Griffon Corp. F4Q08 (09/30/08) Earnings Call Transcript

Nov.20.08 | About: Griffon Corporation (GFF)

Griffon Corp. (NYSE:GFF)

F4Q08 (09/30/08) Earnings Call

November 20, 2008 4:30 pm ET

Executives

Ron Kramer - Vice Chairman of the Board

Frank Smith - EVP

Pat Alesia - CFO

Analysts

Bob Labick - CJS Securities

Tom Spiro - Spiro Capital

Arnold Brief - Goldsmith & Harris

Operator

Good afternoon. My name is Brandy and I will be your conference operator today. At this time, I would like to welcome everyone to the fourth quarter full year 2008 Earnings Call. (Operator Instructions). Thank you.

Mr. Ron Kramer, you may begin your conference.

Ron Kramer

Good afternoon. Welcome to our financial overview of our fourth quarter and fiscal year 2008. With me today are Griffon's Executive Vice President, Frank Smith and our Chief Financial Officer, Pat Alesia. I'll discuss the overall results of the quarter and then we'll answer questions.

Before we begin, I should point out to the extent that matters discussed in this call include forward-looking statements. They involve certain risks and uncertainties that could cause the company's actual results to differ materially from those in the forward-looking statements.

Presentation includes non-GAAP measures, as defined by the SEC. Reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures is available in our earnings release, which went out earlier.

I'm pleased to report that we've taken a number of measures to reposition our company for future growth. The highlight of our fourth quarter was the success of our common stock rights offering along with the investment by GS Direct, the affiliate of Goldman Sachs.

We raised approximately $246 million in gross proceeds from the rights offering, $241 million from the first closing in September and then additional $5 million in subsequent closings in October which we intend to use for general corporate purposes and to fund our growth.

Our liquidity creates opportunity. We are in a very strong position, while the past year has been a very challenging time for the company. We continue to experience the adverse effects with the crisis in the US residential housing and credit markets, resulting in declines in the Installation Services and Garage Door businesses, and along the year we had to navigate through some adverse raw material increases in both the Building Products and the Plastics Company.

When you look at this quarter which we'll go into in some detail; from a GAAP perspective we reported a loss, but when you look at the business it actually was quite a good quarter. Company's segment adjusted EBITDA for the fourth quarter of '08 was $29.5 million, compared to $30.9 million in '07. Segment adjusted EBITDA is a far better measure of the profitability and the condition of our business.

Previously disclosed in May, we commenced our exit from the Installation Services business. We completed our termination of this business in the entirety in the fourth quarter through the sale of our Phoenix, Las Vegas operations.

Total aggregate disposal costs for the segment were $7.1 million in the fourth quarter and $43.1 million for the year, which were below the $10 million estimate for the quarter and the $53 million estimate for the year previously disclosed.

Future net cash outflows to satisfy certain liabilities and other obligations that were accrued as of September 30th are estimated to range between $7 million and $9 million, substantially all of which are expected to be paid within the next 12 months.

Fourth quarter accounting rules required us to write off completely the $12.9 million of goodwill associated with our Garage Door business. Our diluted EPS would have been $0.15 per share instead of a loss of $0.24 per share. Well, I don't want to spend an enormous amount of time on the technical accounting issues. This write-off did turn what would have been a fourth quarter profit from continuing operations into a loss.

I'd like to spend a minute on it. Our Garage Door business generates cash and profits. The write-off of goodwill relates to the market price of our shares at the end of the year, the measurement date September 30th and the theoretical price at which our business can be bought or sold in this environment, triggering a technical accounting requirement under FAS 142. I emphasize this write-off is a non-cash charge.

In addition, I would note that the Garage Door business generated operating profit of about $4 million abstain to write off during the quarter. While Building Products industry is in the near future will continue to be challenged, we believe the Garage Door business continues to perform comparatively well and is well positioned to participate when the economy and housing markets ultimately recover.

Our Clopay Garage Door sales were $124 million, compared to $129 million last year. Garage Door reported an operating loss of $9.4 million this quarter, compared to operating income of $3.1 million last year.

Segment continues to face the challenges in the marketplace, and remains focused on cost reduction programs. Selling prices were raised in the fourth quarter to pass on the rising costs of steel, and we're hopeful that margins will improve as we go forward.

Our Plastic Film business sales for the quarter were $125 million compared to $106 million last year, increase of 18%. We had operating income of $4.8 million, compared to $5.1 million last year. Higher sales resulted primarily from a favorable product mix, partial pass-through of higher selling prices to offset rising resin cost and the impact of foreign exchange.

Operating income decreased slightly, as it was unfavorably impacted by reduced unit volumes and increased resin costs, as well as costs associated with building up our management team in Europe.

We remain focused on new product development in North America, continued improvement in our international operations in Germany and Brazil. In the fourth quarter, our manufacturing performance on thin printed films reached record levels and we introduced a new industrial product in Europe after six month of product trials.

Finally, Telephonics had sales in the quarter of $104 million, compared to $98 million last year. Telephonics operating income was $10.9 million, compared to $10.6 million last year. As I have said before, the year-over-year, quarter-to-quarter comparison doesn't tell the story of how well this business has been performing.

Strong prior year results of Telephonics were driven by substantial contracts with Syracuse Research, which were completed in late fiscal 2007. Excluding the impact of the SRC contracts in the respective fourth quarter periods, Telephonics core business sales grew approximately $24.5 million or 31%, as we continue to aggressively pursue new programs.

In addition, operating profit improved 3.4%, as a result of increased gross margin performance attributable to program mix. This was a transition year for the company getting out of the Installation Services business, recapitalizing through our equity rights offering and refinancing our bank debt earlier in the year. We are in a very enviable position. We have more cash, debt, ending the year with $312 million of cash, unused borrowing capacity of more than $100 million.

Our balance sheet at September 30 allows us to meet both the operating challenges in our existing businesses and to build Griffon for the future. In fact, we've already taken advantage of our opportunistic situation in October, by repurchasing 35.5 million face value of our convertible notes for $28.4 million, which will result in a pre-tax gain of approximately $7 million in our first quarter of fiscal 2009.

We are well positioned as a result of the actions taken this year. We remain optimistic about the prospects for the company and we're happy to take your questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Bob Labick with CJS Securities.

Bob Labick - CJS Securities

Good afternoon.

Ron Kramer

Good afternoon.

Bob Labick - CJS Securities

Hi. I haven't had time to go through the release in full detail, but I had a couple of questions I wanted to ask. First of all, congratulations; it looks like you held up very well in a tough environment.

Ron Kramer

Thank you. We think we did.

Bob Labick - CJS Securities

Yes. As it relates to Garage Doors, the sales were, I wouldn't say strong, down 2% year-over-year, but certainly much better than the environment may otherwise dictate. You mentioned a little bit of mix and a little bit of price in there. Can you give us a sense of unit volumes, and also a sense of what your salespeople in the field are saying for demand on a go-forward basis, just to start there? And I have a couple more questions on doors also.

Ron Kramer

Well, I think we actually had reduced unit volume. So Frank, do you want to.

Frank Smith

Yes, what you are seeing, Bob is that the reduced unit volume was offset by the higher selling costs that we were able to get for the materiel price increase, the steel price increases.

Bob Labick - CJS Securities

Well, I’m trying to guess here; were units down 10 but you had 7 price, or were they down 20? Could you give a ballpark range of where units were going?

Frank Smith

I think the best number to use Bob is about 10% in 2008.

Bob Labick - CJS Securities

For the full year?

Frank Smith

Yes.

Ron Kramer

As you would expect, we're cautious on the outlook for the business. Clearly, we continue to operate the business well and profitably. We look as everyone else does at what's going on in the housing cycle. And while it's impacted us, we continue to have a profitable business. We're continuing to manage our cost and expectations that we're not finished with the downturn in the housing cycle, but we're well positioned as a brand.

We have the best distribution. Our relationship with Home Depot is strong. We continue to do business with Menards. Our dealer network is strong. So whatever the level how the housing market is going to be, Clopay was well positioned to participate in it.

Bob Labick - CJS Securities

Okay, great. That was my next question. If you back out the charge for the last two quarters you have been profitable at much lower levels than sales in the past. Have you found your new lower fixed cost basis? Is there an ability to pull out a lot more costs from this division, or where you want to be and then wait for recovery to the margins really expand?

Frank Smith

Yes. Bob, what you're seeing in terms of that lower break-even line is the result of the cost reduction program that we talked to you about in February. And that cost reduction program has been very successful. We will continue to work on additional opportunities to reduce costs in light of what's going on in the marketplace.

Bob Labick - CJS Securities

So you're anticipation for next year is continued unit softness. What have you heard from the field in that regard?

Ron Kramer

I think visibility is cloudy on the economy. So, I wouldn't want to be out trying to say, we report it as we do it. We clearly have a point of view that reducing costs and expecting that there's still going to be unit volume declines as a result of a declining housing market is the right way to be positioned. If the markets recover sooner, we certainly think that we have the ability to grow and to have the capacity to be able to meet any new demand.

Frank Smith

The other thing I would like to add is that we're introducing a lot of new products in the marketplace to add value for our customers to be able to pass on to homeowners, and we're running a lot of promotions, working aggressively to keep that top line up.

Ron Kramer

The positioning of our balance sheet gives us the staying power that, if the downturn in that business is going to continue, we believe that we are in the best position balance sheet-wise to be able to consolidate in that space. And while that hasn't happened yet, we continue to think there will be opportunities for us.

Bob Labick - CJS Securities

Great. Speaking of the balance sheet, obviously it's very strong and it looks like you repurchased converts to $0.80 on the dollar. Is that something you continue to look to do in 2009? Or would you shift more towards acquisitions, or how have you?

Ron Kramer

We'll be opportunistic about it.

Bob Labick - CJS Securities

Okay. I'll ask one more question and get back into queue. Just on Telephonics you obviously had some very strong core growth of $24 million. Could you tell us what programs or give us some specific ideas really where that came from and if it is sustainable through next year, are those more short-term or long-term oriented programs?

Frank Smith

For the three months, just to put things in perspective, last year or September of '07, we had approximately $19 million in sales on the Warlock program. So those sales don't exist in the September '08 quarter. The two contracts that drove most of the increase in sales offsetting the Warlock program were the MSS program and the lamps, or MRR program.

Bob Labick - CJS Securities

Great. Thank you very much. I'll get back in queue and let others ask questions.

Ron Kramer

Thanks.

Operator

(Operator Instructions). Your next question comes from Tom Spiro.

Tom Spiro - Spiro Capital

Tom Spiro, Spiro Capital. Good afternoon.

Ron Kramer

Good afternoon.

Tom Spiro - Spiro Capital

First regarding Telephonics, is there a backlog number you would like to share with us. I didn't catch it in the release.

Ron Kramer

We typically don't put a backlog number in the release, but it's in the 350 million range.

Tom Spiro - Spiro Capital

And where was it this time last year, could you remind us of that?

Ron Kramer

Probably slightly less.

Tom Spiro - Spiro Capital

As you look at the pipeline of opportunities over the next couple or three quarters, how is it looking?

Ron Kramer

Specifically with respect to Telephonics?

Tom Spiro - Spiro Capital

Yes, please.

Ron Kramer

It's been a stable business. We continue to have backlogged programs, and we have some new programs that we're in the process of hitting on and that are in the review that we expect to have some progress on in 2009.

Frank Smith

Also, about 70% of our projected sales which we don't give guidance on, we're already in backlog already in 2009. That is a very solid performance.

Tom Spiro - Spiro Capital

What's the industry scuttlebutt, the industry point of view, with respect to the new administration, the view about defense spending?

Ron Kramer

I think we'll have to all wait and see. We've owned this business for 75 years. This is very much a core part of our company. We think it continues to have terrific value, not necessarily always recognized in the stock market, and we'll look to build this long-term for the holders of our company.

Tom Spiro - Spiro Capital

You're in three segments at this point; garage doors, films, and defense. If you look out two, three or four years, is there one of those three segments that you would like to really see dominate the company or would you want to keep it in all three?

Ron Kramer

I think the way you have got to start viewing us is that we're in four segments. We have three businesses that each have their own growth profiles, and we have capital that's going to find a way to either grow around one of those three businesses, or look to diversify into another business, or businesses.

The point of repositioning the balance sheet is to give us the flexibility to take advantage of the dislocations that we thought might become available. Obviously, our timing in being able to liquefy our company and be in a position not just to be a survivor but to be a builder is going to allow us to take advantage of some of the things that are going on in the current environment.

So while it's clear we have three businesses today, I think you've got to look at us as management, as looking at the capital that we have as finding new places to invest, and to create shareholder returns.

Tom Spiro - Spiro Capital

Apart from acquisitions, what are the CapEx plans for the new fiscal year?

Frank Smith

Reduce level from 2008 for sure. Right now, we're looking at somewhere in the vicinity of about $30 million to $40 million.

Tom Spiro - Spiro Capital

Lastly, there appear to have been a lot of changes at Goldman Sachs, since Goldman Sachs first stepped forward to work with us. I was curious, whether any of those apparent changes at Goldman Sachs have any ramifications for Griffon?

Frank Smith

No, we have two directors from GS Direct on our board from the private equity group, and we have no changes and don't expect anything going forward, couldn't have a better investor and a partner to help us build this business.

Tom Spiro - Spiro Capital

Well, that's great to hear. Thank you.

Operator

Your next question comes from Arnold Brief with Goldsmith & Harris.

Arnold Brief - Goldsmith & Harris

You've taken price increases in both Garage Doors and Plastics. Raw materials in both of those areas, I think, are down substantially and maybe are still declining. Would you give us some feel for the outlook for profit margins this fiscal year and take a guess on your ability to hold prices in light of declining raw material prices.

Ron Kramer

We don't give forward guidance, but clearly these are pass-throughs. You're absolutely right, that we were impacted negatively by the increased costs of resin and the increased price of steel in both the Plastics and the Building Products business. Both of those have declined in the last few months. We obviously are hopeful that our margins will be able to be positively benefited by that. But I think it's too early to say, whether the end users are going to be able to absorb that increase to us.

Arnold Brief - Goldsmith & Harris

Could you give us some idea how the competition is shaping up, particularly in the Garage Door business where there is so much weakness in housing? You're financially strong and able to survive all this. Number one, how does some of the competition look relative to your strength? Number two, can you give us some idea how your mix is now in terms of OEM replacement in the Garage Door business?

Ron Kramer

We're probably the only publicly traded Garage Door company. So there are lot of privately-held companies, and most companies are feeling the impact of the downturn. We are well positioned in terms of our market share and our distribution to be able to look at situations should they become available. And it's not out of question for us to be looking in that segment.

The issue is that the housing downturn and its impact is happening; what the ultimate result and whether there are companies or assets that become available, we think is a 2009 story. And it has not hit the wall among our competition quite yet. If it does, we think we're there well positioned to take advantage of it.

Arnold Brief - Goldsmith & Harris

So you feel you're taking market share?

Ron Kramer

Well, I think we were going to defend market share, and hopefully by doing that and being better capitalized, we'll be able to increase it.

Arnold Brief - Goldsmith & Harris

Okay. And then OE and replacement mix percentages, have they changed?

Frank Smith

No, but it’s obviously not the same. New residential construction is down.

Ron Kramer

Dramatically.

Frank Smith

Yes significantly. And so the mix is clearly more to repair and remodel.

Ron Kramer

As has been proved, we continue to see that repair and remodeling is the better driver in that business.

Frank Smith

Right. And we are mostly a repair and remodel business. Our products tend to be more of the upscale products as opposed to the more basic product that builders like to put in.

Arnold Brief - Goldsmith & Harris

Thank you.

Ron Kramer

Okay.

Operator

There are no further questions at this time. Mr. Kramer, do you have any additional comments or closing remarks?

Ron Kramer

No. Thank you very much for participating and we look forward to continuing to report on our progress to you. Bye-bye.

Operator

This concludes today's conference call. You may now disconnect.

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