Griffon Corp (GFF) 2004 Q3 法說會逐字稿

Hello, everyone and welcome to Griffon Corporation's third quarter 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 remark, there will be a question-and-answer session. If you would like to ask a question during this time, simply press star, then the number one on your telephone key pad. If you would like to withdraw your question, press star, then the number two on your telephone key pad. All participants will be placed on a listen-only mode. This call is being recorded, August 3, 2004. Your participation implies consent to our recording this call. If you do not agree to these term, simply drop off the line. I will now turn the call over to Mr. Blau. Please go ahead, sir.

Good afternoon and welcome to a financial overview of our third quarter of fiscal 2004 which ended on June 30, 2004. I'm Harvey Blau, Chairman of Griffon Corporation and with me is Griffon's President, Robert Balemian. I will discuss the overall results of the quarter and then Bob will provide some further detail. First, I should like to point out that to the extent that matters to be discussed in this call include forward-looking statements, they involve certain risks and uncertainties that could cause the Company's actual results to differ materially from those in the forward-looking statements.

The Company's performance in the third quarter continued to reflect the result of a solid business environment. While we have certain issues to be faced about by our operating units in the coming months, we remain optimistic regarding the overall strength of our markets. Consolidated net sales for the quarter were $368 million, an 18% increase from the $313 million in last year's second quarter. Pre-tax income was 24.8 million compared to 19 million last year. Net income of 13.2 million for the quarter, resulted in diluted earnings per share of 42 cents, compared to 33 cents last year. Diluted earnings per share for the 12 months ended June 30, 2004, was $1.61. Each business unit reflected increases in sales and operating income in the quarter.

In specialty plastics film, sales increased to $100 million compared to 98 million last year. Operating income increased to 10.8 million, compared to 9.6 million last year. Our Building Products operations continued to reflect solid performance. In Garage Door, sales were up 13%, to $121 million, and operating income increased to .6 million, compared to 9 million last year. The strong sales growth was mitigated somewhat by the impact of rising steel costs. We will address this issue a little later in the call. Our Service and Installation operation had an outstanding quarter with sales of 80 million compared to 72 million last year, and operating income increased 3.5 million, compared to 2 million last year. Telephonics, our Electronics Information and Communications Systems segment, had sales of 73 million, a 72% increase from last year, driven primarily by the ground surveillance radar program for the U.S. Air Force, which we previously discussed. Telephonics operating income watt 6.2 million, compared to 1.8 million last year.

Our cash flow remains strong, and we continue to make investments necessary to support the growth of our operating units. Capital expenditures in the quarter were 6.4 million, including capacity additions in the Plastic Films business. This amount is lower than it has been recently due primarily to timing of expenditures, and does not reflect the slow down of our capital expansion program. We also continue to fund our common stock purchase program using 5 million in the quarter to apply 223,000 shares of stock, and for the first nine month was fiscal 2004, we have acquired approximately 1 million shares of stock for $20 million. Bob will now provide some details on operations and on the outlook.

Good afternoon. It remains an exciting time for us, with the overall business environment being positive. Sales in our Films business grew slightly in the quarter with operating margins increasing to 10.8%, compared to 9.8% last year. Exchange rates reflecting a weaker dollar increased sales by $3 million. Other factors such as volume, pricing, and product mix amounted to a net $1 million sales reduction. Our Films business' largest customer has redesigned their diaper products, and is now introducing these new products to the market. As part of this redesign, the customers' purchase of back sheet materials is changing. In the past several years, Clopay Plastics has applied a back sheet laminate of film plus nonwoven. Going forward we will supply a printed film, that the customer will combine to the nonwoven. As part of this change, the printed film will be slightly narrower than the laminate supplied in the past. To support these changes, which will will have the effect of reducing revenue from these products, Clopay Plastics has developed a new film products and production capacity to meet the customers' changing needs. The conversion to the new diaper and new printed film has begun, and it is expected to be completed by early 2005.

With respect to rising prices, in North American we had a price increase in February, 2004. We then experienced slight reductions in resin prices through May of 2004 at which time our pricing increase brought us back to slightly above the February, 2004 levels. Since May, these prices have been stable. Resin prices in Europe have been relatively unchanged for the past six months. Overall, resin price movement produced a slight positive impact on operations in the June quarter and our belief is that there will be little impact on operating results over the balance of the year.

We have previously discussed our capital expansion programs in Films. 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. Our current operating performance has had some negative impact due to the costs associated with the expansion programs and that transition from laminates to printed film. These costs should tend to be reduced as we make progress in these areas. We are counting on capacity growth and new hygienic customers and markets, particularly in Europe, will offset the effect of customer design product changes. In addition, we are involved in the development of a new process for a new product for our major customer, which we are hopeful will become a substantial program for us.

Garage door sales in the quarter remain strong with increases of about 13%. These increases occurred in both the retail and dealer distribution channels. Also, we had excellent sales growth, our operating income increased but was impacted by rising steel costs. With respect to steel prices, the situation remains unstable. We have received substantial price increases and have tried to minimize the impact by negotiating with our steel suppliers and by increasing selling prices. We believe we are in a better position now on competition, but we continue to be affected. We estimate that increased steel costs, offset by selling price increases had the effect of reducing operating income by approximately 1.5 million dollars in our June quarter. We will keep you informed on future developments and hope that the market returns to a more normal mode in the coming months. With respect to the outlook for garage doors, we remain bullish. Our retail and dealer customers continue to be optimistic. Order input remains strong. And the business environment, other than commodity prices is positive. We anticipate further sales growth and continued improved earnings, even after the impact of steel costs.

Our service and installation operations had an excellent quarter. Not only did we have strong sales growth, but operating margins increased substantially to 4.4% of sales. Our primary markets, Phoenix, Las Vegas, and Atlanta, remain strong, and we also benefited from reduced exposure to under performing locations in Florida and Texas. We anticipate further progress over the balance of the year. Which -- with margin increases continuing to the upside. Telephonics performance for the quarter was driven by new program awards including a contract to provide ground surveillance radar for protection of U.S. Air Force bases. Sales under this contract were approximately $30 million for the June, 2004 quarter. There are a number of new program opportunities for Telephonics radar products that we are currently addressing. This market seems to be as active as it has been for quite a while, and we're optimistic that we will be soon be able to add meaningful new long-term programs to our base of business. Harvey will now say a few words relating to a proposed change in accounting that will modify how certain convertible debentures affect the computation of diluted earnings per share.

We now have outstanding 130 million dollar principal amount of contingent convertible debentures which are convertible at $24.13. The debentures cannot be converted until our stock trades above $36.20. There are approximately 5.4 million shares reserved for conversion of these debentures. Under present accounting standards, our debentures are excluded from the determination of earnings per share, until the $36.27 price referred to as the cocoa trigger is met. Recently, a unit of the financial accounting standards board proposed a rule change under which the issuers of cocoa convertibles would assume conversion of the debentures, to calculate diluted earnings per share, irrespective of the cocoa trigger being met. If the proposed rule is approved, which is scheduled for the end of September, with a proposed effective date of December, 2004, the result would generally be dilution in earnings per share for issuers was these debentures.

In order to minimize the impact on us, what we anticipate doing is using net share settlement for our existing convertibles. This treatment provides that upon conversion, the Company will pay note holders in cash, for the principal amount of notes, and in shares for the value of stock in excess of $24.13 at the time of conversion. Accordingly, only the incremental shares attributable to the market price of our stock, in excess of 24.13 would be included in the calculation of diluted earnings per share, when our stock price exceeds the conversion price of 24.13. For example, if our stock trades at $30, we would increase the outstanding shares for fully diluted earnings per share purposes by approximately 1 million shares. At a $40 market price, the diluted earnings per share calculation would include 2.1 million additional shares. If our stock trades at 24.13 or less, earnings per share would not be affected. In addition to minimizing the impact on reported earnings per share, using this net share settlement, the potential requirements at issue, additional shares from approximately 5.4 million to a substantially smaller amount. Also, we intend to continue our stock buyback program, further reducing the effect of any issuance of stock. At this time, we would like to take questions.

At this time, I would like to remind everyone, in order to ask a question, please press star then the number one on your telephone key pad. We will pause for just a moment to compile the Q&A roster. Your first question comes from Bob Labick with CJS Securities.

Good afternoon.

Hi, Bob.

Hi. I just wanted to ask if you could maybe clarify on Films a little bit, just give us an indication of what you think margins will be going forward on the new product that you will be selling to Procter?

Well, I don't think we will see any significant impact on margin percentages on our business. This is -- this is a product design change that the customer has initiated. It will be phased in over a period of time. Our volume will be affected in the near term. We think in the longer term, we have a lot of offsets, a lot of growth potential in some of the things we're working on that we've talked to you about previously and some new things that we haven't discussed, but in terms of margin percentage, we don't think there will be any significant impact.

So your target would still be in the 12 to 14% range for longer term?

I think the answer to that question is yes. That is a good range for our plastic film to maintain.

Okay, terrific. That's great. And just jumping over to Garage Doors, in terms of -- is there any way you could break out the top line in terms of price versus, you know, volume? Or was there, you know, a unit mix as well? Or if we just could get an idea for the volume increase in Garage Doors?

Yeah, we -- approximately -- the break -- we came to the million and a half dollar impact on earnings by virtue of about a $4 million increase in costs, to our steel prices, increased approximately for -- even slightly more than that $4 million for the quarter. And we estimate that our price increases related to the steel increase were about $2.5 million. So included in the top line for the Garage Door business is about -- for the quarter is about $2.5 million for price increases.

Terrific. Okay, last question and I will get in queue. It is just if you could give us any update on additional uses of cash, such as acquisitions if there is anything out there that you're looking at, or that might fit or where you would be looking and that kind of stuff?

Immediately on our agenda, are -- an increase in the buyback program of our stock. We have substantial cash available, and we bought back a million shares in the first nine months of this year. As I told you, we're taking 5.5 million shares out of reserve for this debenture, as this new ruling comes in. So even any potential dilution will be wiped out by additional share purchases. And we're also looking at a couple of very small acquisitions that would have no effect on our cash or flow.

Great, well great quarter. Thank you very much.

Your next question comes from [Marty Pollock] with NWQ Investments.

Hi, guys. Just if you could summarize once again, the -- looking forward, on the impact of resin prices, the way you described resin prices, were more maybe, you know, favorable in part of the second quarter, but now they've moved up, what's that likely to be for the rest of the year? As well as also the case of steel pricing? You said that the 1.5 million for the second quarter -- for this last quarter, but clearly, prices are -- have escalated again. Can you estimate on both sides what that impact would be?

Yeah, as I said on prepared text, with respect to resin prices, we don't think they will have a dramatic impact on our operating results for the quarter. There has been some upward pressure in resin prices. We believe they're going to go up in August. There is a posted price increase of about 5 cents per pound for August. We are not sure it will stick. And we really won't know for another 30 days or so. But in terms of the current quarter, we won't -- even with that increase, we won't have a dramatic impact, because there is a lag effect, and it won't have a significant impact.

So you're saying the September -- when we're talking about the current quarter, we're talking about -- you don't expect an impact on the September quarter?

That's correct.

And the December quarter is where you're not clear about?

Well, if we have -- if we have increases, obviously the September quarter will be impacted. If its just the increase in August and it goes no further than that, there will be some impact but it will not be dramatic.

In case of the steel pricing impact going into the third quarter?

Steel is -- steel has cost us, obviously. It will continue to cost earnings. We are protected in terms of current costs for a number of months. We go out pretty much toward the end of this year with respect to the current cost of steel. Prices have gone up dramatically. It is still a -- it is still a relatively unstable situation, something in a state of flux. It is something that we have to fight our way through. We will be impacted in the near term with steel prices. We believe it is a relatively temporary situation, we believe that there will be some downward pressure at some point. When it will happen, I don't know. But I would expect the negative impact on us in steel will continue for the next few quarters.

Up -- the 1.5 million may be a good indication of the next quarters, or could it be a little higher than that as an impact? Based on what you are actually seeing right here. You're saying though that you've got steel availability locked in.

Yeah, we have steel availability locked in. It is not a big issue for us. We think we have pricing established for a period of time. There is no guarantees with respect to that, but we believe we do have stable prices that have -- that have been committed to us for a number of months. Its a little difficult to say exactly what the effect will be. I would -- I would say it probably will approach where we are -- what the effect on us on the third quarter. I don't think it will be dramatically higher. I don't think it will be lower, either.

We have to be able to pass on price increase, Marty in the steel business. Over this year. Because that's how we were able to narrow the gap between the actual increase in the price of steel and how it affected us.

Okay. You mentioned, beginning of -- on the Film side, the new -- well, what's the new revenue type recognition? I mean how has the revenue recognition changed with the new -- the modification of -- did you say -- did I hear you say a million dollar difference in that, or did you -- maybe I just not sure what the number is.

With in terms of recognition -- revenue recognition policy, there is obviously no change. It is still as has it has been. In terms of volume, with respect to the product that we have described, there will be a negative impact on us for some period of time. As we said, we have things that we hope can minimize that impact. We don't know exactly what the scope -- the entire scope of it is. And you know, we will talk more about it as we go into, you know, next quarter and so forth. But it is not something that is -- that we're in a position to discuss the exact magnitude of right now.

And lastly, it just -- you mentioned you bought this year a million shares. That's seven months here.

Nine months.

You're saying for the full -- for the fiscal -- I'm just wondering what the share authorization, obviously much higher, is there any reason why you would not accelerate the buy here?

No, we -- I think I said that -- we have a million, 400,000 shares authorized yet to go.

Yet to go, okay.

And what I said was that I believe -- somebody asked me what are we going to ask the cash for, and I think I said probably for an accelerated buyback program.

I'm sorry. I did not hear that word. Beyond the million four then, is there --

Then we would have to go back to the Board to get further authorization, which we will do.

So certainly --

A million four is $28 million, so you know, we have some room over the next quarter.

Okay. Thank you.

Once again, ladies and gentlemen, if you would like to ask a question, please press star, then the number one on your telephone key pad. Your next question comes from Chip Rewey with Cramer Rosenthal.

Hey, guys. Can you go back to the plastics segment, and just talk about the quarter again? Pre-FX. It sounded like revenues were almost flattish. And is this kind of the runway rate we are going to be looking at? For example how much of this switchover has hit the third quarter? And is it a net loss of business? Or were you going to grow off of this base? Can you just talk through about how exactly what was in this quarter on the switch-over? And how it will play out over the next, you know, two, three quarters?

The current quarter included a reduction in volume of about $7 million.

Okay.

So we had exchange rate differences of 3 million of positive volume reduction to 7 million, and the difference was a pricing and product mix. In the short term, we will have a reduced shipments of the diaper back sheet to our major customer, based on these volume changes, based on these product design changes that will be put through the system. So we're still making different types of products, some are printed, some are not, some are plain film, some are still laminate products, this transition will go on for a number of months, and by the middle of 2005, we will be through the transition. And in that time frame, there will be some reduced volume of this product. Based on these design changes.

Okay. And --

I would like to point out, we still have the same type of market share, nothing has changed substantially there. This really has to do with the type of product that we're making for our customer in terms of the scope of the product, the scope of our business with the customer, nothing has changed.

I understand that. So did the third quarter see a full quarter impact of the volume? Is it going to be about 7 million? Or is that just kind of getting started?

I think it is something that we will have to --

Have to see?

Discuss as we go forward, yes.

And the changes are as you expected? They haven't changed anything kind of after your cap ex program has gone into place? I mean this is what you have expected as you have ramped up your investment?

Yes, this has been in the works. There are always decisions to be made. Types of product design changes, who does what, what type of production capacity do we have, and what does the customer want to do, so these decisions are made on an ongoing basis, continual basis. It is the nature of the business. It is something that over a period of time has yielded very dramatic positive results for Clopay Plastics. Much of what we have in the pipeline has resulted from design changes in product that has generally, over a period of time, increased our price to the customer, increased our volume to the customer, because we have done an excellent job of producing these types of products. This is one of those design changes, and the net impact of this one, when we get through all the things that are being done, is a reduction in volume for us. But it is still the same type of market share, and as I said, we expect that we have some programs that we have in the works, in terms of additional capacity, new programs for our customer, and new business in different types of components for diapers, and particularly near-term will be some additional capacity that is coming on stream in Europe, and in South America, which will give us the ability to service other customers.

Does so does this changeover free up some capacity for you?

Chip, not in the near term. And the reason is because this transition is relatively expensive and difficult to do. Remember, we're going from a laminate, breathable laminate product, to ultimately a printed film, and there are a couple of variations and variables within that time frame, within this changeover that have -- that will take a lot of time and effort to make efficient, and to get done. So actually, in terms of the current results, even the one you saw for the June quarter, there are costs associated with -- pretty substantial costs associated with this transition. And those types -- that effort will continue for the next -- the next few months as we get this transition done. So there really isn't a lot of additional capacity that will be available based this change.

Okay. And then in your remarks you mentioned, new opportunities on the horizon at Telephonics, is that anything near term or anything in expansion of ground radar, beyond what we have already discussed, and can you just give more color on the new opportunities?

There are a number of programs around that we are closer to. You know, obviously, not at a point where we can announce them, but they're quite significant for us. They are long-term in nature. We are still trying to sell ground surveillance radar programs, particularly for commercial applications, homeland defense type of applications, and we think we have some ability to grow that, but as important, and even more important, is where we have research and development built into a program, where we start off with an R&D program and then it phases into production, and it goes on for many, many years and that's the type of thing -- the types of programs that we are closer to growing, and we think we have a number, and particularly in the radar area, there are -- the Coast Guard is going to become a pretty significant customer of Telephonics. There is a lot of money -- that mission has changed. There is a lot more money to spend. And they are going to build new helicopter platforms, build new aircraft platforms, build some unmanned aerial vehicle platforms that we think we can participate in. So I would say it is near-term in nature. I think we're talking about months, not years. And I think they're -- you know, I described them as a, you know, a pretty substantial long-term in nature, which will add to our overall base of business, an we're quite excited about that.

Great. If I could trouble you now for just a bunch of housekeeping things, such as the fully diluted share count in the quarter?

I think it was approximately 29 million.

Okay.

And then --

I will have to get that number in a second, chip.

And what was the depreciation, amortization in the quarter?

Hold on one second.

Depreciation for the quarter was $7.1 million.

Okay. And can you give us --

Getting back to the share, 29 million 7, basic and 31 million 6 diluted.

Okay. And you can give us cash on the balance sheet and debt on the balance sheet?

Yes. At June 30, our cash was $65 million. Our long-term debt, $130 million of subordinated notes, and other liabilities of about $18 million. That is a reduction in total of about $8 million for the nine months.

Okay. And the last thing, it looks like the minority interest line was a little weaker this year. Is anything going on there? For this quarter.

The charge -- the minority interest charge?

Yeah. 2.4 million versus 3.5 in March?

That has to do with the earnings of the [Peno Tech] operation in Germany and having to do somewhat with this transition from a laminates to printed film.

Okay. All right. Guys, thanks a lot.

Thank you.

Your next question is a follow-up from Marty Pollack with NWQ Investments.

Yeah, just a question back on Telephonics, I know there is clearly a lost competitions taking place, certainly in radars and others. Are you -- you can just indicate, on some of those programs that you will be, you know, potentially a beneficiary, are you -- on which primes might you be a player, a significant sub, or are you essentially going it alone?

No, no. We're a sub to a whole bunch of primes, depending on which programs you're talked about. Lockheed is one of the key people that we are subcontracted to, Sikorsky is a major player that we are a subcontractor to. Really, Northrop Grumman is another one. Those are the people that we really are, you know, subs to. Boeing, you know, on several programs, there is a lot of programs now being put out for selection in -- what we are really trying to say is that we can't announce a contract until it has been awarded to the prime, and the prime has awarded it to us. But there are certain stages in these developments and one of them is selection. So on several programs, we may be selected to be the supplier to the prime, and now we have to wait for the prime to get his award and then give it us to. And that's where we are. So we've moved closer to the ultimate awarding of these contracts and we are just waiting now for them to come in.

And just an additional question. Back on the Specialty Plastic business, if effectively when you look at your June margins on specialties -- was it specialties? What is the number here?

About 10.8%.

Yeah, 10.8%. Now that number clearly was stronger than last year despite -- I mean is that partly because of the lower revenue mix at this point? I mean the lower revenue that you booked but nevertheless had a fairly solid, you know, operating number? You're saying -- you think you could get back to the 14-type number, but at the same time you're suggesting that maybe some transitional costs. Should we expect some of those costs then to become obviously more apparent in the following quarters?

Marty, there are costs associated with this transition, and capacity growth. It is expensive to put new equipment in. And to make product design changes in the films business. As we phase in from -- and again, this is more than one change. The types of things we've described, is a series of things that will happen over a period of months. So we're making different products for the same application, and that costs money, and we talked a little bit about that in this call, I think, that we do have the negative impact from certain of these changes, and as we get further into the changes, hopefully those costs will tend to be reduced and we will see the results of hopefully improved margins.

Clearly though, year to year, if you look at the June numbers, you have 100 basis points of margin improvement from last year and I don't remember where where last year was more of a resin problem to those margins.

It wasn't -- there was a large resin problem increase last year for at least a couple of quarters. But one of the things that you have to realize is we have transformed the business online during the past year of doing printing on the plastic film, and on the nonwoven, and have put in these huge printing facilities, and gotten them going and running, and the cost of putting them in and installing and training has been affecting our margins over the past year. As we get better and better at it, there should be an ability to get margin improvement.

And some of those things are already in effect, have probably -- have improved, so that some of those costs maybe you've got more efficiencies, right? On some of those things that have plagued you maybe from year to year? I'm just assuming that basically you're saying some of those costs you've already seen the burden of --

We've seen the burden of them and some of them continue.

I got it.

There are additional changes.

Yeah.

But there was some significant impact, I believe, last year, and especially toward the beginning of that year, the second quarter of last year for resin prices that we didn't have this year.

Okay. Thank you very much. Appreciate it.

At this time there are no further questions. Gentlemen are there any closing remarks?

No, thank you very much. We hope to see you next quarter.

This concludes today's Griffon corporation third quarter 2004 earnings call. You may now disconnect.