Griffon Corp (GFF) 2015 Q1 法說會逐字稿

Good day, everyone, and welcome to the Griffon Corporation's first-quarter 2015 earnings conference call. As a reminder, today's conference is being recorded and, at this time, I would like to turn the call over to Doug Wetmore, Chief Financial Officer. Please go ahead, Sir.

Thank you, Aaron. Good afternoon, everybody. With me on the call is Ron Kramer, our Chief Executive Officer. Before we get into the details of the call, I want to bring your attention that once again, as Aaron mentioned, our call is being recorded and will be available for playback. The details of that playback are available in our press release issued earlier today and are also available on our website.

Secondly, during our 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 in our forward-looking statements, please refer to the cautionary statements contained in today's press release as well as the risk factors that we discussed in our various filings with the Securities and Exchange Commission.

Finally, some of today's prepared remarks adjust for items that affect comparability between reporting periods. All of 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. Thanks for joining us today. The first quarter was an excellent start to our year. Each of our businesses performed well particularly Home and Building Products. We continue to see a steady improvement in the US housing market. We also benefited from the Cyclone and Northcote acquisitions in Australia, the efficiency initiatives we've implemented in our companies over the past few years are driving significant earnings growth.

Our consolidated revenue increased 11% to [$502] million, propelled by a yearly 25% increase in Home and Building Products. Our Plastics revenue increased 1% and as expected, Telephonics revenue declined by 6%. Our segment adjusted EBITDA of $49.1 million increased 11% over the prior year [with] no excluding foreign currency impact, adjusted EBITDA increased 15% year-over-year.

Adjusted earnings per share of $0.16 increased over 120% versus the prior year adjusted results of $0.07 and, on a GAAP basis, earnings-per-share (technical difficulty) versus $0.06 in the prior year. Over the past few years we've relentlessly worked to revitalize businesses in order to maximize their earnings power.

To date, we have already seen a significant improvement in both Telephonics and Plastics and we estimate an additional annual cost savings of $10 million in Home and Building Products from prior operating levels beginning next quarter. In addition to our restructuring process, we have executed several corporate level programs designed to improve our financial performance and to award our shareholders.

These initiatives have included a refinancing of our Company debt to reduce our overall interest expense, increasing our dividend, and continue our shareholder repurchase program.

In the first quarter we repurchased just over 1 million shares of common stock under our plan for a total of $12.3 million. Since August of 2011, we have repurchased nearly 12.5 million shares of common stock for a total of [$130.5] (technical difficulty) million.

In addition earlier this morning the Board authorized a quarterly dividend of $0.04 per share. We remain committed to building shareholder value and expect our operational initiatives to continue (inaudible) our performance. Before turning it over to Doug to walk you through the numbers in more detail let me comment on each of the operating segments.

Beginning with Home and Building Products we continue to grow through a combination of both core growth and acquisitions. Our Ames business now includes Northcote, acquired in December of 2013, and the Cyclone Garden and Tools business which we acquired in May of 2014.

On the topline this segment continues to perform exceptionally well. As we have said previously we continue to believe we are in the early stages of a multiyear confident recovery with new residential construction and repair and remodeling activity improving. This bodes particularly well for both the doors and tools businesses.

As housing continues its recovery, relatively small incremental amounts of additional revenue will carry significant improvement and profitability for their (technical difficulty) accelerated efficiency programs that we have put in place, this leveraged benefit of higher sales with was demonstrated during the first quarter which delivered a segment level EBITDA increase of 28% over the prior year to $24.5 million, despite the negative impact from foreign-currency.

Let's move to Telephonics, our US defense business which is impacted by budget and continues to create quarter to quarter of volatility in volume, although we are quite pleased in our order backlog. Backlog ended the quarter at $496 million, up slightly (technical difficulty) and marking a new record high. In the first quarter revenue of $91 million was down from the prior year which mostly reflected the timing of work on multimode radar. Segment EBITDA of $10 million (technical difficulty) mainly as a result of lower revenue and products mixed in the quarter.

Moving to Plastics, we are pleased to see a continuation of our improved volumes despite weaker macro conditions and lower volume in both Europe and Brazil. Revenue was slightly positive against the prior year which reflected a 3% increase in total volume and a 2% increase in resin costs and customer selling prices, almost entirely offset by foreign currency translation impact.

EBITDA of $14.6 million increased 14% against the prior year which was a result of increased volume, favorable mix, and continued efficiency improvements. The benefits of defining resin contributed 15% for the quarter as a result. We've made tremendous progress improving these operations and servicing our customers. We expect these trends to continue.

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

Again consolidated revenue, a total of $502 million in the quarter, an increase of 10.7% [or] $48.7 million in comparison to the prior year quarter and Home and Building Products led that surge in revenue. HBP had revenue of $272 million, increasing 24% compared to the prior year quarter.

Aims revenue increased 38% to [$133] million mainly due to the inclusion of the Cyclone and Northcote acquisitions, which were completed in the prior 12 months, coupled with stronger sales of snow tools in the United States and Canada as well as some increase in pots and planter sales.

This increase in revenue was partially offset by a 3% unfavorable impact from foreign currency trends. [Doors] also had a strong quarter as revenue of $139 million increased 14% against the prior year. Revenue was primarily driven by a 9% increase in volume coupled with continued improvement in product mix. This performance was partially offset by the 1% unfavorable impact from foreign currency translation.

Adjusted EBITDA was $24.5 million, increasing 28% compared to the prior year quarter. The increase was comprised of 22% improvement attributable to the contribution from Northcote and Cyclone acquisitions and (technical difficulty) [20%] enabled by the improved volume in doors. These growth factors were partially offset 6% on favorable currency translation impact on EBITDA.

For the balance of the year in Home and Building Products there will be several factors impacting our growth rates and margins. First at the start of the calendar year 2015 we've owned Northcote for a full 12 months and will wrap the acquisition of Cyclone in May 2015. This will reduce our year-over-year growth rates relative to what we've achieved in the first-quarter levels.

With respect to our EBITDA margins, Home and Building Products efficiency initiatives were essentially complete by January 1 of this year as we had previously anticipated. And we continue to expect a total of $10 million in annual savings as a result of these initiatives at Ames. This benefit was not reflected in our first-quarter results but will positively impact our results for the balance of the year.

Now the Telephonics revenue of $90.7 million was below prior year levels of is $96 million. Ron mentioned that was primarily the result of timing of work performed on multimode radar systems. Telephonics segment-adjusted EBITDA is decreased to some of $10 million from the year ago quarter mainly as a result of the revenue declined. EBITDA margin was 11.1% compared to 12.9% in the prior year quarter, mainly driven by product mix and lower overall volume which impacted absorption to a certain extent.

Orders in this segment were encouraging and our order backlog stands at a record $496 million at December 31 of 2014, of which 69% is expected to be realized in the ensuing 12 months, giving us good visibility for the balance of fiscal 2015.

Plastics revenue totaled $139.8 million, representing an increase of 1% compared to the prior year quarter, benefiting from a 3% volume increase and 2% resin pass-through benefit -- the effects of (technical difficulty) by 4% on unfavorable currency translation.

Segment-adjusted EBITDA was $14.6 million, increasing 14.2% from the prior year quarter, driven primarily by some lower resin costs, the quarter also benefiting from increased volume and improved operational efficiencies. EBITDA reflected 5% unfavorable currency translation impact in the quarter. Plastics segment-adjusted EBITDA margin reached 10.4% compared to 9.2% in the prior year quarter, that Plastics are beginning to regularly exceed our 10% historical margin target but we continue to work towards further margin expansion beyond this historical bubble.

Our consolidated gross profit for the quarter was $118 million, a margin of 23.5% and an equivalent of improvement of [20] points from the prior year quarter. Selling, general and administrative expenses were $9.9 million [for] approximately 18.6% of sales, also an improvement over the prior year levels which were 19.3% of sales.

Net income was $7.5 million or $0.16 per share (technical difficulty) quarter. Current year quarter results included a discrete tax provision of $300,000 or $0.01 per share and the prior year quarter had restructuring costs of $800,000 pretax or $500,000 after-tax, or $0.01 per share. Acquisition costs associated with Northcote of $0.5 million after-tax for $0.01 per share and then discrete tax benefit of [$300,000]. (technical difficulty)

So excluding those items, current quarter adjusted income from continuing operations of $7.8 million or the $0.16 per share mentioned compared to $4 million or $0.07 per share in the prior year. As I mentioned in the opening comments the reconciliation of GAAP resulted in EPS to the adjusted results is included in the schedule.

The effective tax rates for the current and prior year current and prior year were recorded as 37.8% and 32.4%, respectively. As I just mentioned, the current year included a net tax provision of $300,000 for discrete items; the prior year had a $300,000 benefit for discrete items. Including those discrete items from both years the current and prior year quarters' effective tax rates were (technical difficulty) 38.4%. As mentioned in the past (technical difficulty) determining taxable income.

The impact of those permanent differences diminished in the current quarter primarily as a result of the improved pretax results. Also as expected, our [top three] is declining as pretax rate results improve and is the impact of those permanent differences diminish.

Currently we expect the rate excluding any further discrete period items to be in the range of 35% to 37% for fiscal 2015 -- that's a slight improvement compared to the guidance we gave on our last call. As in the past, geographic earnings mix will impact rates somewhat and the rate may also vary in the event of any legislative action taken with respect to (technical difficulty) corporate tax rates.

Capital spending in the current quarter was $18.9 million and we continue to expect capital spending of approximately $80 million in fiscal 2015. (technical difficulty) depreciation to approximate $60 million and amortization to be around $8 million. At December 31, 2014 we had $47 million in cash and total debt outstanding of $809 million resulting in a net debt position of (inaudible) dollars. Remember, due to seasonality the first half of our fiscal year is historically a period of time of operating cash usage. Consistent with the past expect the second half of the year to generate cash flow in excess of the first half usage.

We had $181 million available for borrowing at December 31 and subject to certain loan covenants under our revolver credit facility.

Now with respect to our guidance for fiscal 2015, we now expect Home and Building Products revenue growth in the mid- to high single digits compared to the prior year -- that's an improvement over our prior guidance and reflective of the strong start to the year. Plastics is now expected to decline in the low single digits reflecting the current impact of the stronger dollars versus the euro and the Brazilian real as well as the impact of declining resin costs have on our selling prices.

Telephonics consistent with past guidance is expected to grow at the low single digits. Now, in providing this guidance, we are mindful of the theory risks that may impact our results.

First as I said in the past Aims businesses is the most subject to the weather and (technical difficulty) point-of-sale at many of our customers directly impact our revenue. The snow we saw this week certainly does not hurt but we also need good weather for the very important spring lawn and garden season that will be coming soon.

We continue to foresee a gradual recovery in housing, including repair and renovation of existing housing stock and that should benefit our Home and Building Products segment. Door sales and quarter activity in January have continued at a healthy pace.

While Telephonics backlog is solid (technical difficulty) opportunities in the Telephonics business.

And then finally, Plastics guidance is the one that's most susceptible to variation due to a combination of resin pricing for foreign currency, and also just about half of our Plastics business is situated in Europe and Latin America where macroeconomic conditions remain uncertain and both the euro and Brazilian real have weakened considerably in the last several months in comparison to actual exchange rates in fiscal 2014.

So based on that updated revenue expectations I just outlined we continue to expect (inaudible) $[100] million dollars or better that represents a 5% or better increase over 2014 and that's in line with our previous expectations.

In forecasting this level of profitability we are continuing to take into account certain longer term research and development initiatives underway in Telephonics and Plastics that will impact near-term operating results but which we expect will yield significant benefits in the years to come.

Corporate and unallocated expenses are expected to approximate $34 million and that number will include all equity compensation for the Company which will approximate $11 million to $12 million. (technical difficulty) will continue to update this guidance as the year progresses and with that I'll turn to call back over to Ron.

Thanks. We are off to a great start in 2015. Our earnings this quarter reflect the success of our strategic initiatives. We expect to build and to have it accelerate throughout the year. We have ample resources to invest in each of our segments and we are quite optimistic about the process. We are committed to shareholder value creation and we are confident that we can make investments for organic growth, pursuit opportunistic acquisitions, and return value to our shareholders via quarterly dividend and share repurchases.

As we look out over the next few years, we believe that we can grow our revenues, expand our EBITDA margins, and significantly increase our earnings per share. I'm very pleased with our performance this quarter and I am very excited about where this company is headed and with that, operator, we will open it up and take questions.

(Operator Instructions)

Bob Labick, CJS Securities.

Good afternoon. Congratulations on a great start to fiscal 2015.

Thank you.

I want to start with the Home and Building Products. Obviously you've (technical difficulty) a number of quarters of not only nice growth from the acquisitions -- obviously they are integrating well -- but the organic growth has exceeded our expectations a few times. Could you just talk a little bit about the visibility on the organic growth? What you are seeing particularly the Doors volume is very strong. Could you just tell us what you are seeing out there? Obviously you have raised your guidance so what are the drivers there?

So Home and Building Products are made up of both Clopay and the Ames companies. Both have been seeing steady recovery from housing and we see no diminution over the last several quarters. We were very clear to talk about the slow pace of new Home construction in that we've been positioned in this segment for the last several years to benefit from repair and remodel. That repair and remodel business continues on track. New Home construction is significantly improved year-over-year and quarter-over-quarter and we are getting the benefit.

We are the market leader. We have the only national business with distribution centers where we can sell and install a door in all 50 states. We are supported by 2,100 dealers and in big-box retailing we are exclusive through The Home Depot. So this is a very strong (technical difficulty) leading position. And as housing continues its recovery which we have said and continue to believe is going to be measured in years, not in quarters, this Company is going to continue to benefit from it.

In terms of the Ames business, we see continued growth as the US economy has improved and as our ability to execute some acquisitions in Australia, that has given us further growth in our topline. We are also the largest manufacturer and marketer of long-handled (technical difficulty) -- that business, particularly our snow business is doing well.

So throughout all of the business as I would characterize it as we are getting growth after topline and we've spent the better part of the last several years refining and enhancing their operating strategies. We are seeing manufacturing grow quite well year-over-year and quarter-over-quarter. We continue to believe we are at the early stages of our own efficiency initiatives flowing through to the bottom line and we believe that the topline is going to continue to grow as consumer demand picks up in North America, in Australia; and we have the benefits of having a diversified business in both Doors and Tools so that we are going to continue to benefit.

Okay. Great. That's very helpful color there. And then you started down this path -- maybe this is too much of a (technical difficulty) question but without putting a timeframe on it, the margin opportunities in Homes and Buildings Products is that still do you think north of 10% because of its growth and the leverage there? How should we think about that over the next few years?

Sure. We've been saying that our goal in this segment is to get to a 10% or better blended margin across that. The revenues which we have said for some time that we thought that we could get to $1 billion or better, based on where we were.

We are clearly within sight of that and we continue to believe that this quarter highlights that a 10% margin in that business is achievable and how much beyond that the question of how efficient our manufacturing operations can become. Part of that is going to be skewed by volume. Part of the volume issue is going to be skewed quarter-over-quarter year-over-year. There's going to be good winters, there's going to be bad winters for our snow business. There's going to be rain (technical difficulty) -- but we are in this business for the long run. We've been very disciplined about the capital that we put into this business and we think that the returns that we are able to generate from running these businesses, leading brands, leading market share are going to be able to drive very nice returns to us.

And the opportunity for us like what we've done with Southern Patio with Northcote and with Cyclone there are a number of tuck in acquisitions we have made and continue to look at making in the years to come. All of that helps us -- both organic growth on the topline, both on acquisitions, cost-containment, efficiencies lead to margin improvement.

Okay. Great. Jumping over to Telephonics, there was an article in the Journal (technical difficulty) about talking about is being 7% ahead of (technical difficulty) increased defense spending. Probably too early to tell but how is the visibility there? Obviously you have the record backlog. What are you hearing? What are your expectations?

Telephonics has been in business since 1933, and so it has gone through cycles. This cycle -- we have been saying for some time, we are committed to our core business which is intelligence, surveillance, reconnaissance -- particularly radar base and particularly maritime-based. We are the incumbent supplier. We are cost-effective (technical difficulty) and the political budgetary process (inaudible) is what we are in control of is we deliver the best products to branches of the military, domestically and international sales, prospectively. We believe that there is going to be continued growth, regardless of what's going on in the US budget.

But this is a business that the world isn't getting any safer. The ability to build our defense (technical difficulty) we believe that essential parts of the defense budget will always get over whatever political issues are out there. I guess the best thing I could tell you is in terms of visibility our backlog is growing at a time when there is a cloud of uncertainty about budgetary constraints.

So we are at a record backlog. We think this business is incredibly well-positioned in terms of its products, its customers (technical difficulty) to maintain and improve margins over time.

I think the backlog speaks to the strength of the company. There are quality products and that's why we are building that backlog.

Okay. Great. And then you mentioned in your opening comments as well, some R&D for both films and Telephonics. I don't know if you are able to but could you maybe just elaborate a little bit on that? Is there any capital spending associated with that as well? Or is it just -- is this being expensed now? What's it going towards, if you can tell us.

Currently it's (technical difficulty) there is initiatives in each of the businesses but there is some fairly significant initiatives in Telephonics and Plastics. We said at that point in time that it was probably a little bit too premature to begin to discuss them. Telephonics has a longer tail to those projects than perhaps Plastics does. But it's still at this point in time would be a bit premature to provide further details of those.

But as it relates to capital certainly within the context of the overall expectation for this year, which I mentioned was $80 million of CapEx that we expect, there is (technical difficulty) associated with those initiatives that we have in place.

Great. I'll let others ask questions. Thank you very much.

(Operator Instructions)

Justin Bergner, Gabelli & Co.

Looks like a good quarter so congratulations on that, and I wanted to delve a bit more into the operating leverage in Home and Building Products. Maybe if you could just sort of choreograph when you expect that operating leverage to start to come through? What's going to enable it to really pick up versus prior quarters?

A very good question. We expect as we mentioned in our comments that people begin to realize the savings from the Ames initiatives that we have underway this current quarter. And as we saw, while they diminished a little bit in the quarter that we just completed, we continue to have some inefficiencies associated with that -- those manufacturing initiatives at Ames.

So we will begin to see those benefits right away. I think we are beginning to see -- clearly the acquisition has added a lot to the operating profit into the topline but there is a number of synergies associated with those acquisitions from the sourcing perspective and manufacturing.

We are working towards the initial target of 10% EBITDA margin. It's kind of a parallel to where we were with Plastics a couple of years ago. We kind of said, let us get to 10 and then we will tell you where we are going from there and it's a very similar path that we are trying to follow.

So we will get us to 10 and then we'll build on that.

Okay. (technical difficulty) the new run rate for Building Products with would certainly suggest you are poised to do in excess of $1 billion in sales this year. Do you think that still is an appropriate sales level to achieve that 10% EBITDA margin? Or does the acquisition sort of change the matching revenue for (technical difficulty)?

We haven't established a 10% target for this year. We do know that that is our initial goal. We think it's within the site. Certainly we are going to scale up the profitability associated (technical difficulty) (inaudible) but the key is -- for clarity for Home and Building Products particularly the Ames business -- we really need to see the weather impact over the course of the next three or four months from right now -- for like February until the end of May -- that's the peak lawn and garden season.

And then, that weather also has an impact on doors. If you have harsh weather there's a bunch of people putting garage doors on their house during that period of inclement weather. So it's a little bit early on after one quarter to make a prognostication publicly.

Okay. That's fair. Repurchases versus bolt-on acquisitions -- where does sort of cash priorities lie at the present point in time?

As you can see, we have been buying back our own stock continually and aggressively for the better part of two years. We have an authorized share repurchase plan in place so the only thing with certainty I know is that we can buy our own stock every day at 9:30 in the morning. Acquisitions take much longer periods of time to gestate and we are always looking at things. We think our stock is a compelling value and we have been buying it and expect us to continue to buy it.

Great. thank you.

And this concludes the question-and-answer portion of today's conference. I would like to turn the call back over to Ron Kramer for comments and closing remarks.

Thanks for joining us. We were very pleased about how our Company is doing and we are going to work very hard to deliver our shareholders an outstanding 2015 and beyond. Thank you.

Thank you.

And this does conclude today's conference call. Thank you all for your participation. You may now disconnect.