Griffon Corp (GFF) 2010 Q3 法說會逐字稿

Greetings and welcome to the Griffon Corporation third quarter 2010 financial results conference call.

(Operator instructions).

It is now my pleasure to introduce your host, Doug Wetmore, CFO for Griffon Corporation.

Thank you, Mr.

Wetmore, you may begin.

Thank you, operator.

Good afternoon, everyone.

With me on the call is Ron Kramer our Chief Executive Officer.

Before we get into the details of the call, there are a couple of matters I want to bring to your attention.

First this call is being recorded and will be available for playback.

And information regarding the playback is provided in our press release issued earlier today.

During our call we may make forward looking statements about the company's performance.

Such forward looking statements are subject to inherent risks and uncertainties that could cause actual results to differ from those expressed in any forward looking statement.

For additional information concerning factors that could cause actual results to differ materially from those discussed in our forward looking statements, please refer to the questionary statement and risk factors contained in today's press release and in Griffon's filings from the securities and exchange commission.

In addition, some of today's prepared remarks will exclude those items that affect comparability.

These items are laid out in our non-GAAP reconciliation included in our press release.

And finally, as we previously discussed, effective October 1, 2009, the company adopted the new accounting standard regarding accounting for convertible debt.

The standard clarifies the accounting and disclosure for convertible debt instruments including separate accounting for the liability and equity components.

It also requires us to reflect our non convertible debt borrowing rate when interest cost is recognized on a convertible debt instrument.

The standard was implemented retrospectively and prior period financial results were adjusted to reflect it's adoption.

In our comments today all comparisons made to the prior reporting period will be with reference to results adjusted to reflect the impact of the standard.

Now I'll turn the call over to Ron.

Good afternoon.

Thanks for joining us for our third quarter results.

We continue to be pleased with the performance of each of our operating businesses.

Each business is on a path to revenue growth, increased cash flows and higher operating earnings.

They're all well positioned competitively and they're industry leaders.

We're also thrilled about the Ames True Temper addition to our portfolio and businesses, Ames formula incorporates strong brands, intense category by category focus and a flexible sourcing structure that combines vertical manufacturing with outsource supply.

This business also has excellent growth potential both organically and through continued tuck and acquisitions.

We structured the Ames transaction in such a way that affords us ample capital to continue to implement our strategy, both growing our businesses organically and through acquisition.

The Griffon management team will continue to use its collective skill set to carefully allocate capital to increase shareholder value.

Even as we prepare to close and integrate the Ames deal, we continue to evaluate additional businesses and investment opportunities.

Now I'll turn your attention to some of the highlights from this quarter.

Total revenues in the quarter increased by 14% and all three businesses exceeded their quarterly goal.

Segment adjusted EBITDA in the quarter also increased by 14% versus last year.

Reported earnings per share in the quarter were $0.08 compared to $0.10 in the prior year quarter.

However current quarter results included restructuring costs amounting to $0.02 per share in 2009 included some discreet nonrecurring tax benefits amounting to $0.03 cents a share.

As we note in our press release, excluding these items from the 2010 and 2009 quarterly figures resulted in 2010 EPS as $0.10 compared to $0.08 in the prior year, an increase of 25%.

Our balance sheet remains strong at the end of the third quarter and we held $352 million of cash and $153 million in cash net of debt.

I'd like to talk briefly about the results in each of the businesses.

Strongest improvement in profitability this quarter was in building products, whose segment adjusted EBITDA increased by over 40% to $5.9 million on a 6% revenue increase.

As we have for the past several quarters, we are seeing the benefits of a more focused business, leaner and more effective operating infrastructure.

Our facilities consolidation project continues to be on time and on budget and is expected to be completed in early calendar 2011.

We've positioned building products be profitable in this weak economic and housing environment.

We are more convinced than ever that we can continue to make gains in this business, even if the market remains challenging.

Furthermore, as I have said before, we will be well positioned when the residential housing market ultimately recovers.

Plastics also demonstrated excellent growth in the third quarter with a 17% increase in segment adjusted EBITDA on a 29% increase in revenue.

We continue to capture market share as a result of our technical capabilities, innovative products and great customer service.

The resulting volume increase has enabled us to draw profit by improving the utilization of our assets, at the same time as we add value for our customers.

Telephonics continue to make the highest contribution to EBITDA, $11.8 million, growing revenue by 7% despite a very difficult anniversary created by the end of the crew program.

While EBITDA grew 2% versus last year's $11.5 million, we're excited about a number of near and intermediate term programs and opportunities that we're working on.

Joe Bataglia just returned from the Farmsboro air show which is the industries major trade event of the year and reported that the activity in the commercial sector is a good deal stronger than anticipated.

The long-term trends associated with our categories are strong and our technology leadership position is a key competitive advantage.

Finally, we're looking forward to including Ames in our results.

I just note that as we discussed in our conference call about Ames, this transaction is expected to be accreted to our earnings by nearly 60% on an annual basis.

We're very pleased with the financial aspects of the deal, as well as the strategic direction that it represents.

I'll reserve some additional comments for closing but I'd now like to turn the call over to Doug to review the businesses in additional detail.

Doug?

Thank you, Ron.

In the quarter ended June 30, 2010, net sales were $327 million, or 14% increase versus last year's third quarter of $287 million.

As Ron mentioned, we achieved pretty strong revenue growth in each of our segments and each segment contributed to our profitability.

Gross margin in the third quarter decreased slightly to 22.7% versus 23.1% in the same quarter last year.

This was primarily due to plastics which continued to impacted by resin cost increases with the related price increases implemented on a lag basis.

In offsetting the resin impact we benefited from improved manufacturing efficiency in both plastics and building products.

Operating expenses for the quarter were $63.1 million, or 19.3% of sales compared to the year ago total of $58.4 million or 20.3% of sales.

100 basis points of improvement as a percent of sales came despite the significant increase in corporate expenses which, as we've noted before, were primarily the result of our step up in acquisition related activity, as well as increased incentive and equity compensation costs.

Income from operations was $11.2 million, up 43% versus the year ago level.

Net interest expense during the quarter was $3.7 million, up from $2.6 million in the year ago quarter.

Keep in mind this comparison reflects the full impact of the $100 million of convertible notes issued in December of 2009.

Substantially all of the 2023 notes were put to the company at par during July.

We recorded income tax expense of $2 million at a rate of 28.3% versus the year ago expense of $513,000, a rate of only 7.8%.

The prior year period had about $1.6 million of discrete favorable items primarily attributable to the settlement of open tax period and related release of reserves.

Net income during the third quarter was $5 million or $0.08 per diluted share compared to $6.1 million or $0.10 per diluted share in the year ago quarter.

As Ron noted, adjusting the current and prior year periods for restructuring and discrete tax items, net income was $5.9 million or $0.10 per diluted share in the current quarter versus $4.6 million or $0.08 per share in the prior year quarter.

Turning to the individual segments, Telephonics revenue was 7% ahead of last year at $100 million.

This increase was due primarily to the CREW 3.1 program which essentially ended during the quarter.

And the effect of which was responsible for the slowdown in revenue growth versus prior quarters this year.

During the quarter Telephonics was awarded several new contracts and received incremental funding on current contracts totalling $73 million.

Contract back log was $405 million at June 30, 2010 with about 64% expected to be realized in the next 12 months.

Telephonics segment adjusted EBITDA was $11.8 million in the current quarter versus $11.5 million in the 2009 quarter.

Building products revenue for the second quarter was $104 million, an increase of 6% versus the year ago level of $98 million.

The increase was driven by increased residential demand offset somewhat by commercial weakness.

We believe we'll continue to perform well even in this challenging environment.

The third quarter segment adjusted EBITDA for building products was $5.9 million an increase of over 40% versus the third quarter last year.

This improvement in profitability was driven by higher sales and related capacity utilization improvement, as well as by the cost reduction initiatives we put in place over the last year.

We continue to be on pace with completion of our plant consolidation initiative in the first quarter of calendar 2011 which is our second fiscal quarter.

Plastics generated third quarter revenue of $122 million, a 29% increase versus this same quarter last year.

We continue to capture market share in both Europe and, to a lesser extent, in the United States.

Plastics segment adjusted EBITDA in the third quarter increased 17% to $11.7 million with the impact of resin costs continuing to pressure margins somewhat.

Now turning to the balance sheet at the end of the quarter, we had over $350 million in cash with outstanding debt -- excluding debt discounts of $199 million, or net cash position of $153 million.

After funding the convertible debt that was put to us in July, as well as the cash committed to the Ames transaction, we will continue to have approximately $225 million of cash.

Most of which is at the Parent Company.

We preserved our access to strategic capital of the debt associated with the Ames transaction at the Clopay level with no recourse to Griffon Corporate or to Telephonics.

This preserves not only our borrowing capacity but a variety of financing alternatives that could be specific to Telephonics.

With respect to the upcoming fourth quarter, we're comfortable assuming mid single digit increase for Telephonics, adjusting our revenue expectation for building products to also see some continued growth and believe that plastics will finish the year with continued strength.

With that I'll turn the call back over to Ron for some closing comments.

This was another strong quarter.

We're excited to have reached an agreement on our first major acquisition.

Ames is going to immediately add significant value to our business.

It's a great business in its own right.

We're confident that with the guidance and access to capital that we're prepared to provide, capable of extending its leadership position.

We think this transaction will significantly enhance share molder value.

We remain poised for further growth within our existing businesses and through continued acquisitions.

We've created efficiency and enhanced performance in each of our operating groups over the course of the year.

And as we enter the fourth quarter for us, we expect to finish fiscal 2010 much stronger company.

Next year, as each segment executes on the opportunities we've created and as we've pulled in the operation of Ames, we expect to demonstrate new levels of financial performance and strategic development.

With that, operator, we're prepared to take anyone's questions.

Thank you.

(Operator Instructions).

Our first question comes from the line of Bob Labick with CJS Securities.

Please proceed with your question.

Good afternoon.

Congratulations on a nice quarter and again on the Ames transaction.

Thanks, Bob.

First just wanted to ask about that.

Does this position Clopay the way you wanted or could future acquisitions still be in Clopay in terms of major acquisitions or will that be for tuck ins for Clopay in the future?

Look, let me break it down.

We're very pleased with the job that Gene Colleran has done in overseeing the Clopay companies.

We're fitting Ame into our corporate structure.

It's a significant transaction, so at the Clopay level within our companies, will be about $1.2 billion of aggregate including Ames.

And this is significant acquisition.

The goal for us is to get this deal under our belt.

We've got building products, plastics and the Ames businesses for financing purposes.

We've done this deal on the assumption that there are no Synergies.

Of course we're going to work as hard as we can to create Synergies.

But we've got the customer level and the operating efficiencies going forward.

But this is a stand-alone segment that fits into a very nice, very well-organized Clopay set of businesses.

We'll see what the future brings but this is a very high-cash generating acquisition for us.

We'll delever and we'll put the money back into either our businesses or new acquisitions within the Clopay companies.

Okay, great.

Then shifting over to films.

Last quarter you had some nice market share gains.

Obviously those continued with some very good growth there.

What's the environment out there like for the competitors, I guess, that are losing share?

Is there more opportunity for gains?

And where do you stand capacity wise, given all of the revenue you've just taken on?

Well, look.

We're very happy with what's been happening within our plastics business in spite of a difficult macro environment.

We're also benefiting significantly and expect to benefit prospectively from the dislocation of some of the competitors, particularly in Europe, which should lead to volume increases, lead us to having a higher profitability mix of business in our German facilities going forward.

These are things that the management team has done that have happened after the end of the third quarter.

So into this quarter and going forward, we're very excited about the ability for us to continue to grow our business regardless of the vagaries of resin price and the uncertainties of the global economy.

Okay.

Then just shifting Telephonics and then I'll get back in queue.

Obviously, we understand you'd love to find a nice acquisition at a reasonable price there, but what's the market like out there for that?

Is this more reasonably bought off as an organic growth business for the near term or are there actually opportunities for you in.

We think the world of Telephonics.

The management team is outstanding.

The business has been a success story for going on 80 years.

The reality is that the defense budget is going to be under pressure, so we have a very good business that has important products that are key to programs that are going to be there regardless of any pressure on the defense budget.

Having said that, when we look at acquisitions, we're looking at things that we can use our balance sheet and create value for our shareholders.

We've looked at transactions, you know, like Argon ST that traded at a number like 12 times EBITDA.

And I think that's a good comp for the type of business that we already own, though somewhat lost in some of the parts valuation within Griffon.

So we don't see ourselves making those kinds of high multiple acquisitions, even though we have the financial capacity to do it within Telephonics.

The plan is to continue to grow the business.

We have $400 plus million of funded back log and in a varied well organized set of priorities within the company.

And if we can deliver on those, we think it's a mid single digit growth business.

Very stable cash flow generating company and when we find something that's compelling from a value standpoint, we'll look at it.

Great.

Thank you very much.

Our next question comes from the line of Zahid Siddique from Gabelli.

Please proceed with your question.

Hi.

Good afternoon.

Good afternoon.

Couple of questions.

First on the debt.

I know that from Q2 into Q3 your debt actually went down by about $26 million.

So you were $226 million.

Now you're $200 million.

Did you, I guess, repurchase some of the debt?

Or what was the factor that brought that down in?

That was just some pay downs under the revolver, asset based lending.

Just a normal reduction of debt with some excess cash.

You'll see that fluctuate periodically as we build up working capital and then pay it down.

Okay.

And your cash as of Q2 is roughly $350 million.

I think in your remarks today you said that pro forma you expect roughly $225 million, so the bridge is $125 million.

Remember, This is Q3.

Q3, right?

Remember, we paid down just under $50 million for the convertible debt that was put to us in July.

And then we will use roughly $75 million from corporate for the purchase of Ames.

Sure.

Aren't you getting $20 million from them as well?

No.

The cash, the purchase is on a cash free debt free basis.

You don't quite know until the day you close because there will be a working capital adjustment.

We won't know that answer until the day of the closing.

Okay.

You said that the convertible that you put was $50 million.

For some reason I thought it was, the outstanding amount was $30 million or $29 million.

It was actually $50 million?

It was just under, I want to say it was $49.7 million or something like that.

And all -- essentially all was put to us.

Okay.

And now on the plastics, what was the volume pricing, if you could break down your top line in plastics.

You know, it was mainly volume driven.

And I would just as soon not break out the adjustment of the quarter for the resin.

That's really not particularly meaningful in the long-term because it's driven by fluctuations and the underlying cost.

What is the resin price currently?

I know it's down somewhat from its recent highs because there is some additional capacity that's coming online.

But I think you can get that information off one of the indexes just as readily as I can provide it.

Thank you very much.

Thank you.

(Operator Instructions).

Our next question comes from the line of Marty Pollack from NWQ Investment Management.

Please proceed with your question.

Very nice quarter.

Just on Telephonics, if you would perhaps just elaborate a little bit more on that Russian transaction, or -- the Transas Aviation deal.

What is the potential for that in terms of size?

Marty, it's an agreement to basically co-market and distribute.

I wouldn't characterize it as a current transaction.

Although our colleagues at Telephonics are very enthusiastic about the opportunities of our product being included on some of the Russian made helicopters.

So probably a little bit too early to quantify it.

You'll just have to be patient with us on that one.

I think the broader comment that I'd make Marty, it's Ron, is that growth is going to come internationally.

We're looking at lots of initiatives all over the world with what's likely to be a very competitive defense environment in the United States.

As far as book to bill, you indicate some new funding, but how you measure the book to bill?

What does it look like to you at the moment, at the current level?

As we mentioned, the order book is just over $400 million.

Two-thirds of that will be realized in the coming 12 months.

And indications are from management that order activity, that doesn't include anything for the Fire Scout as an example, which is probably something that will be a fiscal 2011 item.

I'm not quite sure of the specific, whether we're answering your question.

Well, it's actually just kind of the current book to bill, what would be the current book to bill ratio as you measure it?

Well, I guess it would be backlog is about where it was a year ago, which means we've been -- running at $400 million plus pace and filling back logs and we still have Fire Scout ahead of us.

We hope new initiatives that are going to grow and we can fill that in.

Okay.

Thanks.

There are no further questions in the queue at this time.

I'd like to hand the call back over to management for closing comments.

We appreciate your being with us.

We've had another excellent quarter and we look forward to going ahead with the financing for our Ames transaction, which is why we have accelerated the release of this quarter's earnings from its expected date of August 5th, and we'll be marketing that starting tomorrow, going very well and we hope to close this deal as soon as possible.

So thank you very much.

Ladies and gentlemen, this does conclude today's teleconference.

Thank you for your participation.

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