Ron Kramer - Chief Executive Officer Doug Wetmore - Chief Financial Officer.

Bob Labick - CJS Securities Justin Bergner - Gabelli & Company.

Good day and welcome to the Griffon Second Quarter 2015 Earnings Conference Call. Today’s conference is being recorded. At this time, I would like to turn the call conference over to Mr. Doug Wetmore, Chief Financial Officer. Please go ahead, sir..

Thank you, Jamie and good afternoon everyone. With me on the call is Ron Kramer, our Chief Executive Officer. And before we get into the details, there are certain matters I want to bring to your attention. First, our call is being recorded and the playback will be available.

The details of that playback are 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.

For additional information concerning factors that could cause those actual results to differ from those discussed in our forward-looking statements, you should refer to the cautionary statements contained in our press release as well as the risk factors discussed in our various filings with the SEC.

Finally, some of today’s prepared remarks will adjust for those items that affect comparability between reporting periods. These items are laid out in the non-GAAP reconciliations, which are included in our press release. I will turn the call over to Ron..

Good afternoon. Second quarter continued our strong start to the year. Home & Building Products drove our performance, reflecting continued improvement in the U.S. housing market, the benefit of recent acquisitions in Australia and are beginning to reap the savings from the AMES efficiency initiatives undertaken over the past two years.

We expect to build on our momentum through the rest of 2015. Our earnings per share of $0.11 were slightly lower than the prior year of $0.12, with currency translation the main factor accounting for the decline. Had currencies been comparable for both reporting periods, current quarter EPS would have been $0.14 per share.

I would like to discuss a few items that impacted our second quarter results. First, we continued to execute on our corporate programs intended to both improve our financial performance and reward our shareholders.

These initiatives have included refinancing our debt to reduce interest expense and extend maturities at attractive rates, increasing our dividend, and continuing our share repurchase activities. During the second quarter, we amended our revolving credit facility, increasing the facility to $250 million and extending the maturity by 1 year to 2020.

Since August 2011, we have repurchased 14 million shares of common stock for a total of $159 million, representing an average price of $11.30 per share. We will continue to opportunistically buyback our stock based upon our assessment of the intrinsic value of our business compared to stock market value.

During this quarter, we have repurchased 1.6 million shares of our common stock for a total of $24 million. So far this fiscal year through March 31, we have repurchased 2.6 million shares for $36 million and in March the Board authorized an additional $50 million for repurchases.

Earlier this morning, our Board approved a regular quarterly dividend of $0.04 per share. We remain committed to building shareholder value and expect our operational initiatives to continue to enhance our financial performance. Let me give an overview of each of our segments and then Doug will take you through in a bit more detail.

Starting with Home & Building Products, it continues to grow through a combination of both organic growth and acquisitions. Sales climbed 5% over the prior year quarter, reaching $264 million. Our AMES business now includes the Cyclone garden and tools business acquired in May 2014.

The acquisition benefited segment level sales by 6% and door volume and mix continued to improve. These positive drivers were partially offset by the impact of reduced volumes in AMES business due to a slow start in the spring lawn and garden season and an unfavorable foreign currency impact of nearly $4 million.

The underlying trends for Home & Building Products are quite positive. We are encouraged to see momentum in the multiyear housing recovery with improvement in both residential construction and repair and remodel. These trends bode well for both the door and tools businesses.

It bears mentioning that doors, has continued its strong sales performance as April has progressed. And I am pleased to note as the snow has melted away and we finally have spring, lawn and garden sales also picked up significantly in April compared to last year.

Turning to Telephonics, we had revenues of $99 million, which is a decline of 5% versus the prior year, which was in line with our first quarter performance. Defense spending, uncertainty continues to create quarter-to-quarter volatility for Telephonics.

Nevertheless, our backlog remains strong at quarter end at $482 million and we expect to recognize over 70% of this in the next 12 months. This confirms Telephonics product offerings, continues to be well positioned to address the needs of an integrated and modernized battlefield.

Meanwhile, as we have mentioned in the past, Telephonics continues to focus on its research and development initiatives that will yield significant long-term benefit in the years ahead.

Turning to Plastics, which is the most international of our businesses and the one that was most impacted by currency translation, during the second quarter, Plastics volumes increased 2% driven mainly by North America. However, currency was unfavorable by 8% during the quarter, reducing revenue nearly $12 million compared to the prior year quarter.

Overall, Plastics revenues declined 9% in comparison to the Q2 2014. Plastics EBITDA declined 3% from the prior year quarter. Resin benefit and continued improvement in our operating performance nearly offset the impact to the revenue decline. EBITDA margin for Plastics actually improved to 11.4%.

Our Plastics team, led by Alan Koblin, continues to drive improvements in efficiency and provide superior products to our customers, while investing in capacity and developing new technology. So, for Griffon overall, our businesses are performing very well and we expect the balance of the year to be even better.

I will turn it over to Doug who will walk you through bit more details..

Thank you, Ron. Second quarter consolidated revenue totaled $500 million representing a decrease of 2%, or $7.7 million in comparison to the prior year quarter. As Ron mentioned, foreign currency translation impacted both Home & Building Products and the Plastics segments.

After the unfavorable impact of currency, which is mainly the real, the euro, the Australian dollar and the Canadian dollar, revenue would have increased 2% in comparison to the 2014 quarter. Home & Building Products revenue reached $264 million, a 5% increase over the prior year quarter.

AMES revenue decreased 1% to $159 million as weather related headwinds and a 2% unfavorable foreign exchange impact offset the 6% benefit from the Cyclone acquisition. It bears mentioning that AMES has difficult comparison with the prior year second quarter that benefited from significant sales of snow tools late in the season.

This fiscal year we got much of the benefit of snow tools sales in our first quarter. On a year-to-date basis, Q1 and Q2, sales of snow tools increased 6% in comparison to the prior year. In our doors business, favorable trends continued into the second quarter and sales increased 15% over the prior year quarter.

That improvement was driven by the 10% volume increase coupled with improved mix partially offset by 1% unfavorable foreign currency impact. For the balance of the year in Home & Building Products, a couple of factors will impact our growth rates.

As of the start of the calendar year 2015, we have now owned Northcote for a full 12 months and we will anniversary the acquisition of Cyclone in May of 2015. This will reduce our year-over-year growth rates relative to the first half levels that we achieved.

Home & Building Products segment EBITDA was $17.3 million, increasing 1% compared to the prior year quarter. This increase was primarily due to the inclusion of the Cyclone business, improved mix and increased door volume, which was partially offset by reduced volume at AMES and a 5% unfavorable impact from foreign currency.

In our Telephonics segment, revenue of $99 million was below the prior year levels of $104 million, primarily due to decreased timing of work performed by communications and surveillance systems partially offset by the timing of work performed on Multi-Mode Radar systems.

Telephonics EBITDA decreased $900,000 from the year ago quarter primarily as a result of the reduced revenue. EBITDA margin was 11.8% of sales compared to 12% in the prior year quarter.

Telephonics received $85 million in orders during the quarter and segment backlog remains strong ending the quarter at $480 million, plus 73% of which is expected to be realized in the next 12 months. So, our visibility for the balance of the fiscal year remains quite solid.

Plastics revenue totaled $138 million, declining 9% compared to the prior year quarter primarily due to unfavorable foreign currency translation, reflecting both the weak euro and the weaker-still Brazilian real.

Segment EBITDA was $15.8 million, decreasing 3% from the prior year primarily as a result of the 12% foreign currency impact, partially offset by favorable resin pass-through and improved operating efficiencies. Segment level EBITDA margins improved 80 basis points to 11.4%.

And we are pleased to see Plastics margin levels beginning to regularly exceed our 10% margin target. Our consolidated gross profit for the quarter was $114.4 million, a margin of 22.9%, up 120 basis points from the prior year quarter.

Selling, general and administrative expenses were $93.6 million, approximately 18.7% of sales, increasing over the prior year level of 17.7% of sales primarily due to the inclusion of Cyclone. For the full year 2015, I expect SG&A expenses will approximate 19% of sales compared to 19.1% for the full year 2014.

Net income was $5.1 million or $0.11 per share compared to a net loss of $25.8 million or $0.53 per share in the prior year. Current quarter results had a minor discrete tax provision that had no material impact on earnings per share.

The prior year quarter includes a restructuring cost of $700,000, $400,000 after tax or $0.01 per share loss from debt extinguishment of $38.9 million, $25 million after tax or $0.51 per share, discrete tax provisions of $600,000 or $0.01 per share and a benefit of the debt extinguishment on our effective tax rate for the quarter of $5.8 million or $0.12 per share.

So working through all those and excluding those items, current quarter adjusted net income was $5.3 million or $0.11 per share compared to $6 million or $0.12 per share in the prior year quarter. As we mentioned, the current quarter earnings per share, excluding the impact of foreign currency, would have been $0.14 per share.

As mentioned in opening comments, the reconciliation of GAAP to non-GAAP results is included in our press release schedule. Touching on taxes, the effective tax rate for the current quarter was 37.5% compared to a benefit of 16.1% in the prior year quarter.

The current year quarter and the prior year include a net provision of $200,000 and $600,000 for discrete items. Excluding those discrete items, the effective tax rate for the quarter was 35.7% compared to a benefit of 18.1% in the prior year.

As we have commented on in the past, our tax rate is declining as pretax results improve and the relative impact of permanent differences diminishes. We continue to expect the rate excluding discrete items to be in the range of 35% to 37% for fiscal 2015, the same guidance given on our last call.

As in the past, geographic earnings mix may impact rates somewhat, and the rate may also vary in the event of any legislative action taken with respect to U.S. corporate tax rates. Capital spending in the current quarter was $20.8 million. We continue to expect capital spending to approximate $80 million in fiscal 2015.

Depreciation and amortization was $17.2 million in the quarter. And for the full year, we expect depreciation to approximate $60 million and amortization of about $8 million, again in line with previous guidance.

At March 31, 2015, we had $43 million in cash, total debt outstanding of $868 million, which resulted in a net debt position of $825 million. As we have talked about it in the past due to seasonality, the first half of our fiscal year has historically been a period of operating cash usage.

And consistent with the past, we expect the second half to generate significant cash flow in excess of the first half usage. At March 31, we had $134 million available for borrowing subject to certain loan covenants under our revolving credit facility.

And based on the first half results and our expectations for the back half of the year, we are reaffirming earnings guidance that we previously provided. By segment, we expect Home & Building Products revenue to grow in the mid to high single-digits compared to the prior year.

This considers the benefits of the Cyclone acquisition, which we will anniversary midway through our third quarter. Plastics is expected to decline in the high single-digits reflecting the ongoing impact of the stronger dollar versus the euro and the Brazilian real as well as the impact that declining resin costs will have on our selling prices.

And we continue to expect full year growth in Telephonics in the low single-digits. In providing this guidance, we remain mindful of the various risks that would – may affect our results, including AMES business being the most subject to the weather that can dramatically affect point of sale at many of our customers and directly impact our revenue.

Through late April, we have seen strong lawn and garden sales, but the weather needs to continue to drive point of sale volume for our customers and revenue for us. We continue to foresee a gradual recovery in housing, including repair and renovation of existing housing stock, which will benefit our doors business.

And while Telephonics backlog is solid, the future of Department of Defense budget remains uncertain and it’s difficult to predict the time required to develop international opportunities for Telephonics business.

And finally, Plastics guidance is always the most susceptible to variation due to a combination of resin pricing and foreign currency translation. And we are also mindful that half of the business in Plastics is in Europe and Latin America, where macroeconomic conditions remain somewhat uncertain.

Based on the revenue expectations I just outlined, we continue to expect our segment adjusted EBITDA to be $200 million or better, representing a 5% or better improvement over that achieved in 2014.

And in forecasting this level of profitability, we are giving full consideration to the long-term R&D initiatives that we have underway, most notably in Telephonics and in Plastics, that will impact operating results for the next couple of years, but which we expect will yield significant savings in the long term.

Corporate and unallocated expenses are expected to continue to approximate $34 million, including all equity compensation for the company, which will approximate $11 million to $12 million. And with that, I will turn the call back over to Ron..

Thanks. With half of our fiscal year behind us, we are very pleased with our performance and confident in our ability to achieve the targets that we have communicated. 2015 is an exciting year for Griffon and important to our path forward.

The majority of the restructuring costs are behind us and we are beginning to see operating leverage in each of our segments delivered to the bottom line. We see our earnings per share growth accelerating in the years to come.

Looking forward, we have ample resources to invest in each of our segments 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 share repurchases. I am very pleased with the progress we have made and I am quite confident about our future.

With that, operator we would like to open it up for questions..

[Operator Instructions] And we will take our first question from Bob Labick with CJS Securities..

Good afternoon..

Hi, Bob..

I want to start with films, obviously some very nice performance there, particularly on the margin side, we have seen Kimberly-Clark may be looking to continue to increase its outsourcing for some of its personal care products, I know you guys have done work – do work with them, can you just tell us how you are positioned to benefit if they do increase their outsourcing?.

Yes. So we clearly think that we are positioned for additional products across their business, and the timing of that is always up for negotiation. But our company has positioned ourselves for growth with Kimberly, with Procter & Gamble and throughout the balance, it’s both North America, Germany and Brazil.

So timing and specifics, but we think there is a significant opportunity for us with Kimberly..

Okay, great. And then you mentioned the margins were very strong there.

Are there additional initiatives you are taking, can you keep them at this level, is this – are there still further resin benefits to come through or where do we stand in that cycle?.

I wish we were bright enough to be able to predict the future of resin prices, Bob. There has been a fairly sharp decline over the last couple of months, which will then work its way through our selling prices in the next couple of months. As you know, we are pricing on a lag basis.

But it seems as resin has bottomed out or flattened out the last month or so. The benefit on the bottom line will diminish a little bit over the next couple of months and – as we phase in the downward pricing adjustments to reflect the decline in resin..

Bob, it’s Ron. Having said that, we still think that we are going to get continued improvement operationally in both Germany and Brazil, which will help continue the path of success that we have been on in that business.

While foreign currency translation was obviously an impact, but the broader issue is consumer demand in – outside of the United States is still sluggish. So, in improving global economy and stability in exchange rates both have the potential for further improvement to margins in that business..

Okay, great. Thank you. And then jumping over to Telephonics, obviously, they are performing well in a tough budgetary environment.

Are there any updates on the Fire Scout program or any of the other kind of future opportunities we have talked about in the past?.

Yes, it’s still in the pipeline, still things that we look as coming into production in fiscal ‘16 and beyond. So, it’s fully funded green light project.

Telephonics, as the backlog numbers continue to indicate, sticking to intelligence, surveillance, reconnaissance, the growth of the Fire Scout program all give us visibility in spite of what’s still a very challenged budgetary environment. So, our business has gone through many cycles.

We think the defense spending cycle is closer to a bottom here and we think we will be a beneficiary of it over the next several years. One of the programs that we are excited about is Fire Scout and that’s looked at over multi-years from here..

Yes, there is a fairly nominal amount of revenue in the current year associated with it, Bob. It’s still in the right terms, not necessarily development, but evaluation phase. It’s a fairly nominal amount this year..

Okay, great. Thanks. And then on HBP, I believe your restructuring is now complete.

Have we – are you starting to see the benefits in the current quarter or is that more for the back half of this year?.

As you know, it’s a good question, Bob. We basically completed that program at the end of December and we began to realize the cash savings, but most of the savings are really manufacturing expenses.

So, it – the savings that we realized in the first quarter of this calendar year, our second quarter are really in inventory right now more so than flowing through the P&L. So, you will begin to see the P&L benefit of that in the second half of this year..

Great. And then just last one from me, now with this completion of the HBP restructure you have restructured, I think the operations in each of the segments now.

And so what are the next broad strategic steps on your plate?.

Look, we are constantly working on strategic initiatives within the businesses and performance is a function of operating efficiently. We are in the harvest mode. And we believe that our businesses have the right strategies in place, management teams that were quite confident can execute those strategies.

And we are in a luxurious position of running the businesses that we own for increasing financial performance, generating more cash, which is for us to figure out how to either redeploy in the businesses that we own through bolt-on acquisitions or share repurchases or additional dividends.

And the ambition for us is to continue to grow by looking for unrelated businesses to add to our mix. So, we like where we are. We like where each of these companies are. There is challenges on a daily basis within our businesses and there is plenty of things to be concerned about on a macro environment.

But our companies are doing very well and we are quite excited about being able to continue to improve our operating performance in the years ahead..

And also Bob remember we are investing in capital and the businesses. We have talked about the capital spending $80 million this year and we have also made reference to the long-term R&D initiatives that we have most notably in Plastics and Telephonics. So, we are really investing for the long-term prospects for those businesses as well..

Alright, thank you very much..

Thank you..

[Operator Instructions] And we will take our next question from Justin Bergner with Gabelli & Company..

Good afternoon everyone..

Hi Justin..

Hi Justin..

Hi Ron. Hi Doug. First question relates to the guidance for growth.

I mean if you look beyond the FX impacts, if you look beyond sort of the resin impact and you look beyond the weather impact that might have challenged the current quarter, are you changing any element of your organic growth guidance?.

No. The only thing I made reference to it in my comments, Justin is we did adjust downward the revenue expectation for Plastics because the currencies against the dollar are weaker than they were when we last provided that guidance and also resin pricing has declined.

So we anticipate that revenues in the second half of the year or through the full year 2015 will be impacted by that. But organically, from a volume perspective, no we are not changing guidance at all. And we also, at the risk of repeating myself, we reiterated the $200 million or better EBITDA expectation..

Got it.

So the slightly lower Home & Building Product guidance is just a function of some currency in the international markets you serve?.

No, the Home & Building Products is identical, that’s – to what we said the last time, mid to high single-digits..

I am sorry, I must have misheard. Thank you..

Okay..

Secondly, in terms of the – I am just trying to sort out some detail, the press release mentioned that Cyclone was a 6% boost to Home & Building Products, but an 8% boost to AMES in particular?.

It’s included in our AMES business, remember its lawn and garden tools. So that rolls up under the AMES reporting..

Okay.

I was just thinking if it was a 6% boost to Home & Building Products as a whole, it would be a larger boost to AMES within Home & Building Products versus that 8%?.

It could be in the rounding, Justin. My one rounding up and the other rounding down, but that’s – it’s all based – it’s just working the math through..

Okay.

And on the margin side, are you seeing any impact from the mix shift, I guess towards Clopay from AMES within your margin performance in Home & Building Products?.

No, not of a discernible nature, I am not quite sure what you might be thinking of.

Is there something specific?.

Well, I was just thinking about the fact that Clopay was up 15% year-on-year and AMES was flat.

And I was just curious if that had any impact on the margin performance of Home & Building Products?.

Again, not of a discernable nature..

Okay.

And then finally, I think this question was already asked to some degree, but should we think of the March quarter pace of repurchases as being something you would like to sustain or is it perhaps more likely that we would see a slowdown or pause from here versus that pace?.

I think you have to look at it relative to a longer period that I think we have a very clear internal point of view about the underlying values of each of our businesses and what that means. And on an ongoing basis, we judge the value of our own businesses against what we can buyback stock at.

And we saw that, over a period of years, we have been able to buy $150 odd million worth of stock at an average price of $11.30. From the last quarter, we saw an opportunity to buy significant amount of stock based on what we understood to be our operating performance.

So, there is no set guideline about the timing of repurchases, but we continue to believe that our stock has compelling value. And when we have free cash flow, we are going to be able to put it to work..

Great, thank you very much..

And it appears there are no further questions at this time. So, I will turn the conference over to Mr. Ron Kramer for any additional or closing remarks..

I just like to thank you all for hearing our story and we are going to be hard at work to deliver the balance of 2015 and to continue to build the company. Thank you..

Thank you for your participation. This does conclude today’s call..