Griffon Corp (GFF) 2009 Q3 法說會逐字稿

Good afternoon, my name is Julianne and I will be your conference operator today.

At this time, I would like to welcome everyone to the Griffon Corporation Third Quarter 2009 Earnings Conference Call.

Joining us today are Mr.

Ron Kramer, Chairman and CEO; Pat Alesia, Chief Financial Officer; and Frank Smith, Executive Vice President.

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).

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

Ron Kramer, Chairman and CEO.

Please go ahead, sir.

Thank you.

Good afternoon, everyone.

Welcome to our third Quarter 2009 Call.

Before we begin, please remember, our comments may contain forward-looking statements that are inherently subject to uncertainties.

Refer to our Form 10-K for a list of factors that could cause our results to materially differ from those anticipated in any such forward-looking statement.

Non-GAAP measures, as defined by the SEC, referred to during this call are reconciled to the most directly comparable GAAP measure in our earnings release.

Let me start by saying that our businesses are doing extremely well in what is obviously a very difficult economic environment.

We are really happy with how we did this quarter.

Our segment adjusted EBITDA was $26 million on $287 million in net sales.

And our continuing operations earnings per share was $0.12.

A great deal's been accomplished in the last year.

We've exited our Installation Services business; the refinancing of all of our bank debt, the recapitalization of the Company, and our announced plan to consolidate our Building Products Manufacturing businesses.

We have, and we're going to continue to look for ways to reduce our cost structure.

But our Company's very well positioned.

And now in addition to our current businesses, we're focusing on utilizing our balance sheet to undertake acquisitions and investments.

We're currently evaluating several acquisition opportunities, which include businesses that will complement the existing businesses, as well as value-creating opportunities outside of that.

In terms of our operations for the quarter, we're very pleased.

We've made excellent progress in our Clopay Building Products business, navigating the downturn in the housing market and the overall US economy.

And we think that we're positioned quite well to be able to benefit from the inevitable recovery.

Telephonics continues to grow with sales and earnings increasing over prior year quarter.

Our Plastics business increased its segment operating margin by 50 basis points, despite sales pressures.

Our businesses are very well-positioned.

Clopay Building Products particularly had, in our view, a fantastic quarter generating sales of $99 million compared to $113 million in the prior year; recognizing all the issues that the housing market has presented to that business, to be able to be EBITDA positive in the quarter, is really a remarkable job of management, and we think that Gene Colleran and Steve Lynch and his team have just done a tremendous job there.

The sales decline was principally due to reduced volume, offset partially by the product mix.

Building Products reported a segment operating profit of $600,000 for this quarter.

The first quarterly operating profit this year, compared to $2 million last year.

This segment continues to face the challenges in the market place, but we remain focused on its cost reduction programs and the initiatives to gain market share, which has been successful throughout this year and to continue to maximize profit.

We announced in June, the implementation of a plant rationalization plan.

The facilities will be consolidated by 2011.

A $10 million annual recurring savings benefit is expected.

The Company estimates it will incur $12 million exit and restructuring costs, as well as an additional [$11 million in capital investment] related to this realignment (company corrected after the call).

Telephonics generated sales in the quarter of $94 million compared to $88 million last year.

That's a 7% increase driven by our Homeland Security and Border Patrol projects.

Segment operating profit of $10 million increased by 8%, primarily due to the sales growth while maintaining segment operating profit margin.

We continue to pursue new contract awards.

Our backlog is in excess of $400 million with $300 million to be shipped in the next 12 months.

Business is quite stable there.

We think that the team is doing an excellent job of executing its business plan.

The Clopay Plastics business, they had a decline in revenue for the quarter, $95 million compared to $121 million in the prior year.

Lower sales resulted primarily due to lower volume in our European business, the unfavorable impact of exchange rates on translated foreign sales, and the pass through of lower resin costs.

Plastics operating profit decreased by $700,000, primarily due to the drop in sales volume, but that was offset by the 50 basis point increase in segment operating profit margin, that benefited from cost cutting.

We continue to be very positive about our Plastics business.

We're looking at ways to improve our international operations.

The operating environment in Europe is challenged.

We're going to be looking at expanding via new product development in North America.

And the cost cutting measures we undertook early on are on target, and continue to contribute to our margin there.

Let's spend a minute on our balance sheet.

We continue to be quite strong.

We've got $290 million in cash at June 30 with outstanding debt of $180 million.

So we're still in a substantial liquidity position net cash, putting us in really in very strong shape.

We have undrawn borrowing capacity at our subsidiaries of $85 million.

And we have a significant amount of unencumbered assets outside of the United States available for borrowing should we find an acquisition to be able to leverage those assets.

In fact, one of the things that we pay a lot of attention to, and that somehow gets lost when you look at earnings reports; we generated $37 million in cash from operations this quarter.

Very pleased to announce that we have hired Doug Wetmore to join us as our Chief Financial Officer.

Doug joins us after a distinguished career at International Flavors and Fragrances, where he was the CFO.

He strengthens the management team.

Pat Alesia, who's done a terrific job helping me in the last year restructure the balance sheet and reorganize the business, is being promoted to be the Chief Administrative Officer.

And we've spent an enormous amount of time and effort in building up the corporate office in anticipation of building the Company.

Sitting in the room with me today, Len Fuld who joined us from CitiBank, is our Director of Taxes, Brian Harris who's recently joined us as our Chief Accounting Officer, came from Dover Corporation.

This is very much part of our strategy, to be able to build out a very strong deal-oriented team to be able to continue to grow Griffon into the future.

And I'm very comfortable that we've been successful at attracting some really terrific people to our Company.

We continue to look at our long-term returns.

We're shareholder friendly in terms of how we look at acquisition opportunities.

We think that the value of our businesses are not always accurately reflected in the value of our stock.

We're very cautious about what we're looking at in terms of adding on to our Company.

And we're going to continue to explore adding on to the existing businesses and to look to diversify the Company, and recognizing that things that we do are really there to help build shareholder value.

With that, I'm happy to take any of your questions.

Operator, if you want to compile the calls.

Thank you, ladies and gentlemen.

(Operator Instructions).

Your first question is from the line of Bob Labick with CJS Securities.

Hello, Bob.

Ron, it's actually Arne Ursaner.

I'm working as Bob's assistant today.

All right.

A couple of things.

One, in your press release you speak about acquisitions, both within your existing segments and outside.

I think that's a little different language, perhaps, than you've had.

Can you expand a little bit on that?

Perhaps give us some of the criteria you're thinking about.

And if you were to go outside and perhaps create another leg in the story, what you're hoping -- what should we be thinking about there?

Well, it's too early to get into the specifics.

Conceptually, there's now a point where we feel like we've done cost cutting throughout our existing businesses, restructured the businesses, shuffled the portfolio, particularly getting out of the Installation Services business.

And we've now positioned ourselves, both people-wise and balance sheet-wise to be able to look at a lot of different opportunities which we have been.

We, of course, see the potential to add on within the existing businesses.

But the ability for us to look at things from outside of those existing businesses is something that we're considering on an ongoing basis.

When we have something specific to talk about, of course, we'll be announcing it.

Okay, a couple of financial questions.

Your tax rate was 12%, if I've done the math right?

What should we be thinking about for the balance of the year?

Sure.

Do you want to take it Len?

Sure, each quarter stands on its own.

The balance of the year should be as, hopefully as positive as the rest of the year has been.

It's hard to predict what the fourth quarter's going to bring.

But certainly, we're not going to -- we should not expect to see a huge chunk or a decrease in the ETR for the rest of the year.

But we have the benefit of approximately $0.04 a share from foreign tax credits that we were able to apply in the quarter.

And also the statue of limitations ran our on certain tax years without audit, so in the reserves we had on for those tax years, 2005, so off the table for us.

So Pat, we should add -- we should assume it's a more normalized tax rate than in Q4?

Yes, yes.

Perfect, and the other financial item, your unallocated amount had a pretty sizable jump, about $1 million in the quarter.

Were there one-time fees or some other factors in there that we should be thinking about?

And how should we build it out going forward?

The Company's making money and we're building up our bonus accruals.

Okay, we had expected some -- you had I guess -- there'd been talk about two different bids in the summer, Hong Kong airport and the JLTV.

Can you update us on the status of these bids?

Yes, we continue to pursue them.

They're two separate programs.

The JLTV contract is something that's a contract that Telephonics has been pursuing and continue -- we don't expect anything to happen until sometime next year.

The Hong Kong contract is expected to have an RFP later this year, with a process and selection that we're working on sometime next year.

Not the -- and the JLTV?

JLTV, I said the first part of that is something that we expect to happen next year.

And we continue to pursue that actively.

And my final question relates to the film segment.

You've had your third straight quarterly top line decline.

So a couple of questions related to films.

If we were to try to break out foreign exchange, resin and volume in impacting the decline, perhaps you could give us a feel for how each of those three factors have impacted the negative trends.

And moreover, speak to the growth or outlook for the segment over the next few quarters.

So basically trying to break down within that segment --.

No, no I --.

FX, resin and volume.

Look, volume is the financial driver of it.

Resins is really not big a factor.

And FX was not significant.

We don't usually disclose a specific number, but it was below $1 million.

And your outlook for the division going forward?

Our outlook is guardedly positive on the top line.

Look, we clearly are doing very well in North America.

We're making progress in Brazil.

And our business in Germany is suffering with what we believe to be a decline in European business.

It's not a Clopay Plastics issue.

It's an overall Europe issue.

And we continue to see P&Gs business decline.

We're going to work very hard to both cut costs in that business, but also look to grow top line.

And the key to our success in doing that is going to be to look at diversifying and adding some new products into the mix.

The outlook for the business itself is stable.

The business is on a trailing 12-month basis is -- on an EBITDA basis high 40s -- high $40 to $50 million of EBITDA.

So no, we're very comfortable that the business is positioned.

If there's any economic pickup in top line growth, we think that this business has capacity in both Europe and Brazil to use substantially better.

In addition, Arne, we have continued to be on target with the cost reduction program that we initiated knowing the downturn was here.

We've reduced cost significantly over the past nine months.

My final question for you Ron, do you think Doug will be ready to join you at our conference on August 18?

No, September 1 is his first day at work.

So bring Pat.

Okay.

Thank you very much.

Okay, thank you.

(Operator Instructions).

Your next question is from the line of Zahid Siddique with Gabelli & Company.

Hello, good afternoon.

Good afternoon.

A couple of questions, one, with regard to your European Films business, Ron, is there a possibility that you may look to exit that?

And you made a comment that the European business is just not good business.

I was wondering if you could (multiple speakers) elaborate on that.

No, no, no.

No, we would not look to exit it.

And I didn't say that the European business was bad business.

That the European economy is not nearly as robust as what we are seeing in the North American business.

So that's not a comment about our business.

More a comment about the market that our business is operating in.

Okay and how is the Private Label business doing in Europe?

I assume it's weak as well.

Private Label business continues to increase.

Yes there's clearly a consumer shift from a higher priced product down, and Private Label is part of that.

This is the pricing pressure that we had expected.

And we continue to be managing the business in anticipation that there will be a recovery in the European business that seems to be following the stabilization that we're seeing in North America.

Okay and I also wanted to touch base on the appointment of Doug.

I'm assuming you guys were basically -- you were looking around for the CFO position for a while.

Is the rationale, I guess, to bring in basically more deal people?

I think you touched on that.

I think the most important part of building Griffon is building a corporate office that is capable of not just managing the businesses that we already own, but to be able to execute the balance sheet strength that we have to be able to buy other businesses.

And that starts with me, and my role with looking to be able to grow our assets by investing the capital that we have.

And the business has evolved.

And as it's getting more complicated in terms of our looking at new properties and new opportunities, we felt that the ability to strength our bench and bring in someone with Doug's experience, to be able to put Pat into a more administrative role, is the natural transition.

And I've said to you and we clearly view this as building the Company long term.

And building out the quality people to be able to execute that is as important as having built out the balance sheet.

Now clearly having built the balance sheet allowed us to attract some very good people into the Company.

We're in an environment where deals have obviously been very slow, prices have not adjusted to where there's a cheap ability to buy assets.

But we believe that you've got to be positioned for when the markets turn and when opportunities present themselves.

So Doug is a terrific addition.

And really allows me to go to the next level looking at transactions and trying to be able to build out our platform.

Sure, great, and just one last question, can you quantify the resin impact this quarter?

And also what the prices were this quarter versus same quarter last year?

You want to take a shot at resin?

We've never commented on what the resin prices are.

Quarter-over-quarter basically this year, resin has been stable.

Did you get that?

Yes, it's stable.

So in terms of the impact, you said it's not material to the quarter?

Is that accurate?

Correct, correct, that's correct.

Okay, thank you so much.

No problem.

You have a follow-up question from the line of Bob Labick with CJS Securities.

You still have Arne Ursaner for Bob.

Can you give us an update on doors and your outlook there?

We're hearing these green shoot discussions.

And how do you see that impacting your Door business?

Yes, I'll gladly tell you that we're really happy with where our Door business is, given what we expected to be a very difficult environment.

Housing starts seem to have stabilized.

So the decline in new construction is feeling like we may have hit bottom.

The repair and remodel markets have not hit bottom.

So we're not out of the woods.

And that thinking has been confirmed by what we've seen going into this quarter.

We think that we're well-positioned.

We think that taking down our capacity, by doing the plant rationalization, will allow us to be able to really be a low cost producer when revenues pick up.

But we don't see the freefall that we saw earlier this calendar year.

These are always our strongest month and fourth quarter's always our strongest quarter in Building Products.

And we have no reason to believe that that's not going to be the case this year.

Now obviously visibility into next year is part of the overall economy.

And there is more than just green shoots that we're seeing in the housing market.

Okay, thank you very much.

And there appear to be no further questions.

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

Kramer for any further remarks.

Thank you for participating, and we'll be speaking to you after our next quarter.

Bye, bye.

Thank you all for participating in today's Griffon Corporation Third Quarter 2009 Earnings Conference Call.

You may now disconnect.