Griffon Corp (GFF) 2004 Q1 法說會逐字稿

Hello everyone, and welcome to Griffon Corporation's 2004 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. You may press star one to ask a question at that time. 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 have you any objections, you may disconnect at this time.

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

Good afternoon. And welcome to a financial overview of the first quarter of fiscal 2004, which ended on December 31, 2003. I'm Harvey Blau Chairman of Griffon Corporation. With me is Griffon's President, Bob Balemian. I will discuss the overall results of the quarter. And Bob will provide some further detail.

First, I wish to point out that to the extent that matters to be discussed on 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 first quarter has given us a very successful start to our fiscal 2004. Net sales were $339 million, a 12% increase from the $302 million last year. Pretax income was $25.7 million, up 22% from $21.1 million last year. And diluted earnings per share for the quarter was 41 cents, compared to 32 cents last year. Especially encouraging, that each of our business units contributed to this record quarter.

In Films, we continued the trend of substantially increased sales in earnings. Sales for the quarter in this segment increased to $104 million, compared to $87 million last year. Operating income was $12.9 million, compared to $10.7 million last year.

The sales and operating profits of Garage Doors continued to improve, based on many of the factors we have previously discussed. We have made substantial progress in the industry, achieving higher unit volume, manufacturing efficiencies, and effective cost control. Sales in Garage Doors for the quarter were $122 million, compared to $113 million last year. And operating income increased to $13.3 million, up from $10.9 million last year.

A strong business environment for our Service and Installation operation resulted in this segment making a very positive contribution to the quarter, with sales, earnings and margin growth. Sales increased to $77 million, and operating income increased to $3 million, with margins increasing to 4% of sales.

Telephonics, our electronics, information, and communications systems segment had sales for the quarter of $42 million, compared to $36 million last year. And operating income was $2 million compared to $1.7 million last year.

Cash flow remained strong in the quarter, a portion of which was used to fund our stock purchase program. In the fiscal year-to-date, we have spent $10 million to acquire 500,000 shares of common stock. The Board has authorized a one million share increase in our stock buyback program, bringing the current authorization to 1.9 million shares.

The acquisition of Griffon stock continues to be viewed by us as a good use of corporate funds. And our intention is to make meaningful additional purchases in the future.

The company is also -- continues to make -- investments to support anticipated growth in each of its operations. Capital expenditures in the quarter were $14 million. The major portion of which relates to the Plastic Films business.

Bob will now provide some details on the operations and on the outlook. And then we'll have time for questions.

Good afternoon.

It's quite exciting to start off the year with such a good quarter. Not only did each segment report strong results, but each seems to be in a very positive business environment, which should benefit future results.

Sales in the Films business increased by approximately $17 million, a 19% increase, with $8 million coming from additional volume and product mix, and $9 million from exchange rates reflecting a weaker dollar. The margin in Films for the quarter -- the margins in Film for the quarter were up slightly compared to the prior year, reflecting the sales increase and improved production efficiencies.

These positive factors more than offset the negative impact of approximately $2 to $2.5 million from resin price changes. As you may recall, resin prices were quite high in the middle of last year and then tended to come down slightly in the last half of the year. Effective October 1, 2003, we received a 5 cent per pound price increase, which was the major contributor to the impact in our current quarter.

There was an additional 4 cent per pound price increase effective February 1 of 2004. Our operating people then anticipate that there will be slight reductions in resin prices over the balance of the year.

Our capital expansion program in Films continues to make good progress. We are adding additional printing capacity in Europe and North America. And we have added some additional film capacity in our North American operations. Over the balance of this year, our plan is to add substantial additional film capacity in Germany, and in Brazil. Investments in our Films business have been, and continue to be, quite substantial.

I would like to provide some information about what we are accomplishing, and the magnitude of additional opportunities available to us. These investments will enhance our current market leadership position in our core technologies and help us develop new markets. They will also allow for future geographic expansion, and will incorporate the latest engineering and technology upgrades regarding substantial competitive advantages.

The Film capacity investments that began last year will take us through most of the current year and will most likely also extend into the beginning of the next year. Execution is critical, and we have been encouraged by what we've accomplished to date.

Further cost of this equipment is anticipated to be approximately $35 million and involves each of our operating locations. It is anticipated that these investments will yield capacity increases of approximately $110 million, with two-thirds of this capacity in Europe and the balance in North America and Brazil. When you combine these projects with our investment in printing, it's pretty obvious that we have substantial expectations for our Films business.

Garage Door sales in the quarter increased about 7.5%, with sales in the retail channel being especially strong. The volume growth and the favorable product mix resulted in Garage Doors' operating margins increasing to 10.9% for the quarter, compared to 9.6% last year.

The outlook for Garage Doors remains bullish. We have made infrastructure improvements leading to more efficient production, improved customer service, and volume growth.

Although we have not seen any major impact yet, steel prices have been increasing. We are anticipating a price increase in our third quarter, but we expect to be able to pass this on through higher selling prices.

Our garage door customers continue to be optimistic. Our current order input remains strong and the business environment is positive. The near term outlook is similar to what we've experienced the last two years. We anticipate further sales and growth, sales growth and continued improved margins.

We have also made good progress in our Service and Installation operations. The quarter reflected strong sales growth in the Atlanta, Phoenix, and Las Vegas markets, which represent the major parts of our business.

The operating results have also benefited from future -- from reduced exposure, through underperforming locations in Florida and Texas. Our markets remain strong, and we are hopeful that the balance of the year can reflect similar progress with margin increases being the primary goal.

Telephonics reflected positive operating results for the quarter, with increased sales and earnings. The quarter reflected growth in our core programs, and we have started to benefit from the effect of certain new contracts booked at the end of last year. These new programs, together with good performance on existing programs are expected to result in a strong last half of fiscal 2004 for Telephonics, with sales and earnings substantially above last year.

In summary, we are pleased with the quarter and the direction of our businesses, and we are optimistic about the balance of the year.

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

Thank you.

[OPERATOR INSTRUCTIONS]

Rob Labick of CJS Securities, you may ask your question.

Thank you. Good afternoon.

Hi.

Hi. Just to start. Your operating margin in Doors and Installation Services, in particular, are each up over 100 basis points year over year? Is that improvement sustainable in margins going forward? Was there any, you know one time gains in there?

No one time gains, other than business in the building products area being pretty strong. As we said Atlanta and Phoenix and Las Vegas in our installation operations did real well. We've also gotten rid of some of the weaker markets, namely Florida, and we're reducing our scope in Texas. So that's helped margins also. We've talked about increases in that business, and we think -- I'm not sure we can sustain 4% for the entire year, but we certainly will be above last year.

Garage doors also, no one time events, business pretty good. We've talked about margin growth in the past. We've achieved that. We expect to be able to get to 10% operating income for an entire year in the garage door business, and it may happen sooner than we expected.

Great. And in terms of the rented product business in your Films division in Europe, did that have any impact in the quarter?

I didn't get the question. Could you repeat the question? We didn't get the first part.

Sure. In terms of the printed product business for your Films, Specialty Films in Europe, your new product in Specialty Films in Europe, were there any sales of that product in this quarter?

We have -- we started actually in the end of last year, delivering some printed product in Europe. It has continued. It has not made a major contribution to our operating results. We're really getting started in the program.

We have some capacity that we've installed. We're obviously not using 100% of it yet. We are installing additional equipment. But overall, there's probably actually a little drag on margins from the startup costs. We don't have any major contributions from that -- from that project yet.

Great. And then staying with Films, what's the timeframe, I'm sorry if I missed this, in terms of when the $110 million in additional capacity would be done? Is that by the end of this year, it would be in, the end of next year, or when would that be completed, roughly?

It will be accomplished over the next year and a half. We have some equipment installed already, primarily in North America. The project in Europe, which adds a significant piece of that, $110 million, will not be completed until the beginning of '05.

And then we have some equipment being installed in Brazil, which will take most of this year, also. So the answer is we do have some additional capacity on stream now. Most of the -- the bulk of that number will come toward the end of '04, beginning of '05.

Okay. Great. I'll get back in queue. Thank you.

Thank you.

Larry Baker of Legg Mason, you may ask your question.

Good afternoon.

Hi.

Bob, would you just repeat what you said about the 4% -- sounded like a 4% increase effective February 1 in resin prices that you think then will be rolled back slowly over the course of the year? Will you just go over that again?

Yes, that's pretty much what we said. We had a 5 cent per pound increase October 1. And basically, our estimate is that that cost us between $2 and $2.5 million. That's a combination of things, actually. Resin prices came down at the end of last year.

So the element of resin within the price structure for the first quarter included lower prices due to the decreases in the end of last year. And what we were paying went up by 5 cents a pound in the first quarter, effective October 1. That increase will be reflected in our pricing for -- in the second quarter. That 5 cent per pound. Which would help the quarter.

But on the other hand, we do have a 4 cent per pound increase effective February 1, which will be negative for the last two months of the quarter. So the basic effect in that second quarter is we expect some slight negative impact from resin. Not a dramatic number, and we don't think it will be as high as it was in the first quarter. And then we anticipate slight reductions over the balance of the year.

Okay. Can -- the margins in the first quarter were quite good. Do you think that that level is sustainable for the year with the, I guess, the resin issues, as well as whatever interruptions you have from your capacity expansions?

If the volume remains, Larry, and we expect it will, we should be able to maintain margins at that level. What we've done a real good job at is improving efficiencies, and we see some of that built into these numbers. But we do have -- we do have some startup costs, and we do have some negative impact from resins.

But you know, we believe that on a mature basis, a recurring basis, when we get a lot of this capital expansion program behind us, that 13% to 15% margins in the Film business are doable. We're slightly below that, primarily because of what we talked about. So yeah, our anticipation right now for the balance of the year in Films is, if the margins hold up, is to maintain these operating margins.

Okay. And then just on Installation Services, I understood the -- that you had a capacity reduction. Now does that affect the whole quarter? Because I was a little surprised at the sales strength there.

Yes, we did -- actually the sales strength was a little more than anticipated. Because it did involve less operations. We did close down most of our Florida business. And what you see does have Florida into last year and basically not for this year. Volume was good in the three markets we -- basically the three markets we talked about. And that's really helped margins quite a bit.

Also, not having the effect of Florida, and reducing the effect of the, the negative effect of Texas somewhat, we're not there yet, but we have made some improvement there, really has lead to the improved margins.

In Texas?

[INAUDIBLE] In fact we, you know, it seems to have -- remained pretty strong, even in the second quarter. Even, you know, this is obviously our Building Products area, the second quarter is the lowest we have of any quarter. But right now, business is not bad.

And Bob, can you maintain or match last year's sales, even with the reduced geographic territory?

You mean in the Service business?

Yes. Thanks, Harvey.

Yes, our expectation is to have volume higher than last year and also earnings up, of course. But we think we can come in at a higher level than last year.

Okay. And just one final housekeeping question. Your share repurchase program, Harvey, the $1.9 million, is that outstanding after the 200,000 shares you purchased so far this quarter?

Yes.

Okay. Great. Thank you.

[Austin Fields] of Clear Lake, you may ask your question.

Hi. Good afternoon. A couple of quick questions. One is, can you quantify the impact that the weak dollar had on your operations, somehow?

Yes. In terms of volume, it's approximately $9 million, and that would be -- if you take that down to the operating income level, it would be a basic equivalent to what the operating -- what the margins are in the company entirely. Which are about 12% to 13%.

Okay. Terrific. And just to follow-up on the question about the resin. Am I understanding it correctly that there was basically a $2 to $2.5 million hit in this quarter, where as next quarter, you'll theoretically have a one cent theoretical benefit for resin pricing? Is that correct?

No. The first quarter was a $2.5 million hit because resin prices went up.

Right.

We passed through a lot of the resin price increases to our customer. But it takes a quarter for us to get that through. So therefore, in the second quarter, we should be able to recover some of that increase in the first quarter, in the March quarter.

In addition, there's going to be an increase in February that will be in the March quarter, which will take us into the June quarter, to recover that amount. But on an overall basis, we don't think that on a yearly basis, it's going to have a material effect on us.

Got it. And my last question just had to do -- what is the price at which the convertible debt can convert?

The convertible debt converts at $25 and change, but it's not convertible until the stock is $28 and change.

Okay.

I believe it's just slightly below $25. Some --

$24.90 or $24.80. Okay.

Thanks very much.

It cannot be converted until the stock is $28.

Great.

That was July. We can't go back that far.

Thanks very much, guys.

[Nelson Obus] of Winfield, you may ask your question.

Yeah. Hi there, guys. Hey, just eyeballing the P&L, despite the effects of the dollar, it looks again as though the European joint venture within Specialty Plastic Films has been the real star. And I just wonder if you could address, going forward, whether the non-European joint venture components of Specialty Plastic Films, you know, could, you know, potentially emulate the performance of the joint venture?

And also if there's anything about the joint venture that would allow you to become a -- a, you know, a complete owner of that, at some point in time? Whether there's anything in that -- in that contract that offers you a buyout?

Lete me take the first part. The last part first. The answer is we expect to be a 60% owner of the operation in Germany for an extended period of time. I would expect that we will continue to be at that investment level. We don't have anything built into the contract that allows us to unilaterally make a change.

With respect to the operation, I'd like to point out, we've talked about this in the past, the operation in Germany is pretty much at a production facility. They don't have the same overhead structure that that we have in the domestic operations. That business is basically run out of Cincinnati. The operating -- the operations were designed there. All the technical development is in Cincinnati. The overall management of the business is in Cincinnati.

We do have some inter-company charges that are reflected in the production facility in Germany, but basically, that business will always have a higher margin, simply because of the overhead structure. In addition to that, remember, they make basically one product. It would be always a higher margin business than the balance of our business.

They make -- they have equipment running at very, very high speed. We've added some changes to how the equipment runs, and we're running at much higher speeds than ever anticipated. And we're basically making the same type of product over and over again, basically for one customer. So, by virtue of it's, you know, it's basic nature, it's always going to be a higher margin business than the rest of the Films business.

By the way I want to bring one thing to your attention. Our partner in Finotech, BBA, which is in the nonwovens business, is a big help us to, in various aspects of the operation, especially as we want to expand in other parts of Europe, and the Mideast. They have a lot of, you know, European connections, and they're very helpful to us. So it's not in our mindset to want to terminate that relationship.

Okay. Great. And I'm sorry, 'cause now I can hear you better, but earlier I couldn't. But you talked about capacity increases. Was it $110 million? Or 110 -- what's the metric associated with 110?

The equipment for Film capacity that we anticipate installing over the next year and a half, some of which by the way has been installed in North America, that investment which we estimate to be approximately $35 million, will generate capacity of about $110 million.

110 million, yeah. And how much of that will be in Finotech versus the rest of the -- versus the rest of the Film business?

About two thirds of that will be in Germany.

Okay.

And the balance split between Brazil and North America.

Okay. So what you really have there is a totally world class facility, you know, that just, you know, is the most productive entity you could lay your hands on, okay? And --

It is clearly a world class facility. And will become even better with the new investment which will be the most current technology that is available.

And just another, I mean this is sort of an amorphous question, but if you look at the -- and then I'll get out of the way.

If you look at the Communication Systems business going forward, say let's say -- let's say the next four years going forward, is it possible to discuss what a normalized EBIT margin might be in that industry, in that segment? Or is it simply too diverse and too lumpy to, you know, to think about EBIT margins, normalized over a, you know, over say a three or four year period.

We've always considered Telephonics to be an approximately 10% operating income company. We can deliver better than that, 10% to 11% is certainly doable.

We have actually, in our core business, done that in the last few years. We've made some investments that have not generated volumes yet, and if we take those out, we are basically in that range. And then I expect that we should be able to maintain at least that level, especially considering the type of growth that we anticipate there.

Okay. Thanks a lot.

[Chip Lilly] of Kramer Rosenthal, you may ask your questions.

Hi. I've just got a few. The cap ex, the $35 million, is that '04, some of it spilling into '05? I think you said that, or was any of that in '03, as well?

And secondly, related to that cap ex, is it for -- how much of that is kind of like dedicated for an end customer, and how much of that is kind of like free market for you guys to go prospect business?

And then I have a couple more questions.

Okay. The $35 million, we have spent some of that in '03. I would say approximately $8 to $10 million dollars.

Okay.

The balance will be split between '04, with most of it coming '04. And there'll be some going over to '05.

Okay.

Most of that -- it encompasses a lot. And I tried to cover a little bit of that in the prepared text.

One of the important things it does is give us the ability to create capacity to take care of existing and anticipated customer needs, in order to grow the business geographically. Open a new facility.

The equipment we're going to install, especially in Germany, will be state of the art, will be even much faster, much more efficient than what we have now in Germany, which is quite good. Most of the business, most of the capacity we're adding -- well, it relates basically to our entire customer base. Some of it is obviously for Procter & Gamble, and a lot of it is for other customers, also.

Particularly in Europe, we have a very extensive customer base, which we don't address, primarily the private label diaper market in Europe. We haven't addressed that because of capacity constraints. But we have some ability there to grow the business with other customers. Also some of that equipment will be dedicated to Procter and future Procter projects that we anticipate, that we really can't get until we have the capacity. So it is really a combination of the two.

We don't have any major program that's basically guaranteed by a customer. We don't have something similar to what we've done, for instance, in the printing program. Most of this -- a lot of it will be for customers that we do business with now in a smaller way than we anticipate some growth, and some of it will be within our existing customer base.

Okay.

Part of the equipment that we're putting into Germany, part of the reason for the equipment that we're putting into Germany, will free up other equipment that we have there to be moved to another facility in another country. And that will give us the opportunity of expanding into these other countries by using existing equipment without having to go out and get further new equipment. And the new pieces of equipment will be used in Germany to extend the operations there, and fill the gaps with our present customers.

You can go to low cost environments with low cost equipment, basically?

Exactly.

Great. Telephonics, you -- could -- were any of the orders you run at the end of last year material enough that it will make that -- like what are they on any single platform that makes sense? And you said they'll ramp up this year. Any thought as to how much they could be? I'm just not familiar with them. I may have forgotten. Thanks.

We have two contracts -- we have a whole series of contracts at Telephonics that are ongoing. We have two new contracts that we announced last year. One was for the CP-140 which is a marine airplane for the Canadian Air Force or Canadian Navy, and it's used for interdiction of immigration and drugs, and things like that.

That was a substantial contract. That'll be over a period of years. Like five to seven, six years, for that program to be developed, and then [INAUDIBLE] it.

The other program was a program having to do with radars for protection of Air Force bases of their Homeland Security concept, the Air Force through [INAUDIBLE] has awarded us a contract. That contract has to be completed by July of this year. So that full contract will be delivered within this fiscal year, and that is approximately $35 million of sales.

Great. And on -- any -- I haven't heard about Nanocell. Any updates there, either orders or quashing it?

We are reducing our investment as far as R&D is concerned. We have a product that works, and we are now trying to sell it. So the effect on the earnings of Telephonics will be reduced substantially this year, and we're waiting to see whether or not we have a salable product, and we're trying to develop a -- partnerships to try to sell the product.

The product works. And we don't want to add more features to it until we know that it's a usable, salable product.

Great. And then just the last. The Florida and Texas installation markets you exited, or winding down, did you just close those or did you sell them? And if you sold them, was there a gain or a loss in the numbers?

We are -- we are basically completed with the Florida market. Most of what we want to accomplish there, we have done. That was done last year. And it was a combination of closing and selling.

We got it down to a small level, and it made it -- it made it salable, and we did a small transaction there. We have had losses in the last year or so, relating to a phase down of both of these operations. Not a dramatic number.

Texas, we will take a similar approach. What we've decided to do is do it over a period of time to really minimize the negative impact of the transaction. We decided to -- to close down would -- it would be difficult to recover receivables and inventory and so forth. So we have reduced our scope, reduced our involvement, we'll attempt to get down to a certain level where we can then sell it.

All right. Thanks a lot.

Once again, if you would like to ask a question, please press star one at this time. One moment, please.

This concludes today's question-and-answer session. I'll turn the call back over to Mr. Blau.

Thank you very much. We appreciate it. If you have any further questions you can certainly call on us, and we'll be happy to speak to you. Bye-bye.