Griffon Corp (GFF) 2008 Q1 法說會逐字稿

Good morning, I am Natasha, and I will be your operator today. I would like to welcome everyone to the Griffon Corporation first quarter 2008 earnings conference call. (OPERATOR INSTRUCTIONS) It is now my pleasure to turn the floor over to your host, Harvey Blau, Chairman and Chief Executive Officer. Sir, you may begin.

Good morning, and welcome to financial overview of our first quarter 2008 which ended on December 31, 2007. I am Harvey Blau, Chairman of Griffon Corporation. With me today are Griffon's Executive Vice President, Frank Smith, and Chief Financial Officer, Pat Alesia. I will discuss the overall results of the quarter and then we will answer questions with respect to operations and financial results.

First, I would like to point out that matters to be discussed in this call include forward-looking statements and they involve certain risks and uncertainties that could cause the company's actual results to different materially from those in the forward-looking statements. Second, in December 2007, we modified our credit facility to revise certain financial covenants in effect for the first quarter of fiscal 2008 ended December 31, 2007, to maintain compliance. However, we have since anticipated that we may not be in compliance with one or more of the quarterly covenants as a result of this possibility and in accordance with applicable accounting standards, we reclassified $62 million of long-term debt as current debt in our balance sheet.

We have commenced discussions with our banks to further amend and refinance our credit facility by March 31, 2008, for the balance of the year which reclassify the debt back to long-term debt. In addition, we have on our balance sheet approximately $69 million of cash that would more than offset the debt that is owed to the banks. So the amount of the debt and our balance sheet indicate this is not a major situation for us and we expect to have it all settled in the next few weeks. The reason for the issue to start with is the rapid change in the economy and in our balance sheet caused by the decrease in the housing industry, which we will talk about.

Following several strong years of sales and income performance, Griffon's recent results continue to be adversely effected by the crisis in our nation's residential housing market. In fact, today's paper indicates one of the major home builders has indicated that 28% of his contracts were canceled and that the sales are down 22% for the quarter. Indicating a further decline in the housing industry. Consolidated net sales for the quarter were 341 million down from 434 million for the first quarter of fiscal 2007. This quarter our pre tax loss was 2.4 million compared to pretax income of 14.4 million last year. Our net loss was 1.4 million for the quarter compared to net 8.5 million, resulting in a diluted loss per share of $0.05 compared to diluted earnings per share of $0.27.

Telephonics, our electronics information and communication segments had sales in the quarter of 76 million compared to 130 million last year. Telephonics operating income was 5.5 million compared to 12.9 last year. As many of you know, Telephonics radar and communication business is actually continuing to perform well. The strong prior year results of Telephonics were driven by SRC, excluding the impact of the SRC contract in the respective first quarter periods, Telephonics core business this year actually grew by approximately 9.2 million or 15%. We had received previously $340 million of funding from SRC for turnkey production of account to improvise device over the prior two fiscal years, that contract basically came to an end in September. Although future contracts have been awarded and will be taken care of in 2008.

As previously announced, Telephonics has secured additional contracts, as I said, from SRC, about $17 million worth. In addition, we have been awarded additional contracts in excess of 42 million for the MMR program to support the Navy's MH60R helicopter. In January, Telephonics was awarded a $14.5 million contract to supply mobile surveillance systems on behalf of the U.S. customs service. We are happy with the performance at Telephonics. The backlog is high. And we look forward to a very good year this year for Telephonics.

Now co-pay operates in three business segments. Garage doors, installation services and specialty film. Sales in garage doors for the quarter were 100 million compared to 129 million last year. Garage doors report an operating loss of 1.3 million this quarter compared to operating income of 4 million in the prior year first quarter. Revenue and operating income were significantly impacted by the slow down in the housing market both in new home construction and the resale market. The revenue decline of 17.6 million or 14% and the operating loss was principally due to the reduced unit volume. This segment is continued to focus on significant cost reduction programs, including but not limited to reductions in force, reducing or eliminating sales and marketing programs and consolidating facilities where possible.

Our installation service operation had sales in the quarter of 52 million compared to 77 million in the prior year, and we had an operating loss of of 5.7 million compared to 893,000 last year. The decline and installation services operating results were due to the continuing effect of the weakness in new home construction in the segments Las Vegas, and Phoenix and Atlanta markets. During the second quarter of fiscal 2008, the segment management had (inaudible) a restructuring program in its efforts to reduce future operating markets by, among other things, undertaking reductions in force, consolidating facilities and optimizing its exit from certain markets. The company expects the restructuring program to result in charges that range between 12 and 15 million in 2008.

We continue to look at the rest of the operations to see where we can additionally save money and cut down future losses. Specialty film sales for the quarter 106 million compared to 104 million. We had an operating income to 6 million compared to 4.3 million last year. Higher sales and operating profit were favorably affected by improved operational efficiencies and product mix. On average, resin course in the first quarter increased approximately 30% and 6% in North America and Brazil respectively but remain fairly constant in Europe. It is estimated the effect of resin volatility had a negative impact on us when compared to the prior year's quarter of between 3 and 4 million.

The segment's operating resultless were favored by lower unit volumes primarily in Europe. Specialty Plastic Films elastic laminents for the hygiene markets are qualified with the segment with major customers and business development with other key target customers in progress. We anticipate volume should ramp up for this product as the year progresses. Cash flow from operations in the quarter was 41 million. Capital expenditure for the quarter was 6 million and we made payments to reduce debt of 13.8 million and our balance sheet at December 31 remain strong with working capital of 279 million and total indebtedness representing 32% of capital. At this time, I would like to take questions.

Thank you. (OPERATOR INSTRUCTIONS) Your first question comes from Rob Labick from CJS Securities.

Hi, Rob.

Couple of questions. I wanted to start with installation services. You mentioned that you are undergoing some continuation of the restructuring initiatives. Could you give us a sense of the expectations, the expected return from the charges you expect to take and can you talk about it maybe in the context of bringing down your fixed cost in that business? You had 80 million in SG&A last year there; I don't know if it is split, fixed or variable. How much can you lower your fixed cost in that business?

Okay. Frank Smith will answer that.

Yes. Bob, I don't have that particular answer to the dollar. What we are talking about doing in general was of the loss that we incurred in the first quarter, we would be looking to take out between 50 to 60% of the loss. So, if that helps you in trying to figure out some order of magnitude on the numbers you gave.

Okay. That's a start. The original goal, obviously the housing crisis has deepened and gotten worse. The original goal probably a couple of months ago was to shoot for break even for the year for this division through the restructuring. Is there still a possibility of getting back to break even at least on a quarterly run rate basis this year and how do you view this year playing out currently?

Bob, result of sales have deteriorated so much from what we thought, even from the previous month. I wouldn't be comfortable with predicting what the future holds. We are going to do our absolute best to reduce these losses and deal with the situation.

Okay. Skipping to doors again. With the restructuring initiative in place there. Is there any kind of a target savings from the current restructuring?

Yes, there is. We are shooting for at least $10 million worth of improvements through the projects we have underway already.

Okay. That's off of the current level or is that off of, should I take this quarter's G&A. Somewhere in the magnitude of $10 million off that, obviously --

They are not all programs that address G&A. There is a combination of initiatives. Reductions in force. Sales and marketing program spending that will be eliminated or deferred. And there are some sales initiatives that are taking place to improve the top line. Some of which have already been put in place and will produce benefit over the remainder of the year. It is a combination of all lines of the P&L.

Okay. Great. Let's see. Moving on to film. Can you tell us I guess the current outlook that you are seeing? You mentioned from the December quarter the impact of resin. How has resin been acting recently and what are the expectations from your group for the next six months in resin?

It is very hard to call. I mean, with the price of oil doing what it has been doing, if it goes up, we are going to be under additional pressure. Right now, it is a very, very difficult thing to say. Could easily go up, but on the other hand, if the economy begins to falter maybe demand will come down. I don't know. I really couldn't begin to predict what is going to happen. Resin has, as you know, over the last few years, it has been, with a few exceptions, it has been a steady march up.

Right. Absolutely. And now, you mentioned you are expecting volume growth. Obviously there were some good sales in the films division in the quarter. Let's just take resin out of the equation If volumes continue to grow, should we see some continued margin expansion? Are there any other price concessions coming this year or excluding resin again? Good margins in the quarter. Should they continue to grow with the volume growth?

There are additional price concessions that will be coming. On the other hand, there is substantial opportunities with new products to improve margins. And those opportunities as they are executed the remainder of the year will tell us as to what happened with the margins.

Great. And then my last question and I will get back in queue. I appreciate all the time here. Could you just discuss any broader strategic thoughts, in terms of obviously we are in the downturn in housing. Is it your intent to, obviously as reduced costs come out, is there opportunities to purchase assets at depressed lows, are you looking to sell anything, or are there any spinoffs or any broader strategic initiatives or is it really just buckle down, run the business for six months and reevaluate?

Well, to answer you with respect to, the first thing is with respect to the installation business, it is our number one priority and top goal to minimize the cash burn and the losses in that division. So we are going to keep putting pressure on what we do there which could be anything from selling or divestiture or close down of operations to make sure that we keep reducing the losses in that division. Because no one knows at the present time when this market is coming back or if it is coming back in the same way it was before. So that's the first thing.

Second thing is our goal in the Garage Door business is to maintain our market share and try to become more and more efficient by closing down operations, which we have, and laying people off that are connected with the business on a seasonal basis because this is a tough quarter. Coming up now because of of the season and to prepare ourselves for the second half of the year which the Garage Door operators believe there will be some light at the end of the tunnel towards the late third and fourth quarter of the year. We are doing everything we can to become more efficient, lower costs and we have a major reduction program of overhead there.

As far as acquisitions are concerned, it is not on my mind at this time. The banking community right now is in such that I don't think there is not a lot of money available for making acquisitions and I don't think that we want to concern ourselves with that until we straighten out our own house. As far as the plastic film business is concerned, we are doing everything we can to try to minimize the effect of the resin price volatility. We are working very diligently down in Brazil, which we have completed the operations down there to install the facilities and we have a large amount of business down there. Now we have to try to make it more profitable. The resin down there has been very volatile. We have a team of people going down and trying to do what ever is possible to get us to make more money down there. Now we have always, there is no cats and dogs in this company. If we have an opportunity to merge or sell or acquire, we are going to do it and we are going to look at every opportunity as we go along. The key is for us to be here when the market comes back. Our financials are such that we are in pretty solid shape bank-wise. So, we are going to do everything we can to get the company to a profitable level as soon as possible.

Great. Thank you very much.

Thank you, your next question comes from Todd Vencil of Davenport.

Thanks very much. Just, Bob covered a lot of the questions I had. But to dig in a little bit. In films, you mentioned the loss of some volume from a customer in Europe. Can you tell us who that was?

I would rather not. No.

Okay. Fair enough. And then sort of looking further out and again understanding that resin is a real headache right now, but given what you said about your efforts to work on that and given some of the new products and opportunities. What do you feel like at this point is sort of a longer term or reasonable margin to expect out of this business?

Well, what I have said in the past is that this is a market. This is a business that goes through cycles of innovation. When you are in the month cycle of the innovation when you have products that are commanding the margins, they can be anywhere from 7 to 10%, and when you are on the back side of the market where the competitors have caught up, the margins are considerably less. Several points less.

Do you feel like we are coming into one of the phases where, as you said, with the now products w may be moving towards that being a bigger part of the picture?

We have a lot of exciting opportunities is the way I would like to say it.

Okay. Fair enough. You mentioned that the backlog in Telephonics is good. Can you tell us what the backlog is at this point?

Little over $300 million.

How does that sort of compare to last quarter and last year?

It is probably consistent but because of the SRC program which was added to the backlog and which has been sort of completed. It is hard for us to put apples to apples. Based upon projected sales somewhere in the mid 300 million, we have about $305 million of backlog.

Sort of consistent to providing the core growth that you saw X the SRC business in the first quarter?

Exactly.

Can you remind us of what the impact of SRC was in the last three quarters of last year?

Let me put it this way, in a yearly basis, it was approximately 190 million in sales for the year ending September 30. And was approximately $15 million in profit.

Got it.

Tax.

Got it.

If you take that out, and you take it out on a comparable basis for 2006 and go back and measure us against where we were, but without the contracts, you will see that we have internal growth.

Got it. On the installation services side detail, was there any expense that was in the first quarter?

There were severance cost that were in the first quarter.

Can you put a number around that.

There were severance cost of about $300,000 incurred in the first quarter.

Okay. So relative to the 12 or 15 million, pretty small.

Right. And there was a major reduction forced on them in January.

How do you expect that to play out over the next three quarters? Front end loaded. Back end loaded.

The expectation is front end loaded.

How much of that is going to ends up being cash?

Almost all of it.

Okay. Then I guess. Anything you can add. I mean you said that it is really not, with regard to the debt issues and the covenants, it is not a major situation. You expect it to have it wrapped up in a few weeks. I can appreciate that and thanks for that color. Can you give us any color? Are you thinking of maybe moving to a different structure or facility? Or just working to really modify the existing facility and moving forward?

We don't know right now. We are having preliminary discussions with the banks. We should have a term sheet in the next two weeks about what they want to do and the various things they are going to offer and then we will look at it and make decisions.

Okay. Thanks a lot for that. That's all I have got.

Your next question comes from Marty Pollack from NWUQ Investments.

A couple points. One of the 12 to 15 million charge you are saying is going to be mostly cash. Just wondering in terms of the savings you refer to I believe 10 million or so cost reductions. Do you expect that could be sort of cost reductions that actually end up being full phase or partial phase so whatever the economics conditions are, the 10 million can provide you a cushion. Can clarify that?

I am not sure I understand.

You refer to a 10 million initiative that will reduce, I believe, costs. I am wondering whether capturing will effect. And 10 million saves in here.

This is Pat Alesia. The 10 million we referred to was in the building products segment. Not the installation segment.

I understand.

So the savings that are initiated for the building products segment are real cost savings, real cash savings. Flip side on the installation side is a restructuring program, not restructuring the buildings segment. We are instituting cost saving programs. We have initiated already some of those programs which will include consolidation of facilities as we enumerated. So that should be real cash savings over the year. On the installation side, that is a different situation in which Frank Smith referred to with respect to the 12 to 15 million.

So the 12 to 15 is on installation service side.

That's correct.

I was not sure it was in the building product side.

It does not.

It should be able to cover the cost of reductions by the cost of savings as they are on a go along basis. It should not have an effect on the operations of the company. You get rid of a guy, you save his salary. You pay him severance. One balance off the other. In the installation business, we are talking about actual close down of facilities, actually getting rid of operations; therefore, there will be a cost incurred by virtue of leases, severance and inventory receivables and things of that nature.

Continuation of projects is very expensive.

We have obligations of projects we entered into that we have to finish off. We are trying to minimize that by entering into ventures with other people to take over some of these operations and also to continue doing business with them on the Garage Doors part of the business. It is sort of a complicated kind of a close down. It is not simple like you just close the door of a store. And there will be cash, there will be cash required. On an overall basis, we have to cut the losses that are being generated by the division and we have to look at the, at this aspect of it I would call the first aspect of an overall change in our whole philosophy.

With regard to working capital, it seems you certainly did a very good job there and certainly in reducing the net debt of the company. So, a lot seemed to have happened. I am just wondering whether you can clarify in that how much of that was in effect real work capital or working capital reduction or is any of that effectively based on the seasonal requirements going to suggest we will be not as advantaged in the next few quarters? It working capital going to reverse into a use situation?

It should not and also realize the 62 million we reclassified on the long-term debt reduced the working capital number. Once that is reinstated as of March 31, our working capital will be closer to 300 million. So we have no issue there.

Essentially, whatever you captured in the cash column is essentially what you are working off from.

Correct.

Okay. With regard to Telephonics, it seems that margins for this quarter were lower than what I think we would be expecting for the rest of the year. Were inefficiencies due to the SRC program running down and closing and that in effect you should be able to go back to some kind of margins near the pre, near the last year or previous years?

Actually. Our margins increased in Telephonics in the quarter, Marty, from 21%. What you are saying is the SG&A as a percentage of cost going up. Because SRC as a contract and over 300 million in funding. Required very little in SG&A expenses and it has to be maintained to continue to be maintained to continue with the additional work load that Telephonics is doing currently, but the gross profits increased because the SRC work was a lower gross profit business in Telephonics.

So effectively in future quarters, will we see on the EBIT line, we will see the 9 to 10% margins we have seen in the past? Is that the recovery on the EBIT line?

That's very doable.

Okay. On the plastic side, the impact of Brazil, Latin America in terms of the higher cost you are seeing over there and its impact I assume some of that coming back to the U.S. in terms of dollar sales. Can you just describe the structural issue with regard to the currency and its impact overall on the business?

You are talking about what effect it has on us as a positive or negative?

Yes.

Well, what is happening is that the Brazilian operations profitability trails the general profitability of the business. And we got into that business by acquisition so what you see is a strong translation of sales without really sort of what you might think from a profit contribution and you also see the impact on the balance sheet and the fact that good will is coming in and looking at a much higher dollar figure.

Just remind us though. What is the amount of revenues that obviously cost in (inaudible) but as you sell products outside of Latin America what is that number going to into the U.S. or the other markets?

We are not exporting from Brazil right now.

No, it is essentially.

It actually we had in the past and that may be something you are thinking about. The strength of the (inaudible) it has made it uncompetitive on an export basis.

I would have expected that and that's not a risk issue.

No, we are serving, the market down there is growing and is strong and that's what we are selling into right now.

With regard to plastics and just the yield issues that you were facing earlier with some of the other product introductions, where are you right now in terms of yields and clearly you describe that as a positive, I think you described that as potentially a positive going forward?

In the quarter, yields were a big part of the success because we had a substantial negative impact from resin. So we improved yields on many products. I think that the point I was trying to make before is we have a lot of new products coming on line and historically that has meant lower yields in the ramp up periods.

But at this point you are in effect moving into a more high rate production on some of these products?

On some of the existing products we have done very well and what I am questioning you on is the newer products are obviously going to be going through ramp up periods and they are much less during ramp up.

Overall, if you are looking at mix, more products coming into more mature phase previously with yield issues, the overall mix for plastics in terms of new products versus old?

In the remainder, looking forward we expect the mix of new products to be much higher than it was in the first quarter.

But inefficiencies, you had previously the problems let's say are some of those issues are resolving and you have more normalized type of --

They are behind us.

Okay. Last question if I may, CapEx, do you foresee covenant issues forcing you to sort of look at CapEx? Are you anticipating that you may have to reduce that number to be in a more attractive position in terms of working with the covenant and CapEx budget?

No, Marty, those issues will all be resolved within the credit facility?

Do you have an idea what the capital -- CapEx budgets will be for '08?

I think we forecasted somewhere in the area of 30 million.

Okay. Thank you.

Okay.

(OPERATOR INSTRUCTIONS) Next call comes from Michael [Rubelow] of (inaudible) Capital.

I have a couple of questions that are more clarifications of what people have asked. First, on the margin front. There have been a few questions in terms of the longer margin impact. And I am wondering if you can comment on the shorter term going into the first quarter. How you think margins in the plastics business are going to maintain relative to where we are coming off of.

I didn't hear the last part of your question.

I was wondering how, going into the first calendar quarter of this year, how you think that margins in the plastic business are going to hold up just given the resin environment we are in right now?

I don't know. I believe that at the moment that the resin prices being what they are we would expect that it is not material. But we don't know what resin prices are going to do.

Okay. The other question I had. Also with input cost. You said you have done a very good job of passing through price increases in the Garage Doors business.

Yes.

Obviously that's another sector where there has been substantial increases. Looking into 2008, what are your thoughts in terms of your ability to continue passing along these price increases on to customers or do you think it might, you might have to eat some of that input cost?

Well, let me first say that I think our management team has done a great job of being able to manage the buy of resin in the past and we have reason to believe that we have done better than maybe the indexes would indicate. There is no question that there are some market forces out there right now that may put pressure on the continuing price of steel. And if we are not able to manage the round up through our procurement people, we will have to address that question when it comes up.

Also, as you can imagine, it is very difficult to project the prices of steel and based on the economy and where the automotive business is and where the housing business is. There might not be any price increases in steel and it may even go the other way. We don't see any major upward pressure on steel prices.

Have your customers though even recently been taking the full pass through, in terms of the prices?

I don't think there has been a new pass through in prices this year or last year.

Okay. Thank you very much. I appreciate your time.

Thank you, your next question is a follow-up from Todd Vencil of Davenport.

Thanks a lot. Couple of housekeeping items and then a broader thing. You mentioned the CapEx budget. Can you tell me what you are anticipated this year for D&A and the tax rate?

Depreciation, that would be in the area of 40 million. The effective tax rate should be somewhere around 39%.

Okay. And then generally, as I was listening to your response to one of the questions about the installation business this sort of questions swam up. In light of Mr. Blau's comment about this is the first aspect of an overall change, the whole philosophy. Can you go in there and talk about when all is said and done, what do you think of the magnitude. What is the magnitude of the reduction in the size of this business for you guys, in terms of insulation going to be ultimately?

We are reviewing that constantly. What I am really trying to say to you is this is a start of closing up four or five operations and closing up one of our major operations which has been losing money. We are going to review each of the other entities and see what is continuing to lose money and make a decision on each of them so that by the end of the year if we are not in a situation where we are breaking even or making money we will be looking at every one of the operations. That's really what I am saying to you.

If we look at the four or five operations you are starting out with, what is the percentage impact on the sales there broadly?

Well, as I said earlier in the call, we are looking to eliminate 50 to 60% of the first quarter loss.

Sure.

You are talking about maybe 40 to 50% of the sales.

Okay. Thanks guys. I appreciate it.

I want to thank you all. If there is one last question I will take it. Otherwise I will be speaking to you next quarter. And we hope that we see some light at the end of the tunnel.

This concludes today's conference call. You may now disconnect.