Griffon Corp (GFF) 2007 Q3 法說會逐字稿

Hello, everyone, and welcome to the Griffon Corporation's third quarter 2007 earnings call. With us here today we have Harvey Blau, Griffon's Chairman and Chief Executive Officer and Eric Edelstein, Executive Vice President and Chief Financial Officer. After the prepared remarks there will be a question-and-answer session. All lines have been placed on mute to prevent any background noise. (OPERATOR INSTRUCTIONS). This call is being recorded. Your participation implies consent to our recording this call. If you do not agree to these terms, simply drop off the line. I would now like to turn the floor over to Mr. Blau. Please go ahead, sir.

Good morning. Welcome to a financial overview of our third quarter of fiscal 2007 which ended on June 30, 2007. I am Harvey Blau, Chairman of Griffon Corporation and with me is Griffon's Executive Vice President and CFO, Eric Edelstein. I will discuss the overall results of the quarter and then Eric will answer questions with respect to operations financial results.

First I should 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.

We remain pleased with Telephonics' results, and our Specialty Plastic Film segment continues to make progress. However, the severe slowdown in the building products market continues to have a significant impact on the garage door and service and installation businesses. Consolidated net sales for the quarter were $399 million compared to $429 million for the third quarter of fiscal 2006.

And pretax income was $7.4 million compared to $26.9 million last year. Net income was $4.4 million for the quarter compared to $19.4 million, resulting in diluted earnings per share of $0.14 compared to $0.61 last year.

Telephonics, our electronics information and communications systems segment, had sales in the quarter of $121 million compared to $111 million last year. Telephonics' operating income was $10 million compared to $12.7 million last year. Overall, Telephonics had an outstanding quarter, driven by continuing revenue from Syracuse Research Corporation contract and the MH60 program. The sales increase of $10 million was primarily attributable to the MH60 program.

The decrease in operating income was caused by a number of programs which had lower gross profit margins in this quarter and increased marketing expenses as we look to expand into new markets. As previously noted, the Syracuse Research Corporation work is winding down in the fourth quarter. The program has been a huge success as we understand that the customer, the United States Army, has been extremely pleased with the devices being delivered by SRC.

The program has provided Telephonics with a substantial boost to operating results in 2006 and 2007 and it continue to present some opportunities for additional work in fiscal 2008 on similar or related programs. The MH60 program, (inaudible) continues to ramp up, as projected. The production rate is expected to continue to increase with an annual run rate of $100 million per year being reached in fiscal 2008. Based on the United States Navy's current plans, that rate should be achieved for at least the next eight years. Also, extensions to the program could result in the annual run rate increasing by another 20%. Our backlog at June 30, 2007 continues to run high at $315 million.

With respect to garage doors, although we did see the traditional rebound from the second to the third quarter in our garage door segments, the absolute results for the third quarter were disappointing. The declining market for new home construction and the home resale market resulted in weak operating results. New home construction activity continues to decline on a year-over-year basis. Sales of existing homes, which often trigger remodeling sales, have also declined and the inventory of existing homes has climbed to almost nine month's supply, up an additional two months from last year's third quarter and more than four months from the beginning of 2006.

Sales in garage doors for the quarter were $118 million compared to $139 million last year, and this segment had operating income of $4.6 million compared to the prior year income of $10.3 million. Garage door sales in the quarter decreased approximately 15% primarily as a result of sales volume decreases partially offset by a more favorable product mix to more premium line doors. The operating income decline was primarily attributable to the decrease in sales volume partially offset by operating efficiencies and reduced operating costs. Most of the sales volume decline was in our professional dealer distribution channel. Based on market intelligence to the best of our knowledge we continue to believe our decline is in line with overall market decline.

Presently we see no signs of improvement in the overall business environment while certain geographic markets appear to be strengthening or stabilizing, others appear to be weakening. On a positive note, our gross margin for the quarter approximated the prior year 29.8% versus 30.8%, the strengthening of the margin was attributable to a favorable product mix and increased production operating efficiencies. Approximately two months ago we completed a reduction in force, resulting in a salaried headcount reduction of approximately 15% and annual cost savings of $5 million. We also have active improvement programs focused on reducing costs through efficiencies.

The manufacturing and supply chain activities. Initiatives implemented todate should result in an annual savings of $5 million. Despite isolated recovery -- indications of recovery in the spring -- the weakness in the new home construction market has intensified and as a result our service and installation operations had sales in the quarter of $68 million, a decrease of $19 million over last year and an operating loss of $3 million compared to $2.2 million of operating income last year. This weakness has been particularly acute in markets where we have historically been strong, Phoenix, Las Vegas, Atlanta and Minneapolis/St. Paul.

Approximately 60% of the decline was attributable to decreased flooring sales in Las Vegas. Approximately 33% attributable to decreased sales of fireplaces and garage doors in all markets. Approximately 20% attributable to decreased appliance sales offset by cabinet sale gains attributable to our Cabinet West acquisition. The service Company's gross margin for the quarter was in line with the prior year with a number of items improving the margin and a number of items reducing the margin. The business has taken actions to reduce costs commensurate with the market turn down. Nevertheless, in the interest of obtaining customers and rebuilding relationships damaged by operational issues in the Phoenix cabinet installation business, course reduction activities have been balanced against maintaining the infrastructure needed to serve the customers when the market recovers. We have closed this segment's national headquarters and eliminated a layer of management by consolidating with the West region management in Phoenix. This action alone will contribute over $1 million of annual savings when completed. Additional workforce reductions have been taken on a location-by-location business. In Atlanta the Company has shuttered two showrooms and consolidated its warehouses. Similar structural changes are in process in our other leading markets and should be completed in the next quarter. Obviously in this quarter our actions have not caught up with the declining revenues. We hope that additional actions currently taken along with the improved operating efficiencies will result in an improved fourth quarter.

In Specialty Plastic Films sales for the quarter were $97 million, the same as the prior year quarter. Operating income was 2.9 million compared to $8.1 million last year. Sales in the third quarter were positively impacted by higher volume in Europe and the effect of a weaker US dollar on translated foreign sales offset by lower selling prices to our major customer and lower selling prices caused by resin cost fluctuations. The $5.2 million decrease in operating income was the result of the lower selling prices, the impact of resin prices and cost fluctuations and a charge in the quarter for a reduction in force partially offset by higher unit sales.

We are continuing to roll out our new elastic products. However, the timing for the ramp up and volume has been somewhat delayed. On a positive note, we have made excellent strides in improving our European and Brazilian operating performances. Also, our strategy to diversify and grow our films business with new products and customers and into geographic regions with higher growth is progressing.

The cost of resin increased approximately 10% in the quarter, primarily in the months of May and June. For the quarter resin price and cost fluctuation negatively impacted operating income by approximately $4 million. There is pressure to move the cost upward in the fourth quarter. During the quarter we completed a reduction in force in this business that impacted all its functions and geographies. The salaried payroll headcount was reduced by 10%, resulting in annual cost savings of $4 million.

Consolidated cash flow provided by operations was $10.5 million, and we continue to support the growth of our businesses with capital expenditures in the quarter of $4 million which was funded by available cash balances. Our balance sheet at June remains strong with working capital of $358 million and total indebtedness representing 36% of capital. We continue to fund our common stock purchase program, a little cautiously, using $1 million in the quarter to acquire 45,000 shares of common stock.

The Company previously has retained Goldman Sachs & Co. to assist us in evaluating the components of our businesses, our capital structure and other potential strategic alternatives. The Company and Goldman Sachs have concluded the initial evaluation of such alternatives. Due to the present conditions in the residential housing and credit markets, options that would normally be able to increase shareholder value are being explored but do not appear to be attractive to us at this time. We would like to take questions.

Bob Labick, CJS Securities.

I had a couple questions. First I wanted to thank you for the additional detail on the call already. I just want to follow-up, a few follow-ups by division. Regarding doors, typically Q4 September quarter is stronger than Q3. You noted that there is no increase in outlook for visibility but should we still see the same seasonal pattern going forward?

With caution I would expect so, Bob. We looked fairly closely at the pattern Q2 to Q3, the historical pattern. And although obviously at lower levels, we did have that natural uptick from 2 to 3. I wouldn't think there would be any reason to think there would be anything other than that from 3 to 4.

And then it sounds like the cost-cutting in doors has been complete. So was the full impact in the last quarter or should we start seeing the full annualized impact of the 5 million in Q4 and beyond?

I think most of it in Q4. Certainly the people side of it. But the other things to improve manufacturing and our logistics, those are ongoing. So I'd say most if not all. The other thing I would emphasize is that we are going to continue to look as time goes by -- we always do but certainly with a heightened level now given that the market is so weak. And so we would hope over time to be able to talk about other efficiencies that we would gain.

Jumping to films, you noted a pickup in volume in Europe. Was that from your largest customer, was that private label? Could you maybe quantify that or help us get a sense of what is driving volume there?

It is primarily private label. It is for the most part the ongoing program that we've been talking about for several years.

And given the current pricing environment, and I understand the fluctuation due to the resin pass-through, but just roughly speaking where we are, if you could update us on or the annual capacity roughly in films. Previously it had been in the $500 million range at a certain price level. Is it still in that range, or what is the annual capacity, roughly?

Talking about our annual capacity?

Yes.

I think the $500 million is still a good number overall. As we've talked about in the past, there are a lot of variables. You pointed to the most significant one, what resin costs and what we charge for it. This variability based on the types of products we are doing, which determined the speed at which the lines can run. And if there is also variability in terms of the value add that we are putting in and what we'd get, but I think overall that is a pretty good number.

If you could discuss the latest CapEx programs in films and the other regions including South America and US and just how things are trending there.

Nothing has changed relative to CapEx in film. And by that I mean that you are aware -- others are aware that we spent significant dollars on the CapEx program for film in 2002, 3, 4, 3, 4, 5. And in the last year and into the next year or so the plan is to absorb all of that; some of it in the form of completing -- getting to 100% capacity. And so I would expect that for this year and future years we will probably be in the 10 to $15 million range for CapEx for film.

Thank you very much. I will get back in queue. We look forward to seeing you at our conference.

(OPERATOR INSTRUCTIONS) Michael Schechter, Mentor Partners.

Good morning. Just a question on the Goldman process. Is Goldman dismissed at this point, or (multiple speakers) revisit this as the market stabilizes?

No. The answer is no, they are not dismissed. They are continuing to work with us looking for opportunities and looking for suggestions. They've been working with us for a number of months, and the problem has been, candidly, that the markets in some of our areas have deteriorated as they have come on and so they've got to relook at the situation every month to see where we are. The housing industry and the installation business has been really beaten up by what is going on out there in the lending and in the housing industry. So that has affected their ability to be really be able to give us some good advice.

Is the announcement generate interest?

Has the announcement generated interest --

From third parties?

We are working with some third parties with Goldman on a particular situation which we really can't go into at length here -- as something occurs we will. But the, candidly the price of oil and natural gas and the price of resin which has affected us in the plastics business has been an issue, and the garage door has been an issue. The military company is doing fine, so and will do fine, so I don't think that is a problem for us. And we will be reviewing our relationship with that company as well as all our other businesses. But Goldman is still on stream and still working with us on a daily basis.

Thank you.

Marty Pollack, NWQ Investment.

Just if I may on specialty plastics; I just want to if you can kind of tie in what is seasonally the pattern here for it in terms of next quarter? What should we expect. And then also longer-term any of the long-term targets have changed at all as you see the opportunity for the business to recover to more normalized levels.

On seasonality there is really not much to look at there. If you look at our quarterly results over the last two to three years there is no pattern, and we are not thinking of the fourth quarter therefore in terms of any kind of natural pattern. We did say in our opening remarks that we believe we are continuing to make progress with this business. The actual financial performance peaked in 2004 and went down in the subsequent two years. And we think we have it going in the right direction. The longer-term I think we all know is largely a function of our ability to successfully introduce the market new products. And we have a number of things we continue to work on. Having said that, there has been a little bit of slowness in the introduction of our elastic product. We're optimistic that it will roll out in a more substantial way in fiscal 2008.

So as far as let's say longer-term margin targets, what is that band -- is that band changed from previous discussions?

I don't think the band has changed. I think because of the slowness I referenced maybe it is going to take longer to get back up to the higher side of it.

Okay. Thank you.

Zahid Siddique, Gabelli & Co.

A couple of questions. One, if one of you folks would comment on a bit more on the resin price dynamics, what was the dollar price, for example, and did you expect this hit to turn into a benefit in the next quarter? And then my second question is on the electronic systems you commented briefly on the margins being low for some of your projects, and I wanted to see if that is something we should expect on a going forward basis.

On resin, as we noted, the present had an impact both on sales and gross margin, s negative impact in the quarter. What I want to remind everybody is the message in which we analyze resins is to compare the movements in the quarter to the year ago movements in the comparable quarter. And so we did make the observation that in the fourth quarter for us there appears to be pressure for resin prices to perhaps increase. Relative to a year ago you need to compare the movements of resin a year ago. And at this point we actually don't have a prediction of whether it is going to be helpful or harmful compared to a year ago.

Needless to say in the context of the quarter itself if resin goes up it will impact of the quarter. But as I said for purposes of how we are doing in a relative neutral environment, it could potentially be helpful. On Telephonics we looked at your question fairly closely, and what we concluded was that the overall gross margin in the business in the third quarter was in our normal ranges for actually our third quarter. There is some seasonality in this business so it was important for us to look at the third quarter. There are a number of projects that generated lower margins for reasons like a year ago they were more geared toward manufacturing and production. And this year they is more development work going on. We had a number of programs that were reaching the conclusion of a key phase last year at this time in the third quarter and they happened to wrap up quite successfully creating some additional margin dollars.

We had a program last year where at this time we were delivering so-called spares, which in this instance where generating some margins that are higher than the normal production. There are a series of one-off things. That is kind of a long-winded way of saying we think on an overall basis the margins will stay consistent with the past and not be declining. The other point I do want to make is that Syracuse Research contract which had a very significant impact on operating income on the gross margin line did have a lower margin than our typical job. And so some of that is also impacting the margin comparison.

Okay. Thanks a lot.

Robert Vermillion, Axial Capital.

Just a quick question on the SRCs, I was wondering if you could tell me how much revenue remains under that contract.

Yes, we've been talking about it winding down and winding down in the fourth quarter. And on average for this quarter there is probably about 10 to 15 million left for this quarter.

10 to 15 for Q4?

Correct.

And how much was in Q3?

I believe about 60 million.

Thank you very much.

Maybe 55.

Marty Pollack, NWQ Investments.

With regard to the cost savings actions this was the quarter since you accelerated whatever implementation of cost reductions from your previous one. You didn't mention a number of items on -- I'm not sure I caught them all -- but annualized savings of $5 million out of garage doors; isolated actions also installation services. Just wondering, and I think also specialty, I believe some additional cost reductions. How much of the benefits actually have realized that this last quarter and effectively visibility for the rest? How is it likely to spread out in the quarters beyond September? Clearly the time and hence that quarter you will see a drop-off in Telephonics and I am just wondering whether some of that will provide some cushion at that time.

The simple answer, and then I will come back to some more detail is and using your words, yes it will provide some cushion next year. Let's take garage doors first. What we spoke about a little earlier is the combination headcount reduction and various programs to improve our manufacturing and distribution operations, we believe are worth about $10 million in annual savings. My sense is and sometimes it gets a little hard to hone exactly in, but my sense is we had little or no benefit in the third quarter for that. Because we did have a certain amount of severance to pay that would have carried through and resulted in the normal charges in the quarter. If anything just a small benefit. I think their was an earlier question where I said the majority of that we would ask to get a positive impact in the fourth quarter. And then certainly by next year expect all of that to result in improved bottom line.

The film business, the reductions in the third quarter actually as a result of severance and things like that, actually penalized or reduced the operating profit probably about $1 million. In the fourth quarter that should switch over to some positive impact. And then next year the full impact of about $5 million or so. The service and installation business, we have done a number of things we referenced changes on a location-by-location basis. That has been going on for a long time. So what we have in some instances is the benefit of things that we did three, five and six months ago. But we were also as we are doing it for the newer things that we are implementing incurring some cost to implement; in some instances again in the form of severance.

My sense is that in the quarter just completed in the aggregate it is probably a level amount to or maybe a small negative impact. And within months again in the fourth quarter and next year we'd expect to continue to see some improvement on those actions.

And on Telephonics itself, what is there any action that is to be taken in that division? Clearly very profitable but --.

No action. We have the Syracuse Research work winding down. It is fortunately going to wind very organized way, so there is not an inordinate amount of planning that is necessary relative to the resources dedicated to that program. The business is extremely strong. All of our programs are doing quite well. On average we tend to be resource short. So although we don't like to see a program wind down, there are lots of places we could use our resources.

We continue to work hard on the MH60 program. We see it ramping as the U.S. Navy had predicted all along, there's always the possibility of some minor modifications and tweaks. But the program continue to develop as is, and our various other radar and communication programs are moving along nicely.

We are also spending some money, Marty, on R&D and on salespeople looking for new programs or add on to some of the programs we have. So while we have the (inaudible) cash flow and the earnings in the division we've decided to spend some money, and that is partially reflected in this quarter.

I'm assuming therefore just concluding the discussion with Goldman Sachs will continue to focus on further actions even beyond these -- over time?

Yes, we are waiting to -- we are continuing to work with them. They are continuing to watch the marketplace and the Company. We are looking for whatever opportunities develop for us to be able to enhance stockholder value. The fallout from the housing industry has really hurt us badly, as you can see. And between installation services and in the garage door business we are off dramatically. So that has made it very, very difficult for us to do things that we might otherwise want to do with the Company. And we are working with them on a daily basis, and we think they are very smart guys and they certainly have access to the marketplace. So we are hopeful that we will be able to come up with an idea.

Thank you very much.

I'm sorry to get you up so early this morning, Marty.

Okay.

At this time there appears to be no further questions. I would now like to turn the floor back over to Harvey Blau for any closing remarks.

I want to thank you all for following us and being supportive. As you can see, the marketplace has been very difficult. We are working very, very hard; as a matter-of-fact we are probably working harder than we've ever worked to react -- we have, and we think we have reacted pretty rapidly in face of a very fast downturn in the marketplace which has affected a lot of companies, including mortgage companies and investment banking firms who obviously didn't think there was going to be this major downturn. So we are continuing to look at places to cut, cutting only gets you so far. Obviously business has to come back, and we are out there pushing very hard for new business. We will continue to consolidate our operations and cut back on any costs that we possibly can cut back on. We have made cuts at every level including corporate. We have cut out a number of people in corporate. And so we are hoping that we will be in a very good position if and when the market turns around.

The resin prices are up in the air with oil where it is, and natural gas and what have you. It is not surprising that there has been some small increases in the resin price for this quarter, coming this present quarter. But we think that some of the efficiencies we've put in and some of the new programs we are putting on will more than offset it. So I look forward to talking to you again in November and thank you very much for your cooperation. Bye-bye.

Thank you. This does conclude today's Griffon Corporation third quarter 2007 earnings call. You may now disconnect, and have a good day.