Griffon Corp (GFF) 2010 Q4 法說會逐字稿

Greetings, and welcome to the Griffon Corporation fourth-quarter 2010 financial results conference call.

At this time, all participants are in a listen-only mode.

A brief question-and-answer session will follow the formal presentation.

(Operator Instructions).

As a reminder, this conference is being recorded.

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

Thank you, you may begin.

Thank you.

Good afternoon, everyone.

With me on the call is Ron Kramer, our Chief Executive Officer, and before we get into the details of the call, there are a couple of matters I want to bring to your attention.

First, as Jen mentioned, our call is being recorded and will be available for playback.

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

During this call, we will make forward-looking statements about the Company's performance, and such forward-looking statements are subject to inherent risks and uncertainties that would cause actual results to differ materially from those expressed in any forward-looking statements.

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 cautionary statement and risk factors contained in today's press release and in our various filings with the SEC.

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 with our press release.

And finally, as we have previously discussed, effective October 1, 2009, the Company adopted the new standard regard -- the new accounting standard regarding accounting for convertible debt which clarified the accounting and disclosure for convertible debt, including separate accounting for the liability and equity components of such debt.

The standard also requires us to reflect a non-convertible debt borrowing rate when interest cost is recognized on the convertible instruments.

This standard was implemented retrospectively, and prior period financial results were adjusted as reflected in an 8-K we filed in February 2010.

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

So having said that, I will turn the call over to Ron.

Good afternoon.

We are very pleased with our fourth-quarter and fiscal 2010 results.

During the quarter, our Company continued to focus on improving its efficiency and profitability, and we completed the acquisition of Ames True Temper.

This deal, along with the continued progress we expect to make in our other companies, places us on a trajectory for a very strong 2011.

I would like to start by giving you some financial highlights from the year we've just concluded.

You should keep in mind that the acquisition closed on the last day of the fiscal year, and so there is no impact from Ames in our results of operations other than certain transaction costs which we have highlighted in the press release.

To give you a sense of the impact on Griffon from this deal, I will talk about both reported and pro forma numbers.

Revenues in the fourth quarter grew by 6% to $348 million.

Our pro forma revenue for the quarter was $429 million.

Segment adjusted EBITDA in the quarter was $30 million, our pro forma segment adjusted EBITDA was $41 million.

For the full year of 2010, revenues grew by 8% to $1.3 billion, our pro forma revenue for the year totaled $1.74 billion.

Our segment adjusted EBITDA grew 19% to $108 million, with our pro forma segment adjusted EBITDA of just under $181 million.

Operationally, over the year, we continue to streamline our building products infrastructure.

Our plant consolidation initiative remains on track, and we expect to eliminate $10 million in annual expense by the end of the second quarter of fiscal 2011.

We will begin to see the related savings from this initiative in the second half of fiscal 2011.

Secondly, we successfully positioned our Plastics business to capture significant market share by responding to the market demands for greater performance in functionality in plastic films as well as maintaining and improving our customer service.

As a result, we added new customers and grew our existing business and were able to better utilize our manufacturing assets, particularly in Europe.

We expect more growth from these initiatives in the years ahead.

Strategically, there is no question that the completion of the Ames True Temper deal is the highlight of the year.

Ames is a very strong consumer products company and its wide array of brands will prove to be a powerful addition to our business.

The deal was expected to be significantly accretive in 2011, driving earnings per share excluding one-time charges by more than 60% against Griffon's normalized 2010 EBITDA level.

It is a growth business with elements that are countercyclical to the home building market.

In addition, with Ames, we expect organic growth as well as the opportunities for bolt-on acquisitions to reinforce the business.

While we are confident that the home building market will inevitably recover, we are prepared for a period of continued challenges and Ames is a great balance for that business.

Our Telephonics business also made great strategic progress this year.

It is truly a gem.

We are well positioned to serve the commercial air traffic management market, particularly as it develops in the Far East which, we believe, is a tremendous long-term opportunity.

Our selection for Fire Scout will be very meaningfully financially, ramping up in 2012.

Of equal, if not greater importance, having our systems on Fire Scout puts us in a great position on a major program in the UAV market which we regard as a high-growth niche in the defense space.

While results from Telephonics will plateau a bit in the next year as we anniversary the end of the CREW 3.1 contract, the business is very well positioned to continue to grow in its core businesses in the next few years.

We have also made great progress in Plastics over the course of the year.

We have got excellent momentum in this business and captured significant market share in 2010 which bodes well for 2011 and beyond.

Our new customer wins deepen relationships with existing customers reinforce a significant competitive advantage.

The product development effort in this business, which led to a new generation of high-performance lightweight films, has been highly successful.

We are entering 2011 with a great deal more operating profitability, a powerful portfolio of growth opportunities and continued ability to pursue strategic development through careful capital allocation.

Our balance sheet continues to be strong.

We intend to continue to demonstrate that our model is capable of generating superior returns and long-term value for our shareholders.

To put this in context, over the past two incredibly difficult years, our total equity return in the two-year period ending September 30, 2010, has been 35%, an annualized rate of 16%, outperforming any major index over the same period and by means of comparison, the S&P 500 increased less than 3% over the same period.

This is a measure of our performance.

It is something that we believe investors who pay attention to the development of our Company and understand our philosophy will appreciate.

I would now like to turn the call over to Doug to discuss our results and outlook for next year in detail.

Thanks, Ron and I will start with the quarter.

For the quarter ended September 30, 2010, net sales were $348 million, a 6% increase compared to the prior year quarter of $328 million.

We saw a strong increase in Plastics, slightly offset by small declines in both Building Products and Telephonics.

Consolidated gross margin in the fourth quarter decreased to 21.4% compared to 23.7% in the same quarter last year.

The decline was mainly attributable to Building Products due to increases in the price of steel that have not yet been offset by implemented price increases.

A portion of the margin decline is also due to Plastics which continued to be impacted by resin cost increases, where the corresponding increase in customer selling prices is implemented on a lag basis.

There was a slight positive effect to these factors from improved manufacturing efficiencies at both Plastics and Building Products.

Operating expenses for the quarter were $74.2 million or 21.3% of sales compared to the year-ago total of $61.5 million or 18.7% of sales.

The increased rate was primarily due to an increase in corporate expenses, largely the result of nonrecurring costs incurred in connection with the Ames acquisition.

Excluding these Ames transaction costs, our cost as a percentage of sales would have been 18.5% for the quarter in line with the prior year.

Income from operations in the quarter was $400,000 compared to last year's $16.4 million.

The Ames acquisition-related costs were the primary reason for the decline, with the balance mainly attributable to the Building Products margin decline I mentioned a few moments ago.

Net interest expense during the quarter was $1.8 million, a modest decrease from the $2 million in the year-ago quarter.

There was no impact in the quarter or fiscal 2010 with debt taking on in connection with the Ames acquisition.

Other income expense included a write-off of $1.1 million regarding previously deferred financing costs for the old Clopay asset-based lending agreement.

That facility was terminated on the closing of the Ames deal.

We recorded income tax expense of $2.7 million in the quarter versus a year-ago expense of $3.5 million.

The effective tax rate in the current quarter was unusually high, 270% of pretax income, mainly due to the non-deductibility of certain of the Ames acquisition-related costs.

Excluding those costs and discrete period items from the determination of taxes, our effective rate in the fourth quarter would have approximated 32% compared to about 14.5% in the prior year quarter.

The 2009 quarter was unusually low due to certain discrete period adjustments as well.

We reported a net loss during the fourth quarter of $1.7 million or $0.03 per diluted share compared with income of $11.9 million or $0.20 per share in the year ago quarter.

Adjusting the current and prior periods for acquisition-related costs and restructuring, net income was $7 million or $0.12 per share in the current quarter and $12.6 million or $0.21 per share in the prior year quarter.

Now I will provide more insight on the year-over-year performance as I discuss the individual segments.

Telephonics fourth-quarter revenue declined slightly versus last year at $114 million.

As Ron mentioned, this decrease resulted from the cessation of the CREW 3.1 program as we had expected, largely offset by some gains in a variety of other programs.

Also remember the 2009 fourth quarter benefited significantly from a large volume of CREW 3.1 shipments in the corresponding revenue.

During the fourth quarter this year, Telephonics was awarded several new contracts and received incremental funding on current contracts totaling $117 million.

Contract backlog was $407 million at September 30 this year with 73% of that backlog expected to be realized in the next 12 months.

Telephonics segment adjusted EBITDA was $13.3 million in the current quarter compared to $13.4 million last year.

The performance was in line with the revenue performance.

Building Products revenue for the fourth quarter was $103 million, a slight decrease versus the year ago level of $107 million, driven primarily by the effects of the weak construction market particularly in the Commercial Building segment.

The fourth-quarter segment adjusted EBITDA for Building Products was $2.8 million versus the year-ago level of $8.7 million.

This decline in EBITDA resulted from somewhat lower sales as well as the increased cost of steel, partially offset by the benefit of cost reduction programs we have undertaken over the past two years.

Having said that, we have anniversaried most of the cost savings where the benefits began to be realized in the fourth quarter of fiscal 2009.

We continue to be on pace for completion of the plant consolidation initiatives in the first half of fiscal 2011, and will begin to realize those corresponding savings expected in the second half of next year.

Plastics generated fourth-quarter revenue of $130 million, a 24% increase versus the same quarter last year.

We continue to capture market share in each market that we serve.

Plastics segment EBITDA -- segment-adjusted EBITDA in the fourth quarter increased to $14.2 million from $12.9 million in the prior year driven by the revenue and volume growth, with the impact of resin costs continuing to pressure margins somewhat.

With respect to the full-year income statement, net sales were $1.3 billion, an 8% increase compared to last year's $1.2 billion.

Plastics increased to $470 million from $413 million; Telephonics increased to $435 million from $388 million; and Building Products was down slightly to $389 million compared to $393 million.

Consolidated gross margin for the year was 22.3% versus 21.5% in the same period last year.

The improvement resulted primarily from manufacturing efficiencies achieved in both Plastics and Building Products and continued good cost control.

Operating expenses for the year were 20.5% of sales compared to the year-ago 19.4% of sales.

Excluding the acquisition-related and other nonrecurring costs, the full year SG&A level as a percentage of sales would have been in line with the prior year.

Income from continuing operations for the year was $9.5 million, but excluding those items I just mentioned, it would have been $20.6 million increasing 30% versus the prior year comparable amount of $15.8 million.

Net interest expense for the year was $11.9 million versus $11.6 million in 2009 and, as I mentioned before, debt taken on in connection with the Ames acquisition did not directly impact 2010.

There were some significant swings in other income and expense, driven mainly by the gain on extinguishment of debt in the prior year and a loss in the current year, due to writing off of the deferred financing costs I mentioned earlier.

Total other expense for the year including all of these items and interest expense was $8.9 million versus $5.5 million of expense in 2009.

The income tax expense for the year was $4.3 million in 2010 compared to a year-ago expense of $1.7 million.

As with the fourth quarter, both 2009 and 2010 full-year effective rates were impacted by certain discrete items and by the acquisition-related costs in connection with Ames, a large portion of which are nondeductible.

Currently, we expect the 2011 effective tax rate to be in the range of $0.32 to $0.34 per share -- 32% to 34%, excuse me.

There will be some variability because of the geographic mix of earnings.

We reported net income for the full year 2010 of $9.6 million or $0.16 per share and that compares to net income of $18.7 million or $0.32 per diluted share in 2009.

However excluding the discrete nonrecurring and acquisition-related items from both years, we achieved $0.34 per share in 2010 compared to 27% -- cents, $0.27 per share in 2009, representing a growth rate of 26%.

We recognize that 2011 is going to be a somewhat challenging year to model, given the significant impact of the Ames business on our overall numbers and how we report.

First, we will henceforth be reporting our Building Products and Ames companies under a newly formed segment, Home & Building Products.

Last Friday, we filed an 8-K with pro forma information that included Ames with the previously reported Griffon consolidated results for the full year fiscal 2009 and the first three quarters of the year just ended, including relevant financial information for the Home & BUILDING Products segment.

We will file another 8-K by the close of business today or shortly this evening with pro forma fourth-quarter and full-year 2010 results under this same reporting format.

Secondly, we felt it somewhat important to provide some insight into our expectations for the full year 2011.

As we look out on the year ahead of us, we currently expect consolidated revenue, which will include a full year contribution from Ames, to be in the range of $1.8 billion to $1.9 billion.

Compared to the 2010 pro forma, we expect Home & Building Products revenue to benefit from a resumption of growth at Ames while Clopay doors will be fairly flat with 2010.

Telephonics is expected to produce a mid-single-digit rate of growth while we currently expect Plastics to continue to grow at a mid- to high-single-digit rate.

And in the case of Plastics, as you know, revenue will fluctuate dependent upon resin prices.

With respect to earnings, we continue to expect the Ames acquisition to be significantly accretive to Griffon's consolidated results.

We expect that segment-adjusted EBITDA will be in excess of $190 million in 2011, compared to the $108 million reported for 2010 and the $181 million that we've told you is the pro forma basis.

2011 results will reflect approximately $15 million of amortization in cost of goods sold, which results from the acquisition accounting for Ames inventory.

The applicable accounting standard requires the write-up of the carrying value of the Ames inventory as part of the acquisition accounting, and we expect that this written up inventory will be used in the first two quarters of the coming year.

We'll provide more details on that as we report 2011 results.

And with that, I will turn the call back over to Ron for some closing comments.

It has been a terrific year.

It was a powerful finish for us to conclude the Ames transaction.

We go into '11 with a portfolio of great businesses, each with varying degrees of near-term and long-term opportunity.

We continue to be confident that with this strategic direction and access to capital that we will provide to our businesses that each will prove that it can grow, generate good returns and create value for our shareholders.

And with that, Operator, we are happy to take questions.

(Operator Instructions).

Bob Labick with CJS Securities.

First question.

First, thanks for the 8-K last Friday.

Putting in those numbers I noticed the nice acquisition, the Westmix acquisition that Ames did right before you got them.

I was wondering if you could tell us a little about that?

And if there's more opportunities like that out there for the new Building Products entity that you have?

Sure.

Westmix represents what we think is a continuation of their ability to organically grow and to provide tuck-ins.

So getting into the Australian market with the Westmix transaction is the start of what they hope to be is a significant rollout.

There is an initiative within Ames that they characterize as go global which we encourage and in our longer term horizon capital structure that we want to be able to grow this business, we are in Australia, our ability to source out of their global sourcing office in China, you know, we can ship goods to the US.

We can ship goods to Australia and other parts of the world.

So the Westmix really is the type of acquisition, and you could expect us to continue to look to add to those and to make other ones as we try to support Ames's initiative to be able to expand their range of products and brands around the world.

And, if I may add, they have been very successful in terms of adding businesses in the past and then growing those brands, leveraging their distribution network and their customer relationships.

Great.

We look forward to more of those for you.

Drifting over to doors, you mentioned essentially flattish demand and then rising steel environment.

Is there an ability to raise prices there or how do you look to, you know, that challenge for next year?

Well, I -- my words -- we actually have implemented a series of price increases.

There was a bit of a lag effect, but those -- the full benefit of those price increases were not yet felt in the fourth-quarter results.

The price increases have been implemented.

Shifting over to film, obviously you had a lot of growth there and I think initially there was some market share gain from a competitor in Europe that has gone away, but it sounded like you said there was [Ames] across-the-board.

Could you tell us just what the environment is like there and if you expect continued market share gains for films?

Your last portion of the question there was a crackle online.

Could you repeat that please?

Sure, sorry.

Just -- it looks like in the beginning of the year you had gains in Europe on films.

Is that across the board now?

And what are you doing to drive these gains and do you expect that to continue?

I think if you talk to the Plastics folks, it is a combination of one, very good technology and two, continued just outstanding customer service in terms of being a reliable, on-time, on-spec supplier.

And all of those attributes have enabled them in a competitive landscape to win new business and to take advantage of opportunities that have been presented to them.

And then, looking in the five-year outlook for Griffon, obviously with Ames and the continued growth in the Building Products area, that will be a bigger part than it was in the past.

Telephonics has significant growth opportunities.

Where does film stand in Griffon's five-year outlook?

And what factors influence either growing it more from here or taking other actions?

Look, what we've tried to look at it in all of our businesses is standalone management, strong cash flow characteristics.

So, our Plastics business, we've made tremendous investments.

We have great customer relationships.

We think we have got big opportunities with our existing customers and with new customers and new products?

And we think it has got a very bright future in terms of our ability to be able to organically grow the business and to be able to penetrate in new jurisdictions as our existing customers continue to expand around the world.

So we view that as very much an organic growth part of our Company.

Has been a terrific return over time and as the economies and the markets that we participate in get better, we think we will be able to generate better returns on the assets that we have already invested in.

As Ron said in his earlier comments, the steps that we are undertaking in 2010 really bode well for 2011 and beyond, because of the new business that has been won and what that will mean to us in the future.

Great.

I'll let others ask questions.

Thanks very much.

(Operator Instructions).

Bob Labick.

Well, while other people are thinking out there, I will just ask another.

Could you talk a little bit about the acquisition environment in the Telephonics area.

You mentioned Fire Scout is probably a 2012 event.

What else is going on in Telephonics and what does the environment look like?

Look, we -- first let me deal with the environment for Telephonics.

They are incredibly well-positioned on the platforms that they are on.

They continue to be competitive on additional developments.

We think the business is just incredibly well managed, opportunistic around the air traffic management initiatives.

You know, Joe Battaglia and the team just came back from a trip to China.

You know, we have been saying for some time and I think that it is becoming clearer that the development of air traffic in China is a huge opportunity for us and others.

We have been there.

Telephonics has sold 20 air traffic management systems in China over the last 20 years.

So this is not a new opportunity for us.

We are going to put resources towards further developing that.

We recently implemented the Macau air traffic tower.

We are competing for the Hong Kong air traffic management tower.

These are all highly competitive and we feel like we are one of the top suppliers.

We work with the best.

We are partnered with Hewlett-Packard in the Hong Kong bidding, and we are going to continue to try to grow as China develops.

So that is just one portion of their business.

You know, while Defense is clearly going through a consolidation phase, we look at all sorts of opportunities and we think there is going to be a continuation that is going to present us with opportunities.

But those opportunities are all coming at very high prices and very high multiples, and those multiples are not necessarily easily achieved for us as a buyer.

But it is not going to prevent us from continuing to look at them.

We think Telephonics is a very valuable business.

We think that we've got a very strong long-term growth plan in that business, regardless of the short-term environment and whether Defense is trading up or down and we really like the company.

We really like the management team.

We are going to continue to invest and grow it.

(Operator Instructions).

Gentlemen, it appears there are no further questions at this time.

I would like to turn the floor back over to you for any closing comments.

Okay, well, look, we think we are very well positioned.

You know, our businesses are doing well, our opportunities are in front of us, the size of our Company significantly enhanced by having Ames.

Everyone talks about shovel-ready projects to rebuild the economy.

We own the shovels.

So we are going to look forward to participating in the growth of America, which we are very confident is going to happen.

So thank you and we will be speaking to you next quarter.

This concludes today's teleconference.

You may disconnect your lines at this time.

Thank you for your participation.