Griffon Corp (GFF) 2004 Q2 法說會逐字稿

Hello everyone and welcome to Griffon Corporation second quarter 2004 earnings call. With us today is 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.

To ask a question please press star 1. All participants will be in a listen-only mode. Today's conference call is being recorded. Your participation implies consent to our recording this call. If you do not agree with these terms, simply drop off the line. I would now like to turn the call over to Mr. Blau. Go ahead, sir.

Good afternoon, and welcome to a financial overview of our second quarter of fiscal 2004 which ended on March 31st, 2004. I am Harvey Blau, Chairman of Griffon Corporation, 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 detail. First I would 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 statements.

In the last quarter, we said that each of our segments seemed to be in a very positive business environment which should benefit future results. The company's operating performance in the second quarter is a reflection of that outlook at our first quarter.

Consolidated net sales were $318 million, a 15% increase from the $270 million last year second quarter. Pretax income was 19.3 million compared to 11.2 million last year.

Net income of 8.7 million for the quarter resulted in diluted earnings per share of 27 cents compared to 14 cents last year. Diluted earnings per share poor the last 12 months was $1.52.

Each of our business units reflected increases in sales, operating income, and margins in the quarter. In specialty plastic films sales increased by 16% to $107 million.

Operating income increased to 15.1 million representing a 14% of sales compared to 9.2 million last year. Our building products operation also continued their impressive performance.

In garage doors, sales were up 16% to 96 million and operating increased to 4 million compared to 3 million last year. Our service and installation operation had sales of 72 million compared to 67 million last year. Operating income increased to 1.7 million compared to 500,000 last year.

Telephonics, our electronic information and communication systems segment, had sales of $47 million, a 16% increase from last year. Operating income was 3.7 million compared to 2.9 million last year. With respect to cash flow we continued to make the investments necessary to support the growth of our operations. Cash flow from operations was 18 million compared to 3 million last year.

Capital expenditures in the quarter were 10 million, primarily for capacity additions in our plastics films operation. We also continued to fund our common stock purchase program using $9 million in the quarter to acquire 420,000 shares of stock.

For the first six months of fiscal 2004 we have acquired 730,000 shares of stock for $15 million. Bob Balemian will now provide some details on the operation and on the outlook.

Good afternoon. This is a very interesting and exciting time for us. The continued substantial improvement in operating results and cash flow present numerous expansion and business opportunities for the company.

Sales in our films business increased by approximately $14 million, representing a 16% increase. Of the increase $8 million came from exchange rates reflecting a weaker dollar and 6 million came from other factors such as volume, pricing, and product mix.

The operating margin in films for the quarter was up substantially compared to the prior year reflecting the sales increase, improved production efficiencies, and a benefit from resin price changes and foreign exchange rates.

With respect to resin prices, as we discussed last quarter, in North America we had a 5 cent per pound increase effective October 1, 2003, which resulted in a negative impact in our first fiscal quarter. There was another price increase in February 2004.

The expectation of our operating people is that we would experience slight reductions in resin prices over the balance of 2004. So far this is in fact what has happened. There has been some weakening in domestic resin prices and our belief is that overall there will be little impact in operating results over the balance of the year.

In prior calls we have discussed in detail our capital expansion program in films. We don't have a great deal more to add at this time.

We continue to make good progress adding additional printing capacity in Europe and North America and we are in the early stages of adding substantial additional film capacity in Germany and Brazil. Execution of these programs is critical and we are encouraged by what we have accomplished to date and we will keep you informed on future progress.

Garage door sales in the quarter increased about 16% with good sales growth in both retail and dealer distribution channels. The volume growth and a favorable product mix resulted in garage doors operating margins increasing to 4.1% for the quarter compared to 3.6% last year.

For the six months ended March 31, 2004, operating margins increased to 7.9% with their strongest seasonal period still to come. Last quarter we spoke of increasing steel prices. The current situation is that we have received steel price increases which are substantial enough to require an increase in our selling prices.

We have instituted price increases which are currently in effect. I don't want to sound like it's easy, because it isn't, but we continue to monitor the situation and will attempt to take steps necessary to minimize the effect on our business.

With respect to the outlook for garage doors it's similar to would benefit been saying. Our customers continue to be optimistic, current order inputs remain strong and the business environment is positive. We anticipate further sales growth and continued improved margins.

Our service and installation operations had an excellent quarter with strong results in our primary markets. The operating results have also benefited from reduced exposure to underperforming locations in Florida and Texas. Our markets remain strong, and we -- we are hopeful that the balance of the year can reflect similar progress with margin increases continuing to be the primary goal.

Telephonics reflected positive growth win creased sales, earnings, margins. The quarter reflected growth in our core programs and also benefited from the effect of certain new contracts booked at the end of last year.

In October 2003, we announced the award of a $35 million contract for ground surveillance radars providing protection of U.S. Air Force bases. Most or all of this project will be completed in the last half of the current fiscal year 2004 which will result in sales and earnings gains for Telephonics for that period which are substantially above last year.

In summary we are pleased with the strong operational performance of our business unit and we remain optimistic with respect to the near term.

At this time we would like to open --.

One moment, please. Are you ready for the question-and-answer session, sir?

Yes, we are.

Thank you. At this time we will begin the question-and-answer session to ask a question press star. You will be prompted to record your name. To withdraw your request press star 2. One moment, please, for our first question from Mr. Bob Labick from CJS Securities.

Good afternoon, congratulations on a very nice quarter.

Thank you.

One question. I just touched on Telephonics, the homeland defense, the ground surveillance contract you said will be mostly in the second half. Was any of that pulled forward into this quarter or was the strength in Telephonics from things other than that contract?

We have shipped none of that contract through March. The program has started in April. We're making good progress. We're on schedule, probably ahead of schedule.

The results in the first six months of Telephonics relate to our core programs and some growth in the other programs we booked. None of it relates to the ground surveillance radar program.

Great. In garage doors you said you got a price increase. Was that effective in this quarter as well or will that also be felt next quarter?

None of that price increase is reflected in the March numbers. It's effective at various times from April 1st on.

Okay. Terrific. And then in terms of specialty film, was any of the new printing capacity reflected in the top line for this quarter, you know, in Europe?

We are shipping some printed product in Europe.

And the --.

it's not a very substantial number as yet.

Were there any one-time events that caused the substantial increase in operating income? Or is this a more sustainable level going forward?

I don't know if we can say it's sustainable or not sustainable, but there's nothing one-time in these numbers, no one-time contracts, no one-time payments of any sort to distort these numbers.

Terrific. Last question. Just -- could you prioritize your uses of cash? You had very strong free cash flow. Are there any acquisitions in the pipeline? Where would you be looking? Obviously you're buying back stock does that continue to be a priority as well? Thanks.

The first thing we do with our cash is use it for capital improvements and for investments in our plastic films. The second thing we've been doing is discretionary, which is buying back stock.

If we had an imminent or some imminent acquisition in mind we would probably stop buying back stock and look at the acquisition, which would be probably paid in cash. So right now we don't have anything imminent on our horizon.

Okay. Great. Congratulations on a good quarter.

Thank you, Bob.

David Martin of Deutsche Bank you may ask your question.

Thank you, and congratulations on a good quarter. First question, coming back to the ground surveillance product, which is going to be sold in the second half of the year, how should we think about margins on that piece of business relative to what you earned in the quarter?

Well, it's -- it's a -- it will have obviously a -- I'm not sure about obviously, but it will have a positive impact on margins at Telephonics. It relates more to the volume of business which obviously makes everything else more profitable. The specific profit on the -- on that program is comparable to other Telephonics programs. But the overall impact because of its size will have a positive impact on the margins.

Secondly, coming back to the plastics business, you had a great quarter, you commented in the text about mix. Now, I don't know if that mix was some of the product you're selling out of Europe or whether it's particular to markets. Can you give us a little color possibly?

Yes, part of it relates to the new product being produced in Europe. There's some -- the dollar value obviously attached to that, new value-added, and that number is so far relatively insignificant but we'll grow that substantially over the next six to nine months.

In addition to that we have another element of our that we don't spend a lot of time on, other than the hygienic film but other elements of the business which are in a lot of ways from a margin standpoint as profitable or more profitable than the hygienic business, some of that having to do with the medical area, and that business has been relatively strong for us also.

I would say generally speaking, it's coming from all segments of the business, both hygienic and some of the new product we've been involved in.

Okay. Then coming back to steel costs quickly, just kind of curious about the financial impact by steel cost increases or decreases, for that matter. Absent any price push-through, what impact does, say, a $10 or a $20 increase or decrease in steel costs have on your business?

We're really not going to get involved too much on specifics about impact on various elements of our cost of making a product or the components of manufacturing costs. That's obviously a touchy situation for us.

Okay. And then I guess lastly if you could --.

Let me cover the issue about steel price increases. We have seen some. Most of them have occurred prospectively with respect to the second quarter. We haven't seen a major impact in our cost structure as yet but we -- but it's coming and it's quite substantial.

We have -- we have price increases announced in the marketplace. We think when we're all through, and it's put to bed we will have essentially no impact from the steel prices on our business. That's our aim, positive or negative.

Okay. And then lastly if you could just update us in Telephonics on the wireless venture. Any capital commitments or -- maybe you could just update us on the plans there.

We have basically minimized our investment in the wireless program. We are trying to capitalize on what investments we've already made by going out and trying to sell our technology to various customers without making further investments in the program.

As you may know the program has cost us a few million dollars a year every year, so -- which has had an adverse effect on Telephonics, and we want to either terminate that, which -- or bring it down to a very, very manageable level which is what we've done, and we will see if anything occurs, and if nothing occurs over the next few months, then we will just terminate the balance of the investment, and we won't make any more investments in the program, which will have a positive effect on Telephonics.

Okay. Great. Thank you.

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

Good afternoon, Harvey, Bob.

Hi, Larry.

To go back to the steel, Bob, have you raised prices? Is this an across-the-board price increase? For every segment of the market, home builders, retail?

As I said, It may not be as easy as just describing where we are right now. It's something that we continue to fight in the trenches, it's generally been accepted by the marketplace because, you know, it's more than garage doors that have been impacted here.

The answer is yes, we have a price increase announced in the marketplace which is effective, which has been generally accepted by all elements of the market and that goes for retail dealers and new construction.

Okay. And then on the specialty plastics, can you break out what the effect on sales and operating income was the pass-through of higher resin costs and sort of comment on the continuity of that into the third quarter?

We had very slight impact in the quarter on our operating -- we had about a $2 million increase in volume as a result of passing through higher resin prices, compared to what they would have been with no change. And in terms of margins, you know, our normal percentage related to that $2 million, which would be some relatively insignificant amount, something less than a half million dollars.

Looking at the third quarter or the fourth quarter was there anything in mix or in pricing that you'd expect to go away in the second half of the year?

In the films business?

Yes, in the films business.

No, the key really is volume. The volume's been very strong and again there's no unusual items there except the volume is relatively high, and if we stay at that level we will be able to maintain margins pretty similar to would we've accomplished in the third quarter.

Our expectation with respect to resin prices, again, we've been wrong before but we've been right more times than not. Our expectation is that there should be little change other than some slight weakening between now and the end of the year and we don't anticipate any significant impact from resin price changes.

Okay. In your conversations with your key customers is there any indication of a change in their product outlook that would make you think you might not be able to sustain the volume?

No. No, we haven't -- no. No, business seems strong. We have no reason to believe that things will change. With respect to the third quarter, which, of course, we have more visibility on than -- we expect a real good third quarter.

Great. Thank you very much Bob.

Thank you.

Our next question is from Rudy Mueller of Winchester Group.

The question is on garage doors. Roughly, what proportion goes into new construction and what goes to replacement?

Generally estimated somewhere around 70 to 75% of our business in garage doors being in replacement market, remodeling, and the balance in new construction. You don't know exactly but that's a pretty good estimate. And that's more than the marketplace. More in the marketplace for renovation and generally speaking that's because we have a big element of our business in retail which tends to be more renovation than the balance of the business.

And the second question, are any of your garage doors made from materials other than steel, or do all garage doors contain steel?

We have some relatively insignificant amount that are made from product like wood other than steel, but steel represents at least 95% of our business.

Thank you.

Alan (ph) Margolios of Forstmann-Leff, you may ask your question.

Good afternoon. In terms of the foreign currency can you talk a little bit about your -- do you do any hedging or anything like that to offset it or take advantage of the rates now?

We do not, just in terms of actual currency, our operation operate in Germany in euros, so the risk -- the numbers the impact on our company and what we're talking about really is translation gains or losses.

Okay.

It's really just translating the operations that are done in euros to dollars to present them in the financial statements.

And just another question on the acquisition strategy. It sounds like there's nothing out there right now that you're really looking at. In light of your positioning at Home Depot and what you have with the garage doors it seems like it should be -- there must be many, I guess, home products goods out there that you could just layer on through your distribution channel.

Is that accurate, or -- because I'm just trying to understand how why maybe you haven't been able to take advantage of any opportunities like that.

Well, the answer is yes, there are a number of other building products that relate to the type of business we're in, whether it's manufacturing or distribution or from a customer standpoint. There are a number of them, and we've looked at them. We are still hopeful that we can get something done. We are -- our people are very difficult to satisfy.

Sure.

We have a lot going on in our garage door business. They've put a lot of time and effort in making it better. We have a lot of room to improve it. We believe we have a lot of room to grow our garage door business.

That said we'd like to do an acquisition that's complimentary to that building products area but until we find the one that seems right to our operating people we will not go forward.

Thank you.

Patrick Forkin of Rockhouse Research you may ask your question.

Congratulations on a great quarter. Just back to the films operating margins, one last time, if I heard you correctly, you had a 500-basis-point improvement year-over-year but you're saying that that's not significantly related to price increases that you've passed along to your customers or to recent price decreases in resin; is that correct?

The only item that we probably should describe in detail, some impact on it, really from exchange rates. That may be sort of out of the realm of operations.

We have had some positive impacts on -- from exchange rates because the operations that relate to the foreign exchange that do business in euros generally are plants which have operating -- higher operating margins than the overall business I've estimated, I think, about 1% of the increase relates to exchange rates.

The balance relates to very little from resin prices. The balance -- there is some pricing change but that relates to product changes. So there may be some profitability items with respect to the new things that we're making that have some margin the element that maybe didn't exist in the prior quarter but generally speaking it relates to those types of things plus volume, plus the high level of sales.

Okay. Great. That's helpful. With respect to the previous price increases that you've had as resin prices sort of took off, last year, do you expect the customers may start coming back to you at some point in time for some kind of price give-backs, and if so, you know, when would that -- when could that happen?

That happens all the time. We have in very significant part of our business built in pricing adjustments related to resin prices. So as resin prices go up, selling prices will tend to increase, and as they come down selling prices will tend to come down.

There is some lag and as they're going up there is some negative impact on margins, as the resin prices are coming down there's a positive impact on margins.

But that's built into the the equation and the numbers you see, in fact, last year the last six months of last year we did see some negative impact in total volume as resin prices came down we did pass that on.

Great. Thank you very much.

Chip(ph) Brewey from Kramer Rosenthal, your line is open.

One question then a bunch of little -- accounting or income statement questions. You mentioned cash flow was producing lots of interesting opportunities in plastics and other. Anything specific in that that you're looking that was foreshadowing that you can talk about more? Then just the one-timers, can you give us ending share count or average share count for the quarter, what the D&A was for the quarter and what cap ex and D&A are for the year and the net -- the cash position, the debt position and the equity position? Thanks.

You think I can remember all those things?

Why don't we do one at a time.

How about the first question?

The first question had to do with --.

investment opportunities that are interesting at the moment.

Okay. We have certain requirements to make capital improvements. Just maintenance capital improvements run to substantial dollars, and in addition we are adding capacity in Europe and Brazil and we are adding printing capacity both in the United States and in Europe.

So these alone take a very large amount of investment and we have been investing somewhere between 40 and 50 million dollars a year over the last couple of years. So $10 million in the first quarter is not out of line.

The balance of the money we use to buy back stock because we didn't have any other thick to do with it since we don't have any bank debt.

Okay. I understand that. So I guess you're not saying that there's anything on the horizon that you would like to do here and your strong cash flow is giving you the opportunity above and beyond what you've been doing?

We are constantly looking for things to add on to our business and acquisition and those kind of things but so far what we have seen has either not fit in, did not have proper profit margins, were very competitive, was susceptible to the customer being able to put pressure on margins so we don't want to get involved.

The one-timers if you don't mind. The average share count for the quarter?

Basic earnings per share number was about 29,900,000 shares, fully diluted 31,8.

Thank you, what was the D&A in the quarter?

7 million 1.

What's that for the year?

About four times that number, about $28 million.

What's the cash, the debt, and the equity?

I think you might have asked about [inaudible] addition, and that was $10 million. Cash is 58 million five. Debt level about what it was last quarter. We have about $30 million in liabilities in long-term liabilities other than the subordinated debentures which are $130 million.

So our total debt is somewhere between 150 and 155 which is very similar to what it was last quarter.

Okay. And just the equity?

Our equity, 300 million. Our debt is basically fixed -- we don't have too much variable debt.

Great. Thanks a lot. Good quarter.

Thank you.

Once again if you would like to ask a question press star 1. Gentlemen, I show no additional questions.

Thank you very much. Look forward to speaking to you the next quarter.

Thank you for participating in today's conference call.