Griffon Corp (GFF) 2004 Q4 法說會逐字稿

Hello, everyone, and welcome to the Griffon Corporation fourth quarter and full year 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. (OPERATOR INSTRUCTIONS) I would now like to turn the call over to Mr. Blau. Please go ahead, sir.

Good afternoon and welcome to the financial overview of the Griffon fourth quarter and year-ended September 30, 2004. I am Harvey Blau, Chairman of the Board, and with me is Griffon's President, Bob Balemian. We are sorry for the delay, but for some reason, we could not commence the call from our end.

I will discuss with you the overall results of this quarter and the full year, and then Bob will provide some further details.

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.

The Company's performance in the fourth quarter continued quite strong. It was an appropriate end to the most successful and satisfying year in the history of the Company.

Consolidated net sales for the quarter were $370 million, up from the $363 million in last year's fourth quarter and pretax income was $35 million compared to $31.6 million last year. Net income of $18.9 million for the quarter resulted in diluted earnings per share of $.61 compared to $.50 last year. For the full year, net sales were $1.4 billion, compared to $1.250 billion last year and pretax income was $104 million, a 26 percent increase and diluted earnings per share was $1.71 compared to $1.28 per share last year.

I would like you to note that in 1983 when we took over the Company, the sales of the Company were less than our pretax earnings this year.

In Specialty Plastic Films, sales for the quarter were $101 million compared to $104 million last year. Operating income was $13.8 million compared to $14.8 million last year. For the year, film sales increased to $411 million and operating profits increased to $52.7 million, up from $44.2 million in 2003. These were outstanding results, after you consider the course associated with our capital expansion programs, the impact on our sales and costs related to product designs by a major customer, and the escalating resin prices.

Our building products operations continue to reflect solid performance. The operating profits of garage doors increased substantially, on the strength of higher unit volume and continued improvement in manufacturing efficiencies. These results were in the face of rising steel costs, which impacted our numbers.

Sales in garage doors for the quarter were $138 million compared to $126 million last year. Operating income increased to $15.7 million, up from $10.8 million last year. For the year, garage door sales were $477 million, up from $428 million last year. And operating income increased to $42.6 million, with margins increasing to 9 percent of sales.

Our sales -- our service and installation operation had sales in the quarter of $78 million, approximately the same as last year, and operating income was $2.7 million compared to $3.2. For the year, installation service had sales of $307 million, operating income of $10.9 million, up from $7 point (sic) million for fiscal 2003 and increased operating margins.

Telephonics, our electrics information and communications system segment, had sales in the quarter of $58 million compared to $60 million last year and Telephonics operating income was $8.3 million compared to $7.7 million last year. Telephonics sales for the year were $221 million, up from $175 million in 2003 and our operating income increased by $6 million to $20 million. Overall, Telephonics had a solid year with improved operating results, high order input and increased operating margins.

Consolidated operating cash flow in the quarter increased to $51 million. For the year, operating cash flow was $106 million and we continue to support the growth of our business with capital expenditures for the year of $56 million.

Our balance sheet at September 30 remained strong, with working capital of $270 million and total indebtedness representing 35 percent of capital. We continue to fund our common stock purchase program, using $8 million in the quarter, to acquire 400,000 shares of stock. For fiscal 2004, we have acquired approximately 1,350,000 shares of stock for $28 million.

The Board of Directors today has authorized a 1 million share increase in the Company's stock buyback program, bringing the current authorized to 1.9 million. Our plan is to continue to be aggressive with purchases under this program.

Last quarter, we discussed a change in accounting that would modify how certain convertible debentures effect the computation of diluted earnings per share. We now have outstanding 130 million principal amount of contingent convertible debentures which are convertible at $24.13. These debentures cannot be converted until our stock trades above $36.20.

In order to minimize the impact of this accounting change, the Company has elected to pay note holders in cash for the principal amount of the debentures, and in shares, for the value of the 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.

In addition to minimizing the impact on reported earnings per share, this election also extinguishes our requirement to issue 5 point (sic) million of additional shares upon conversion of the debentures. Our obligation now is to issue shares only to the extent that our stock price exceeds $24.13, which at $30.00 per share, would be approximately a million shares. We intend to continue our stock buyback program, further reducing the effect of any issuance of stock.

Now, Bob will provide some details on operations.

Good afternoon. Our Specialty Plastic Films business had an outstanding year in sales, earnings, product penetration and implementation of new programs. However, sales in the fourth quarter were impacted by a product design change by our largest customer. Sales in the films business were lower by $4 million in the quarter, and operating income was down by $1 million. Operating margins remained healthy at approximately 14 percent of sales. Exchange rates reflecting a weaker dollar increased sales by about $3.5 million.

Our earnings in the fourth quarter were positively impacted by increased efficiencies and exchange rates. The negative factors were reduced volume, and the impact of higher resin prices.

For the full year, sales in the segment were $411 million, compared to $382 million last year. Sales by location in 2004 were in North America, $176 million; in Europe, $216 million; and $19 million in Brazil. Our operating income in the segment for the year was at an all-time high of $52.7 million.

With respect to our capital expansion program in films, we continue to add printing capacity in Europe and North America and we are in various stages of adding additional film capacity in Germany and Brazil. The overall objective here is an expansion of our capacity, and the ability to address potential demand from new customers.

Griffon's capital expenditures in 2004 totaled $56 million, approximately $40 million of which relates to our films business. The majority of the $40 million is for printing capacity, and for a fourth extrusion line in one of our facilities in Germany.

A comment on the overall expenditure level, we have made payments for equipment in German in 2004, which will come back to us in the form of Government grants. We anticipate that we will receive grants of approximately $8 million in future periods related to expenditures made in 2004.

With respect to resin, we have continued to see escalating prices. In North America, we had a price increase in February of 2004. We then had slight reductions through May, 2004, at which time a price increase brought us back to slightly above February, 2004 levels. From May through July, these prices were stable. August saw a price increase and there was another increase in October and one projected for December.

Resin prices in Europe have also been going up, with increases in each of the last 4 months. We estimate that resin price movement produced a negative impact on operations in the September quarter of approximately $1.7 to $2.2 million.

Garage door sales in the quarter increased approximately 10 percent. Our operating income increased substantially due to the sales growth and mix, improved manufacturing efficiencies and cost controls, somewhat offset by rising steel costs. With respect to steel prices, we have received substantial price increases and have tried to minimize the impact by negotiating with our suppliers and by increasing selling prices. We estimate the increased steel cost had the effect of reducing operating income in the fourth quarter by approximately $500,000 to $1 million.

With respect to the outlook for garage doors, we and our customers continue to be optimistic. The business environment, other than commodity prices, remains positive.

Operating margins increased substantially in 2004. We have more efficient production and excellent customer service. Our focus for this segment is further margin improvement.

Our service and installation operations had a good quarter and an outstanding year. In the year, we completed the exit from our Texas location and included were some related charges. Our markets remained relatively strong, the exception being Las Vegas, which is going through somewhat of a market correction. For this year, the segment had good sales earnings and margin growth. We are hopeful that we'll see more of the same in 2005.

Telephonics ended the year in positive fashion, with earnings and margin growth. The markets remain active, although some new programs continue to be delayed. Our backlog is at a good level, approximately $175 million at September 30th. Also, and very important, is that the backlog includes a number of diverse programs, such as the C-17 for the U.S. Air Force, the MA-60R which is the Navy's launch helicopter, AWACS for the Air Force and NATO, the CP-1 for the Canadian Air Force and various other communications and radar products for domestic and international defense applications. In addition, while not yet in our backlog, we have also been recently selected to provide the radar for 2 U.S. Coast Guard programs. The program diversity is very important, as we look to maintain and grow this business by developing new products and customers.

On a Company-wide basis, we're very pleased with our performance in 2004. Our operating management has done an outstanding job not only with respect to current results, but also by establishing a solid base for future growth.

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

(OPERATOR INSTRUCTIONS) Your first question comes from Bob Labick.

Good afternoon. Could you give us, you know, an update on -- you mentioned the, you know, product redesign or product design changes at your largest customer in Europe? Where are we in terms of the change in volume? Is 100 million a good run rate right now for you guys or is there, you know, should there be a little more impact in the next quarter or two?

Well, we haven't seen the full impact of the product design changes. We -- remember, in this quarter we had some positive impact from resin prices, from prices increases, and from exchange rates. So, the overall impact on our business is felt in this quarter and will continue to be felt as this transition goes on. Now it should take the better part of the next 5 or 6 months to complete this transition, and just to refresh your memory, we've gone from a breathable, laminate product to a narrower, printed film.

So, some of this change has some positive impact on it and the reduced size of the component is a reduction in our revenue. So, we're going to see some continued impact. I think, you know, we tend not to make, you know, estimates of volume and so forth, but I think in the rate we're running, with some of the other programs that we have that are positive in nature, somewhere around the $100 million level is sustainable for us.

Great. And then when does -- I mean, you've obviously spent a significant amount on capacity additions and, you know, the $40 million last year. When should we see the impact of that coming on line, because I presume, as that comes on line and as you had lapped it, you know, in 5 to 4 months when you get through the redesign changes, then we should see resumed growth in the films business.

Well, we've -- you know we've demonstrated very substantial growth this year in the films business. So some of the investment that we've made over the last couple of years, particularly in North America , has evolved into new business for us. We've -- in addition to that, we've made -- we tended to make our equipment in Europe run faster. And those are capacity additions and that's reflected in some of our numbers.

The two major projects we have with respect to capacity now, one relates to a fourth line in Europe and one relates to the additional investment we anticipate -- that we're making now in South America. Those are ongoing . We have -- we're fairly close to the end, the completion of the fourth line in Phenotech . It should be operational sometime in the middle of 2005. We have not seen any volume from it yet, of course.

In Brazil, we're -- we should complete that project toward the end of 2005. We have, at this point, spent some money for equipment. We have purchased the land. The next phase will be putting up a building and then installing the equipment. So, it will take most of next year. So, in terms of those 2 capacity projects, we should see some impact toward the end of '05 and more impact as we go into '06

Okay, great. And then just finishing on films, you know, you mentioned that there was an impact from resin pricing. How were you able to get such good margins, the 13.7, in spite of this impact on resin? Is that, you know, a sustainable number or was there anything else in there? Where should we kind of look for margins next year? Can they be maintained at that level?

Well, we've made good progress in production efficiencies. We do have some costs still associated with the transition of production from -- generally from a breathable laminate to a printed product and a number of iterations in between. So, it has cost us money; it continues to cost money . We had some fairly substantial reworks as we got through this production process and we have intended to make some investments related to that and make our equipment more efficient with less rework of inventory, and we've made a lot of progress there and we are now becoming much more efficient in the process.

In terms of margins, we have generally, and I believe that the films business, in a mature environment, should be somewhere in the range of 13 to 14 percent in margins. We may have some slight interruption from that -- from those numbers, so from time-to-time, depending on some product transitions and some capital expenditure programs and so forth. But, generally speaking, we should be in that range.

Okay. Great. And then just -- kind of the same question for doors. You did a terrific job in spite of, you know, the higher steel prices and the margins there and you mentioned it was mostly from, I guess, increased volume and then also from product efficiencies or production efficiencies. Is that also sustainable through next year?

We've done a good job in film . The operating people have -- we put a lot of money into the business, into the infrastructure, both in terms of production and supply chain. A lot of it came together this quarter. We had very good mix. We're making a lot more of these higher-priced doors. We're shipping -- our doors tend to be more expensive. Now, the types of products that our customers are demanding are some of the carriage house doors. They tend to be higher priced and higher margins.

So those factors together have resulted in a good quarter, an excellent quarter, with -- in spite of the steel price increases. If the market holds together and our volume, and we can sustain our -- the level of volume that we have now, and we've had excellent growth this year, the answer is yes, we can maintain those margins. And, you know, I talked about in the past about operating income, a target of 10 percent of sales and we're not there yet. We still have some work to do and we think, frankly, we have some further improvement.

Okay. Great. Well, congratulations. Great quarter and a great year. Thanks.

Thank you, Bob.

Your next question comes from David Martin (ph).

Yeah. Thank you. Just a couple items. I wanted to come back to this garage door business, first of all. As it relates to steel prices, are there any further price gains or realizations that you'll see in, I guess, the beginning of '05 from your pricing announcements you made late in '04 ?

Well we -- you know, we're evaluating the market. The market is still tight. We have come to expect that there will be further price increases. We think we are protected through the end of this calendar year. We expect an increase in prices in the first quarter calendar '05 . And again, in terms of selling price, we'll have to evaluate the market, y ou know, how able we are to pass those cost increases on and how much would be required because of, you know, further price increases.

Okay. And then thinking about interest rates, you mentioned some slowing in Las Vegas, for example. Have you seen, whether it be in the garage door business, or in the installation services business, any material slowdown from the impact or anticipation of higher interest rates?

Our volume is good. I mean, you see the numbers. We're comfortable right now with the business environment. Las Vegas seems to be a little bit of an exception and there's somewhat of a slowdown and people expect it to last just a few months, not an extended period of time. And I think it had to do with -- and from what I've been reading, it had to do a lot with some aggressive pricing and speculative buying. It slowed down a little bit but, again, I don't -- our people do not expect it to last a very long period of time. The other markets look pretty good. We don't see -- we don't think -- see anything dramatically changing from what we've experienced.

Okay. And then next, I just wanted to turn to Telephonics quickly and your margins in that business, which were a little better than I expected. Can you talk about the sequential improvement in margin and what kind of drove that? And then, what should we expect in '05 , as you did with the other segments?

Yeah. Telephonics will tend to be, again, in the mature environment with a representative segmentation of the business, around 10 percent operating. Again, we're not there. We do have further improvement. We think we can get to 10 percent. We have been there before. We have spent some money for some development projects, which we ended toward the end of the year. That helped to improve margins. And we tended to have more of our business in the production area rather than the development area which, generally, is a little higher margin business for us. And that basically accounts for some of the margin improvement in the fourth quarter.

Okay. And then lastly, I just wanted to touch on -- in the specialty plastic films business, this grant of $8 million which you anticipate. Is that now on the balance sheet as a receivable and how will that be used and treated going forward on received?

It is not on the balance sheet, not as a receivable. We will reflect that when the money is received. That will be a reduction of fixed assets.

Okay. Thank you.

Your next question comes from Larry Baker.

Yeah. I just have 3 questions. First is, in the -- in Telephonics, can you tell about the potential to replace the $30 million in sales you generated this year from the ground surveillance radar? Is that going to be limited to 1 order or is there a good chance that, going forward, you will get a follow-on order for that product?

It's a product that we have in our inventory. We continue to try to market the product. We -- right now, we don't have a new order to replace that business. It was very substantial. There is potentially some follow-on business directly with that customer for the same type of application and then we've gone after a lot of other potential customers.

Right now, the big comparison issue for Telephonics in '05 will would be replacing that business in the third quarter, where we had about $30 million. So that would be an issue that we have to work through and book some other business to basically offset that. In terms of that specific product, again we don't have anything. We think we'll have some business in the future, but right now we have nothing to report.

Okay. And then, can you talk about the size of the 2 Coast Guard radar programs that you've been selected for, but the award, I guess, hasn't been made yet?

We have talked in the past about the Coast Guard being an important -- becoming an important customer of Telephonics and of companies like Telephonics. We believe that the Coast Guard's entire mission and structure will change and they will have a lot more money to spend and, in terms of equipment, for the types of things that Telephonics produces.

This is our first inroad and there's a couple of very important things here. They're pretty advanced radar systems and it puts us in the UAV market which is an exciting one. We think there will be a lot of other applications here. So I think it's -- our plan is that it's a start of something, hopefully good, with a new customer.

The specific makeup of the programs that we've talked about, you know, it's something obviously, we can't talk about the size of it now. They are -- they will be meaningful programs for us. What we have right now is, we have been selected to produce that product for them. They have given us some very small contracts for us to start the work and start accumulating some questions and information for things that will help speed up the program. But we're talking about something, frankly, less than a million dollars right now. But the programs, each one of them, is sizeable and almost as important, maybe even more important, is they could lead to other programs for us.

Okay. And then, on the installation services, the drop in sales in the fourth quarter, was that all Vegas or was that somewhat of a -- of some other territories that you eliminated, I think, at the beginning of the year?

Yes. Part of it was -- you know, we even go back to Florida. We had some sales in Florida with respect to location, which we don't have any longer. We have now discontinued our Texas location and that -- those discontinued businesses had some volume. At one time, those 2 companies were doing about $30 million in volume and they're both gone now. And we're -- in terms of operations, operating results, we're better off for it. We did see a little bit of a fall-off in Vegas, not too much, but a little bit. But our basic markets, which are primarily Lanter (ph) in the Phoenix area, have continued pretty strong in the fourth quarter.

Okay. Thanks, Bob.

Thank you.

Your next question comes from Alan Margolis.

Hi. Thank you. I just wanted to talk a little more about the growth in garage doors. Was it more on the contractor side or was it more through Home Depot and the Big Box stores?

We've had an excellent year in the garage door business. Growth in sales has been about 10, 11 percent. Throughout the year, it's been spread almost evenly through both channels of distribution, professional installer and the retail channels. In this quarter, in the fourth quarter in particular, the dealer channel was slightly higher than the retail channels. But we've done a real good job in both areas. We've grown retail very substantially and the dealer market has followed, and we had a particularly strong quarter in the fourth quarter with the dealer business.

Is there a -- is there any -- is there the chance that the strength was related to buying ahead of price increases? Do you have a sense of what the inventories look like in those channels now?

No, Alan, no one really buys garage doors to keep in inventory. I wish, in a lot of ways, they would. It would make production a little bit easier.

Right. Right.

No, they -- we tend to deliver garage doors very quickly. It's very important, of course, to get the timeframe down that we -- from receipt of order to delivery of goods and we've done probably a better job than most of our competition has. But we're trying to contract that and we have made progress in that area, and frankly, that's helped business because as you become more efficient and get the product to the customers when they want it, you tend to get more orders.

Right.

So I don't believe it has to do -- we're short has nothing to do with a buildup in inventory.

Okay. And then my last -- just my last question. On these Coast Guard programs, you said right now the -- you know, these new programs are right -- about -- are less than $1 million, but will become meaningful. What's the timing of that? When do you estimate they will be meaningful?

We think we -- interesting. We need a lot of patience --

Sure. Sure.

-- in the business -- in this business. We've actually -- it's something we've kicked around and been after in this program for in excess of a year now.

Oh, wow.

There generally is not a long timeframe between when you are selected, and when you actually receive a contract for the production.

Okay.

So I would think a matter of months.

In a matter of months, they'll become more significant?

Yes.

Okay. Great. Thank you very much. Thanks for having the call.

(OPERATOR INSTRUCTIONS) And I have a follow-up question from David Martin.

Yeah. Thanks. Just 2 housekeeping items, if you may (sic). For '05 modeling purposes, what should we be using as your capital expenditures and then any potential changes in your pension expense and assumptions?

The -- with respect to the second part of it, there shouldn't be any dramatic impact there. We don't have a significant effect. We have reduced certain estimates, certain assumed interest rates. It will not be a big number for us.

And then regarding the capital budget?

Capital expenditures, I would -- I think we should talk about somewhere between $45 and $50 million. Again, these are -- it's a difficult number to project because of timing issues. The idea, I think, is that we should not anticipate a significant change from where we are this year. We have some very exciting opportunities to grow the businesses. We will tend to put some money in the garage door business this year; a little bit higher, frankly, than we've had in the past. We have plans for a new line to produce a new model garage door that is quite exciting for us and it follows some of the trends of the new products that are out there. And we're going to put some money into that area.

In addition to that, we do have the projects that we talked about in the films business, primarily completion of the printing both in North America and in Europe. We've talked about Brazil and we've talked about completion of the fourth line in Phenotech.

So I would expect that the level of expenditure would be approximately what it is this year -- what it has been in '04 , excuse me. And the $45 to $50 million would be a little bit lower, but frankly, again, these things have to do with timing. The fourth quarter was quite high. That had to do with some things that we have planned in order to get Phenotech done a little bit sooner. So I think $45 to $50 million is a pretty good range for next year.

Okay. Great. Thanks.

At this time, there are no further questions. Mr. Blau, do you have any closing remarks?

I want to thank everybody for joining us. Again, I apologize for any delay. I have no idea what happened, but we could not get on the call. I'm as excited as all of you, I'm sure, for this great year and we look forward to 2005. We'll see what it brings. Bye-bye. .

Thank you for joining today's conference call. You may now disconnect.