Griffon Corp (GFF) 2014 Q2 法說會逐字稿

Good day and welcome to the Griffon Corporation second-quarter fiscal 2014 results conference call. Today's conference is being recorded.

At this time I would like to turn the call over to Doug Wetmore, the Company's Chief Financial Officer.

Thank you, Melanie. Good afternoon, everyone. With me on the call is Ron Kramer, our Chief Executive Officer.

Before we get into the call, there are certain matters I want to bring to your attention. First, our call is being recorded and playback will be available, the details of which are in our press release issued earlier today and are also available on our website.

Second, during the call we may make certain forward-looking statements about the Company's performance. Such 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 those actual results to differ from those discussed, you should refer to the cautionary statements contained in today's press release as well as the risk factors discussed 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 the reporting periods and these items are laid out in the non-GAAP reconciliations which are included in our press release.

With that, I will turn the call over to Ron.

Good afternoon. Thanks for joining us on the call today. I am very pleased with our performance this quarter. We had very good results, reflecting the continued improvement of our operations.

Specifically Home and Building Products increased through a combination of core business growth and acquisition. Plastics had excellent results benefiting from the initiatives and actions implemented to improve its operating efficiencies over the last few years. Telephonics performed very well despite facing a difficult comparison to last year's second quarter and a challenging Department of Defense budgetary environment.

Revenue of $508 million increased 4% over the prior-year quarter. This is the highest revenue Griffon has ever reported in second fiscal quarter.

Segment adjusted EBITDA of $46 million was ahead of last year. Our adjusted income was $0.12 per share compared to $0.08 per share in the prior-year quarter. I will comment on each of the operating segments and then Doug will take you through the financials in more detail.

Starting with Home and Building Products, revenues totaled $252 million, increasing 11% over the prior year, led by strong sales of snow shovels and tools at Ames and inclusion of Northcote, the acquisition we made in Australia which closed December 31 of 2013. Segment adjusted EBITDA was $17.1 million, down slightly compared to the prior-year quarter, notwithstanding the sales growth, as we continue to refine our manufacturing efficiency at Ames and the impact of some weather in the doors business.

We continue to believe that we are in the early stages of a multi-year housing recovery with new residential construction and repair and remodel levels in the United States improving. Over time this bodes well for both the doors and tools businesses as housing continues to recover. Relatively small incremental additional revenue will carry significant improvements in profitability for the Home and Building Products segment.

Telephonics' revenue was $104 million, which was down 14% from the prior-year quarter but as expected. The 2013 quarter included $13.2 million of ICREW electronic warfare program revenue, where Telephonics served as a contract manufacturer. There was no such revenue in the current year quarter.

Excluding the ICREW revenue from last year's second quarter, core revenue declined 4%, primarily due to lower mobile surveillance system sales. EBITDA of $12.5 million decreased compared to $15.5 million in the prior-year quarter. As expected, EBITDA margin was 12% compared to 12.7% in the prior year.

With all the uncertainties regarding the federal defense budget, it remains unclear as to what ultimately happens to defense spending in the next few years, so not immune from the impact of budgetary constraints. Our core programs remain well-positioned in an uncertain environment.

Our experience suggests that demand and funding for these programs in intelligence, surveillance, and reconnaissance remain reasonably well-funded relative to other areas of the defense business. We expect continued growth in airborne ISR equipment and should see the benefit from both the continued upgrade and recapitalization of the existing platforms, as well as growth from selected new platforms including the Fire Scout program.

Our funded backlog remains strong, ending the quarter at $486 million compared to $444 million at September 30, 2013. With this funded backlog we have excellent visibility for the upcoming year. Telephonics is well-positioned to succeed in the coming years and enhance its industry leadership position.

Our Plastics business, Clopay, had revenues totaling $152 million, which is an increase of 7% from the prior-year quarter, mainly driven by favorable product mix. EBITDA increased 31% to $16.2 million from $12.4 million in the prior-year quarter. The last time EBITDA was at this level was in 2005, so you can understand how pleased we are with the progress that we've made.

The EBITDA margin was 10.7% compared to 8.7% in the second quarter of 2013. At Plastics we are well on our way to returning to the historic margins in excess of 10% on an annualized basis and, as we have always stated, our goal is to continue to improve the margin beyond this historical standard.

We've made tremendous progress improving our operations and servicing our clients. Our expanded capacity has made us a stronger global competitor and is enabling us to service and sustain our industry leadership position. Very pleased with the performance of Plastics over the past few years. Alan Koblin and his team have done an outstanding job.

On corporate, in February we issued $600 million of senior notes due 2022 and used the proceeds to redeem $550 million of 7 1/8% notes that were due in 2018. Our new notes bear interest at 5 1/4%, so we expect to save approximately $8 million a year of interest expense and view this as a timely refinancing.

We amended our $225 million revolving credit facility, extending its maturity from March 28, 2018, to March 28, 2019. And earlier today the Board declared a regular quarterly cash dividend of $0.03 per share payable on June 26 to shareholders of record as of the close on May 23.

Lastly, the Board also approved a $50 million share repurchase program. At March 31, 2014, $4.5 million remains of the existing share repurchase authorization. Since the resumption of share repurchases in 2011, Griffin has repurchased $107 million of its common stock inclusive of December 2013 $50 million repurchase from an affiliate of Goldman Sachs.

I will let Doug take you through the quarter in a little more detail. Then I will come back for closing remarks and we will open it up to your questions.

Thank you, Ron. Consolidated revenue totaled $508 million in the quarter, representing an increase of 4%, or $19 million, in comparison to the prior-year quarter. Home and Building Products led our growth, with revenue increasing 11% over the prior-year quarter.

Ames revenue increased 18% due to a combination of improved snow, tool, and planter sales and the inclusion of the results of Northcote effective December 31, 2013. Door revenue increased 1%, with favorable product mix offsetting weak volume and that weak volume was influenced by the harsh winter that we experienced in many of the markets that we serve.

Segment adjusted EBITDA was $17.1 million, down from $17.6 million in the prior-year quarter. Driven by the volume increase in the quarter, Ames incurred higher distribution and selling costs and Ames also continued with manufacturing inefficiencies being encountered in connection with its plant consolidation initiative. These inefficiencies are expected to continue until the end of calendar 2014, when that initiative is complete.

The effect of the decline in door volume impacted absorption in our door plant, further impacting EBITDA. However, that was partially offset by the benefit of the favorable mix. The impact of Northcote in the quarter was not significant to segment EBITDA.

The Ames manufacturing consolidation remains on schedule and on budget. We continue to expect the annual cash savings exceeding $10 million based on current operating levels on completion of this consolidation initiative at the end of calendar 2014, as I mentioned.

Telephonics revenue of $104 million declined $17 million, or 14%, from the prior-year quarter. The decrease compared to last year's quarter was mainly due to the prior year including shipments of ICREW electronic warfare, totaling $13.2 million. Core Telephonics revenue decreased 4% in the current quarter with the decline primarily due to lower mobile surveillance system sales partially offset by higher identification, friend or foe system sales.

Telephonics' segment adjusted EBITDA decreased to $12.5 million from $15.5 million in the year-ago quarter. The prior-year quarter profit benefited from the electronic warfare revenue as well as a combination of favorable program mix and manufacturing efficiencies, which we cautioned at the time would not be repeated.

Telephonics' EBITDA margin was 12% in the quarter compared to 12.7% in the prior-year quarter. The current quarter margin is in line with previous long-term guidance for the business and with our expectation.

Plastic revenue totaled $152 million, increasing 7% compared to the prior-year quarter. The increase reflects the benefit of favorable mix, the pass-through of higher resin costs, and customer selling prices partially offset by some negative effect from foreign exchange translation.

Volumes were slightly higher than the prior-year quarter, overcoming the loss of volume forgone as plastics exited certain low-margin products in the second half of 2013. With the close of this quarter we have anniversaried the impact of exiting that lower margin business.

Plastic segment EBITDA was $16.2 million, increasing 31% from the prior-year quarter with that improvement driven by favorable product mix, continued efficiency improvements, and the positive impact of restructuring initiatives undertaken during the past year. Resin has no material impact on EBITDA in the quarter. Plastic EBITDA margin increased 200 basis points to 10.7% of sales, compared to 8.7% of sales in the prior-year quarter.

From a consolidated income perspective, our consolidated gross profit was $110 million with a margin of 21.7%, in line with the prior-year quarter. Consolidated SG&A expenses were $90 million, or approximately 17.7% of sales, again in line with last year's quarter.

The net loss that we reported was $25.8 million, or $0.53 per share, compared to a loss of $800,000, or $0.02 per share, in the prior-year quarter. The current quarter results included a charge related to debt extinguishment of $39 million, $25 million after tax or $0.51 per share; restructuring costs of $700,000, $400,000 after tax or $0.01 per share; and the benefit of debt extinguishment on our full-year effective tax rate was a positive of $5.8 million or $0.12 per share; and discrete tax expenses of $600,000 or $0.01 per share.

The prior-year quarter included restructuring of $9.3 million, $5.8 million after tax or $0.10 per share, and that was mainly related to the Plastics restructuring, the benefits of which I just mentioned a moment ago, and the Ames plant consolidation initiative. And the prior-year quarter also included discrete tax benefits of $300,000 or $0.01 per share.

Excluding these items, current quarter adjusted income from continuing operations was $6 million, or $0.12 per share, compared to $4.7 million, or $0.08 per share, in the prior-year quarter. As I mentioned earlier, the reconciliation of GAAP results to the adjusted results is included in our press release.

The effective tax benefit rates for the current and prior-year quarters were 16.1% and 65.7%, respectively. The current quarter includes $600,000 of provisions for discrete items resulting primarily from the inclusion of tax audits -- conclusion of tax audits in certain jurisdictions and the impact of tax law changes enacted in the current quarter.

The prior-year quarter included $300,000 of benefits from discrete items, primarily the retroactive extension of the federal research and development credit that was signed into law January 2, 2013. Excluding discrete items, the effective tax benefit for the current and prior year were 18% and 52.7%, respectively.

As we have mentioned in the past, rates in both years reflect the impact of permanent differences, not deductible, in determining taxable income. Mainly limited deductibility of restricted stock, tax reserves, and changes in earnings mix between domestic and non-domestic operations -- all of which are material relative to the overall level of pretax result.

As a result of the loss from debt extinguishment, the Company anticipates it will now incur a pretax loss for the full year 2014 and recognize a corresponding tax benefit at an effective rate approximating 13%. Prior to refinancing the debt and the loss on debt extinguishment, the Company anticipated its full-year 2014 effective tax rate to approximate 40%, as I have mentioned on the prior-quarter call.

Excluding discrete items and the impact of the debt refinancing on our full-year results, we continue to anticipate that the effective tax rate for the full year 2014 will be in the range of 38% to 40%. So the impact of the debt refinancing is dramatic in terms of the -- on the tax rate.

In the current quarter the impact of debt extinguishment on the full-year effective tax rate was estimated to be a benefit of $5.8 million, or $0.12 per share, and that is detailed in our reconciliation of net income to adjusted net income. And as we always do, we will provide additional commentary on taxes and tax rate as the year unfolds.

Capital spending in the current quarter was just under $17 million and we continue to expect cap spending of about $70 million in fiscal 2014. Depreciation and amortization was about $16.4 million in the quarter and we expect depreciation for the full fiscal year to be about $64 million. Amortization will be in line with 2013, about $8 million.

At March 31, 2014, we had $70 million in cash, total debt outstanding net of discount of $787 million, resulting in a net debt position of $717 million. We have about $185 million available for borrowings under our revolving credit facility.

Now with respect to our full-year 2014 guidance, we expect consolidated revenue to approximate $2 billion. We now expect home and building products to grow in the mid single digits, reflecting the benefit of the strong snow season and the acquisition of Northcote. Plastics is also now expected to grow in the mid single digits and Telephonics core business, excluding the electronic warfare items from the prior year, will grow in the low single digits.

In providing this guidance, we are mindful of the various risks that may affect those results, which include Ames' business being the most subject to the weather, which can dramatically affect point-of-sale at our many customers and directly impact our revenue. Snow this winter was great, but we continue to need a good spring lawn and garden season, as that represents the largest portion of Ames' overall portfolio of business.

We continue to foresee a gradual recovery in housing, including repair and renovation of existing housing stock, which should benefit our Home and Building Products segment. And while Telephonics backlog is solid, we remain mindful of the risks that Department of Defense budgetary constraints pose for us and the time required to develop international opportunities in Telephonics business.

Finally, plastics guidance is always the most susceptible to variation due to a combination of resin pricing and foreign currency translation. We are also mindful, as we stated in the past, that more than half of our plastics business is in Europe and Latin America, where macroeconomic conditions remain somewhat uncertain.

Based on the revenue expectations outlined, we continue to expect our segment adjusted EBITDA to approximate $190 million, and that represents a 5% increase over the comparable 2013 number. Corporate and unallocated expenses are expected to be in the range of $31 million to $32 million and that includes all equity compensation for the Company, which will approximate $12 million for the year.

I will now turn the call back over to Ron for his closing comments.

Thanks, Doug. We are executing well on our strategy of improving the operations of each of our segments. This quarter highlights the meaningful progress we've made.

Our businesses are poised for continued growth and profitability. We have ample resources to invest in these businesses to support their growth and are optimistic about their prospects. We are committed to shareholder value creation and are 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.

As we look out over the next few years, we believe we can sustain revenue growth, expand our EBITDA margins, and significantly increase our earnings per share. I'm pleased with our performance this quarter and quite confident about our future.

Operator, we will take questions.

(Operator Instructions) Bob Labick, CJS Securities.

Good afternoon. Wanted to start with HBP. Ames had a very nice quarter, obviously very strong sales there. I was wondering if it was possible to estimate the disruption from the restructuring initiatives underway in terms of the margin there.

There was obviously a little margin pressure, but we have been expecting some from the restructuring. Is there any way to kind of pull that out or give us a sense of where this can get back to?

Bob, it's a good question. I'd prefer to not go into the specifics of it because there's always a reasonable amount of approximation in terms of estimating what that effect is of inefficiencies.

But, suffice to say, they were probably exacerbated by the strong demand on -- for snow-related products during the quarter, which kind of stressed the operations a little bit more than it might otherwise have done, while at the same point in time they are building up for the spring lawn and garden season. So I will kind of deflect that question if it's okay with you.

Fair enough. I think you mentioned you remain on track to complete the restructuring by year-end, calendar year-end, with $10 million in savings, which would I guess imply somewhere in the neighborhood of $7 million plus in 2015 if it all happens that once. So I guess first question is does it happen right away? Is there a slow ramp? Then also, will you be reinvesting that our will we see that flow through to the bottom line?

Bob, that should scale up pretty dramatically beginning with the start of calendar 2015. While we are always going to continue to reinvest in the business, I think the early on anticipation would be that would be generating $10 million of cash savings, as we've said. We have to look at reinvestment as and when appropriate, but right now we would expect a significant bump in EBITDA.

Okay, great. Then jumping to Telephonics, there's a nice pickup in backlog there. I was wondering if you could tell us a little bit about some of the new programs maybe or what that has picked up from, and then talk about the international opportunities there as well.

Look, Telephonics continues to build up in its core radar and surveillance equipment business. It's got a number of initiatives to try to grow internationally to make up for what we fully expect to be a slow-moving budgetary process.

Core business continues to be strong. There's all sorts of things going on relative to multiyear programs. We have had this business for a very long period of time. We've gone through cycles and we believe we're going to continue to grow top line and profitability of the business over time.

Okay, great. Then jumping to films, obviously a very impressive quarter. I can stop asking when you will get to 10%, a great job there.

Now that you have lapped the exiting of the low-margin business, what should we expect in terms of volume growth going forward there?

To a certain extent, at least for about 55% of the business, it does depend upon the macroeconomic circumstances for the business in Latin America and the business in Europe. And as I said in kind of the risk comments, those are hard to put your finger on, just to be imprecise.

But we feel as though we're going to continue -- we are competitive from a cost standpoint. We have continued to work on efficiencies and so forth, which drives further competitiveness. We think we can still drive further volume growth, but I think we would be very happy if we achieved low single-digit volume growth on a sustained basis.

And we still have room for improved profitability, particularly in Brazil and in Germany. Those are -- while we have accomplished a great deal and we are very pleased about the management team and their ability to execute, we still think we have more that we can accomplish and increase profitability.

Bob, by the way, that's without making a substantial further capital investment because obviously if we installed a lot more capital we could grow the top line.

The goal is to continue to run the business for free cash flow and to improve the return on invested capital.

Okay, that sounds great. Thanks very much.

Justin Bergner, Gabelli & Company.

Good afternoon. I guess my question relates to the share repurchases during the quarter. It seems like the shares were repurchased earlier in the quarter when the stock was at a higher price, about $12.50 per share.

I'm wondering, if the performance of the quarter in your eyes was good, why wouldn't you continue purchasing stock later in the quarter when the share price was lower?

Look, there are windows that we can be in the market and there are windows when we can't be in the market.

Okay. I assume the window of which you could have been in the market lasted through March 31?

We have been a continued purchaser of our stock -- go back and look at from 2011 on -- and we continue to believe our stock is a compelling value. When we can, we will be in the market buying stock.

Okay. I guess secondly, I was wondering if you might be able to quantify the headwind to Ames in the quarter from the higher distribution in selling costs.

I think those are pretty much moving in line with the increase in the sales. Remember they increased 18%. A lot of that is distribution costs so freight and associated costs involved with that, so that drove a higher expense number there.

I wouldn't characterize that so much as a headwind; it's just a natural part of the business. The headwind we really had, as I mentioned to the previous question, was the manufacturing inefficiencies that we had and that challenged the business. And our people, quite frankly, at Ames did a great job of satisfying the customer demand during a very difficult winter season.

So that was the primary driver, the challenge -- headwind, to use your term -- from a profitability standpoint.

Okay. So I should think about the I guess non-increase in profitability as relating more to sort of the continuing effort to take out manufacturing inefficiencies rather than to challenges in dealing with the step up in volume?

That's very fair. Then as I mentioned in my comments, the weaker volume at doors -- because the doors business is a business that very much benefits from an (technical difficulty) standpoint by throughput. And volume was down there, so the door volume did impact absorption in our doors business.

Okay. One more question, if I may. In Plastics, I guess thinking about the EBITDA margin, were there any sort of one-time benefits to the performance this quarter or is that a level of margin that you are hopeful you can sustain sort of against the low single-digit volume growth looking out this year and next?

There was no one-time item. Mix was favorable and we believe that this margin -- we have said that we would get to a 10% EBITDA margin and that we would continue to work to expand it beyond that. We are at that level and we are going to continue to try to make this business as profitable as we can.

Okay. Thank you, Ron. Thank you, Doug.

Philip Volpicelli, Deutsche Bank.

Thank you very much. Two questions for you. One, what is the timing on the new $50 million share repurchase; is it over a year, two years? Then second, I have to ask; on acquisitions are there any imminent acquisitions and has the philosophy changed at all?

The authorization doesn't have a time limit on it so it's immediate. We have, as I've said, over a period of 2011 through this increase we have repurchased $107 million worth of our stock. And when we think the market is not paying attention, we are and we will continue to put our money where our mouth is.

As far as acquisitions, we always have something in the pipeline and we continue to believe that tuck-in acquisitions around the businesses that we already own are the primary drivers of near-term growth.

Can I ask, Ron, is there anything that you think is imminent that might close within the next quarter?

I will tell you we always have something that we are hoping is going to get to the finish line.

Okay, great. Thank you, good luck.

(Operator Instructions) [Russell Collins], NWQ.

Really impressive numbers on plastics, congratulations. It looks like you guys are really turning that around.

I noticed as I was looking at the -- on the building products side if you look at the sequential change from December through March, Ames up around 50% and Clopay down around I think 25%, 30%. So I'm just trying to understand a little bit the operating leverage on both ends.

Can you give us a little bit more sense of what is currently sort of the negative leverage on the Clopay side and maybe the positive leverage on the Ames, if we are getting some of that? I understand year over year we see the numbers, but I guess the sequential numbers really look so dramatically different on the sales side as well.

And clearly -- (multiple speakers)

Part of it is seasonality, but, Doug, why don't you --?

If you touch on doors, first of all, in the first quarter we did -- we had -- we were up year over year from a volume standpoint. And as I mentioned earlier that the door plant is very much a beneficiary of volume throughput, because the finished costs are essentially fixed but any additional throughput benefits us.

The current quarter the impact of volume being slightly down was partially offset by a somewhat favorable shift in product mix, but it did not completely offset. Remember, this quarter is typically and historically the smallest of the quarters for doors because of the inclement weather. If you look back, the comparison last year and the year before we benefited because of very moderate weather and doors had very strong performance in both of the first calendar quarters of 2012 and 2013.

So it's a bit of a difficult comparison because the impact of weather on doors is pretty pronounced. All kidding aside, we got the benefit of snow on the industry tempered business but it did have a negative effect on the doors business.

We have every reason to see the spring selling season starting off well for both businesses. Obviously, the weather impact is going to have a big impact for Ames for its lawn and garden business. Door business, go back over the last year we have consistently said that there is a slow, steady recovery in the housing markets and we continue to believe that that's the case.

I think you saw some crazy weather pattern in the first quarter that not only affected us, but slowed down the entire economy. We continue to believe our doors business is moving at the pace of recovery that we saw prior to last quarter.

So you would expect second -- I know the June quarter to see a benefit from weather -- the weather essentially delaying some activity into the June quarter?

That is our expectation, yes.

Okay, thank you.

That will conclude our question-and-answer session. I would like to turn the conference back to Ron Kramer for any additional or closing remarks.

Thank you all for joining us. Very happy about where our companies are positioned and we look forward to continuing to report on our process -- progress over the next quarter. Thank you.

This does conclude today's conference call. We thank you for your participation.