Griffon Corp (GFF) 2008 Q3 法說會逐字稿

Good afternoon. My name is Donald and I will be your conference operator today. At this time, I would like to welcome everyone to the Griffon Corporation third-quarter 2008 earnings call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. (OPERATOR INSTRUCTIONS). It is now my pleasure to turn the floor over to your host, Ronald Kramer, Chief Executive Officer. Sir, you may begin your conference.

Thank you. Good afternoon and welcome to our third-quarter conference call. Sitting here with me is our Chairman, Harvey Blau; our Chief Operating Officer, Frank Smith; and our Chief Financial Officer, Pat Alesia.

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.

I am pleased to announce that, earlier today, our Board authorized a common stock rights offering to our shareholders in order to raise equity capital for general corporate purposes and to fund future growth. We expect gross proceeds from this financing to range between $170 million and $255 million. Goldman Sachs affiliate, GS Direct, will backstop this rights offering.

The terms of the rights offering are 20 million shares at $8.50 per share, which will give each shareholder the ability to purchase 0.66 shares for each share held. These rights will be transferable and each existing holder will have a 20% oversubscription right. Goldman Sachs will purchase any and all shares not subscribed through the exercise of rights and has committed to purchase additional shares of common stock if it does not acquire a minimum of 10 million shares as a result of its backstop. I refer you to our news release this afternoon for the full details of this offering. We intend to file a registration statement promptly.

Let me turn to the operations. The past year has been very challenging for our Company, and we continue to experience the adverse effects of the crisis in the US residential housing market that resulted in the significant decline in our installation services and garage door businesses. However, I am pleased to report that the measures we have taken that we discussed with you on our last quarter are moving us in the right direction.

In May, our Board approved management's plan to exit the installation services business. Since that time, we've sold nine operating units to one buyer, merged two units into our garage door business, closed one unit and expect to sell our two remaining units in Phoenix and Las Vegas in our fourth quarter.

On our last call, we stated that our estimated aggregate disposal costs would range between $30 million and $40 million for the remainder of '08. We expect to conclude our disposal costs in the fourth quarter within that range. Cash outflows related to our exit plan were $2 million in the third quarter, and we estimate an additional $5 million to $10 million of additional cash outflows, also within our previously established parameters.

Our Clopay garage door sales were $115 million compared to $124 million last year. Garage doors reported operating income of $2.3 million this quarter compared to $4.5 million last year. Although these results are below last year, they are an improvement over our second-quarter operating results and have exceeded our internal forecasts. This segment has been and will continue to focus on cost reduction programs.

Let me talk about our film business briefly. Sales for the quarter were $121 million compared to $97 million last year, which is an increase of 25%. We had operating income of $5.5 million compared to $2.9 million last year. The higher sales resulted primarily from a favorable product mix, partial pass-through of higher selling prices to offset rising resin costs and the impact of foreign exchange. The operating income increased by $2.6 million as a result of the favorable mix and this foreign exchange. We remain focused on new product development in North America and improvement in our international operations in Germany and Brazil.

Finally, Telephonics, our electronics information and communication systems segment, had sales in the quarter of $88 million compared to $121 million last year. Telephonics' operating income was $9.2 million compared to $10 million last year. Business continues to perform well year-over-year. The quarter-to-quarter comparison doesn't quite tell the true story. The strong prior year results of Telephonics were driven by substantial contracts with Syracuse Research, which were completed in late fiscal 2007, excluding the impact of the SRC contracts in their respective third-quarter periods. Telephonics' core business sales grew approximately $24.6 million or 39% as we continue to aggressively pursue new programs.

Our balance sheet during the quarter, we closed a $100 million credit facility for the domestic operations of the Clopay Building Products and Clopay Plastics Company. We used $33 million under this facility to refinance existing maturing lease obligations.

Balance sheet as of June 30 is strong, was able to deal with looking out at our operating challenges and as we look at repositioning Griffon for future growth, our looking at doing this equity financing is really want to strengthen the Company in order to execute that business plan and has nothing to do with the credit condition of our Company. We are in very good shape before this financing. We will be even better after. We are optimistic about the prospects for the Company, and we are excited about the investment from Goldman Sachs. And we are committed to build shareholder value in the years ahead. And with that, I will be happy to take your questions.

(OPERATOR INSTRUCTIONS) Robert Labick, CJS Securities.

Hi, Ron. It is actually Arnie Ursaner on behalf of Bob. I guess I am still a little trying to sort through the very interesting announcement you made today. Focusing on your business a little bit, can you give us a little better feel for what sort of raw material cost increases you are managing through? You mentioned, for example, very specifically on film that you are recovering some, but not all of these. Can you kind of give us a feel for how we should think about the cost increases and the outlook for these various businesses for the balance of the year?

Simplistically, we pass along increases in resin costs with the delay of approximately four months. There has been a spike in resin costs. It now seems to be somewhat of a decline. We are continually at risk for the increased price of the raw material, and we continue to look at the cost of our raw materials in trying to deal with purchasing. But there is really a very difficult position for us to be able to pass through the raw material costs without it impacting our margin.

You can see that the plastics business has actually done quite well in terms of top line, margins continue to be squeezed somewhat. And we are at the whim, like most of the US economy, as to what the price of the raw materials, crude and natural gas, are going to do.

Okay, and I guess I will take a stab -- I assume you're going to be highly limited in what you can say about the upcoming transaction, but it appears as if you plan to raise as much as 30 million shares, which would basically double your shares outstanding and it would appear to me at least to be a very dilutive transaction and one you are indicating you don't need to do. Can you perhaps take a step back and highlight some of the other choices you may have had. Did you consider sales of some of your subsidiaries, and do you have more specific targets or needs that would encourage you to take the massive dilution that appears you are about to take?

Look, obviously, we are in registration, so we've got to be a little bit cautious. Let me say that need is the wrong word. We want to do this transaction for the benefit of our shareholders in order to position the capital base of the Company to be able to deal with any eventuality in front of us. We see that our businesses have growth prospects in them in the existing platforms -- defense electronics, plastic films and garage doors.

We think that the economy is presenting opportunities for us going forward, and in order to build the Company from here, we have done everything we can to position the balance sheet by redoing our credit facilities to be able to be in a position to manage the existing businesses. To be able to grow in the economy that we are in today requires liquidity and opportunity. And to find the right opportunities without having the capital available to do it we think is not the growth plan that I've outlined to our Board and that we are bringing to our shareholders.

So we think that the dilution -- this is a transaction that is being offered to our shareholders for their participation, and we have a backstop commitment from Goldman Sachs to buy shares in the offering up to 20 million shares. So we think it is a transaction that very much positions our Company to be able to do some exciting things in the future.

I generally agree with that. The only thing is that you are offering Goldman the opportunity to buy 10 million shares. Meaning if every one of your shareholders does accept this and you take this massive dilution, you are still going to sell an additional 10 million shares to Goldman at half of book value at a material discount, severely diluting your shareholders. And I'm sure Goldman Sachs is going to make some sizable fees on the backstop. Why are they getting the right to buy an additional 10 million shares, harming all of your shareholders?

We will be filing the registration statement promptly, and we will be looking to talk to you once we go effective. This is a very unusual financing that we think makes sense and that is going to create value, and when you see the full scope of the transaction, I think it will answer your questions.

Thank you very much.

Marty Pollack.

This is Phyllis Thomas on Marty's line. Good afternoon, I think. As the prior speaker mentioned, this is an incredibly dilutive situation or deal that you are doing here. And here you are selling stock at measurably below book value and measurably below the valuation of Telephonics, and you are saying it is to create shareholder value. I am really having trouble understanding how, given the history of acquisitions in that they rarely add value to the shareholder, how can you sell stock at this level, at an eight-year low and well below book?

We think the transaction is clearly an ability for our existing shareholders to participate in the new plan that we are going to go on around our existing businesses and looking at other opportunities to deploy this capital.

Why not fix the businesses you have, get the valuation of your stock up and then do a deal to go and (multiple speakers). To sell stock down here is egregious.

Well, we think that it has been well-considered, and we have looked at what other alternatives might be and that we feel that our Company is better off long term by having the capital base to be able to work around the existing companies and to be able to position it for other opportunities. And that the markets are so uncertain and so impossible in terms of capital availability that in order to build the Company from here that the infusion of additional capital is something that is going to be a positive for us, and that is the determination that we've made in consultation with advisers. And it is a transaction that we think will be viewed in terms of what we do in terms of building the Company with the additional capital.

Ron, I would just suggest to you that selling stock well below book has never, ever, unless you are desperate for liquidity, has never created value for the shareholder. I will let Marty ask some fundamental questions.

Clearly, it certainly doesn't look, based even on your comments, that there was a compelling need to raise capital. Certainly, the performance was good for this quarter on Telephonics. It looks like you are back to the 10% margin plus and specialties in a recovery mode. I am wondering if you could just -- getting back to the electronics, what was the, despite the lower sales, the better profitability? Was that probably higher than you budgeted expectations because clearly it looked like you were going to get back to 9%, but this is even above that? Can you just maybe describe a little bit what you see as a fundamental change here?

Well, it is two things. You remember last year we had at the SRC business, which accounted for about $150 million in sales difference from Warlock last year versus this year, and if you remember, SRC was a lower profit margin business. So we replaced that business with higher-margin business, being driven by about four or five other contracts that had significantly increased volume. On a core basis, Telephonics fails sales were up 39% in the quarter and 29% year-to-date. Those are the driving factors. Basically, the SRC business was replaced with higher-margin business.

Just to add on -- this is Jon Bosse, Chief Investment Officer -- I am still, I guess, trying to understand, without being overly critical. What you are asking existing shareholders to do is either step on the sidelines and be diluted and not participate or buy in that -- basically a company that has put itself in the current situation deserves to get a lot more capital to deploy on behalf of shareholders when the history of the Company had not been given where the stock is to deserve that. And I am still perplexed why other options can't create value or what is out there that is so incredibly attractive with 30% or 40% rates of return on it that can justify doing this.

Well, you recognize that we can't discuss it on this call, and we believe that this is a well-considered transaction. We think that it is going to benefit the shareholders and allow management to be able to execute a growth plan from here different than where we've been over the last few years.

I understand you can't give specific details on anything, but I think what you are asking for is not -- hey, we need a couple of additional rights. You are asking for an incredibly transformative transaction or structure that somehow is not as simple as we have utmost confidence that we can deploy capital and really benefit people given what the recent results have placed the Company into. I think that is what has us very -- (multiple speakers).

And we are giving our shareholders certainty of execution for those that are going to be long-term investors in this Company by having Goldman Sachs backstop this and allowing shareholders who choose not to exercise their rights to be able to transfer them and to be able to sell them and to have shareholders who want to increase their position as a result of the transaction to be able to oversubscribe. So we think that when you are looking at the four corners of the transaction, that you will see, as we do, that this is something that is for the better returns going forward for this Company from where it has been.

Well, I am sure this is something we would like to continue a discussion off-line.

Sure.

Beth Lilly, Gabelli.

Beth has seemed to drop from queue. We will turn it over to the host.

No further questions? Thank you and we look forward to speaking to you shortly.

This does conclude today's conference call. You may now disconnect.