year. In the film business, substantially increased sales continued throughout. Sales for the quarter in this segment increased to $104 million compared to $83 million last year.

And operating income was $14.8 million compared to $11.7 million last year. For the year film sales increased by 27% with each of our locations reflecting strong performance.

Upgrading profit increased to $44 million, outstanding results after considering the record resin price increases experienced early in the year and the costs associated with our capital expansion programs. The operating profits of the garage door business continued to improve object the strength of higher unit volume. Manufacturing efficiencies and effective cost control and were also positively impacted by the 2002 divestiture of the Atlas unit.

Sales in garage doors for the quarter were $126 million compared to $121 million last year. After considering the effect of closing Atlas, sales were $11.6 million higher than last year, a 10% increase. Operating income accretes to $10.8 million up from $9.4 million last year. For the year garage door sales were $428 million, up from $416 million last year after excluding Atlas.

Operating income increased to $34 million with margins approaching 8.8% up sales. Our sales and installation operation also contributed to the improved quarter with sales earnings and margin growth. Telephonics our electronics communication segment had a strong -- had the strong quarter that we've been expecting all year. Telephonics sales for the quarter were $60 million compared to $55 million last year, and operating million was $7.7 million compared to $6.2 million. This performance coupled with recent contract awards has resulted in a very successful period for Telephonics, a direction, which we anticipate being able to continue.

Operating cash flow in the quarter increased to $27 million for the year, operating cash flow was $67 million and capital expenditures were $44 million, primarily related to the plastics film business. Our balance sheet at September 30 remains strong with working capital of $250 million and total indebtedness representing 37% of capital.

As previously discussed in July 2003, we completed the sale of $130 million principal amount of 4% convertible debentures, they are convertible under certain circumstances at $24.13 a share, which represented a 48% premium above the market price of our stock at the time the deal was done.

The proceeds of the notes were used to purchase 3.1 million shares of our common stock for $50 million and to repay all of our domestic bank debt. The balance will be used for general corporate purposes including additional share repurchases under the existing stock purchase program.

Robert will now provide some details on operations and on outlook.

Our fourth quarter concluded Griffon's most successful year especially encouraging was all of our business units showed substantial progress with sales and earnings growth. Fourth quarter sales in our films business increased by about $21 million. This represents a 25% increase, which is accounted for as follows $12 million from additional volume and product mix, 6 million from exchange rates reflecting a weaker dollar and $3 million to reflect the pass through or prior resin prices.

Sales for the quarter increased in each of the film operations with margins comparable to last year at 14% of sales. The full year sales in films were $382 million compared to $300 million last year. The sale by location in 2003 was as follows $180 million in North America, $185 million in Europe and $16 million in Brazil. The sales in the quarter after the divested Atlas operation we had cost controls and garage doors operating margins with increased to 8.6% for the quarter and 8% for the year.

We anticipate that increased margins can be maintained, benefiting future periods. Telephonics positive operating results for the quarter was quite important to us as it represented a turn around from the first nine months of the year. We had good volume growth, excellent earnings and improved margins. Also we received several new programs, which have increased backlog. Now a few comments regarding how we see the near rems of Griffon.

In films the outlook for the business continues positive with volume remaining strong. Films capital expenditure programs, which relate primarily to additional capacity and new products include a significant investment in equipment and facilities in Europe and North America, to manufacture printed products to baby diapers.

This multi-year project results in us providing higher value products to our customers. Some of this equipment has been stalled and is in operation, additional expenditures to add further (inaudible) capacity will be made in 2004. There are a number of other capital projects which should also have an impact on films future operating results including capacity efficiency in each of our locations to meet anticipated strong demand and additional production facilities in new locations we deem necessary to best serve our major customers.

In garage doors, it's pretty much what we have recently experienced. The operational improvement over the past few years has resulted in more efficient production and improved customer service. Our customers are still quite optimistic regarding business conditions and our current order input remains strong. We anticipate further sales growth and continued improved margins.

In Telephonics, in addition to the strong operating performance in the third quarter, we have recently received a number of contract awards, which will have a positive impact on 2004 and thereafter. These contracts include multi-year $38 million production contract from Boeing as an add-on to our very successful C-17 communications system program, a contract which is expected to amount to $60 million over its life to supply the radar for Canadian air force CP140 Maritime Patrol aircraft program and a $35 million homeland security type contract from Northrop Grumman to supply ground surveillance radar, which provides perimeter security for U.S. Air Force Bases. An important aspect of this last contract is that the entire program is scheduled to be completed over a 12-month period.

Harvey and I are quite proud of the accomplishments of our operating people. Griffon had an outstanding quarter and year based on factors such as our technology, internal investments, financial condition, operating management and position in various marketplaces, we believe that we have the tools in place to allow this type of performance to continue. At this time, we'd like to take questions.

Once again, if you would like to ask a question, please press star, 1.

Robert LaBac (ph) from CJS Security (ph), please ask your question.

Great quarter. Question on one thing, minority interest was higher than we expected or than I expected implying strength in our European operations. Is that from the new product yet? Or what's driving that?

Very little of new product introduction has added to our profitability in Europe. Most of that relates to our start-up business (inaudible) has done exceptionally got this quarter and this year.

Could you give us an idea of what magnitude new product could increase sales for next year then?

We talked about this in the past. Very difficult to do, very difficult to convey that type of information. This is an awful lot of changes in the business. The printing aspect of it both for North America and in Europe is very important component of the product that we will be delivering. It adds a great deal of value. It solidifies our relationship with our major customers and it is a very important program for us. But in terms of additional capacity it's difficult to say that it is and there will be a lot of other changes in the components.

In fact the components that will occur over the next few years. Our position is really that it's very difficult to isolate that as a particular component within revenue. I think you've gotten the message across and we've gotten the message across that we expect growth in films and part of that will be contributed by the new products in the baby diaper market.

OK. In terms of garage door margins in the quarter, was there any effect from steel pricing and how do you see that trend?

Steel prices have been relatively stable. No major impact on us in steel in the quarter.

Great. How about where is that trending for next year?

I don't think we anticipate any substantial changes in steel prices.

OK. And then my last question and I'll get back in queue, installation services so growth in margins and the quarter. I know you've been working on closing some facilities and potentially had some to go. Should we expect sustained margins around 4% or what's the outlook for that next year?

We are quite optimistic the last quarter was very typically strong for us. We did make some improvement in the Florida market. It was a weak one for us. We've reduced our participation in that market. And we have seen some benefit from that.

We have some further work to do in the Texas market as we've talked about before. We are going to reduce our dependence there and make some strategic changes and we believe we got some improvement to be reflected there. Our position is that the margins that we have experienced are recently in the installation and operation and we can continue to maintain that.

Great. I'll get back in cue. Thanks very much.

Rudy Miller (ph) from Winchester Group (ph) are you may ask your question.

I'd like to get some idea as to the breakdown of operating income in the plastic films business between the U.S. and Europe and, of course, south America is so small, but that might also be a factor. And how do you see that trending next year and next?

Well, we're not able to supply that information, Rudy. We haven't done that in the past. Actually I can give you some guidance there. The minority interest line in the income statement basically represents 40% of the after tax profits off our foreign operations.

OK. Thank you.

We believe we will continue to see growth in international operations and in the domestic market next year.

Nelson Obus (ph) from Wynfield Capital (ph), you may ask your question.

Hi, Robert. Nice quarter.

Thank you.

Let me go back to the plastics film segment. And actually I have a different take on the numbers than the first caller. One of the things that I have noted and you can help me here, as to the last four or five quarters, is the bulk of the growth has come from the joint venture.

In fact, if you took the numbers -- if you did the exercise you gave us the key to 40% after tax profits in the minority number and if so, if you bulked it all out, you actually were less in I believe a number of quarters with the conclusion that the European joint venture that the comparisons were negative. And I know that was the case in a number of quarters.

When I look at this quarter, I see something very interesting. For example, the comparison in minority interest, your minority interest was up 13% in regard to specialty film while for the quarter 26% for the entire division. And if you look at the year, you see an opposite perspective for the entire division up 10% for the year 12 months but up 29% for the minority interest.

So the conclusion that I reach here -- tell me if I'm wrong -- is that this last quarter actually represents an interesting watershed where for the first time in a number of quarters, we're seeing the non-European joint venture operating income year-over-year trend up as you had promised that it might, and I hope that's the beginning of a trend with all the money that we've put in that there continue for the foreseeable future. Am I reading that right?

What a job? I'm impressed. Yes. What you've seen in this quarter to a certain extent is an improvement in the domestic operations in the films business. Part of that is related to resin. You know, we had some problems earlier in the year. And the major impact in the resin occurred in the domestic market and we've gone through some efficiencies.

We have also got some product design changes in the domestic market that have not occurred in Europe that have impacted our production efficiencies in the last year or so. We've gotten through most of that.

What you do see in this quarter is the benefits of increased market share from our major customers, resin prices behaving better for us, being basically stable, and in addition to that, improved efficiencies. I believe that the trend in domestic market is something that we can maintain. This is not a one time one quarter occurrence.

All right. Thanks.

Thank you, Nelson.

Larry Baker (ph) from Legg Mason (ph). You may ask your question.

Good afternoon. I also would like to say this was a very nice quarter. Just a couple of housekeeping questions. First, shares outstanding fully diluted going into the first quarter, I think probably below where they were in the fourth quarter, something around 31. Could you just give me some guidance on that?

I think you should use about $31.5 million.

OK.

That's about what the number will be.

OK.

Like a handicap.

And then second, CAPEX for '04.

We did about $44 million for the year. We had a little over a number in the fourth quarter, 8.8 or $9 million or so, that shouldn't be viewed as a trend some of this equipment just relates to timing so it will occur and one quarter might bump up or down. But in terms of the overall perspective with respect to expenditures especially for films, is that we will continue at a high level. I would imagine that we would be closed next year to what we did in 2003. So I wouldn't expect anything -- any dramatic changes. I would expect somewhere between low 40's to high 40's.

OK. And then, on the garage door segment, sales were up, earnings were up, but margins were down in the quarter, even taking out Atlas. Can you sort of explain what happened or why were margins off a little bit in the quarter.

I think they were about the same. We actually had some expenditure related to some unusual insurance types of things that affected G&A in the garage door business. I would imagine where we are going in terms of margins are certainly a low point and would not get any lower. I would expect that we continue to see margin growth next year in garage doors.

And can you quantify -- you said orders were up in the quarter. Can you sort of quantify the order strength in the quarter or for the second half of the year over some period?

You mean in garage doors?

Yes.

The orders relate pretty much of volume. We don't have a lot of backlog in garage doors. What you see is pretty much what the order input was. I'm relating that also to what October and November looks like. We've had a very strong October and it looks like November is going to be strong, also.

Okay. I will get back in line. Thank you very much.

Right.

Once again, if you would like to ask a question, please press operator, 1.

Derrick Winger (ph) from Jeffries and Company, you may ask your question.

I apologize I got on just a bit late. If you could give me the gross interest expense for the quarter, the depreciation and amortization and then I missed the capital expenditures for the quarter.

Hold on one second. Interest expense for the quarter was $1.7 million.

That's gross or that's net?

That's gross. Interest expense net. But there is very little -- it's probably a couple of million dollars.

OK, and then depreciation and amortization and CAPEX.

Depreciation for the quarter was about $7 million. We had about $26 million for the year in capital expenditures in the quarter were $8.9 million a total of $44 million for the year.

And you expect next year would be about the same you're saying?

Yes. That can change pretty significantly because of timing. Some of the projects that we're involved in are pretty -- you know, each one is pretty significant. If we put something in place in a particular quarter, you know, it can change the number by $4 or $5 million just by a few days. The answer is I believe somewhere in the mid 40's should be about what we do next year. Again, most of it directed to the films business.

Thank you.

Larry Baker from Legg Mason you may ask your question.

Yes. Just, Robert, you had several good defense contract wins in the fourth quarter. Are there other programs out there that you guys are looking at that you would expect to announce over the -- over the first quarter of this year?

Well, we have some other proposals out. And as soon as they, you know, are signed off and authorized, we'll make whatever announcements you know as we win them. We have some that -- we have one that we think will be imminent but we can't talked about it until we have a signed off order.

Harvey, can you talk a little bit about any changes at Telephonics in the Nano sell, just any update there?

We are continuing to do some research and development. We have a working model. We have sold some to some of the carriers in Alaska and Oklahoma and we're trying to now sell it in Mexico and South America and not to spend large amounts of money to develop one that meets all the requirements of Verizon. We're trying to get around over Verizon requirements and sell it to smaller carriers and putting a lot of our effort right now in Mexico and South America. And we'll know better by January, February, where this is going. But we've cut back dramatically on the amount of dollars we're spending.

OK, and just one question on films may be this was the question that Arnie asked I missed his question. Can you sort of project what in '04 would be revenues associated with printing?

No, we have not done that. We have not broken that out. You know, the printing is going on-line as the customer has the needs for it and he's expanding. And as he expands further and further in introducing the printed item, more and more is going on stream. So we can't really give it any kind of quantitative analysis of what it's going to be at this time by quarter or for the year. But more and more is going on-line every day.

OK. Thank you very much again.

Once again, if you would like to ask a question, please press star, 1.

And at this time, sir, we have no questions.

Thank you. Bye.