Griffon Corp (GFF) 2008 Q4 法說會逐字稿

Good afternoon. My name is Brandy. and I will be your conference operator today. At this time, I would like to welcome everyone to the fourth quarter full year 2008 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (OPERATOR INSTRUCTIONS)

Thank you. Mr. Ron Kramer, you may begin your conference.

Good afternoon. Welcome to our financial overview of our fourth quarter and fiscal year 2008. With me today are Griffon's Executive Vice President, Frank Smith, and our Chief Financial Officer, Pat Alesia. I will discuss the overall results of the quarter and then we'll answer questions.

Before we begin, I should point out, 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. The presentation includes non-GAAP measures as defined by the SEC. Reconciliation of these non-GAAP financial measures with the most directly comparable GAAP measures is available in our earnings release which went out earlier.

I'm pleased to report that we've taken a number of measures to reposition our company for future growth. The highlight of our fourth quarter was the success of our common stock rights offering, along with the investment by GS Direct, the affiliate of Goldman-Sachs. We raised approximately $246 million in gross proceeds from the rights offering, $240 million from the first closing in September, and an additional $5 million subsequent closings in October which we intend to use for general corporate purposes and to fund our growth.

Our liquidity creates opportunity. We are in a very strong position. While the past year has been a very challenging time for the company, we continue to experience the adverse effects of the crisis in the US residential housing and credit markets, resulting in declines in the installation services and garage door businesses, and along the year we had to navigate through some adverse raw material increases in both the Building Products and the Plastics company.

When you look at this quarter, which we'll go into in some detail, from a GAAP perspective, we reported a loss but when you look at the business, it actually was quite a good quarter. Company's segment adjusted EBITDA for the fourth quarter of '08 was $29.5 million compared to $30.9 million in '07. Segment adjusted EBITDA is, to us, a far better measure of the profitability and the condition of our business. Previously disclosed in May, we commenced our exit from the installation services business. We completed our termination of this business in the entirety in the fourth quarter through the sale of our Phoenix, Las Vegas, operations. Total aggregate disposal costs for this segment were $7.1 million in the fourth quarter, and $43.1 million for the year, which were below the $10 million estimate for the quarter and the $53 million estimate for the year previously disclosed.

Future net cash outflows to satisfy certain liabilities and other obligations that were accrued as of September 30th are estimated to range between $7 million and $9 million, substantially all of which are expected to be paid within the next 12 months.

Fourth quarter accounting rules required us to write off completely the $12.9 million of goodwill associated with our garage door business. Our diluted EPS would have been $0.15 per share instead of a loss of $0.24 per share. While I don't want to spend an enormous amount of time on the technical accounting issues, this write-off did turn what would have been a fourth quarter profit from continuing operations into a loss. I'd like to spend a minute on it.

Our garage door business generates cash and profits. The write-off of goodwill relates to the market price of our shares at the end of the year, the measurement date of September 30th, and the theoretical price at which our business can be bought or sold in this environment triggering a technical accounting requirement under FAS 142. I emphasize this write-off as a non-cash charge. In addition, I would note that the garage door business generated operating profit of about $4 million absent the write-off during the quarter. While the building products industry is, and for the near future will continue to be challenged, we believe the garage door business continues to perform comparatively well and is well positioned to participate when the economy and housing markets ultimately recover.

Our Clopay garage door sales were $124 million compared to $129 million last year. Garage door reported an operating loss of $9.4 million this quarter, compared to operating income of $3.1 million last year. The segment continues to face the challenges in the marketplace and remains focused on cost reduction programs. Selling prices were raised in the fourth quarter to pass on the rising costs of steel, and we're hopeful that margins will improve as we go forward.

In our plastic film business, sales for the quarter were $125 million compared to $106 million last year, increase of 18%. We had operating income of $4.8 million compared to $5.1 million last year. 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. Operating income decreased slightly as it was unfavorably impacted by reduced unit volumes and increased resin costs, as well as the costs associated with building up our management team in Europe.

We remain focussed on new product development in North America, continued improvement in our international operations in Germany and Brazil. In the fourth quarter our manufacturing performance on thin-printed films reached record levels, and we introduced a new industrial product in Europe after six months of product trials.

Finally, telephonics had sales in the quarter of $104 million compared to $98 million last year. Telephonics operating income was $10.9 million compared to $10.6 million last year. As I've said before, the year-over-year quarter to quarter comparison doesn't tell the story of how well this business has been performing. 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 the respective fourth quarter periods, Telephonics core business sales grew approximately $24.5 million, or 31%, as we continue to aggressively pursue new programs. In addition operating profit improved 3.4% as a result of increased gross margin performance attributable to program mix.

This was a transition year for the company. Getting out of the installation services business, recapitalizing through our equity rights offering and refinancing our bank debt earlier in the year. We're in a very enviable position. We have more cash than debt ending the year with $312 million of cash, unused borrowing capacity of more than $100 million. Our balance sheet at September 30 allows us to meet both the operating challenges in our existing businesses and to build Griffon for the future. In fact, we've already taken advantage of our opportunistic situation in October by repurchasing $35.5 million face value of our convertible notes for $28.4 million which will result in a pretax gain of approximately $7 million in our first quarter of fiscal 2009.

We are well positioned as a result of the actions taken this year. We remain optimistic about the prospects for the company and we're happy to take your questions. Operator?

(OPERATOR INSTRUCTIONS) We'll pause for just a moment to compile the Q&A roster. Your first question comes from Bob Labick with CJS Securities.

Good afternoon.

Good afternoon.

I haven't had time to go through the release in full detail but I had a couple questions I wanted to ask. First of all, congratulations. It looks like you held up very well in a tough environment.

Thank you, we think we did.

Yes. As it relates to garage doors, the sales were I wouldn't say strong, down 2% year-over-year, but certainly much better than the environment may otherwise dictate. You mentioned a little bit of mix and a little bit of price in there. Can you give us a sense of unit volumes and also a sense of what your guys in the field are saying for demand on a go-forward basis, just to start there and I have a couple more question on doors, also.

Well, I think we actually had reduced unit volume. So, Frank, do you want to--

What you're seeing, Bob, is the reduced unit volume was offset by the higher selling cost we were able to get for the material price increase, the steel price increases.

Were units down 10 but you had 7 price or were they down 20? You know, just a ballpark kind of range of where units were going?

I think the best number to use, Bob, is about 10%, in 2008.

For the full year?

Yes.

And as you would expect, we're cautious on the outlook for the business. Clearly, we continue to operate the business well and profitably. We look, as everyone else does, at what's going on in the housing cycle. And while it's impacted us we continue to have a profitable business. We're continuing to manage our costs and expectations, that we're not finished with the downturn in the housing cycle, but we're well positioned as a brand. We have the best distribution. Our relationship with Home Depot is strong. We continue to do business with Menards. Our dealer network is strong. So whatever level the housing market is going to be, Clopay is well positioned to participate in it.

That was my next question. Certainly for the last two quarters, if you back out the charge, obviously, you have been profitable at much lower level of sales than in the past. Have you found your new lower fixed-cost basis? Is there an ability to pull out a lot more costs from this division, or are you where you want to be and then you wait for a recovery to see the margins really expand?

Bob, what you're seeing in terms of that lower break-even line, is the result of the cost reduction program we talked to you about in February. And that cost reduction program has been very successful and we continue to work on additional opportunities to reduce costs in light of what's going on in the marketplace.

And so your anticipation for next year is continued unit softness, what everyone else's anticipation for the economy. What have you heard from the field in that regard?

Look, I think visibility is cloudy on the economy. So, I wouldn't want to be out trying to say -- we reported as we do it. We clearly have a point of view that reducing costs and expecting that there's still going to be unit volume declines as a result of a declining housing market, is the right way to be positioned. If the markets recover sooner we certainly think that we have the ability to grow and have the capacity to be able to meet any new demand.

The only other thing I would like to add, Bob, is that we're introducing a lot of new products in the marketplace to add value for our customers to be able to pass on to homeowners, and we're running a lot of promotions, working aggressively to keep that top line up.

And the positioning of our balance sheet gives us the staying power that if the downturn in that business is going to continue, we believe that we're in the best position balance sheet to be able to be a consolidator in that space. And while that hasn't happened yet, we continue to think there'll be opportunities for us.

Speaking of the balance sheet, obviously it is very strong and it looks like you repurchased a convert at $0.80 on the dollar. Is that something you continue to look to do in 2009? Or would you shift more towards acquisitions, or how have you--

We'll be opportunistic about it.

Okay. I'll ask one more and get back into queue. On Telephonics, you obviously had some very strong core growth, $24 million. Can you tell us what programs, or give us some specific ideas really where that came from and if it is sustainable through next year, or if it was more short term or long term oriented programs.

For the three months, to put things in perspective, last year, or September of '07, you had approximately $19 million in sales on a rollout program. So those sales don't exist in the September '08 quarter. The two contracts that drove most of the increase in sales, offsetting the rollout program for the MSS program and the LAMPS MMR program.

Great. Well, thank you very much . I'll get back into queue and let others ask questions.

Thanks.

(OPERATOR INSTRUCTIONS) Your next question comes from Tom Spiro.

First regarding Telephonics, is there a backlog number you would like to share with us? I didn't catch it in the release.

We typically don't put a backlog number in the release, but it's in the $350 million category.

And where was it this time last year? Could you remind us of that?

Probably slightly less.

And as you look at the pipeline of opportunities over the next couple, three quarters, how is it looking?

Specifically with respect to Telephonics?

Yes, please.

It's been a stable business. We continue to have backlogged programs and we have some new programs that we're in the process of hitting on and that are in the review that we expect to have some progress on in 2009.

Just also to respond, also about 70% of our projected sales, which we don't give guidance on, we're already in backlog, already in 2009. Very solid performance.

What's the industry scuttlebutt, the industry point of view with respect to the new administration's view about defense spending?

I think we'll have to all wait and see. We've owned this business for 75 years. This is very much a core part of our company. We think it continues to have terrific value, not necessarily always recognized in the stock market, and we'll look to build this long-term for the holders of our company.

You're in three segments at this point, the garage doors, the films and the defense. If you look out the two or three or four years, is there one of those three segments you would like to really see dominate the company or would you want to keep it in all three?

I think the way you have to start thinking about us we're in four segments. We have three businesses that each have their own growth profiles and we have capital that's going to find a way to either grow around one of those three businesses, or look to diversify into another business, or businesses. The point of repositioning the balance sheet is to give us the flexibility to take advantage of the dislocations that we thought might become available. Obviously our timing in being able to liquify our company and be in a position not just to be a survivor, but to be a builder, is going to allow us to take advantage of some of the things that are going on in the current environment. So while it's clear we have three businesses today, I think you've got to look at us, as management, as looking at the capital that we have and finding new places to invest in to create shareholder returns.

Apart from acquisitions, what are the CapEx plans for the new fiscal year?

At a reduced level from 2008 for sure. Right now we're looking at somewhere in the vicinity of about $30 million to $40 million.

Lastly, there appear to have been a lot of changes in Goldman Sachs, since Goldman Sachs first stepped forward to work with us. I was curious whether any of those apparent changes at Goldman have any ramifications for Griffon.

We have two directors from GS Direct on our board from their private equity group, and we have no changes and don't expect anything going forward. Couldn't have a better investor and a partner to help us build this business.

Well, that's great to hear. Thank you.

Your next question comes from Arnold Brief with Goldsmith & Harris.

You've taken price increases in both garage doors and plastics and the raw materials in both of those areas I think are down substantially and maybe still declining. Would you give us some feel for the outlook for profit margins this year, this fiscal year, and take a guess on your ability to hold prices in light of declining raw material prices?

Look, we don't give forward-looking guidance but clearly these are pass-throughs. You're absolutely right, that we were impacted negatively by the increased costs of resin and the increased price of steel in both the plastics and the building products business. Both of those have declined in the last few months. We obviously are hopeful that our margins will be able to be positively benefited by that. But I think it's it's too early to say whether the end users are going to be able to absorb that increase to us.

Okay. Could you give us some idea how the competition is shaping up, particularly in the garage store business where there is so much weakness in housing? You're financially strong and able to survive all this. How does some of the competition look relative to your strength, number one? And, number two, can you give us some idea as to how your mix is now in terms of OE and replacement in the garage door business?

W e're probably the only publicly-traded garage door company. So the information, obviously there are a lot of privately-held companies. And most companies are feeling the impact of the downturn. We are well-positioned in terms of our market share and our distribution to be able to look at situations should they become available. And it's not out of the question for us to be looking in that segment. The issue is that the housing downturn and its impact is happening and what the ultimate result and whether there are companies or assets that become available, we think is a 2009 story, and it is not, hit the wall among our competition quite yet. If it does, we think we're there well positioned to take advantage of it.

Do you feel you're taking market share?

Well, I think we're going to defend market share and and hopefully by doing that and being better capitalized we'll be able to increase it.

Okay. And OE and replacement mix percentages, have they changed?

It is obviously not the same. The new residential construction is down. Dramatically.

Yes, significantly. And so the mix is clearly more to repair and remodel. And has been, so where we continue to see that, is being the better driver in that business.

Right. And we were never, we were mostly repair and remodel business. Our products tend to be more of the upscale products as opposed to the more basic product that the builders like to put in.

Thank you.

There are no further questions at this time. Mr. Kramer, do you have any additional comments or closing remarks?

No, thank you, very much, for participating and we look forward to continuing to report on our progress to you. Bye, bye.

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