Griffon Corp (GFF) 2013 Q3 法說會逐字稿

Good day and welcome to the Griffon Corporation third quarter 2013 earnings conference call.

Today's call is being recorded.

And at this time, I would like to turn the conference over to Doug Wetmore, Chief Financial Officer.

Please go ahead, sir.

Thank you, Matt.

Good afternoon, everyone.

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

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

First, the call is being recorded and will be available for playback, the details of which are in our press release issued earlier today, and those details are also available on our website.

Second, during our call, we may make certain forward-looking statements about the Company's performance, and such statements are subject to inherent risks and uncertainties that could cause actual results to differ materially from those expressed.

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 statements contained in our press release 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, and these items are laid out in our non-GAAP reconciliations, which are included in our press release.

With that, I'll turn the call over to Ron.

Good afternoon, everyone.

Thanks for joining us.

Our third quarter financial performance was in line with our expectations.

We're performing well in what continues to be a challenging environment.

Our consolidated segment-adjusted EBITDA was $46.8 million, compared to $51.8 million in the prior year quarter.

We're pleased with our results, as our businesses are well positioned for long-term growth and are benefiting from more strategic operating initiatives we have implemented.

I'll now make a few comments about each of our operating segments.

Doug will then take you through the financial results in more detail.

I'll start with Telephonics.

Third quarter revenue totaled $130 million, increasing 29% compared to the prior year quarter.

The increase was primarily related to higher shipments of ICREW units in the quarter.

Excluding the contract manufacturing revenue for ICREW and CREW 3.1 programs in both periods, revenues increased 12%, primarily due to the timing of work related to several multimode surveillance radar contracts.

Telephonics EBITDA was $13.1 million compared to $15.9 million in the prior year quarter.

The decrease compared to the prior year quarter resulted from less favorable product mix, the effect of which was partially offset by lower expenditures associated with R&D initiatives and bid and proposal efforts.

Remember that in the prior year quarter, Telephonics benefited from a favorable mix of products, most notably the LAMPS MMR.

Our funded backlog remains strong, ending the quarter with $440 million, compared to $451 million at the prior fiscal year end and $422 million at June 30, 2012.

At present, defense budget cuts are clearly in focus, and the question on everyone's mind is the implications of sequestration.

Since our last update, not much has changed.

In addition, with our revenue and backlog all exceeding prior year period levels, we do not believe that we've experienced any material disruptions to our business to date.

Though not immune from the impact of DoD budgetary constraints, we remain well positioned in an uncertain environment.

We have become more efficient and will continue to adapt our business accordingly.

Let's turn to our Plastics business.

Third quarter revenue totaled $139 million, which is a decrease of 2% from the prior year.

Plastics revenue reflects a 5% decrease in volume, a portion of which was attributable to our European operations exiting certain low-margin products.

The volume impact was partially offset by a favorable product mix and the pass through of higher resin cost and customer selling prices, which contributed 2% and 1%, respectively.

Plastics EBITDA increased 20% to $12.2 million, from $10.1 million in the prior year quarter, with year-over-year margins expanding 160 basis points.

As you know, Plastics' top priority for the past year has been to improve profitability and operational performance.

We believe we are well on our way, with results primarily being driven by continued efficiency improvements made on past capital initiatives, notably in Germany and Brazil.

We have made tremendous progress and customer demand remains robust.

Our expanded capacity has made us a stronger global competitor and is enabling us to service and sustain our industry leadership position.

I'm very pleased by the performance of Plastics over the last year and expect continued improvement in the years ahead.

Let's turn to our Home and Building Products businesses.

Third quarter revenue totaled $241 million, increasing 1.4% from the prior year quarter.

Ames' revenue decreased 2% as unusual cold and wet weather contributed to lower lawn and garden sales.

Door revenue increased 5% on a combination of higher volume and a favorable mix.

Third quarter segment-adjusted EBITDA was $21.5 million, a decrease of 17% compared to the prior year quarter.

The decline resulted from lower Ames' revenue, which also affected absorption of manufacturing expenses, partially offset by a benefit of higher volume and a favorable mix at Clopay Building Products.

Ames also incurred some manufacturing inefficiencies in connection with its plant consolidation initiative, which are expected to continue until this project is complete in 2014.

Recently, Ames successfully concluded several customer line reviews, which provide opportunities to increase volumes.

These successes highlight Ames' ability to serve the marketplace with a diverse, high-quality complement of products at excellent service levels, and we think this company is very well positioned for the years ahead.

Our Doors business continued to perform well.

We're pleased with its performance and the progress made over the past several quarters, and we continue to look forward to a better environment to leverage the leadership position in this business.

Recent data continues to support that we're in the early stages of a multi-year housing recovery, with new residential construction levels in the United States steadily improving.

This bodes quite well for our Doors business.

As housing recovers, relatively small increments of additional revenue will carry significant improvements and profitability for home and building products.

On the corporate side, we're continuing to execute on our strategy of improving the operations in each of our segments.

Our businesses are well positioned, and we continue to have excellent liquidity.

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

We're confident that we can make investments for organic growth, pursue additional acquisitions and return value to our shareholders via quarterly dividend and continued share repurchases.

Earlier today, the Board declared a regular quarterly cash dividend of $0.025 per share, payable on September 25, 2013, to shareholders of record as of the close on August 27, 2013.

During the quarter, we repurchased 300,000 shares of stock for $3 million under our buyback program.

And at June 30, there was $17.7 million remaining under our current $50 million buyback authorization.

Doug is now going to take you through the quarter in more detail, and then I'll come back for closing remarks and we'll open it up to your questions.

Thank you, Ron.

Consolidated revenue was $510 million in the quarter, which was an increase of 6% compared to the prior year quarter.

Net growth was driven by Telephonics revenue, which increased 29% to $130 million.

The Telephonics current and prior year quarters included $20 million and $2.7 million of revenue related to electronic warfare programs where we serve as a contract manufacturer.

Excluding revenue from these programs, Telephonics current quarter revenue increased a strong 12% from the prior year quarter.

And on the same basis, the core revenue has increased 6% for the nine months ended June 30.

Telephonics segment-adjusted EBITDA decreased to $13.1 million from the year ago quarter, and the margin was 10% in the quarter compared to 15.7% in the prior year quarter, with product mix being the key element influencing profitability.

The prior year quarter also significantly benefited from higher gross profit and favorable manufacturing efficiencies, both of which were primarily due to an increased level of multi-mode radar deliveries, thus making the comparison with the current quarter that much more difficult.

Plastics third quarter revenue totaled $139 million, decreasing 2% compared to the prior year quarter, but EBITDA increased 20% to $12.2 million.

Our focus on driving profitable business, coupled with the ongoing initiatives to improve operating efficiency in Europe and Brazil, resulted in segment- adjusted EBITDA margin of 8.7%, compared to 7.1% in the prior year quarter.

We've also begun to see the benefits of the Plastics European restructuring initiative, which we announced in February of this year.

These actions resulted in restructuring charges of $5 million in our second quarter for one-time termination benefits and other personnel costs, and that program is essentially done.

The impact of currency on the quarter was not significant, nor was the impact of resin.

We had about a $500,000 benefit to EBITDA from resin in the quarter.

Year-to-date, Plastics profitability has been unfavorably impacted by $4.7 million of resin cost in comparison to 2012 year-to-date results.

Home and Building Products revenue was $241 million, increasing 1.4% compared to the prior quarter.

As Ron mentioned, Ames' revenue decreased 2% to $128 million, mainly due to poor weather conditions, which impacted lawn and garden tool sales.

Door revenue increased 5%, benefiting from a combination of higher volume and favorable profit mix.

Home and Building Products third quarter segment-adjusted EBITDA was $21.5 million, decreasing 17% compared to the prior year quarter, and the Home and Building margin was 9%, compared to 11% in the prior year quarter.

That decline mainly resulted from the lower Ames' revenue, which affected absorption of manufacturing expenses, partially offset by the benefit of the volume and mix improvement at Clopay Doors.

Ames also realized some manufacturing inefficiencies in connection with its plant consolidation initiative.

Those inefficiencies are expected to continue until the initiative is complete in 2014.

Our Ames consolidation plans remain on schedule and on budget.

We expect to complete this initiative by the end of fiscal 2014 and continue to estimate resultant annual cash savings exceeding $10 million, based on current operating levels on completion.

Consolidated gross profit in the third quarter was $108 million, a margin of 21.2% compared to 24% in the prior year quarter.

Consolidated selling, general and administrative expenses were $86 million in the quarter, slightly higher than last year in dollar terms, but representing approximately 16.9% as a percent of sales compared to 18.2% in last year's quarter.

The variance in the quarter was due to several cost control initiatives as well as adjustments to incentive accruals.

Third quarter net income totaled $3.6 million, or $0.06 per share, compared to net income of $9 million, or $0.16 per share, in the prior-year quarter.

Our current quarter results included restructuring costs net of tax of $500,000, or $0.01 per share, in Home and Building Products, mainly related to the Ames plant consolidation initiative.

Telephonics recognized restructuring costs also about $500,000, or $0.01 per share, relating to facility lease termination payments.

The facility was vacated in connection with the headcount reductions and other changes in organizational structures that Telephonics undertook in the last two years.

And we also had a discrete tax benefit of $1.5 million, or $0.03 per share, resulting from release of previously established reserves for uncertain tax positions on conclusion of tax audits in those taxing jurisdictions.

Current quarter-adjusted net income was $3.1 million, or $0.06 per share, and that compared to $7.4 million, or $0.13 per share, in the prior-year quarter.

As I mentioned in my opening comments, the reconciliation of GAAP results and EPS to adjusted results is included in our press release.

Our third quarter effective tax rate was 54%, compared to a tax rate of 39.7% in the prior-year quarter, and our current year 9-month effective tax rate, based on adjusted net income, was 51.5%, compared to 50.3% in the prior-year period.

In both years, the effective rates reflect the impact of permit differences that are not deductible in determining taxable income, mainly limited deductibility of restricted stock, certain tax reserves and changes in earnings mix between domestic and nondomestic operations, all of which are material relative to the level of our pretax result.

For the full fiscal year 2013, I now expect that our effective tax rate, normalized to exclude any discrete tax items, as well as other nonrecurring items, such as restructuring costs, to approximate 50%, up slightly from previous guidance, with the increase primarily attributable to our geographic mix of earnings.

Capital spending in the current quarter was just under $15 million, compared to $17.5 million in the prior-year quarter, and year-to-date, we've spent just about $46 million, compared to $58 million in the prior-year period.

At this time, we continue to expect cap spending of $60 million to $65 million for the full-year fiscal 2013, which is just slightly above expected depreciation for the fiscal year of $64 million.

These expectations contemplate the capital to be incurred in connection with the Ames plant consolidation initiative.

Depreciation was $15.8 million in the quarter and amortization about $2 million.

Full-year 2013 amortization expense is expected to be about $8 million, in line with the prior year.

And as I just said, depreciation is about $64 million.

At June 30, 2013, we had $126 million in cash and total debt outstanding net of discount of $692 million, resulting in a net debt position of $566 million.

As in past years, our cash balance will build between now and the end of the fiscal year as seasonal working capital transitions to cash.

We have no borrowings outstanding under our credit facility, and there are approximately $25 million of standby letters of credit outstanding that account for the utilized portion of that facility.

With respect to guidance, our expectations for fiscal 2013 are consistent with those discussed on previous calls.

We expect consolidated revenue to be between $1.9 billion and $2 billion.

We expect Home and Building Products revenue to increase in the low single digits, Telephonics core business to achieve mid-single-digit rate of growth, and Plastics to grow, on a reported dollar basis, in the low single digits.

In providing this guidance, we're mindful of the risks that can affect those results and which bear mentioning here.

As we've seen in the past and continue to see, Ames business is the most subject to the vagaries of weather, which can dramatically impact point of sale at many of our customers and directly impacts our revenue.

We continue to expect a gradual recovery in housing, including repair and renovation of existing housing stock, which will benefit our Home and Building Products segment, both Doors and Tools.

While Telephonics backlog is strong, we continue to be mindful of the risks that Department of Defense budgetary constraints pose for us.

And finally, Plastics guidance, as is always the case, is susceptible to variation due to a combination of resin pricing and foreign currency translation.

We're also mindful that more than half of our Plastics business is in Europe and Brazil, where macroeconomic conditions remain uncertain.

Based on the revenue expectations outlined, we continue to expect our segment-adjusted EBITDA to approximate $180 million, representing a 5% increase over the level achieved in 2012.

Corporate and unallocated expenses are expected to be in the range of $29 million to $30 million, and corporate includes all equity compensation for the Company which will be between $12 million and $13 million for the year.

With that, I'll turn the call back over to Ron.

Thank you.

The results reflect the disciplined focus on profitable growth and the restructuring initiatives at Ames, our Plastics company and Clopay Doors.

Our companies are extremely well positioned for enhanced operating performance as the global economy continues its recovery.

We continue to work to drive incremental shareholder value through organic growth and through strategic acquisitions.

We believe that over the long term, our businesses have room to grow and they're going to continue to outperform.

We have ample resources to invest in these businesses and are optimistic about their prospects.

As we look out over the next few years, we believe that from our solid foundation, we can sustain revenue growth, expand our EBITDA margins and significantly increase our earnings per share.

I'm pleased with our performance to date and believe our future to be bright.

With that, Operator, why don't we open it up for questions?

Certainly.

Thank you.

(Operator Instructions) Robert Labick, CJS Securities.

I wanted to start with Ames.

You obviously mentioned, and we've all felt it ourselves, the weather impact in the quarter.

Can some of those sales be made up for in the current quarter, or are those going to impact inventories on a go-forward basis?

How does that impact the inventory level out there, and do you make that up or is that gone?

I think -- Bob, it's Ron.

The selling days that we have for spring are diminishing, and this is not something we expect that you can make up.

The inventory levels, we think we're well positioned going into next year for both fall and for winter as a result of some of the odd weather that we experienced in the prior two years, but clearly it's going to have an impact on the business.

We fully think that over time, we'll get to some normal predictability and weather patterns, but we like the way the business is set up for the long term.

Okay, great.

And on the plant consolidation in Ames, just sticking there for a minute, has there been any impact on orders to customers, or is that just a lot of extra work for you guys and a little cost for you, but the customers can't see anything going on there?

It's more along the lines of a lot of extra work and some incremental expense for us as we transition, because we are consolidating manufacturing equipment and so forth from one plant to the other.

So you build a little inventory, you end up with some periods of time where you have under-absorbed overhead while you transition, those types of inefficiencies, not dissimilar to what we saw when we executed the mega plan for Doors a couple of years ago.

And as we said, facing the reality of the situation, we expect those inefficiencies to continue until the plant consolidation is done towards the latter part of fiscal 2014.

Okay, great.

And then jumping over to films, you mentioned the European restructuring basically behind you now, and it's certainly shown in an improvement in margins.

What are the next steps to keep margins marching towards your goal of 10%-plus?

Well, Bob, we have to continue to work on the efficiencies in Germany and Brazil.

As we've said, we've made substantial progress, but I think we know that Plastics Management knows that there's further opportunity.

It's kind of like peeling the onion -- you see additional opportunities as you address certain things.

That's an element of it, and then, again, focusing on R&D development and new technologies that we can roll out with our valued customers.

Yes, I'd just add to it that macroeconomic environment in Europe -- any improvement there, we should see some benefit of.

North America continues to be strong.

We clearly improved the Brazil part of the operation.

We think quarter-over-quarter, year-over-year, it's going to be continual improvement in the business, but its problems are behind it and we think the management, led by Alan Koblin, has done a spectacular job of righting that business.

Okay, great.

Last one, on Telephonics, and I'll jump back in queue.

Obviously, over the last several quarters, absent one-time things, you've had significant improvement in margin, and part of what that was, you've said in the past, to be able to bid on more projects out there.

What's the bidding environment like out there now?

Are you able to put out more bids?

How does it look out there?

I know the sequestration overhang is certainly, as you addressed earlier, still an overhang.

Look, the core of the business is quite stable, and we're an important part of a lot of very long-life programs.

There's always things in the development hopper.

The core of the business and the backlog continues to improve.

Sequestration and the cloud of uncertainty that's there is out of our control.

We've tried to manage this business on the expectation that there's going to be budgetary pressure.

We've taken our cost structure down, and we continue to compete for new projects, both domestically and, increasingly, internationally.

We've talked about the Mahindra joint venture.

We expect that to kick in sometime in 2014, but these are things that we're doing for the long-term positioning.

And short term, we think the business is well positioned for whatever the budgetary environment is going to be.

But this is a core set of products in intelligence, surveillance and reconnaissance and radar-based maritime systems that are important to our customers and are well-documented in their performance characteristics.

So whether it ultimately translates into mobile security or into other forms of radar systems, we're going to continue to try to grow and diversify the business.

What shouldn't be lost on you is, over a five-year period, the top line of this business has grown better than 20% and the EBITDA line has grown better than 50%.

We really like the business.

We really think it's incredibly well run by Joe Battaglia and his team, and we're going to continue to invest and try to grow it in the years ahead regardless of what the budgetary environment is.

Great.

Thank you very much.

(Operator Instructions) And at this time, we have no further questions in the queue.

I'll turn things back over to Ron for any additional or closing remarks.

Well, thank you.

We're going to continue to grow and build Griffon, and we look forward to speaking to you in November.

Thank you, everybody.

Once again, this does conclude today's conference call.

Thank you all for your participation.

You may now disconnect.