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Griffon Corp. (NYSE:GFF)

F4Q07 Earnings Call

November 05, 2007 9:00 am ET

Executives

Harvey Blau - Chairman and Chief Executive Officer

Eric Edelstein - Executive Vice President and Chief FinancialOfficer

Frank Smith - Chief Financial Officer of Clopay Subsidiary

Pat Alesia - Vice President

Analysts

Bob Labick - CJS Securities

Marty Pollack - NWQ Investment Management

Todd Vencil - Davenport

Charles LaPorta - Arc Pause Partners

Debra Fine - Fine Capital Partners

Operator

Good morning. My name is Melissa and I will be yourconference operator today. At this time, I would like to welcome everyone tothe Griffon Corporation Fourth-Quarter 2007 Earnings Conference Call.

All lines have been placed on mute to prevent any backgroundnoise. After the speakers' remarks there will be a question and answer period(Operator Instructions).

It is now my pleasure to turn the floor over to your host,Mr. Harvey Blau, Chairman and Chief Executive Officer. Sir you may begin yourconference.

Harvey Blau

Good morning and welcome to a financial overview of ourfourth quarter and year ended September 30, 2007. I am Harvey Blau, Chairman ofGriffon Corporation, and with me is Griffon's Executive Vice President andChief Financial Officer, Eric Edelstein, and Frank Smith, Chief FinancialOfficer of our Clopay subsidiary. In addition, Pat Alesia, Vice President ofthe company, is also present.

On slide eight, Griffon Corporation announced changes in itssenior management and Board of Directors. Frank Smith is being promoted to theposition of Executive Vice President of Griffon Corporation effective November30, 2007.

Pat Alesia, who presently serves as Vice President, Treasurer,and Secretary of Griffon, is being promoted to the position of Chief FinancialOfficer, effective November 30, 2007. Eric Edelstein is retiring, alsoeffective November 30, 2007.

Griffon Corporation also announced the appointment of twonew members to its Board of Directors. Effective on Friday, Lieutenant GeneralGordon E. Fornell, U.S. Air Force Retired, and James A. Mitarotonda, alsoeffective on Friday. Lester Wolff has retired from the Board and will be aDirector Emeritus. I will now discuss the overall results of the quarter andfull year, and then Eric will answer questions with respect to operations andfinancial results.

First, I should like to point out that to the extent thatmanaged to be discussed in this call include forward-looking statements, theyinvolve certain risks and uncertainties that could cause the company's actualresults to differ materially from those in the forward-looking statements. Byway of introduction, I want to note that we are pleased with the outstandingperformance of our Telephonics subsidiary and the improvement in our SpecialtyPlastic Films segment.

We continue to be concerned about market conditions inresidential housing and the impact on our building products segments.Consolidated net sales for the quarter were $396 million, compared to $483million in last year's fourth quarter, and pretax income was $9.2 million,compared to $29 million last year.

Net income was $9 million for the quarter, compared to $18million, resulted in diluted earnings per share of $0.29, compared to $0.60last year. For the full year, net sales were $1.6 billion and the pretax incomewas $31.6 million, compared to $78.7 million in the prior year, and dilutedearnings per share were $0.71, compared to $1.65.

As you can see, the housing market has affected our buildingproducts and installation businesses very severely and has offset the greatgrowth that we had in Telephonics during the year. Telephonics, ourelectronics, information, and communication systems segment had sales in thequarter of $98 million compared to $152 million last year.

Telephonics' operating income was $10.6 million, compared in$19.2 million last year. Telephonics sales for the year were $473 million,compared to $387 million last year, and operating income was $45.9 million,compared to a $39.6 million in the prior year.

The decline in sales in the fourth quarter was primarilyattributable to the wind-down of the SRC contract, with revenue in the quarterapproximating $19 million compared to $74 million in the prior year of fourthquarter.

The revenue increase for the year of $86 million wasprimarily from an SRC contract revenue increase of $47 million and MH60helicopter revenue increased of $31 million. We did announce in early Octoberan additional $11 million contract with SRC and opportunities exist foradditional related work for fiscal 2008.

The MH60 program and Telephonics other programs continue toexpand. As previously noted, the MH60 program is expected to ramp up to $100million per year run rate this year, with the opportunity to increase anadditional 20%.

We recently announced additional contracts for this programtotaling $360 million. Our funded backlog at September 30 was approximately$309 million. Sales in Garage Doors for the quarter were $128 million, comparedto $146 million last year.

Operating income was $2.9 million, compared to $13.6 millionin the prior year. The decline in sales for the quarter was primarily caused bya volume decline in sales to dealers. The decline in operating income for thequarter was primarily caused by the sales volume decline, restructuring chargesassociated with closing one of our manufacturing facilities, and increasedmarketing and advertising costs for our retail distribution business.

For the year, Garage Doors' sales were $480 million,compared to $550 million last year, and operating income was $7 million,compared to $41 million last year. The decrease in sales and operating incomewas primarily attributable to sales volume declines to dealers and retailers,somewhat offset by a favorable product mix.

Consistent with our forecast of a year ago, steel costs infiscal 2007 were relatively stable compared to 2006. And at this point, we areexpecting similar stability for fiscal 2008. This stability could be negativelyimpacted if the relatively low demand level for steel was discrepant.

During the year we made excellent progress in bringing ournew facility in Troy, Ohio online. As you may recall, it is a large facilitywith much potential. Two of our important product lines are now being producedin Troy. Also, the product offerings previously made in our closed facility arebeing made in Troy.

By the end of 2008, we expect to be producing two additionalinsulated door product lines in Troy. The lines, in general, are designed withmore automation and we anticipate they will achieve greater efficiencies. Withrespect to the overall 2008 outlook for Garage Doors, we continue to beconcerned about trends in the market conditions. Key statistics are poorer andin some cases seem to be getting worse.

The latest data through August compared to prior years shownew home starts down 34%, new home sales down 25% and an 8.2-month supply ofnew homes versus 6.1 months in September of 2006. Existing home sales were down15% and the inventory of existing homes is up 33% and now stands at a 10-monthsupply versus 6.5 months in 2006.

Just this past week Macgoyle issued a projection for 2008.They see new construction down 6% in units and 3% in dollars versus 2007. Whileit is difficult to project the repair/remodel market, an October HomeImprovement Research Institute study showed 31% of respondents not engage in aproject versus 20% in 2005.

The drop in existing home prices and the extensive mediacoverage of the housing decline are cited as reasons for the curtailment ofremodeling activity. Needless to say, we're doing everything we can to retainour customer base and, where possible, take market share to offset theshrinking market.

We believe that when the market does turn around, we will bein a good position to take advantage of the hopeful backlog boom that willcome, but we do not know when this is going to be. Our service and installationoperation had sales in the quarter of $69 million, compared to $89 million lastyear, and an operating loss of $1.9 million compared to operating income of $3million last year.

For the year installation services had sales of $276million, compared to $339 million in the prior year, and operating loss of $10million, compared operating income $9 million in the prior year. The decreasein revenue for the quarter and the year was primarily attributed to decreasedsales in our Las Vegas and Atlanta markets.

In those markets, flooring, fireplace garage door, and appliancesinstallation sales have declined. There is also a marked competition inpricing. New home construction activity in our major markets continues todeteriorate and single-family permits are projected for 2007 to be levels equalto 35% to 55% of the peak levels reached in 2004 in 2005, and in absolutelevels equal to pre-2001 activity.

In response to all of this in the building market, we havereduced our costs with personnel cuts and in the last quarter, approximately$2.5 million and the consolidation of showroom, warehouse, and facilities, withsavings of approximately $1.8 million.

We continue marketing and selling activities to gain share,including establishing a national brand identity and national marketingmaterials and rebate programs. These programs have been started by recentlyhired President of our Installation Services, Ray Lippin.

Ray has over 30 years of experience in homebuilding otherrelated fields. With the changes made in 2007 includes cost-cutting and fixingkey operational issues, along with experience and leadership brought by Ray,assuming no further deterioration of market conditions. Our goal is theinstallation business to at least breakeven in 2008.

In Specialty Plastic Films, sales for the quarter were $106million, compared to $102 million last year and operating income was $5.1million, compared to $39,000 last year. For the year, film sales were $407million, an increase of $25 million over the prior year, and operating profitsincreased to $17.3 million from $15.5 million in 2006.

The increase in revenue for the year was primarilyattributable to increased unit volume in Europe and North America increasedsales of new products, and the effect of a weaker U.S. dollar on translatedforeign sales, somewhat offset by price declines to our largest customer.

The increase in operating profits for the quarter isprimarily attributable to the impact of production efficiencies and reducedadministrative and operating expenses, partially offset by the impact ofunfavorable resin price fluctuations.

The increase in operating profits yield is primarilyattributable to higher unit sales volumes and the impact of resin price andcost fluctuations, the weaker U.S. dollar and its impact on foreign sales.

This year, we started shipping commercial quantities of ourimportant new product, elastic laminates, for the hygiene products market. Inprevious quarters we noted that this product had not ramped up as we hadanticipated.

Progress has been made and we are presently optimistic thatsales for these new products will ramp up significantly in fiscal 2008.

In previous quarters, we spoke of startup inefficienciesresulting from bringing on new businesses and the trend towards thinner films.We're pleased in the fourth quarter overall efficiency levels have achievedtargeted levels. We continue to study ways to achieve additional operationefficiencies and are planning some capital investments to achieve them.

Resin price increase had an unfavorable impact on operatingincome of approximately $1 million to $2 million for the quarter and afavorable impact of approximately $6 million to $7 million for the year.

Most recently, resin prices have been increasing and we areconcerned with the impact it could have on 2008 results. While, oil at 90 someodd dollars a barrel and natural gas seems to be going up now, this issomething that we are keeping our eye on.

We continue to make strides in diversifying our product lineand customer base. Over the past four years we have significantly reduced theconcentration of our business on one customer and we are satisfied with theprogress we're making to build a more balanced product portfolio.

While we expect to be challenged in our plastics businesswith resin prices and the new product roll-ons, we are optimistic that workwe're doing on the cost structure and product mix side of the business willresult in improved performance for 2008.

Consolidated operating cash flow for the year was $66million and we continue to support the growth of our business with capitalexpenditures for the year of $30 million and $17 million to fund acquisitions.

Our balance sheet at September 30 remains strong, withworking capital of $343 million and total indebtedness representing 33% ofcapital.

We continue to fund our common stock purchase program, using$1.1 million in the quarter to acquire approximately 66,000 shares, and forfiscal 2007, we have acquired approximately 208,000 shares of stock for $4.4million. We have paid down approximately $20 million of bank debt this year outof cash flow generated by Telephonics.

At this time, we would like to take questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question is coming fromBob Labick with CJS Securities. Please go ahead.

Bob Labick - CJS Securities

Good morning.

Eric Edelstein

Good morning.

Bob Labick - CJS Securities

Hi, first question I want to ask us with regards to theDoors division. You mentioned some restructuring charges. Could you quantifythat?

Eric Edelstein

Hi, Bob. Yeah, the restructuring charges were about $2.5million. They break down three ways. One piece of it is estimated costsassociated with closing and cleaning up the facility we were in.

One part of it is a fairly significant cost associated withmoving the production line from Tempe to the new facility in Troy. And thenfinally, severance for key personnel that are on in the intervening months asthe business transitions.

Bob Labick - CJS Securities

Okay, great. And then, excluding the restructuring, I amtrying to back into the math a little bit. It looks like operating margins wereprobably down slightly or flat versus the prior quarter, even with a little bitof a pickup and sales seasonally, so what has the trend in gross margin been?

Eric Edelstein

When you said prior quarter, you mean…

Bob Labick - CJS Securities

I mean, that the June quarter, when you did lower sales. Youpicked up in sales little bit, so I would expect gross margin to maybe pick up,but I just want to get a sense of…

Harvey Blau

I do not think there is an actual trend there. I think anydifference that you would see from Q3 to Q4 would be more rounding.

Bob Labick - CJS Securities

Okay, so gross margins have been stable. It was more thetransition cost that caused the decline in operating profit in the quarter?

Eric Edelstein

I believe that is correct.

Bob Labick - CJS Securities

Okay, great. And where does that division stand in terms ofits cost-cutting goals overall?

Eric Edelstein

Well, it is an ongoing process. You probably recall, that wespoke of a number of initiatives mid-year that we were planning and doing.Those have all been completed except for one, which is something that isongoing.

We need to take a look at as the year unfolds as to whathappens with market conditions, as Harvey has referenced, and if -- our senseis we do not believe it is going to strengthen dramatically in the comingmonths, and so we have to see how we do in that market and the possibilityexists that we might need to take other steps in the course of the year toreduce the overall cost.

Bob Labick - CJS Securities

Great. And then you also mentioned higher I guess retailmarketing. Could you quantify that?

Eric Edelstein

Probably, about $1.5 million.

Bob Labick - CJS Securities

Okay.

Eric Edelstein

Special programs to further support the retail part of thebusiness, which actually has held up a little bit better, quite a bit betteractually than the dealer side.

Bob Labick - CJS Securities

And is that an expected ongoing new level of spending fornext year or was it a peak period that you tried it and you will see what youdo with it next year, or how should we think about it?

Eric Edelstein

I think it is more of the latter.

Bob Labick - CJS Securities

Okay. Great. And then moving on to films, you mentioned therollout of the elastic product. Can you give us the expectations now where youare, a range of expectations for 2008 and then beyond, or maybe even just threeyears out, what you might expect that opportunity to be?

Eric Edelstein

Yeah, actually, although admittedly, we have had some delayin the timing of the rollout of the product, the expectations really have notchanged. You know, we spoke in the past about initially trying to get it up toabout a $50 million-a-year product and that is still very much achievable inthe foreseeable future, next 12 to 18 months or so.

As you would guess, a lot has to happen, but we think thereis a good chance it can. Then finally, over a longer period of time it has gotthe potential to easily double from there.

Bob Labick - CJS Securities

Great. And then just the last question and I will get backin queue. Obviously, you had the $2.5 million roughly in restructuring inDoors. Was there any other restructuring charges in the quarter in any otherdivision?

Eric Edelstein

There are probably some small amounts in service andinstallation.

Bob Labick - CJS Securities

Okay, great. I will get back in queue. Thank you very much.

Operator

Thank you. Your next question is coming from Marty Pollackwith NWQ Investment Management. Please go ahead.

Marty Pollack - NWQ Investment Management

Hi, guys, just a couple questions. Looking at the progressfrom second quarter to third quarter, just trying to gauge that progress. Canyou describe the seasonal impacts that would color that progress in a positiveor negative way?

If you could just go through the division's and clearlythere's pickup --

Eric Edelstein

Just for the others on the line, when you say Q2 to Q3, Iassume -- you were referencing -- you mean our three to four, correct?

Marty Pollack - NWQ Investment Management

Right, I meant Q3 to Q4, correct.

Eric Edelstein

Taking the easiest one, first or the most obvious.Traditionally our Telephonics segment has a very substantial fourth quarter. Italways has to deal with our and our customer’s and our customer’s, customer’syear-end being 9/30, including the federal government.

And consistent with the past, they had an excellent fourthquarter bump in both revenue and margin. Of course, I say that when you factoringin you have to factor out the significant impact of our one contract, SRC,which actually came to an end.

The garage door business, we experience a strong jump,typically from our second to third quarter and then on average three to fourtends to jump a little bit more. And we did experience that same jump this yearfrom Q3 to Q4. but, admittedly, at those lower volume levels or the lower basethat we've been at for this past nine to ten months or so.

Service and installation, probably similar observations, andthen finally, in the film business, really no impact based on seasonality.

Marty Pollack - NWQ Investment Management

I see. Would you just described, then, in a sense, can yousort of put some rough numbers on the costs, the nominal costs taken out or anyother way that you could describe the progress on cost reductions and therestructuring?

In a sense, if you could just put a little bit moregranularity by those segments, even if you can't put the numbers out, but Imean, where you have been targeting, where are you comfortable that you'reachieving some of those goals?

I know you did mention that, clearly, you were comfortablewith specialty plastic's improved inefficiencies there. But can you go throughthe other segments as well?

Eric Edelstein

Okay. First on Telephonics, we have not focus at all on costcutting, which I do not think would be a surprise. It has been more developingthe base of talent to serve as the increased number of contracts and theincreasing revenue.

In this service and installation business and in the garagedoor business, the focus on cost has been consistent over time. In the case ofthe garage door business, it has been a heavy focus for about, as I just said alittle earlier, nine or ten months.

In the case of the service and installation business, we'veprobably been looking at it closely for about 16 months. The way we’veapproached the cuts, the method of executing going through the process, Ithink, we’ve done a good job.

But the question, which we had from start and continue tohave today, is how much to cut, how much is necessary for instance, in the caseof installation business, to achieve the goal that Harvey spoke of at leastbreaking even in this year, but at the same time, not putting ourselves in aposition where when things turn that we are at a disadvantage compared to thecompetition.

Keeping in mind in the garage door business, we continue tobelieve we are the number-one supplier to the country and we want to be strongat the time that things do turn.

That is kind of where we are on general terms. As I said forthe garage door business, in particular, we need to look as the year goes by asto what additional cuts we might need to make.

Marty Pollack - NWQ Investment Management

I think one other line item was it unallocated expenses? Ithink, I saw that the numbers were up. Are there some costs there thatunallocated accounts expense about $4.7 million versus $4.1 million last year?

Again, is that an area that we can expect, what would youtargeting on a quarterly basis? Clearly, that has been areas of a number ofinvestors have thought that there is a lot of room to perhaps cut those costsdown. Where do you think those numbers can go to?

Eric Edelstein

Those numbers, the variable parts of those numbers tend tobe event-driven. The increase that you're noting in the current quarter for themost part comes out of an increase in our professional, legal, and consulting,which I think, you would recognize would be event-driven.

To the extent that we do not have events, being as we do notneed to respond to things, those numbers ought to be able to come down. As amatter of course, we are always looking at those pool of expenses to see whatwe can do better and more efficiently.

Marty Pollack - NWQ Investment Management

On an annualized basis, what would be the normalized costwithout those other items?

Eric Edelstein

Looking at the -- if we're talking about the whole pool ofunallocated, I always think of a normalize quarter to be about $4 million.

Marty Pollack - NWQ Investment Management

All right. Thank you very much.

Harvey Blau

Marty, I just want to point out to you that it is ourinterest and our desire to watch the marketplace very carefully in BuildingProducts that is the whole both parts of the business and to make further stepsto make the company more profitable depending on where the market is going.

If the market continues to deteriorate, we're going to watchthat very carefully and take as many steps as we can to try to increase ormaintain our gross profit margins and not just suffer like this.

But unfortunately, nobody really knows where it’s going andI think in the installation business, more than any of them, there is a lot ofcompetition by smaller companies that may be under pressure and this may havean effect going forward on that part of the business giving us opportunities tomake up some space.

Marty Pollack - NWQ Investment Management

And second, you just mention one thing, because I think thecall does reflect a sense of urgency, but a certain balance on understandingthat some of these markets are cyclical, and so I think you guys areapproaching it very much correctly, making sure that your finances are in goodshape and able to sustain a recovery.

It’s clearly you'll be in the game for that. So I certainlyapplaud you for the efforts and articulation of that.

Harvey Blau

Thank you.

Marty Pollack - NWQ Investment Management

We will miss you of course, Eric. Take care, all the best.

Eric Edelstein

Thanks.

Operator

Thank you, your next question is coming from Todd Vencilwith Davenport. Please go ahead.

Todd Vencil - Davenport

Hi, guys, thanks very much. I got cut off earlier, so I'mgoing to apologize because I am probably going to ask a repeat question, but itshould be easy. Can you tell me why the tax rate was so low in the quarter?

Eric Edelstein

It’s actually not a repeat question, has not come up yet.

Todd Vencil - Davenport

Okay.

Eric Edelstein

There is really two things that are impacting it. First, asyou probably recall, we have significant operations in Germany and the tax lawchanged there and as a result, a really substantial amount of deferred taxliabilities we had the books, as a result of the tax law change, got revaluedat lower amounts.

To say it another way, the projected amount, we ultimatelywill pay will be something less than the current tax law and proper accountingis to make that adjustment.

The second thing is the continuing shift in our operatingincome that is the amount that comes from outside the United States versus inthe United States. That shifting created an additional favorable impact.

And then finally, in the quarter, we did have several itemsthat were of a subjective nature that came to resolution relative with thetaxing authorities in a favorable way and that further reduced the rate.

Todd Vencil - Davenport

Okay. What should we look for on the tax rate going forwardgiven some of those things are one-time and some, it sounds like probablyaren’t?

Eric Edelstein

Well, we ended up the year at about 30%. You probably sawthat and I would say sticking with something in the 35% area is probably a goodstarting point.

Todd Vencil - Davenport

Okay. And secondly, you talked about some of the additionalcontracts you had gotten under the MH60 program in the Telephonics division.Just to be clear, were those, did those change your sort of anticipated $100million run rate or does that just sort of feed into that run rate asanticipated?

Eric Edelstein

It feeds in. That is the actual definitive win you areseeing.

Todd Vencil - Davenport

Right, okay.

Harvey Blau

Basically that’s a funding of the program, over the nextthree to four years, so that you have in your numbers security to make aprediction of $100 million a year, because you've got it already funded intothe program.

Todd Vencil - Davenport

Got, that makes sense. Just finally, on the SRC contract,how much is remaining under that? You had a bit this quarter.

Harvey Blau

It basically has gone away in the fourth quarter, exceptthat we have gotten award for $11 million on a go-forward basis and we will seewhat else happens in that program on a go-forward basis as the Army needsadditional crew materials.

But we have no knowledge of where they are going to go withthis program and we expect that there will be a continual addons, either forspare parts or for new equipment, as they build new vehicles.

Todd Vencil - Davenport

Okay. And what’s sort of the time frame on delivering onthat $11 million?

Eric Edelstein

Is over the next three, four, five months.

Todd Vencil - Davenport

Okay, great. Thanks a lot.

Operator

(Operator Instructions) Your next question is coming fromCharles LaPorta, with Arc Pause Partners (ph). Please go ahead.

Charles LaPorta - Arc Pause Partners

Hi. I guess, kind of a several naive questions. Look at yourInstallation Services during the quarter, it looks like year-over-year you dida $20 million decline in topline and roughly, I guess, $4 to $5 million declinein operating income. That business kind of suggests to me that the cost shouldbe fairly variable in nature.

Do you have existing fixed contracts with subcontractors orunion labor that mandates you have to keep a certain headcount? Could you justdescribe to me the nature of that business?

Harvey Blau

Frank Smith?

Frank Smith

Sure.

Harvey Blau

Are you able. Do you want, answer that question?

Frank Smith

Sure. We do not have union employees, but it’s not quite asflexible as you may think in terms of the overall pool of costs. What Harveyand Eric talked about earlier, the need to balance the skills, because this isa service level, a service business, is paramount in trying to make thedecisions. And so we are continuing to study that, but it isn’t just a businessthat flexes up and down the way you might think with the volume decrease thatyou saw.

Charles LaPorta - Arc Pause Partners

Okay. Another question is in terms of your Telephonicsbusiness. Could you give any sort of indication in terms of what RFPs you'recurrently responding to our what sort of kind of contracts in terms of just anaggregate, on an aggregate basis the level or volume of contracts that you'recurrently bidding on?

Eric Edelstein

I guess generally the most important thing to note is thatthe SRC contract, which was a wonderful opportunity and it contributedimmensely to our performance, you pull that out of the last two years.

Charles LaPorta - Arc Pause Partners

Right.

Eric Edelstein

And what you have if you look at the last ten years is asteady, consistent growth in revenue and profitability, obviously, therefore,supported by an increase in the number of programs and the size of the programsthat we are dealing with.

The management at Telephonics would tell you that at thispoint in time, they are as optimistic as ever about the continuing growth ofTelephonics in the future. In the Marine radar area, we continue to be a leaderand have any number of opportunities, either with ongoing programs that are expandedor being retrofit or new programs. In the communications area, similarly, thenumber of programs we're looking at and the size of them continue to increase.

We don’t, the heart of your question or the specifics ofyour question were the actual number of RFPs and it is not an indicator weactually track. Certainly we are tracking potential dollars and growth ofprograms, but we can answer it as simply as 400 this year versus 200 last year.

Charles LaPorta - Arc Pause Partners

Right, okay.

Harvey Blau

We have a large number of programs that we are bidding on.The Marine programs are going to be very hot in the years to come, with thedevelopment of the Chinese of a blue water navy and of submarines, which theyare building at a high rate, which is going to require the Navy to step up intoanti-submarine warfare and detection, of which the LAMPS helicopter is aprimary vehicle.

There will be other systems going on it and we expect thereto be continuing growth in that field and we think that not with standing thefact that the IED program, the Syracuse Research program, has been built anddelivered and has gone away, that you will still see on a 2005 to 2008comparison without the IED programs, in other words, in 2006 and ‘07, substantialgrowth in Telephonics and it will continue to grow.

Charles LaPorta - Arc Pause Partners

Okay. With the SRC program rolling off and these otherprograms, MH60 I think it's called, right, ramping up, would we still see asequential decline in top line?

Harvey Blau

We’ll see a sequential decline in top line of 2007 to 2008because the amount of dollars in the SRC program that we generated in the twoyears, 2006 and 2007

Charles LaPorta - Arc Pause Partners

All right.

Harvey Blau

Is approximately $450 million on that one program.

Charles LaPorta - Arc Pause Partners

All right.

Eric Edelstein

$350 million.

Harvey Blau

$350 million excuse me, on that one program.

Charles LaPorta - Arc Pause Partners

In '06 and '07?

Harvey Blau

Yes.

Charles LaPorta - Arc Pause Partners

Okay.

Harvey Blau

So we are probably -- we can’t make up the $150 million orso -- I think it was $190 million during 2007. We can’t make up the $190million of sales…

Charles LaPorta - Arc Pause Partners

All right.

Harvey Blau

But we’ll definitely have an improvement. If you took outthe sales of 2007 for the SRC program and you take a look at where we're goingin 2008 without it, there will be a substantial growth in the sales and wethink by 2009 and 10 will be a back up to where we were.

Charles LaPorta - Arc Pause Partners

What you have would you, do you have equivalent operatingmargins?

Harvey Blau

Yes.

Charles LaPorta - Arc Pause Partners

Ex-those – ex-that programs?

Harvey Blau

Yes.

Charles LaPorta - Arc Pause Partners

Okay. And last question, what's your current revolveravailability?

Harvey Blau

Well, we paid down the revolver and we now owe approximately70 some odd million dollars to the banks, so we really don’t have any issuewith respect to money’s. We have probably --

Eric Edelstein

About $95 million.

Harvey Blau

Available? We have about $100 million available under ourexisting bank line and we're talking to the banks now about expanding theavailability. But we are not constrained by money or a need for money, becausethe cash flow has been fine and the amount of debt in the company of our size, bankdebt of between $1.6 billion, is approximately $75 million, $80 million.

I think we have run it in such a way that, to tell you thetruth, we always predicted internally that someday, somewhat there was going tobe a change in the economy and we didn’t want to be squeezed when it happened.

Charles LaPorta - Arc Pause Partners

Okay. Thank you.

Operator

(Operator Instructions) Your next question is coming fromDebra Fine, Fine Capital Partners. Please go ahead.

Debra Fine - Fine Capital Partners

Good morning. I am wondering if you could talk a little bitabout what prompted the Board changes?

Harvey Blau

The Board changes were prompted by the fact that two of ourstockholders, one was Barrington and one was Clinton Group, have -- we havebeen talking to them for some time. They have made substantial investments intothe Company and they felt that -- they made a recommendation that there shouldbe some modification of the Board and get new people in.

And so Lester Wolff, who is a former congressman, who servedthe company for over 20 years, retired and the Clinton Group recommended anumber of people and we picked one of the people that they recommended, whichis Lieutenant General Fornell. He would approved by the board. He is -- has gota long history in the businesses that we are in and we think he can be very,very helpful.

And Jim Mitarotonda from Barrington felt that he could behelpful with acquisitions and things of that nature and wanted to have a roleand we thought he could be helpful and bring another perspective to the companyand so we put him on.

Debra Fine - Fine Capital Partners

Great. We applaud the changes.

Harvey Blau

Thank you. When is the market going to turnaround inhousing? I know you are an expert.

Debra Fine - Fine Capital Partners

I will pass to the next questioner.

Operator

Thank you there appear to be no question at this time. Iwould now like to turn the floor back over to Harvey Blau for any additional orclosing remarks.

Harvey Blau

I want to thank you for taking the time and a lot of youhave been stockholders for a long time. I certainly have been stockholder for along time and we're trying to do everything we can in the face of what seems tobe a very difficult situation with the housing industry and every day you readthe newspapers, more negative information.

I can only say to you, that we are in a position, where wehave strong financials. We can withstand all these different kind of hits. Wehave cleaned up a lot of issues in our installation business and we think a lotof them are historic.

And so we think that we should be making a lot of progressand reduce the amount of indebtedness, the amount of losses and hopefully we'llget down to a zero basis, which would be a $10 million turnaround.

And if we can keep the other businesses going while GarageDoors improves or at least stabilizes, I think, we will have a better 2008 andhopefully in 2009 and 10, we're going to be a great shape.

We're doing everything we can in the company to prepareourselves for the ultimate turnaround in the housing industry by makingourselves more and more efficient. We will have more consolidations of ouroperations into Troy.

Troy gives us an opportunity to really consolidate ouroperations under one roof and in a very central distributing area, so that wecan really, I think, be more efficient and we look forward to better timescoming.

I want to thank you again and I will speak to you some timein February. Bye-bye.

Operator

Thank you. This concludes today's Griffon Corporation,fourth-quarter 2007 earnings conference call. You may now disconnect.

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Source: Griffon F4Q07 (Qtr End 30/9/07) Earnings Call Transcript

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