Griffon Corp (GFF) 2009 Q1 法說會逐字稿

Welcome to the Griffon Corporation first quarter 2009 earnings conference call.

With us today from Giffon's headquarters we have Mr.

Ron Kramer, Chief Executive Officer.

Frank Smith, Executive Vice President; and Patrick Alesia, Chief Financial Officer.

(Operator Instructions).

I would now like to turn the floor over to Mr.

Kramer.

Sir, you may begin.

Thank you.

Good afternoon, everyone.

Welcome to our first quarter 2009 conference call.

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.

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 today.

Let me start by saying we are extremely pleased with our performance this quarter in a very difficult operating environment.

Our Company is very well positioned for this difficult economy.

We built our liquidity last year, laid the foundation for some operational improvements, and to be able to build our Company for the future.

This quarter shows, some of the benefits of the cost cutting initiatives from last year, and we will talk about each of the businesses.

Telephonics generated sales in the quarter of $81 million compared to $76 million last year, 6.5% increase.

Sales increase was primarily attributable to the growth in the radar systems division driven by increases in the Lamps MMR and the ARPDD programs.

Last year's first quarter sales favorably impacted by contracts with Syracuse Research Corporation, that were winding down in the latter half of fiscal '07.

Excluding the prior period sales related to the SRC contracts the core business grew by $9 million or 13%.

So we continue to look at that as being very strong organic growth.

Operating income of $5.4 million decreased slightly as a result of decreased margins, performance which is really attributable to some start up expenses on program mix.

Telephonics continues to aggressively pursue new programs.

In the plastics business for Clopay, sales for the quarter were $113 million, compared to $106 million last year which is a 6% increase.

The higher sales resulted primarily from the favorable product mix, and the impact of increased selling prices, passing through increased resin costs, which was partially offset by the unit volume decreases in an unfavorable foreign exchange translation.

We had operating income of $5.5 million, compared to $6 million last year.

The operating income decreased as the favorable contribution to gross margin from the pass through of resin costs was more than offset by an unfavorable product mix in foreign exchange translation.

We continue to look at this business as doing well.

Think that there's room for improvement in our international operations, and bringing on new product development in North America.

Our Garage Door business did $109 million, compared to $113 million prior year.

Garage Door sales decline was principally due to reduced unit volumes, offset partially by higher selling prices, pass-through increased material costs, and product mix.

Garage Doors reported an operating loss of $4.4 million this quarter, compared to an operating income of $1.4 million last year.

This segment continues to face the challenges in the marketplace, and remains focused on cost reduction programs and initiatives to gain market share.

Credit and housing cycle are obviously, still gives limited visibility for this business, but I think it is a testament to the management as to how well we have been able to maintain our top line, and to minimize the loss in the business during the quarter.

From a management standpoint, I would like to talk about a change that we made during the quarter.

Gene Colleran, who was the head of the Building Products Company has now become President of Clopay Corporation, with oversight responsibility for both the Building Products business, where now Steve Lynch has become the President of that business, and Gary Abyad continuing to run the Plastics business.

Gene has done a terrific job at managing through the cycle in the Garage Door business.

And we believe that this will add significant pressure and accountability within the Clopay businesses, to be able to grow and improve our margins in both Plastics and in Building products.

Let me focus for a moment on our balance sheet.

At December 31, we were very strong, able to meet all of our commitments.

We have more cash than debt, ending the quarter with $276 million of cash, $200 million of debt, undrawn borrowing capacity of nearly $85 million.

We are in very strong shape.

The future of our Company is to continue to seek out new investments that will build shareholder value.

Our liquidity, we believe, will create those opportunities.

We will always strive to keep our focus on long term returns for our Company and its shareholders, and with that I am happy to take any of your questions.

(Operator Instructions).

Thank you.

Our first question is coming from Bob Labick of CJS Securities.

Hi.

How are you, good afternoon.

Good afternoon.

Congratulations on a strong performance in the environment.

Thank you.

Appreciate the comments you have made so far, we would love just a little more color.

Starting with doors, obviously you mentioned the commodity cost environment, the steel environment and the favorable impact on price that had.

Could you give us a sense of color on units and what you are seeing now.

I know it is seasonally its a weak period, but just give us a sense of where that's going.

And also have you completed the right sizing there or what is the outlook for this year in terms of cost containment or cost controls.

A couple of questions in there.

I will take a crack at some of them.

Let's, in terms of volume, residential no surprise is down.

One of -- probably in the 10% range.

Our commercial business was up, -- 4.9% in the quarter.

We seem to be maintaining market share, and possibly taking market share by aggressively pricing and with popularity of our polyurethane product.

In terms of visibility, it is impossible to talk about what happens in the macro economy, other than to say that you know, that we hope for the best and plan for the worst.

Meaning we continue to look at additional ways to take out costs, looking at plants, looking at all of the things we should be doing, before we have some clear outlook on what the business environment is going to be.

But you know, the raw material costs particularly steel have come down.

We think they have the room to continue to come down for us, to be able to look at some margin improvement.

But the top line this is not a long inventory business.

So we are at risk to a continued decline in the housing cycle and obviously the credit.

It doesn't feel like it is getting worse.

But this is always -- you're asking us this question in the middle of our seasonal worst quarter.

So second quarter is difficult to get any real outlook on the year.

And I think it is going to take at least another quarter or two, before we can really give you, a good sense of what the future of that business, what the right top line is going to be, and thereby what is the right cost containment to run the business going into the future years.

Okay.

Great.

And then, as it relates to the pricing environment.

You mentioned you may be a little bit aggressive to gain some share there.

Should we expect -- do you have the positive mix in the steel (inaudible) going forward because commodities have come down might prices come down as well?

Or how should we think about that?

Take a crack at that, Frank.

We have not seen overall decline in prices.

Obviously we have had to help our customers meeting some competitive situations, but we have not seen that at this point.

We also had the strong US dollar which hasn't happened, which created a Canadian impact during the quarter.

So the business is performing, as well as can be expected, given the environment that it is operating in.

And we are the leader in this business, we are going to be here.

We have a balance sheet that positions us, to be able to ride through whatever the cycle brings us.

And we think there will opportunities in this segment.

Okay great.

And shifting to films, you get some benefit from resins, finally getting that after a year it seems like.

Yes, we are hopeful that it is going to continue and it seems like it is.

That's what I was going to ask, which is what is kind of the outlook there.

And what do you view as the range of future margins in that business on a one, three, five year basis?

How should we think about that?

And what are the growth initiatives you have in place, as it relates to private label or other opportunities and capital requirements for that business?

Well there's a lot of questions in that question.

Will let me try to peel them off, Bob.

The business is not performing today at margins that we were pleased with.

We certainly see, and Ron has made this point several times, that there's a lot of opportunity for improvement.

We believe we have a lot of products and activities in process that are going to contribute to that improvement.

Also want to point out we recently hired a new general manager in Germany, as part of the management improvement, to be able to deliver those margin improvements.

We have a lot of opportunity for expanding our core products to new customers, and we have some projects, investment projects going on to that effect.

We also have new products in development that will expand our IP portfolio.

And so all these things coming together, Bob, we believe give us the basis for the expected margin improvement over the -- not over a near term time frame -- but over a reasonably middle term time frame.

Okay.

Terrific.

That's, and then just jumping to telephonics, obviously the organic growth remains strong and you said Lamps is probably the biggest driver there.

Can you give us any color on visibility -- and or other programs that we should expect, or what we should expect the outlook to be for that for this year?

It seems like probably the most visible.

Sure.

The biggest in that pipeline is obviously [Visex] and the JLTV programs which we think could move somewhat sideways into the March or April time frame, we continue to pursue those, looking at other programs, but those are the two big driving programs that are on the immediate horizon.

Great.

One - question and I will get back in queue certainly.

But as it relates to the balance sheet and cash flow in the quarter it looks like payables consumed working capital.

What's the outlook for cash flow and working capital use for the year?

We did reduce our payables but we also reduced our receivables by almost a like amount.

As far as the future year is concerned, we are not anticipating any additional debt requirements.

Certainly if we are sitting on $276 million in cash, we have no issues there.

As far as working capital it should proceed along as we expect and forecast and we should not experience any deterioration in working capital.

Great.

Okay.

Thank you very much.

Your next question comes from Marty Pollock of NWQ Investment Management.

Hi, Marty?

I was going sort out the questions I was going to ask, but now I can't, but let me just ask a couple of question.

Back to the working capital, inventories themselves -- seem to be fairly -- not too much change there.

In this environment, is any reason to assume that inventories -- I mean where are you on the inventory situation?

Would you like to make more progress?

And do you think overall working capital that can be a source of cash in Q1, Q2?

The inventory from 9/30/08 to 12/31/08 was basically flat, it went from 167 to 169.

The increase there was really related mostly to telephonics on some of the programs where they were building up inventory, specifically and started delivering on that inventory in January, February.

But the inventory will buildup commensurate with our sales revenue, and the needs of the Company to supply product.

But to this point -- you are at a point where inventories are adequate and you say there's no --

Sure, no question about it.

Sure.

With regard to just the outlook for garage doors, clearly the seasonal aspect is reason for the loss, part of the reason for the loss, but also just wondering as you look at the garage door business, what is -- what are the expectations in terms of turning the corner on profits here.

Look our expectations are just is to build the business long term, then -- and do everything we can to preserve our top line.

And to take market share in this environment, and we will ultimately position the Company to get to a normalized profit level, when there's a normalized housing and credit cycle.

I can't tell you how long that is going to take.

What I can assure you, is we are going to manage the business as aggressively as we can to minimize our loss, in the short term in order to have profits in the business for the eventual recovery.

And as far as the outlook for specialty, I believe you mentioned foreign currency, you know was a negative here.

How much is foreign currency impacted the earnings for you in this fourth quarter?

What did we say $1.5 million.

How much.

$1 million, $1.5 million.

And to -- as far as income.

Yes.

So basically ex that your target -- I mean this point your margins on specialty are closer to the 7% type of number?

I'm losing you there.

More like 7% on the specialty side.

No, no, no.

I think you got it wrong.

Okay.

(Operator Instructions).

Your next question comes from Zahid Siddique of Gabelli & Company

Hi, good afternoon.

Hi.

I have a couple of questions.

The first one, with regards to the films segment, what was the resin impact and what were the film volumes you had in the quarter?

We are going to get away from this concept of benefit of resin.

We pass along the resin price, and we clearly benefited from it, during the quarter.

The idea is that whatever resin cost is, we are going to absorb it and pass it along.

There are going to be quarters where it helps us, and there are quarters where it is going to hurt us.

And for competitive reasons I think it is a mistake for us to be trying, to normalize and give everyone a look through.

So we will say it is in the millions of dollars in the quarter and the volumes Frank, you want to address.

The unit volumes are down slightly.

Okay.

The other question, do you have also within the films, is there still some idle capacity in Europe?

We think there's capacity in Europe, yes..

There's capacity available in Europe.

What's the size of that capacity?

I'd rather not say.

Okay.

Just last question.

We have room for improvement there.

Just last question, could you just expand a little more on the Lamps MMR and the other program you mentioned on the press release, ARPDD program.

What would you like us to tell you?

Just the size increases, what, you know, what the increases were in terms of the revenue?

Okay.

Specifically with respect to the Lamps MMR program.

Yes.

Sales were up over $6 million.

And ARPDD program was up almost $3 million.

That was offset in the prior year we had about $4 million in sales from the SRC program, and that basically nets you down to the $5 million or $6 million increase in sales in the quarter.

Okay.

Thanks a lot.

Thank you.

Your next question comes from Tom Spiro of Spiro Capital Management.

Hi, Tom.

Hi.

A balance sheet question, In these difficult financial times I'm curious about the receivables, any bad debt issues, any customers who are making us nervous.

Look.

We have been very careful, not this quarter but for the last several quarters about managing the exposure in the building products business, based on our view of a declining and challenged environment.

So, we think we are are in good shape.

We have been ahead of the curve in terms of extending credit, and we continue to think that we are --, managing the business to minimize any credit issues going forward.

That's helpful.

Sticking with doors for a moment could you just remind us of the break down residential versus commercial?

It is primarily residential.

And as far as margins go, is residential typically larger than commercial.

Yes.

Okay.

Many thanks.

Thank you.

Your next question comes from Gary Steiner of Hubert Capital.

Hi.

Good afternoon.

I just wanted to get a sense of what the M&A environment is like out there where do you see opportunities, what segments do you think are most likely, and what's the probability that you will actually put some of this capital to work in the next 6 to 12 months?

Sure.

We are very active at looking at opportunities around each of our existing businesses, and clearly part of what I have laid out previously, is my interest and desire to grow Griffon by adding additional legs to the platform.

Liquidity is at a premium in the environment we are in today.

So while we are looking at lots of things that until there's a credit environment that give us confidence to trade liquidity for a new business platform we are going to continue to run the businesses, maintain our cash our ability to look at things.

Patience I believe is at a premium in the environment we are in today.

And when the right thing comes along, we clearly have the capacity to be able to do it, whether within building products, plastics, defense electronics, or something new that might come along.

But the M&A environment, is clearly from both a supplier recognition, and from a banking recognition that Griffon is positioning itself, to be able to look at doing things outside of its existing businesses.

And we are going to continue to work on finding an opportunity to be able to add to our mix.

Okay.

So in terms of just the likelihood doing something within one of the three businesses, versus adding a new leg to the stool, it sounds like you are more leaning towards adding a new business.

No, no, just the opposite.

I think that it is clear that our plan is to add to the existing businesses, and for the right opportunity we would add another leg to it.

But at the businesses we are in we see growth opportunities, particularly in building products and plastics.

We are dealing with very highly leveraged competitors that are going to go through various forms of reorganization.

And most of those industries and we think we can be a consolidator.

We have seen terrific organic growth over a number of years in our telephonics business.

And for the right technology, the right opportunity, the right price, we have a capable management team, and we will continue to look to add to that.

The ability to look at something outside of those three businesses, is really opportunistic.

And what I am saying is that liquidity remains a primary goal in managing through the cycle.

Okay.

That is real helpful.

Just with one follow up on that.

So -- in terms of the opportunities within the existing segments, can you give us a sense of the size of some of the companies you might be looking at in terms of either sales, EBITDA or purchase price or anything that would be helpful there?.

I think it is premature.

I think we will look at things that are either additive in terms of product, or in terms of markets, or ultimately diversification with within the existing product segments we are in, in both building products and plastics, but I think it is premature to talk about specifics.

Thanks so much.

There are no further questions at this time.

Mr.

Kramer, do you have any closing remarks.

No, thank you all.

And we will speak to you in May.

Thank you.

This does conclude today's Griffin Corporation's first quarter 2009 earnings conference call.

Please disconnect your lines at this time, and have a wonderful day.