Griffon Corp (GFF) 2009 Q2 法說會逐字稿

Hello, everyone, and welcome to Griffon Corporation's second-quarter 2009 conference call.

With us today, we have Ron Kramer, Griffon's Chief Executive Officer and Pat Alesia, with Griffon's Chief Financial Officer.

After the prepared remarks, there will be a question and answer session.

(Operator Instructions).

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

Kramer.

Please go ahead, sir.

Thank you.

Good afternoon, everyone.

Welcome to our second-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 including 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.

It's been a little over a year since I became CEO of Griffon.

We've accomplished a great deal that I am quite proud of.

We managed our exit from the Installation Services division, we refinanced our bank debt, and we re-capitalized our Company with substantial liquidity.

While we are financially quite comfortable, we have not been complacent.

We have relentlessly taken costs out of our businesses, that these earnings that we've put out today reflect, and we expect more efficiencies in the future.

Overall, this has been a very good quarter for us.

Telephonics and Clopay Plastics results were better than prior year and better than our own internal projections.

We continue to remain challenged in our Garage Doors business, given a very difficult operating environment, and as it's related to this past quarter, the seasonal nature of the business.

Our Company remains very well positioned to weather this difficult economy.

As you recall, we built our liquidity last year, we laid the foundation for some operational improvement, and are in a strong position now to build our Company for the future.

I would like to talk to you about a few of our businesses.

Telephonics generated sales in the quarter of $97 million compared to $98 million last year, a 2% decrease.

Despite the slight decrease, core business revenues grew by $12 million or 14%.

This core growth was primarily attributable to the Radar Systems Division and driven by increases in the Lamps MMR, the CP-140 and the ARPDD programs.

Last year's second-quarter sales were favorably impacted by contracts with Syracuse Research Corp.

that we are winding down.

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

Our operating income of $8 million increased 16%, primarily as a result of increased margins due to product mix and reduced expenses in the period related to R&D.

Telephonics continues to aggressively pursue new programs and evaluate acquisition opportunities.

Clopay Plastics' sales for the quarters were $100 million compared to $115 million last year.

Lower sales resulted primarily due to the lower exchange rates on a translated foreign sales, negative impact from the pass-through of lower resin pricing and lower unit volumes, partially offset by a favorable product mix.

Our operating income increased $2 million or 51% as the favorable contribution to gross margin from lower resin costs and from a favorable product mix more than offset the impact of foreign exchange translation and lower unit volumes.

We continue to view our plastics business as doing well and are looking at areas for improvement in our international operations and in bringing on new product development in North America.

We've initiated several cost-cutting measures to improve or stabilize our operating margins in upcoming quarters.

Let's turn to the Garage Door business, where we generated $79 million of sales compared to $85 million in the prior year, decreasing only 7%.

Garage Door sales declines were principally due to the reduced unit volumes, offset partially by higher selling prices to pass through increased material cost and product mix.

Garage Doors reported an operating loss of $12 million this quarter compared to $9 million last year.

Remember, the second quarter is seasonally our worst quarter of the fiscal year.

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

I would like to say that we are encouraged by the pickup in daily orders that we're seeing in April and May.

We are hopeful that the housing markets are stabilizing.

We think we've done an excellent job of managing this business through the storm by shifting the mix of our business from new home to repair and remodel, and any increase in new home construction will have a very positive impact on this business.

Our balance sheet remains very strong.

At March 31, we had $274 million of cash, $196 million of debt and undrawn borrowing capacity of $80 million.

So, nice to be in a net cash position.

In April, we purchased $15.1 million face value of the convertible notes for $14.3 million, further reducing our debt related to our convertible debentures to $79 million.

In April, we also received a tax refund of $14 million for carry-back losses from our exit from the Installation Services business.

So we continue to have a very strong cash balance as we continue to reduce the debt in the Company.

We're in a very enviable position.

We will continue to keep our focus on long-term returns for our Company and our shareholders, as we actively review new opportunities.

With that, I am happy to take your questions.

Operator.

The floor is now open for questions.

(Operator Instructions).

Thank you, our first question is coming from Robert Labick with CJS Securities.

Good afternoon.

Good afternoon.

Hi, thanks.

Good quarter there.

I wanted to ask a couple of questions.

First is, as it relates to the Doors, you just mentioned a slight pickup in April and May.

Could you maybe elaborate on that?

And also I think in the release you discussed additional cost actions.

So could you just kind of tell us where you stand there and what is giving you hope for the pickup in orders in April and May?

Well, look, obviously we monitor our incoming order activity on a daily, weekly, monthly basis.

And April is the start of our seasonal better quarters, third and fourth quarter.

And it's clear that our daily orders have picked up.

That's a long way from saying that we are back to levels of volumes from prior years.

But the pace seems to feel like the overall housing market is stabilizing and certainly the free-fall effect that we saw from the end of November through the end of this quarter has clearly stopped.

Okay.

That's great.

I hope it continues, obviously.

Yes, so do we.

But (inaudible) this is more trying to give an indication that there may be some bottoming.

Like everyone, we'll continue to keep our fingers crossed.

There is a lot of hope and a lot of optimism, but this is a business that has been managed through a very difficult period.

There is significant upside exposure to the business based on an increase in volume.

We are hopeful to see that increase in volume.

But in the meantime, we're going to continue to look at plant rationalization, capacity rationalization on the expectation that it's nice to hope for the best, but you have to plan for the worst.

Perfect.

As it relates to films, you had a very strong margin quarter; actually I think it's the highest margin since '06, but a sequential decline in sales and I guess part of that's related to the resin pass-through.

Could you maybe just give us a sense of where you think margins may go and if this is the right run rate to start thinking about the sales level and just help us put those two together?

I guess -- as we've tried to say that the price of resin is out of our control.

We're going to benefit from it and there is this approximately four-month lag.

We are now seeing the benefit of the decrease that had started at the end of '08.

So, I wouldn't expect resin price decreases to have the level of increase in our margins going forward.

But we are hopeful that we just kind of stay stable, and we can run the business on its current rate based on the volatility of resin prices becoming much less.

It was the -- you did 6.6, I think in margin in the quarter.

Is 5 to 7 the right range for the current size and rate of the business, somewhere around like that?

I think that's a fair range.

Okay, great.

And then on Telephonics, obviously you continue to show the strong double-digit organic growth.

Could you talk about some of the future projects you are bidding on and any timing -- if we might hear about any of them in '09 or are they more 2010 events?

No, I think that there is still ongoing interest in process which we are participating in on the VIS-X program and we believe that the JLTV program is also making progress and we continue to participate in that.

So it's always hard to say how these contract awards are going to go.

What we've always said is that we think our technology gives us an advantage.

We think we have an excellent relationship with our customers and as these contracts get awarded, we think we are positioned to be able to get some of the benefits as they happen and they are very much in our mind's '09 events.

Great.

And then my last question, I'll get back in queue.

I think during the quarter, you filed a mixed shelf for pretty much everything except for straight equity.

I was wondering if you could just elaborate on the reasonings behind it, if there is anything you are seeing out there, I mean be it acquisitions or what your thought process was behind the shelf offering?

Sure.

We are actively looking at a number of opportunities both around the existing businesses we are in and some businesses that are outside of the scope of where we are.

The shelf provides us a level of flexibility to be able to finance those acquisitions.

It was purposeful that we did not include common in there, because at these prices, we wouldn't be issuing our common stock.

But we want to have the ability to create debt securities and to be able to create other types of hybrid securities as opportunities present themselves.

Okay, great.

I'll get back in queue.

Thank you very much.

Our next question is coming from Zahid Siddique with Gabelli & Company.

Hey, good afternoon.

Just a follow-up on the shelf, if you are going to do the -- potentially do convertibles or preferred stocks which could be converted into common, then wouldn't that then mean that you're essentially doing the common or essentially will be issuing the common at some point?

Yes, but not at what we would view at the current market levels.

And so while we clearly have the ability to do a convert at some higher conversion price, the point of not having common included as part of this shelf was that we didn't view that as being something that we wanted to signal as something we would be willing to do at these prices.

Okay.

And my other question is about the debt, you -- I guess you bought some convert, about $15.1 million.

Is that something you will continue to do on an opportunistic basis?

Well, look, those converts are putable to us in July of 2010.

They become a current liability of ours in July of 2009.

We will continue to monitor the market.

There's been moments where they have been offered to us at prices we deem attractive but ultimately this is -- we have the cash on our balance sheet.

If they are available at prices that make sense versus our cash sitting in the bank, we're a buyer.

Okay.

And have been a buyer and we obviously significantly reduced the outstanding.

Okay.

And just one last question on the VIS-X, any visibility as to when you would hear about that?

No.

The process continues to go through its paces and we continue to participate in it.

And we think our technology is an excellent solution.

We're teamed up with Rockwell Collins.

And we're hopeful that we're going to be part of that ultimate success.

Okay.

Thank you so much.

Thank you.

(Operator Instructions).

Our next question is coming from Marty Pollack with NWQ Investment Management.

Yes.

Wondering if you could just talk a little bit about the Garage Door, in terms of where you've gone on breakeven and on any volume recovery.

Just wondering what does your operating leverage look like?

It looked like on this quarter sequentially, you did, I would say, fairly decent margins relative to the decline of $30 million sales sequentially.

Your decremental margin was about 25%, so presumably you're clearly -- you're being affected by the lower volumes.

But on the other side, what do you think you could do when we start seeing a pickup?

Look, I think visibility is so cloudy that I wouldn't want to talk about where we're going to end up in margins in that business until we see higher levels of volume.

The increase in units is obviously positive, but I think it's premature to try to get to a margin that is normalized until we see what a normalized economy looks like.

I see.

And just a question just with regard to inventories in that business, how -- well, have you been reducing inventories, able to essentially reduce working capital via doing that and what is the -- I mean is there more opportunity to see that working capital improve via inventory reduction?

Pat, do you want to --?

Sure.

So inventory is certainly down with sales, probably down about 20% and that's obvious with the sales volume decreasing as well.

So we'll continue to monitor that, and I think that's it.

Okay.

At this time, there are no further questions.

I'll turn the floor back to Ron Kramer for closing remarks.

I would like to thank you all for being with us.

We'll continue to work on building the Company and we will speak to you after our next quarter.

Thank you very much.

Thank you.

This does conclude today's Griffon Corporation second-quarter 2009 earnings conference call.

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