Griffon Corp (GFF) 2008 Q2 法說會逐字稿

Good afternoon. My name is Rose, and I will be your conference operator today. At this time, I would like to welcome everyone to the Griffon Corporation's Second Quarter 2008 Earnings Conference Call.

(OPERATOR INSTRUCTIONS)

Thank you. It is now my pleasure to turn the floor over to your host, Mr. Ron Kramer, Chief Executive Officer of Griffon Corporation.

Good afternoon. Welcome to an overview of our second quarter. With me today are Frank Smith, our Chief Operating Officer; Pat Alesia, our Chief Financial Officer. I'll discuss the overall results of the quarter, and then we'll answer your questions and we'll get an overview on where we're headed with the business.

Before we begin, I should point out that to the extent that matters 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.

This is my first chance to talk to you as CEO, and I do so at a very difficult time for our company. We continue to experience the adverse effects of the crisis in the U.S. residential housing markets, which has resulted in a decline in our Installation services companies and our Garage door business.

Earlier today, our Board of Directors approved management's plan to exit the Installation services business in 2008. As a result, we estimate the aggregate exit cost, including the operating and intangible asset write-offs, would range between $30 million to $40 million for the remainder of 2008, of which $25 million to $35 million is estimated to be non-cash. This action was taken after consideration of many factors, all in the interest of increasing shareholder value.

Last quarter, we announced plans to address the most serious issues associated with the downturn. As a consequence, we focused on our weakest market positions while taking actions to maintain our historically strong operations. We discontinued operations in several markets -- Atlanta, Fort Myers and Fresno -- and we restructured several others in the second quarter.

During this time, we continued to weigh the severity of this downturn, the likelihood and timing of market recovery, and the strengths of our restructured operations. We believe the time is right to pursue selling the remaining locations, exit the business, and focus on our core manufacturing-based businesses.

I'd like to acknowledge the dedication of the installation services employees, the loyalty of their customers, and we're confident that the location teams will continue to provide industry-leading service. But for us, this is the right time to exit the business.

Our Clopay garage door business, sales were -- in this, our weakest seasonal quarter, were $84 million compared to $105 million last year. Garage doors reported an operating loss of $8.6 million this quarter compared to $4.6 million last year. The segment has been and will continue to focus on cost-reduction programs.

I'd like to say that we have every confidence in Gene Colleran and the management team of what we think is a terrific business in a very bad business cycle. We'll do all the things to protect our position as the number one brand for the inevitable upturn.

In our plastic films business, sales for the quarter were $115 million compared to $100 million last year. We had operating income of $5.2 million compared to $4.9 million last year. The higher sales resulted primarily from a favorable product mix and the impact of foreign exchange. However, operating income was unfavorably affected by lower unit volumes, higher revenue costs. It's estimated the negative effect of resin was $5 million to $6 million.

Gary Abyad and his team have performed well in what we think is a very difficult environment, but we still have room for improvement in our international operations in Germany and Brazil.

Finally, telephonics had sales in the quarter of $98 million compared to $124 million last year. Telephonics operating income was $7.1 million compared to $12.4 million last year, but the year-over-year, quarter-to-quarter comparison doesn't tell the story. Our business continues to perform quite well. The strong prior-year results of telephonics were driven by the substantial contracts we had with Syracuse Research Corporation, which just were at a lesser level this year. Excluding that impact of the SRC contract in the respective second quarter periods, telephonics' core business sales grew by approximately $8.2 million or 11%.

Joe Battaglia and his team have built this business as a preferred provider and have delivered solid growth. Our technology advantage is acknowledged by our customer and widely recognized by our industry competitors. Telephonics is celebrating its 75th anniversary, and I think its brightest days are ahead.

Our balance sheet on March 31 remained strong to meet both the operating challenges in our existing businesses and to reposition Griffon for future growth. There's much work to be done, but we have the ability and the desire to build shareholder value in the years ahead.

With that, we'll take your questions.

(OPERATOR INSTRUCTIONS)

Mr. Kramer, your first question comes from the line of [James Greer] of MBO Company.

Hello?

Hi, thanks for taking my question. I had a few questions. I guess the first was just with respect to steel costs. I noticed they've moved up rather rapidly during the quarter and just wondering if as that inventory flows through the garage door business, if you'll be able to pass that on to the customers in the residential industries, especially through Home Depot? And if not, how that might impact margins in the current quarter and the next quarter?

Well look, what we're experiencing, the inflationary impact of steel in the garage door business and obviously oil and natural gas and its flow-through into resin in our plastics business.

So, the answer to your question is that yes, the cost of our raw materials are going up. It hurts our margin. We intend to be able to pass through prices, but ultimately, the end consumer is under pressure, and the ability for that to pass through to the consumer market still remains somewhat in doubt. But there's no question that we, like others, are going to have increased cost of production and we'll be passing that through to our retailers.

I see. And that applies to the -- on the polyethylene prices, I was going to ask you?

Well, look, when the price of oil is going up, you can expect the price of resin to follow, and vice versa.

I see. Another question on -- with respect to the garage business. It seems you will be closing the distribution -- the installation business. How will that affect sales in terms of your ability to push products through that channel?

Yes, good question. We've been very sensitive as we've explored how to go about selling and exiting the installation business to protect the intercompany sales that we have between Clopay Garage Doors and for service companies. We -- the plan that we've developed will protect the approximately $20 million of intercompany sales from Clopay Garage Doors. So, we believe that we'll roll out some of the locations directly under Clopay Garage Doors' management, while exiting others into third-party hands with supply agreements.

Okay. And then just one last one on the pension. Are you planning on funding that this year? Or is the goal to keep it unfunded for another year?

I'm sorry. What was the question?

On -- with respect to the pension, the company's pension plan. I noticed there is an unfunded pension program, and I wasn't sure if that can be maintained or if there's a need to fund that.

No. There's no plans to fund the pension plan.

I see. All right, that's all I had. Thank you.

Okay.

Your next question comes from Bob Labick of CJS Securities.

Hi, Ron. It's actually Arnie Ursaner. I --.

Hi, Arnie.

Not Bob today. How are you? Welcome. A quick question to ask you on specialty plastic films. Obviously you were impacted by dramatically higher resin costs in the quarter. It doesn't look like you were able to fully recover those at all. Can you just --.

Well, look, we think we had a very good quarter in Plastics. We would have had a better quarter if resin prices were lower. But the reality is, we're subject to the same cost pressures that others.

But the relationship --.

And the lag effect of the resin increase is going to continue to have an impact both positively and negatively.

My understanding, though, with your relationship with your customers is that you were generally able to recover higher costs with some modest lag. Is it something we're likely to see in the next quarter or two?

Well, as resin prices continue to go up, you're never going to catch up the lag. And the outlook for resin prices is murky at the moment.

And the refinancing you have with Clopay, how do you intend to perhaps use those funds? Can you give us a feel for what you hope to gain with the refinancing with Clopay?

Yes. Yes, what we're doing is to be able to ship the -- what was $175 million of Griffon parent company debt, which we've successfully put $100 million at the telephonics subsidiary at the end of March, so in the second quarter. We're in the process of discussing an asset-backed loan on Clopay. And what that is -- would be doing is replacing the credit facility that we previously had at the parent company level. So, the use of proceeds is to fund the development of our businesses directly secured by the assets of the subsidiary, and to provide the liquidity for what could be future events both in our capital structure and as we look to grow in the next few years.

And final question for me. I know at least a partner you've been involved with in the aerospace side. I think you've partnered up with someone who has a fairly sizable program that's just rolling out -- Lockheed, I believe it is. Can you perhaps comment on some of the opportunity that may present to you for the next year or two?

Could you repeat that question?

Is it -- it's either Rockwell or Northrop. You have a pretty sizable relationship --.

Oh, are you talking about the VIS-X Program?

Yes.

Okay. Yes, that's -- we're a teaming agreement with Rockwell Collins for a sizable program that's in process, where we expect to be one of the competitors on a $3 billion program that will give -- go for selection later this year sometime and expect it July or August.

To the extent you are the winner or -- could you give us any feel for the possible revenue contribution over the next 18 or 24 months?

No. We don't give guidance. We -- this is a visible contract. We're always looking at various arrangements. So at this point, I think it's premature to talk about what the impact would be. We're going to do our best to try to win this contract, and there's plenty of others in the pipeline.

Thank you very much.

Okay.

Sir, your next question comes from Marty Pollack of NWQ Investments.

Hi. I wonder if Ronnie could give us an idea of the seasonal -- the expectations on the seasonal impact of the garage business. Because clearly, this is -- this is a point where -- in the cycle or in the season that's going to be the worst part. Do you see cost reductions having been impacted by this -- the current environment? And I'm just wondering if you look at seasonal pick-up and then cost reduction benefits? Should we be expecting -- can you give us some guidance in terms of just of what could be -- could be the improvement? I recognize that you can't forecast the economy, but at least seasonality, and getting a better handle on that?

Yes. I guess the second quarter has always been the weakest for garage doors. What I would say is that the visibility of the future upturn in the -- historically the third and fourth quarters is somewhat more difficult because of the economic environment that we're in. There's no question that the management team has been right-sizing the business, and we announced previously a cost reduction program, which is impacting throughout the balance of fiscal 2008 of $12 million, $12 million, $13 million, which is ongoing.

We're at the point where we think that the right-sizing activities have happened, or are in process of happening, by plant closures and consolidation into our Troy facility. So, the ability to benefit from the upturn really is dependent on the flow-through at the retail level and through our dealer network, which is basically a forecast of what the consumer economy is going to do for the balance of this year.

So, I think the -- clearly seasonally, this is when it starts to get better. We're optimistic. One month doesn't make a trend, so we'll certainly -- we'll look at how things evolve over the balance of the quarter.

Yes, as far as the cash flow impact -- is seasonally or are we approaching a period where you need more -- your working capital requirements go up, so that in a sense, do you have a inability to -- or is in the sense of the offset of a pick-up, is it from a cash point of view, we may still have to wait before we see much improvement?

Yes. I think the question is really, is there any working capital problem as we go into the pick-up or lack of pick-up. And the answer is no.

Okay. And just one last question. In a sense, your commentary about specialty suggests that you believe you guys are doing well, fairly well during these very difficult conditions. Obviously, the lag effect because of resin might continue, so it's not clear that you're going to capture that in the next quarter. But, you'd want to assume that if you look at the [six or source] -- $6 million, $7 million of penalty that -- not that you would add it back necessarily immediately, but in a sense, if you took away that penalty, clearly the margins would look significantly healthier.

Yes.

In terms of how might you look at it. So I'm just wondering whether -- does specialty have the capability therefore in a sense, coming back to the near-teen-type margin if things get normal, or when things get normal?

Yes. And we're not going to forecast. But what I will say to you is that we think that our Germany and Brazil operations can be more efficient and be better contributors, which would have the impact of improving our overall consolidated margins. So, there is room for improvement both domestically somewhat, but more importantly internationally.

Okay, thank you.

And that's where our focus is.

(OPERATOR INSTRUCTIONS)

Your next question comes from the line of [Carlos Rayeson] of LCG.

Hello?

Hey, guys. I hate to get back to this, but just another question on steel, because the vertical escalation in steel is kind of a relatively new phenomenon, at least in '08. And I just am curious as to if you've actually been able to get the pricing through to Home Depot and just your other customers, just given kind of the weak demand and the troubles that those guys are facing?

We have passed this price on to our customers, and I think Ron earlier indicated that it's an open question yet whether these price increases will stick.

Okay. I just -- I was just curious if you were talking about stick to the ultimate consumer or actually just to your customer. So, it's not like there's a little bit of a question that they're going to actually stick with --.

No. This is an industry-wide phenomenon. And the question is whether the industry is going to stay together, or whether we're going to have to react to competitive situations.

Okay, all right. That's great. Thanks, guys.

There appear to be no further questions. At this time, I would like to turn the floor back to Mr. Ron Kramer for any closing remarks.

Okay. Well, we've got a lot to do, as I said. We will look forward to reporting as we make progress on our strategic plan. Thanks for joining us.

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