Griffon Corp (GFF) 2005 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to your Third Quarter 2005 Griffon Corporation Conference Call. At this time, all participants have been placed on a listen-only mode, and the floor will be open for questions following today's presentation. Today's conference is being recorded. It is now my pleasures to turn the floor over to your host, Harvey Blau, Chairman and CEO of Griffon Corporation. Sir, the floor is yours.

Good afternoon, and welcome to a financial overview of our fourth quarter and year ended September 30, 2005. I am Harvey Blau, Chairman of Griffon Corporation, and with me is Griffon’s Executive Vice President, Eric Edelstein. I will discuss the overall results of the quarter and full year, and then Eric will answer questions with respect to operations and financial results.

First, I would like 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.

I will start by noting that we are pleased with our results in the fourth quarter and we are well-positioned for further improvement in our financial results for fiscal year 2006. The improved operating results in both our third and fourth quarters demonstrated that the Company was able to respond to the challenges created by the significant material cost increases we experienced in the first 6 months of the year.

Consolidated net sales for the quarter were $388 million, up from the $370 million in last year’s fourth quarter. Our pre-tax income was $35.4 million, compared to $35 million last year. Net income of $22.6 million for the quarter compared to $18.9 million resulted in diluted earnings per share of $0.71, compared to $0.61 last year.

For the full year, net sales were $1.4 billion compared to $ 1 billion 390 million last year. Pretax income was $ 78.9 million, compared to $104.7 million in the prior year. Diluted earnings per share was $ 1.55 compared to $1.71 per share last year.

Telephonics, our electronics information and communications systems segment, had sales in the quarter of $67 million, compared to $58 million last year. Telephonics’ operating income was $9.4 million compared to $8.3 million last year.

Telephonics’ sales for the year were $221 million, the same as in 2004. Operating income was $18.1 million compared to $20.2 million in the prior year. Overall, Telephonics had a solid year with improved operating results, high order input and a number of contract awards that involves the Company with key new programs. The recently announced contract with Syracuse Research is one of those programs.

Telephonics received a subcontract award from Syracuse Research for the turnkey production of an SRC product. The initial release on this subcontract could exceed $20 million in value, and under the structure of the joint cooperation agreement with SRC, Telephonics total share of all production for the program will exceed $150 million.

The total contract award announced by the U.S. Army to Syracuse Research Corporation of approximately $550 million, makes Telephonics share of the program substantial. The award to SRC is to produce, field and support a next-generation capability against Remote Control Improvised Explosive Devices (RCIED) known as Counter RCIED Electronic Warfare Increment Two (CREW-2). RCIEDs, better known as roadside bombs, are the number one killer used by enemy insurgents in Iraq today. Crew-2 will provide an affordable capability against a broad spectrum of RCIED threats with a design that is sufficiently flexible to allow for future capability growth.

The contract is intended to meet a Multinational Corps Iraq urgent operational need for a field-programmable electronic countermeasures system designed to provide force protection against RCIED detonation ambushes. Our building products operations continued to reflect solid performance. Operating profits and margin for our garage doors segment continued the improvement over first half results that started in the third quarter. Sales in garage doors for the quarter were $149 million compared to $138 million last year, and operating income was $15.6 million, approximately what it was in last year’s excellent fourth quarter.

For the year, garage door sales were $532 million, up from $477 million last year. Operating income was $37.7 million, compared to $42.6 last year. The decline in operating income was primarily attributable to higher steel costs, which were not completely passed on to our customers.

Our service and installation operation had sales in the quarter of $84 million, an increase of $6 million over last year; operating income was $4.0 million, compared to $2.7 million last year. The increase in revenue and profitability were primarily attributed to outstanding results in our Las Vegas and Phoenix markets.

For the year, installation service had sales of $300 million, and operating income of $9.1 million, a decrease from $10.9 million for fiscal 2004. In specialty plastic films, sales for the quarter were $94 million compared to $101 million last year. Operating income was $10.7 million compared to $13.8 million last year.

For the year, films sales decreased to $370 million, and operating profits decreased to $31.6 million, from $52.7 million in 2004. The decline in revenue and profitability for the quarter and the year were primarily attributable to reductions in sales volume from our major customer. The sales volume reduction was caused by the diaper redesign process, and the fact that we have not achieved the market share growth that we anticipated at this point.

Consolidated operating cash flow in the quarter was $12 million; for the year, operating cash flow was $58 million and we continue to support the growth of our business with capital expenditures for the year of $ 40 million.

Our balance sheet at September 30 remains strong, with working capital of $273 million and total indebtedness representing 37 percent of capital. In the fourth quarter we purchased the outstanding 40% minority interest in our specialty plastics largest European operation for $82,000,000, a portion of which was funded by bank borrowings of $60,000,000.

We continued to fund our common stock purchase program, using $ 11.4 million in the quarter to acquire approximately 460,000 shares of stock. For fiscal 2005, we have acquired approximately 1,100,000 shares of stock for $26 million. I will now provide some details on operations and on the outlook. Telephonics ended the year in positive fashion Ð with an outstanding fourth quarter and several key contract wins.

Our backlog is at a good level, at approximately $217 million at September 30. It includes a number of diverse programs, such as the Maritime Helicopter Program for the Canadian Forces, C-17 for the U.S. Air Force, the MH60-R, the U.S. Navy’s [Lamps] helicopter; AWACS, for the U.S. Air Force and NATO; and various communications and radar products for defense and international applications.

Recent contract wins, include radar systems for the Spanish Navy, Sikorsky S-70 for the Singapore military as well as the Syracuse Research Contract work. Most importantly, the MH60-R program plans call for the ramp up of production in fiscal 2006 with a corresponding increase in revenue. Overall, the activity level at Telephonics is high and we are very optimistic about its future. Garage door sales in the quarter increased approximately 8 percent, primarily as a result of selling price increases and a more favorable product mix. Our operating income for the year was negatively impacted by approximately $7 million due to rising steel costs.

With respect to steel prices, overall they remained fairly constant during our fourth quarter. We have experienced some increases in the first quarter of fiscal 2006, but not at the level experienced last year. Also, we do not expect our supply chain to be significantly impacted by recent storms such as Katrina. Looking forward, we would not be surprised by continued volatility in steel costs for the remainder of fiscal 2006. However, we are cautiously optimistic that this will be manageable as it relates to the impact on our profitability. With respect to the overall outlook for garage doors, we continue to be optimistic. The business environment remains positive. We continue to expand our business as a result of market share gains achieved by our retail and dealer customer base. Consistent with recent years we expect to see additional supply chain and sourcing efficiencies this new year. Also, a shift in our product mix should also contribute to revenue and margin improvement. All of this activity points to a year of further improvement in operating results for fiscal 2006. Our service and installation operations had a good quarter and a strong year. Our markets in Phoenix and Las Vegas are very strong and we see them continuing that way for the foreseeable future. We are continuing to put heavy emphasis on the sale and installation of flooring and kitchen cabinet products, which have more revenue and profit potential. Also, in Phoenix we have achieved market share gains among national and regional home builders.

Our films business had a tough year in sales and earnings, especially when compared to our record results in 2004. The decrease in sales in the 4th quarter of $7 million was primarily due to lower unit volume somewhat offset by the effect of selling price increases.

Moving into fiscal 2006, we are optimistic about replacing this volume with other revenue opportunities in Europe, Brazil and North America. Our business development activities are high in all geographic markets, with discussions involving new customers and new products. Discussions are proceeding with major multinational and regional producers of hygiene, healthcare and industrial products. We are also continuing to plan new production capability in North America and Europe to address a specific new product program for our customers. Our efforts toward geographic expansion resulted in sales for the full year, in this segment as follows. 163 million in North America; compared to $176 million in the prior year, $186 million in Europe; compared to $216 million in the prior year, and $22 million in Brazil; compared to $19 million.

With respect to our capital expansion program in films, we continue to enhance our film production capability in North America, and we are in final stages of adding additional film capacity in Brazil. Our new line in Germany, Finotech 4 is up and producing.

Griffon’s capital expenditures in 2005 totaled $40 million dollars, approximately $ 27 million of which relates to our films business. With respect to resin, we have continued to see extreme volatility. Resin prices stabilized in the early part of the fourth quarter, and then increased dramatically in the latter part of the quarter. Those increases continued in the beginning of this quarter, but recently there have been signs that they may soon moderate. As we have noted in the past, we do pass through cost increases to our customers either through contract provisions or by raising selling prices and over time the impact of resin price volatility on our operating results tends to be neutral.

In summary, on a company-wide basis, we are quite pleased with the Company’s performance in 2005. After a slow start in the first half of the year, our operating management did an outstanding job not only with respect to current year results, but also establishing a solid base for fiscal 2006. At this time, we would like to take questions.

[Operator Instructions] Bob Labick, CJS Securities.

Wanted to start with films - you had very operating margins in the quarter, despite, you know, a similar sales level to the entire year. Could you tell us what impacted the margins? Was it resin-related, or have you made changes there, or how do you see margins going there?

Bob, it's two things. It's primarily resin-related, but also in the fourth quarter, Finotech 4 was up and operating, as opposed to being in more of a trial and error basis in the prior quarters.

OK, so you got some impact or favorable impact from resins. Could you quantify how much that was?

Not really. It's probably half, but you know, it starts to get hard to tell when you have a lot of volatility and when you're purchasing resin at so many different locations and at so many different price points. But the reasonable estimate would be half of what we're talking about.

OK, because basically, if I just looked at Q2, you had 6.5% margins on the same sale. So now you had 11.5% margins, so say half of that is roughly resin swing?

Right.

And could you just update us in terms of progress on private label sales? My understanding was, for you to get to, you know, these 11% to 12% margins, you'd probably need to increase utilization, if resin were flat. So where do we stand in terms of additional private label sales?

As Harvey talked about in the prepared remarks, we have a lot of business development activity going on, not only in Europe, but also in South America and in North America. And as we've talked about in the past, the focus in Europe is on private label diaper manufacturers. And at this point, I can just say that we're making good progress. I think we've talked about the fact that it's not an overnight sale. There's the normal discussion and negotiation, there's production on a test basis of goods that has to be approved by the potential customer, and then ultimately agreement. And I guess I would say at this point, we're satisfied with that progress and that hope that over time, both in the short-term and mid-term, that it'll show up in the numbers, specifically revenue and profitability.

Got it. So to be clear, though, in the $94 million for the quarter, there was none?

No, there definitely has been some. The-- you might recall us saying that we started to have available capacity, a little bit in the third quarter, and a bit more in the fourth quarter. I think on the last call, we talked about the fact that the fourth line, Finotech 4, was beginning to run on a fairly regular basis. So, we have completed sales, shipped product, and expect to do a lot more as time goes by.

OK, and last question on films - you had also discussed that earlier in this year, I think one of your big customers had moved some capacity out of Germany into another region, and that they were operating underneath-- below the contracted levels of volume to you. Has that been made up for? You know, did we see a payoff for that in this quarter, or where does that stand?

Well, that was and is a situation, and we hope to overcome it through the initiatives that I was just talking about.

OK, but there's been no, you know, make-good as of know, or certainly not in this quarter's numbers?

Oh, relative to that same customer?

Correct.

No, we're still in the middle [inaudible] discussions on that.

OK, got it. Great. OK, moving to doors, could you just remind us-- I think you said before, price increases were roughly 15% in the prior quarters, and if that's the case, was there, you know, a sales mix difference or was their impact from the hurricanes, because sales were up less than that, 15%

Bob, I actually don't remember talking about price increases being 15%. I don't think we've ever said anything like that. I know we've talked a lot about percentage increases in our raw material costs for steel, and we certainly have talked about, in the past, the impact selling prices have had on our revenue increases. And as Harvey said a little earlier, the increase we're experiencing this quarter to Q4 last quarter in garage doors is primarily selling price increases.

OK. And then I just-- I guess I have-- units, were they up or down, I guess, year over year?

In the quarter, a little bit down, made up for by mix.

Got it. OK, great. And then this last question, and I'll hop back in queue -- corporate expense and SG&A in general in the quarter was, you know, I guess very well under control, is the best way to put it. Yeah, corporate was $2.4 million versus 4.7 last quarter and $4 million a year ago. Is there a major structural change? I mean, that's a significant amount. It's always run north of four. To get it down to 2.4 in the quarter, was there a major change? What should we expect it to run at, going forward?

I'd like to say there was a major structural change, because it is going down, but it's really not. It's a number of different things. We've talked about in the past, that this is a net number, after we allocate out certain costs that directly relate to the segment, and in the quarter, you know, a simplified answer would be some of it is depreciation, some of it is salary, some of it is the benefit cost. But if you're looking at a trend, you probably ought to look at the annualized numbers. I'm sorry, the annual numbers.

OK, so this year's annual-- whatever that--

Yeah, maybe a weighted average, this year, last year.

Got it. And that's what we should look at, going forward?

Yeah, I think so.

So don't extrapolate 2.4 for each of the quarters next year? Great. I'll get back in queue. Thank you.

[Operator Instructions] [Rob Northy], Davenport & Company.

Hi, Harvey and Eric, nice quarter. Just real quickly - most of my questions have been answered, but in terms of the film margins, I know you mentioned clearly after quarter end, we've seen a subsequent spike in resin costs, in some cases, I think up to 32%, and then we've seen some moderation. But would it be fair to say that that's going to have some adverse impact in the first quarter, or I guess can you kind of walk us through where we are, relative to our pass-throughs, especially with these recent price increases, or cost increases?

Yeah, I can respond to that. They-- you had it pretty accurately, in that the resin cost have continued to increase, and for the new year, we're observation talking about the month of October and the first few days in November, it's something we're looking at extremely closely, everybody is. Harvey commented about the fact that it looks like it's about to moderate. What that means specifically is that some planned or announced increases for November may not stick, and there's a general sense that come December and January, that the market will decline. My remarks are obviously not simply about Griffon and resin but about the resin marketplace in general -- polyethylene, propylene, and the like. So, we have one month under our belt with rising costs, we've talked about the fact that we, fortunately, have the ability to pass through those costs to our primary customer. Having said that, contractually, it represents about-- or it calls for about a 120-day lag, so it would like, based on one month, that it is going to hurt in the quarter. But we still have November and December to see what might take place there, and most importantly, have the whole year to look at, relative to the time to recover and build back to what we're coming up, in the way of a shortfall right now.

Great. And just in terms of the operating leverage of this business, we talk about capacity utilization rates, you talked about a bunch of new product coming on line, with Finotech being there, Brazil. Even assuming that resin prices remain a little bit on the high side, would it be fair to say or characterize that we would expect this year, for margins to exceed the 8.5% level that they were in 2005?

I'm not sure how you voiced it, but we achieved 8.5 this past year as a result of, you know, a really solid fourth quarter. Our goal probably for this year would be more in the 10% range; that's our goal. I can see us, depending on how things go, falling short of that, in the 8 to 9 range, and I can see, depending on what happens, surpassing the 10%.

Great. That's great. One more question, Eric. Obviously we're going to start expensing options this year. Can you just give us some guidance in terms of a run rate for that, on a quarterly or annual basis?

Yeah, the-- I'm going to stay- walk away from a run rate. I'm simply going to say, if you look in our financial reports, you'll see that we have minimal unvested options outstanding. And at the moment don't have the ability to give out very many additional options. We don't have that many reserved under our approved plan, and therefore I'm just going to conclude by saying at the moment, we don't anticipate the expensing of options to be in any way significant this year.

Great. Thanks so much, and good quarter again.

[Operator Instructions] Rob Longnecker, Barrington.

Hey guys, how are you doing?

OK.

Sorry, I joined late, so I apologize if you already covered this. Did you guys speak a little bit to the progress you're making in filling the excess lines in Europe?

Yes, we did, and I think I'll be real brief, since we did cover it. We've said that our business development activity is high. We haven't given any specifics on orders [inaudible] things like that, but we're optimistic, based on the level of discussions, the types of prospective customers we're talking to, and the products that they're interested in.

OK, and did you guys-- you know, a couple of quarters ago, you kind of stuck by a $400 million run rate number for that business. Is that still a number for you guys?

It's a reasonable number, yes.

Bob Labick, CJS Securities.

Hi, just wanted to ask one question - cash flow from operations, you mentioned $58 million for the year. Could you just walk us through? I mean, actually that was down from '04. Is there any unusual timing this year versus the past? You know, what do you expect it to be next year? It looked like you used a bit of working capital towards the end of the year. What do you expect next year.

Bob, I'm going to have to ask you to repeat it. It was a little hard to hear you.

Oh, sure.

I know it's about working capital, and $58 million.

Right, no, basically the question is this -- you had $58 million cash from operations this year, which was down from last year. Looks like a lot of that, you know, is a change in working capital. I'm trying to understand if there's a difference in timing this year, and, you know, what you expect from working capital, you know, sources or uses, in general for next year, so assuming we have our own estimates for income and D&A, we can to a cash from operations number, if you give us, you know, expectations on any changes there?

Yeah, the-- your first statement is correct. The difference, or the delta between last year and this year is more as a result of some swings in working capital than it is cash provided by operations. I would say that you probably want to split the difference between the prior year and the current year, in thinking about our working capital needs and the change in working capital, for 2006.

Great, thank you very much.

Jan Loeb, Amtrust Financial.

Next year, or the year that we just started, I believe the Lamps contract turns to a production contract?

Yes.

What would be the annual differential in revenue and margin between kind of development into production?

We're doing about $25 million a year now in Lamps, historically. Depending on the number of chipsets in 2006, we're talking about probably $50 million. So it'll be an increase of about $25 million.

OK. And would margins be similar or margins would increase?

I would think margins will increase in the production phase.

OK. And then what would margins on the Syracuse Research Contract -- would margins be similar to Telephonics margins, or would you believe they would be higher or lower?

The Syracuse Research contract is a high-profile contract where we're limited in what we can say or not say about it. The-- what we can talk about, quite honestly, is unit production, unit cost, and delivery time, and the like, so we're going to be silent on that.

OK, so you're saying that you can't talk about unit costs?

No.

Right, and therefore margins.

We're not allowed to talk about that, we're not allowed to talk about how many units are going to be delivered.

OK. Historically, with your primary customer in the film business, when you miss out on some unit volume from them, they typically make it up to you in other ways. Are we going to see that happen in the current year?

Very good question. I hope so. I think- I think the way you characterized it also was quite good -- ``other ways.'' There's lots of different things - new business, new geographies to get involved with, and support and new development and things like that. How much and what we'll see in the coming year, I don't know for sure.

If you note, we have indicated that we're going to be having capital expenditures for a new program for the customer, and that's one way that the customer makes up for the shortfalls historically.

OK. And lastly, it seems to me that this year, in terms of your earnings per share, it's kind of, you know, a trough earnings per share, and that going into the current year, it looks like in just about every one of your divisions now, you have the wind at your back, and not only for the current year, but because of backlog and contracts, seem-- that seems to be the case, going a few years out. Is there a number, kind of an annual growth rate, that the management is willing to subscribe to for the next three to five years?

You know, Jan, historically we have not made those kind of projections, and with reason, because you have the situation with the price increase in resin and [resin] normalization and then the price of [inaudible]. We're comfortable that we agree with you, that the wind is at our back and Telephonics should have a very good year next year and the service installation business should be in good shape next year, and good growth, and that the garage door business is going to do OK. The only question mark we have is going to be how much private label business we get into plastic film and how fast we get it in there, and how much the normalization of resin. If you notice that over a period of a year, by the way, and this is, I think, is very significant, that the resin prices, up and down, don't really affect us as much as one might think, because in the end, we have a normalization of the resin prices. It's really a question of the volume, and it's a question of how fast we come on with new programs for our major customer, and how much of the private label business comes on stream in 2006, and we're very hopeful, but we're not really prepared to commit to a range.

OK. Fair enough, thank you very much.

[Operator Instructions]

Thank you very much, and we look forward to speaking to you sometime in February. Bye-bye.

[Operator Instructions]