Griffon Corp (GFF) 2012 Q1 法說會逐字稿

Good day, ladies and gentlemen and welcome to this Griffon Corporation first quarter fiscal 2012 financial results conference.

Just a reminder that today's program is being recorded.

At this time I would like to hand the call over to Mr.

Doug Wetmore.

Thank you, Lisa.

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 that I want to bring to your attention.

First, I will mention again, that our call today is being recorded and will be available for play back.

Details are regarding the playback are provided in our press released issued earlier today, and are also available on our website.

Second, during our call we will make certain 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 materially from those expressed.

And for additional information concerning factors that could cause actual results to differ from those discussed in our Forward-looking statements , you should refer to the cautionary language contained in today's press released as well as the risk factors that we discuss in our various filings with the Securities and Exchange Commission.

Finally some of today's prepared remarks will adjust for those items that affect comparability between reporting periods.

These are laid out in our non-GAAP reconciliations which are included in our press release.

Thank you, and I will now turn the call over to

Good afternoon.

It is a good start to the year.

Each of our operating segments achieved strong revenue growth this quarter with our consolidated revenue increasing 9%.

This revenue growth drove our 5% improvement in segment adjusted EBITDA.

Given the continued challenging macroeconomic backdrop, we are pleased by this growth both at the top line and the EBITDA line.

We see it as a validation of effective competitive positioning for each of our businesses and of the hard work that has been done to implement our overall strategy.

Here are the consolidated financial highlights of this quarter.

Our revenues grew to $451 million, an increase of 9% or nearly $37 million over the prior year quarter.

We had significant organic growth in both Plastics and Telephonics where revenue increased 16% and 6% respectively over the prior year quarter.

Home and Building Products revenue also increased 6% with our Doors business increasing 7% driven by a combination of volume and favorable product mix.

Ames True Temper revenue increased 5% benefiting from the addition of the Southern Patio business that we acquired in October.

Our consolidated segment adjusted EBITDA was nearly $42 million, increasing 5% over the prior year quarter EBITDA of $39.8 million.

Our EBITDA growth was driven by a nearly 27% EBITDA increase at Telephonics which continues to perform superbly.

EBITDA generated by Home and Building Products improved modestly increasing 1% over the 2011 quarter.

As has been expected and as we discussed on the last two quarterly calls, Plastics EBITDA declined in comparison to the prior year quarter mostly as a result of the impact of scaling up production of newly installed assets in both Germany and Brazil.

We have made substantial progress in returning Plastics to normalized operating levels and as discussed in past calls, we expect to have addressed the remaining scale up issues by the end of our second fiscal quarter.

On an earnings per share basis, our results improved from our reported loss in the prior year of $0.03 per share to an income of $0.04 per share in the current quarter.

However, the current prior year quarters were impacted by restructuring charges, acquisition-related costs including accounting for inventory acquired in the Ames transaction and discreet period tax items as applicable.

Adjusting for those items as we more fully analyze in our press release, adjusted earnings per share were $0.07 this quarter compared to adjusted earnings per share of $0.11 in the comparable prior year quarter.

While these are good numbers, we are confident that our consolidated results will continue to improve as the economy recovers.

Now, we will talk more about the quarter in a few moments, but before doing do, I want to cover a couple of other matters.

Over the next few quarters we have meaningful revenue opportunities and some powerful scale and efficiently related margin opportunities.

Each of our businesses is well positioned and to a certain extent our growth is not dependent on an improvement in the economic environment.

I would like to go through each of our operating segments in further detail, so that you can better understand why we are confident about delivering on our expectations for fiscal 2012 and in the years beyond.

I will start with Telephonics which is arguably the most valuable of our businesses.

Telephonics is performing well in the toughest events environment seen in decades.

Fortunately the Intelligence, Surveillance and Reconnaissance category remains well funded relative to the rest of the Defense market.

This is true for Communications, Intelligence, Electronic Intelligence and for Radar Systems.

The things we excel at.

There are two major sets of opportunities for Telephonics.

The first is for continued growth in Airborne ISR equipment.

We should see benefit from both the continued upgrade and recapitalization of existing platforms and growth from selected new platforms with secure funding especially Northrop's Fire Scout-on-Man Helicopter Program.

We should start seeing revenue from this program late this fiscal year or early next year, and we expect that for Telephonics total revenues over the life of the program will reach hundreds of millions of dollars.

This is a unique and highly capable aircraft, and we are excited to be part of this program.

The second set of opportunities for Telephonics has been in the commercial Aerospace market.

We are at the beginning of what looks to be a strong upcycle that will last for quite some time.

We believe that our weather and air traffic radar systems are well positioned to take advantage of this.

As you are no doubt aware, strong ISR companies have proven to be very attractive assets in the M&A market, particularly over the last few years.

We continue to believe that Telephonics is a very valuable business.

Our backlog gives us confidence in the near term.

At the end of the first quarter it was $380 million.

As expected down slightly versus year-end due to the timing of some orders.

Longer term we are very confident that our continued investment in research and development will further extend our leadership position, and we are excited for the continued development of a number of key category initiatives and product families.

We remain very confident that Telephonics will become steadily larger and more deeply entrenched as a leader in its markets as time goes by.

Turning to Plastics.

This is where we believe we have the most opportunity for near term improvement.

In the first quarter, Plastics revenue increased 16% to $136 million driven mainly by volume growth.

Notwithstanding the strong increase in revenue, segment EBITDA for Plastics declined.

For those of you who may be new to our story, I would like to recap the situation.

We are working through in Plastics here in the first half.

Last year we initiated the largest capacity expansion project ever undertaken in this business.

We added about 20% total capacity to the global operations which includes manufacturing assets in North America, Europe and Brazil.

Significant expenditures were made in both Europe and Brazil in 2011 in order to meet demand from new business one.

In scaling up production of this new capacity, we experienced manufacturing inefficiencies related to the new machines including higher than normal levels of scrap.

As we discussed during our calls in the second half of last year, we are in the process of addressing these growing pains.

We have made a lot of progress, and we expect the process to be largely behind us by the end of the second quarter.

Plastics has increased business of both new and existing customers, and we believe it is exceptionally well positioned to continue to grow and increase market share.

The increased volume carries a good scale opportunity, and we believe that over time, we can exceed our historical peak operating margins and run this business at an EBITDA margin rate exceeding 10%.

As you may have seen a few weeks ago, we announced that Alan Koblin, a solid industry veteran and a strong leader, has joined us as President of the Plastics business.

I am confident that our team which continues to include Gary Abyad in an important customer-facing role is more than equal to the task of realizing substantial returns on the recent investment and capacity.

This positioned us well for a much stronger consolidated second half and for the years to come.

This brings us to our largest segment, Home and Building products.

The Home and Building product segment had first quarter revenue of $210 million versus $198 million last year.

Within that Ames True Temper had revenue of $99 million versus $94 million last year, and Clopay Building products had revenue of $112 million up from $104 million last year.

Segment adjusted EBITDA was 17.8 versus 17.5 last year.

Weather continues to play a role in how Ames True Temper fares with very limited snow so far this year impacting sales of snow-related products.

We cannot predict the weather let alone control it, so we are focused on the opportunities and challenges that we can address.

Innovation, customer service, broadening our product portfolio organically and through acquisition.

Clo pay Building products is doing well in what continues to be a very difficult housing market.

Revenue increased due to a somewhat improved volume and improved product mix.

Margins are better driven by the volume pick up and improved mix, as well as the successful restructuring of our manufacturing and distribution infrastructure completed last year.

We have been really pleased by the progress we have made, and as I have said before, while it may not happen soon, a secular improvement in the home building environment should result in strong sales, and because we are running at an inflection point, a good deal of margin improvement.

As we execute the strategy and improve the operations for each one of our segments, we expect to generate significant cash flow.

We will utilize this in several ways to ensure that we are providing value to our shareholders.

Our first priority will clearly be funding our organic growth, however our excess cash flow can be used for share buy-back.

As you know, we have an outstanding authorization of $46 million which at current trading levels represents approximately $4.5 million shares.

We also initiated a quarterly dividend in November 2011 our forward-approved the second quarterly dividend with a record date of February 28th payable March 27.

We believe our businesses are well positioned, and we continue to have excellent liquidity.

We are confident that we can make investments for organic growth, pursue additional acquisitions and return direct value to our shareholders via quarterly dividend, as well as our previously announced share repurchase program.

We remain committed to driving value to our shareholders through the full range of opportunities.

Finally, we expect to continue to evaluate strategic acquisitions.

We have the capacity, infrastructure and skill set to identify and complete transactions.

While we have a preference right now for tuck-in acquisitions for our existing businesses, we also continue to evaluate larger transactions that would further diversify our portfolio.

While there is nothing imminent, we should be able to bolster our growth rate through the deployment of strategic capital for acquisitions.

As we look out at the next few years, we believe that conservatively even if the environment stays challenging and even worsens a bit, we can sustain an organic revenue growth rate of 5%, achieve EBITDA margins of 10% and generate compound earnings growth of better than 12%.

This is strictly organic growth.

I would now like to ask Doug to take you through the quarter's financials in more detail, and then we will open it up to your questions.

Thanks, Ron.

Consolidated revenue in the quarter increased 9% to $451 million.

Note that we have now anniversaried the Ames acquisition and so with the exception of a small amount of revenue from Southern Patio which had annual revenue of about $40 million last year, current quarter performance was driven by organic growth in each of the business segments.

Each of our operating segments contributed to the revenue growth versus last year.

Telephonics strength derives from its technology leadership position in a variety of categories, and from the continuing demand for intelligence, surveillance and recognizance equipment.

Telephonics revenue grew 6% to $104.5 million with broad based strength in the business.

Revenue growth related to ground surveillance radar systems was notably strong in the quarter.

As has been the case for the last several quarters, revenue associated with the Crew of 3.1 production impacts reporting a growth of what we consider our core business.

Remember we are a contract manufacturer for the Crew product.

Excluding sales associated with Crew 3.1 from the current and prior year quarter, revenue in Telephonics core business grew 9% this quarter in comparison to the prior year.

Segment adjusted EBITDA was $15.7 million, a margin of 15% compared to the prior year result of $12.4 million and a margin of 12.6%.

Margin inTelephonics improved as a function of product mix and lower SG&A expenses in the quarter related to the timing of certain R&D initiatives.

The SG&A also reflected the benefit of the voluntary early retirement plan and other restructuring initiatives undertaken in the later stages of last fiscal year by Telephonics.

.

In that regard, Telephonics recognized an additional $1.5 million of restructuring and other related charges primarily for one-time termination benefits and other personnel costs in the current quarter in conjunction with changes to its organizational structure.

As Ron mentioned, Telephonics backlog was $380 million down from $417 million reported at our year-end.

As we mentioned on our last earnings call, we expect order and timing to limit backlog growth in the first half of this year, but we also expect much stronger order activity in the second half of 2012.

Home and Building Products grew revenue by 6% to $210 million an increase of more than $12 million and both Ames and Clopay Doors contributed to this performance.

for the quarter Ames and Door revenue Increased 5% and 7% respectively.

Ames growth was driven mainly by Southern Patio which was acquired in mid-October 2011 and excluding the benefit of Southern Patio, Ames True Temper revenue actually declined in comparison to the prior year quarter.

Door revenue increased mainly due to a combination of favorable mix and higher volume.

Overall Home and Building Products EBITDA increased modestly, 1% from the prior year quarter .

The inclusion of Southern Patio's operating profit and the current period's results as well as improved production efficiencies were the main drivers of the increase, partially offset by somewhat higher material and fuel costs at both Ames and Doors.

Plastics revenue grew 16% to $136 million as we continue to reap the benefits of strong product development initiatives in our new manufacturing capacity.

Volume was the main driver accounting for nearly the entire increase.

Resin and foreign exchange were both nominal in terms of impact on the quarter revenue growth.

The quarter ended 12/31/2011the past EBITDA decreased $1.6 million compared to the prior year quarter.

As we discussed in the second half of last year both Germany and Brazil experienced a higher incidences of start-up costs related to expanded capacity and such higher costs included higher then normal levels of scrap.

Improvements in operations in the newly expanded locations continue, and we have not changed our view of the scaling up challenges will continue to impact profitability to the first half of this year.

We will continue to update you on these calls as progress is made.

Consolidated growth gross profit in the first quarter was $103 million a margin of 22.8% versus the prior year rate of 21.2%.

The year-over-year margin improvement reflected the absence of the prior year $11 million acquisition-related inventory write up charges with better margins in Telephonics and Door businesses offset by somewhat lower margins in Ames, excluding the inventory accounting item and in Plastics.

Consolidated selling, general and administrative expenses excluding restructuring charges were $83 million in the quarter or 18.4% of revenue compared to $80.4 million or 19.4% of revenue last year.

The increase in operating expenses in absolute value results primarily from the inclusion of Southern Patio, from its acquisition date, but overall, we continue to exercise very tight cost control across our businesses and are pleased with the overall trend of SG&A expenses as a percentage of consolidated revenue.

Earnings per share in the quarter were 4 versus a loss of 3 per share in the year-ago period.

As Ron mentioned, there were a number of factors that impacted reporting in both years including restructuring charges, acquisition costs, the acquisition accounting for inventory at Ames and prior year discreet period tax benefits.

Excluding those items from both periods, we had earnings per share of $0.07 in the current quarter compared to $0.11 per share in the prior year.

The reconciliation table going from GAAP to these adjusted items in our press release as I mentioned before.

Regarding our tax rate, as I discussed last quarter, the mix of our earnings on a geographic basis can move our rate around .

While the rate is somewhat elevated in the first quarter because of this, we expect our overall fiscal 2012 rate at this time to approximate 45%.

Capital spending in the first quarter was just under $20 million.

We continue to expect full year 2012 CAP spending be in the range of $65 million to $70 million.

Depreciation in the quarter was about $14 million, and we remain comfortable with four-year depreciation forecast of about $63 million as I noted on our last call.

That increase of depreciation rises as the capital investments are brought on-line.

Amortization expense in the quarter was about $2 million and is expected to be about $8 million for fiscal 2012 in total.

Our balance sheet at the end of the first quarter had $177 million in cash and total debt outstanding of $707 million resulting in a net debt position of $530 million.

The cash balance at the end of the quarter was somewhat lower than we had expected mainly because we saw significant volume of cash receipts in the first week of the new calendar year.

That cash had for the most part been expected prior to the holidays, but I think the way the Christmas holidays fell impacted the timing of receipts.

Additionally, about $180 million of our $200 million revolving line of credit is available for borrowing.

Letters of credit that we have issued account for the utilized portion.

There are no actual drawings under the line of credit.

For the full year 2012, we continue to expect consolidated revenue to be in the range of $1.9 billion to $2 billion with home and building products revenue up in the low single digits.

Telephonics at low to midsingle digit growth and Plastics at a high single digit rate of growth.

As I mentioned in the past, in the case of Plastics, revenue will fluctuate depending on resin prices and foreign currency exchange rates.

At this time, we also continue to expect segment adjusted EBITDA to be in the range of $180 million to $190 million compared to the $166 million reported for 2011.

Corporate and other expenses are expected to increase somewhat from reduced levels in 2011 and be pretty much in line with actual results reported for fiscal 2010 or about $26 million.

The corporate expense includes all equity compensation for the company which is a noncash expense, and that will be about $9 million for the full year 2012.

With that I will turn the call back

Before we go to the questions, I would just like to say that I think we are very well positioned for an uncertain economy.

We factored this into our planning and still see good growth opportunities even in a sluggish recovery.

As the global economy expands, we expect to see profitability expand meaningfully.

All of our businesses are growing, and we believe they will out perform their competition.

We have ample resources to invest in these businesses and support their growth and are excited about their prospects.

We have not only built a strong business here, but we have some talented new management in each of our businesses to take us forward and continue to create value for our shareholders.

Thank you, and with that, why don't we open it up for questions.

(Operator Instructions).

We will go first to Stuart Gillespie, Stephens Incorporated.

Thank you.

I think, Ron, you said earlier that it continues to be a difficult housing market.

Are you all seeing signs of recovery?

You know, the answer is things are not getting worse, so therefore they feel like they are getting better.

I think we have a very good view of what is happening.

We have been saying consistently when the talk of a double dip last August was talked , there had been sequential improvement in both volume and activity.

But it is not because there is a broader tailwind of new housing starts and development.

There has been absorption, and part of it is we think our Clopay business has managed itself extraordinarily well through the downturn and has been able to not just maintain market share , but to take market share in a slow , painful recovery that is going to continue, and we think our business is positioned for the housing market to slowly recover if things get better faster we have plenty of capacity, and we will be a big beneficiary of it.

But we have been seeing steady improvement in our business, really going back and

Okay, and so in terms of the mix, is it still around 70% renovations to 30% new homes?

Yes.

And do you all have any sort of plan on where you would like that to be long-term?

We would love to see the new home market come back to anything approaching its historical $1 million annual unit.

We are so far from that today that let's get sequential improvement year-over-year and the repair and remodel market will continue to improve as the absorption of the oversupply and there will be foreclosed markets find their way into ownership hands.

People are going to be putting money into improvements.

Garage door is an important part of that value equation.

We think we deliver a superior product that -- at a better then competitive price.

I would like toss both the home -- new home market as a percentage increase, and I would also like to see just the sheer volume from a $400 million top line, while we are profitable here, we think there is a tremendous amount of operating leverage in this business for an increase in top line.

Whether that is repair and remodel or new home and in a recovering housing market we should see both improve.

Okay.

And moving on to ATT, I know that you all said there hadn't been a lot of snow, and that is likely to impact the business, but are there any potential benefits of an early spring?

There is certainly because people are working in the yard sooner and so forth.

We get the benefit.

The one thing we have to keep our fingers crossed on is you don't get a late season down fall of snow that impacts the early lawn and garden season, but as Ron mentioned in his comments, we worry about the things that we can worry about and control, and you manage through the weather as best you can.

And I would just add to that spring is, by comparison, a much more important quarter for us in Ames than the winter.

These are things that are always going to be unpredictable.

If you remember October started out great.

There was snow in the Northeast.

We benefited from it.

Over the period, by December, there was no snow.

And in spite of the variations in weather, we had a quarter that tracked the prior year's quarter which had a tremendous amount of snow.

So this business, we are in it for the long-term.

We think it has brands and it has a platform of opportunities, and there are going to be years where we get the benefit of the weather, and there are years where it will go against us.

What we like is our positioning of market share and our relationship with our customers and our ability to continue to grow the business into an economic recovery.

Ok, that makes sense, thank you.

One final question for you, I am not sure if you guys do this, but can you break down the revenues from Southern Patio for the last quarter?

They were roughly $8 million in the quarter.

Overall they have much of the same seasonality that the Ames True Temper business has, and as I mentioned in my comments, for the last year -- and they were on the same September 30th fiscal year as we are.

They had just about $40 million for the full year.

Thank you.

(Operator Instructions).

Our next question will come from [Philip,Duchechelli] Deutsch Bank.

Good afternoon.

Hi, Phil.

My questions are with regard to the Plastics business.

Clearly you guys are hopefully making some headway there with the Brazilian and German operations.

Are there any metrics that you can point.

out to us, or is there any qualitative information you can give us to give us more confidence that this will be behind you by the end of the second quarter?

As we have said, we are closely monitoring it, and they are really right on plan in terms of achieving the efficiencies that they anticipated in getting to the full operating profit level by the end of the second quarter.

I probably would say that Germany and Europe is probably a little further along than Latin America and some of that has to do -- and we mentioned this on the last call, but with the fact that the Brazilian market slowed down a little bit in the last six months of last year, that was pretty well documented in the financial press and so forth.

So in terms of our evaluating how far they have progressed in achieving the operational efficiencies, I think it is safe to say that they haven't really been stressed as much as we expect they might need to be when the Brazilian market rebounds a little bit.

That's the only caveat that I have, Phil and other then the one that Plastics is our most international business and obviously foreign currency and resin pricing can significantly impact the Plastic reported results.

And then with regard to Telephonics, Leon Pineda put out his budget and it calls for a 30% increase in the fleet of U.S.

Unmanned Aerial Aircraft.

If that were to come true, how soon do you think that would benefit you guys, and would it benefit you guys if they are building more of the Unmanned Aerial Aircraft?

Well, there is no surprise that we are absolutely a beneficiary of that direction and Fire Scout is the first of what we hope to be many programs that our communication surveillance radar systems become a part of.

The direct answer to your question is that we have said that Fire Scout won't impact us until the end of this fiscal year and won't ramp up until 2013 and beyond.

But that in and of itself is part of our confidence in the organic growth story within Telephonics.

Additional programs, international sales of those programs, and the ability to be part of new programs are all opportunities for us.

And so while we are completely realistic about how difficult the funding environment for defense is going to be, the piece of the business that we are in is a more likely growth part in terms of its requirements that the big cuts are coming out of procurement and coming out of personnel.

And we continue to think the ISR part of the market that we compete in, that we are very well positioned.

And as we have said in the past, our technological capabilities for small, size, weight and power consumption as well as the performance of the radar unit itself is ideally suited for a UAV application.

Ok.

Are you guys on the Predator, or is that another program that somebody else is on?

The radar unit is not on the Predator.

There are some communication ground to air on some of the UAVs.

I couldn't tell you if it was the Predator, but we are on other UAV platforms.

But our expertise is helicopter-based programs.

And then just last for me, clearly you guys have cash on the balance sheet and liquidity available to you.

Have you been looking at any acquisitions?

Is there anything out there that is imminent to anything you want to give us guidance toward?

We are always looking.

The reality is we think that managing in this uncertain environment that we want to be certain that we get our Plastics performance to where we expect it to be over the next several quarters.

The Home and Buildings Products while improving it is a long way from reaching the levels of profitability that we would like to see it at.

Of course if we can continue to do tuck-ins like Southern Patio which are very attractive in terms of it being accretive and strategic, we are going to do that.

But there is no big transformational acquisition that is on our horizon, and not that we are not looking for it, but it is just not the environment that we see lots of very attractive, well-priced high growth assets.

Understood.

Thank you very much.

Thanks, Phil.

We will take our next question today from Zahid Siddique, Gabelli & Co.

Hi, Good afternoon.

Hi, Zahid.

A couple of questions, any updates on the Mahindra joint venture?

Yes, we continue to work through our memorandum of understanding, and we expect to be able to formalize it over the coming months.

But it is still moving ahead, and we are quite excited about the opportunity that it presents to us, and being able to do business in the India market and to be able to do business with one of the finest companies in that market.

So we are very excited about those prospects and it would be additive to the Telephonics growth plan.

Would you be able to quantify the operating income for the Garage Door Business?

Zahid when we made the acquisition with Ames True Temper, we said we would no longer comment on the individual operating profit of the businesses that comprise Home and Building Products, so I would hold to that.

But I assume it was profitable, at least you can confirm that?

Oh yes, it is profitable.

Just to confirm, it has been profitable through this entire down cycle, and its profitability has been improving.

We expect it to continue to improve.

as volumes increase

Remember the first and second quarters of this fiscal year will continue to be anniversarying the plant consolidation savings which we began to realize in the third and fourth quarters of last year.

And then are you guiding to the adjusted EBITDA of $180 to $190 million, and I believe in Q1 you did about $41 million, $42 million, so you are comfortable -- or are you comfortable with the ramping up in the next three quarters?

Well, to be quite frankly, we would not have affirmed the guidance if we weren't comfortable with it.

And remember our first fiscal quarter is our smallest quarter of the year.

This is our seasonally weakest quarter, and we are ahead of where we were last year.

The short answer to your question is, yes.

And last question I have is on the resin prices.

Could you throw some light on what is going on in terms of prices?

They are down a little bit particularly in the United States from the peak of the last say 18 months, and I think that is probably driven by the overall decline in natural gas which is a feed stock, but they are still pretty far above the bottom which was in December of 2008, and I don't think you have seen that sharp of a decline in Europe because a lot of the resin there is manufactured from Naptha and That's not quite seen the decline that you have seen in natural gas.

A mixed bag, probably a downward pressure, but I don't anticipate seeing a precipitous decline in the overall cost of resin.

Thank you so much.

Thank you.

Gentlemen, at this time there are no further questions.

I would like to turn the conference back over to you for any additional or closing remarks.

Thank you very much.

We will speak to you after our next quarter.

And ladies and gentlemen, that does conclude today's conference.

We would like to thank you all for your participation.