Ron Kramer - CEO Brian Harris - CFO.

Michael Conti - Sidoti Chris Moore - CJS Securities Justin Bergner - Gabelli & Company.

Good day, and welcome to the Griffon Corporation Third Quarter 2016 earnings conference call. Today's call is being recorded. And at this time I would like to turn the conference over to Mr. Brian Harris, Chief Financial Officer. Please go ahead, sir..

Thank you, Matt. Good afternoon everyone. With me on the call is Ron Kramer, our Chief Executive Officer. Our call is being recorded and will be available for playback, the details of which are in our press release issued earlier today and on our Web site.

As in the past, our comments will include forward-looking statements about the company's performance based on our views of Griffon's businesses and environments in which they operate. Such statements are subject to inherent risks and uncertainties that can change as the world changes.

Please see the cautionary statements in today's press release and in various Securities and Exchange Commission Filings. Finally, some of today's remarks will adjust for those items that affect comparability between reporting periods. These items are explained in our non-GAAP reconciliations, included in our press release.

Now I will turn the call over to Ron..

Good afternoon. Thanks for joining us today. We're pleased with our performance this quarter. We delivered adjusted earnings per share of $0.26, which was a 13% increase compared to the prior year.

On a GAAP basis, earnings per diluted share were $0.18, which included a $5.9 million restructuring charge related to our previously disclosed plastics initiatives and discreet tax items.

This performance was the result of outstanding execution as we remain focused on the factors that are in our control, and was achieved despite the softer revenue during the quarter. Third quarter consolidated revenue was $462.2 million, which was lower than the prior year of $511.7 million.

The decline year-over-year was attributable to timing of work performed on various Telephonics product lines, lower AMES volume from unfavorable spring weather and reduced plastic volumes, which was partially offset by the growth at our Clopay building products unit. Segment-adjusted EBITDA was $57.8 million, which is up 5% from the prior year.

This performance was driven by our Home and Building products segment, which posted record segment-adjusted EBITDA of $32.1 million, which is up 26% over the prior year quarter. Before turning to our segment-level details, I'd like to provide an update on our capital allocation activities and return of cash to shareholders.

In the third quarter, we continue to execute on our share repurchase program and bought 764,000 shares for a total of $12.3 million or $16.08 per share. As of June 30, 2016, $15.7 million remains under our 2015 repurchase authorization.

And today our Board authorized an additional $50 million in repurchase authority, bringing our total current authorization to $64.6 million. In the last five years, we've repurchased 19.5 million shares, which is nearly a third of our outstanding stock, which was a total of $245.4 million, or $12.61 per share.

Earlier today we announced quarterly dividend of $0.5 per share which is payable on September, 22 to holders of record on August, 25. Our buybacks and dividends have been accomplished while maintaining balance sheet strength through cash generation from our businesses, and we continue to believe our stock is a compelling value.

This return of cash to shareholders remains a focal point of our strategy as we assess our use of capital to balance growth organically, execute strategic acquisitions and provide shareholder returns through stock repurchases and dividends.

Also, earlier in July, we announced that we would settle on conversion up to $125 million of the conversion value of our $100 million principle amount 4% convertible notes which are due January 2017 in cash, with the incremental amount, if any, to be settled in Griffon common stock.

At June 30, 2016, the conversion rate was 70.2 for a 1000 of principle amount or $14.25 per share. Now I'd like to provide some detail on each of our businesses before turning it back to Brian for a little bit more detail on the financial results and our outlook. So let's start with Home and Building Products.

Third quarter revenue was $255.6 million compared to $272.2 million in the prior year. AMES volume was unfavorably impacted by rainy and cold spring, reducing the demand for lawn and garden tools, wheelbarrows, pots and planters. This was partially offset by a modest increase in our door sales as the mix continues to shift to our premium product.

Despite the lower top line, we are very pleased with our ability to generate higher profit, a segment-adjusted EBITDA of $32.1 million marked a 26% improvement compared to the prior year. This increase was driven by AMES operational efficiency improvements, cost control measures, and coupled with a favorable doors mix and decreased material cost.

As we've discussed for some time now, we believe the underlying trends for Home and Building Products remains positive, and we're pleased to see the slow but steady multi-year housing recovery continuing to drive results. U.S.

Census Bureau data indicated annual single-family construction spending increased 4.8% since June of 2015; however, spending is still well below the 2006 peak. In addition, June annualized existing home sales increased 5.6% year-over-year in the Northeast, and 4.7% in the Midwest, our largest markets.

Our Home and Building Products segment has significant earnings growth potential from the continuation of this housing recovery. Moving to Telephonics, third quarter revenue was $91.8 million compared to the prior year of $115.3 million.

The decline in the quarter resulted from the timing of work on both multi-mode and identification, friend or foe, airborne maritime ground surveillance radar systems. Revenue in the segment tends to fluctuate based on the timing of work performed and ordered deliveries.

Our year-to-date orders and revenue are up 12% and 1% respectively versus the prior year nine-month period, so we're tracking.

During the quarter Telephonics received a contract award from Oshkosh Defense to integrate NetCom communication systems on the new JLTV, and was also awarded a contract by Saab for our model SFF 44A Identification, Friend or Foe Interrogator systems.

We continue to expect growth from both international and domestic opportunities, including those related to the foreign policy in the South China Sea and Middle East.

And we're going to continue to leverage commercial opportunities, like our recent communication systems contract with the Long Island Rail Road in our position on the FAA's Common Terminal Digitizer program. Telephonics is in very good shape. Plastics revenues totaled $114.9 million compared to $124.2 million in 2015.

The decrease primarily reflects reduced North American and European baby care volume. We had improved orders in the first month of the fourth quarter, and we're optimistic about where we are going.

While our total profit was down modestly compared to the prior year quarter, we are pleased to report a segment adjusted EBITDA margin of 11.8%, up 50 basis points over the prior year quarter driven by cost reduction efforts.

During the quarter, we'll begin the restructuring we previewed last quarter at our Dombuhl, Germany facility, and are completing the closing of our Turkey operations. These initiatives will make our European operations more focused, efficient, and more profitable.

As we announced last quarter, we are also investing in capacity expansion and Sof-flex Breathable Film products in North America, Europe, and Brazil. We expect this initiative to drive our long-term second growth and solidify our industry-leading position.

The Sof-flex technology provides a lighter weight material while maintaining customer performance requirements. We've been working with our first customer utilizing this technology. We have high hopes for how this is going and roll out. I'm going to turn it back to Brian, who is going to go through the numbers in a little bit more detail.

And then, we'll close and take some questions.

Brian?.

Thank you, Ron. Consolidated third quarter revenue was $462.2 million, reflecting a decline of 9.7% compared to $511.7 million in 2015. Segment adjustment EBITDA increased 5% to $57.8 million. By segment, Home and Building Products third quarter revenue of $255.6 million decreased 6% compared to the prior year of $272.2 million.

AMES revenue was $122.2 million or 13% decreased compared to the prior year, primarily due to reduced volume caused by cold and rainy spring. In our doors business, sales increased 1% to $133.4 million mostly as a result of the earlier mentioned favorable product mix.

Home and Building Products segment adjusted EBITDA increased 26% to $32.1 million, marking a 330 basis point year-over-year improvement in segment adjusted EBITDA margin to 12.6%.

The improved margin reflects operational efficiency improvements and cost control measures implemented at AMES and the continuation of the favorable mix shift to higher end doors as well as reduced material costs. Turning to Telephonics, segment revenue was $91.8 million compared to $115.3 million in 2015.

Reduced revenue was primarily result of timing of the work and various product lines. Year-to-date, revenue was up 1% over the prior year period. Segment adjusted EBTIDA decreased 23% to $12.1 million compared to the prior year quarter with margin decreasing 40 basis points.

The decrease is attributable to lower sales volume and the timing of R&D spending. Third quarter margin improved 330 basis points over the second quarter. Contract backlog remain healthy and ended the quarter at $415 million, of which, 71% is expected to be realized in the next 12 months, providing good visibility through the balance of the year.

Year-to-date bookings were $279 million, a 12% increase over the prior year period. In our Plastic segment, third quarter revenue was $114.9 million, which led to 7.5% decrease from the prior year quarter, reflecting reduced baby care volume in North America and Europe, and 1% unfavorable foreign currency impact.

Resin pricing did not have a material impact. Segment adjusted EBITDA declined 4% from the prior year to $13.6 million as a result of reduced volume and unfavorable mix partially offset by decrease SG&A. The impact of resin and foreign currency was not material.

Gross profit for the quarter was $119.4 million or margin of 25.8% compared with $123.5 million or 24.1% margin in 2015, a 170 basis point improvement. Third quarter selling, general and administrative expenses were $88.9 million compared to $95.6 million in the prior year.

Our effective tax rate, excluding the impact of restructuring discreet tax items for the nine months ending June 30 was 37.9% compared to 35.7% last year with the difference primarily from geographic earnings mix. For the full year, fiscal year, we expect our tax rate excluding discreet period items and restructuring to be approximately 37%.

As this is always the case, geographic earnings mix and any legislative action may impact rates. GAAP net income in the third quarter was $7.6 million or $0.18 per diluted share compared to $10.9 million or $0.23 in the prior year.

Excluding discreet tax items in both periods, and the current quarter restructuring, adjusted net income was $11 million or $0.26 per diluted share compared to $10.6 million or $0.23 per diluted share in the prior year quarter. Again, foreign currency did not have a material impact. Third quarter capital spending was $17.3 million.

For the full year, we continue to expect capital expenditures to be in the range of $90 million to $95 million. This includes the expansion and upgrade of our doors manufacturing facility, the Q1 property purchase, and the earlier mentioned investing in plastics capacity and equipment upgrades.

Depreciation and amortization for the quarter was $17.7 million, and for fiscal 2016, we expect depreciation to be approximately $63 million and amortization to be approximately $8 million. Additionally, in the quarter we completed an add-on offering for $125 million principle amount of 5.25 senior notes due 2022.

So the company has previously issued 600 million notes. Outstanding senior notes due '22 now total 725 million. In that proceeds of the offer were used to pay down outstanding borrowings under our revolving credit facility.

As of June 30, 2016, we had $68.6 million in cash, and total debt outstanding of $931.6 million, resulting in a net debt position of $863 million. We had $334 million available for borrowing under our revolving credit facility subject to certain loan covenants. During the quarter Griffon generated $62.9 million of cash flow from operating activities.

As in the past, the first six months of our fiscal year saw operating cash usage mostly related to seasonal inventory build at AMES, with the second half producing strong, positive cash flow generation. Year-to-date, cash flow from operations was $57.6 million, compared to $29.6 million in the prior year.

Corporate and unallocated expenses are expected to approximate $38 million for the year, including all equity compensation for the company, which will approximate $12 million. Given our results for Q3 and expectations for the balance of the fiscal 2016, we are confirming our segment-adjusted EBITDA guidance of $215 million or better.

In providing this guidance we're mindful of the risks and impacts of weather to AMES to help with the housing market on Home and Building products, the U.S. Department of Defense budgets on Telephonics, resin pricing on plastics and foreign exchange and macro conditions on plastics and Home and Building products.

In addition, we expect the long-term R&D initiatives that we have underway, most notably in Telephonics and plastics, to positively impact operating results for years to come. I'll now turn the call back over to Ron for his closing comments..

I'm pleased with our performance, and happy to report that we remain on track to deliver to our full-year EBITDA commitment.

We have ample resources to continue to invest in each of our segments, and are committed to shareholder value creation by growing our businesses by buying other businesses, paying quarterly dividends, and continuing our share repurchases.

Let me thank our 6,000 employees in North America and around the world for their extraordinary efforts in very uncertain times. And we look to finish the year out on a strong note. With that, operator, we'll open it up for questions..

Thank you. [Operator Instructions] And at this time we will take a question from Michael Conti with Sidoti..

Hey, good morning..

Good morning, afternoon..

Afternoon..

Afternoon..

Oh, good afternoon rather. Yes.

So, yes, just on the EBITDA margin on the home -- the building products, very impressive just considering the reduction in revenue there, can you just give us an idea on how much each of the drivers you cited in the release just contributed to the margin expansion? And then may be just a sustainability of margins at these levels going forward?.

I'll give you a little bit of the background. We've been working for some time at improving the manufacturing efficiencies at both AMES and at Clopay building products. Revenue is somewhat out of our control on the AMES side based on weather patterns.

And obviously this has been a year of both diminished winter, snow-related activity, and a rainy spring. So impressive part to us as we look at the business we've been able to do more with less. And that can't control the weather, we can't control our overheads. And the AMES side of the business has made tremendous improvements.

And the doors side of the business, we've been building the business back from the depths of the financial crisis. We've invested in plant and equipment. We're in the process of expanding our facilities.

So we believe that our margins are sustainable in both of these businesses, and the top line growth, the housing, we think has got plenty of upside ahead of it. I'll note that homeownership came out in the last week or so is at a 50-year low, and this is seven years into a recovery. So housing is clearly got much, much more expansion ahead of it.

And our door business is the leading high-end residential garage door company, and we have every expectation that we're going to keep and expand our market share into a better housing market.

So the conclusion is that our manufacturing overheads are in a terrific place for us to be able to hold margins, and we'll be able to deliver returns that should be even better with more revenues. But the revenues are going to be on the AMES side always subject to the various weather patterns. But we're very pleased with how that business is doing.

And this quarter is a reflection of what's been years of hard work and positioning the overheads of those businesses..

Okay, great. And then on the AMES side, just the reduction in revenue there, how does that impact inventory going forward? I guess, do those sales get made up throughout the year or how should we think about maybe, I guess, realizing those revenues in later quarters if any..

The beauty of that business is the products don't go out of style. So the inventory that we do carry over when the selling season ends and we're at the end of the summer season, and now we're loading in for the fall season, and producing for the winter season.

So over time we're not worried about inventory obsolescence, and we will always have more inventory than our customers ever need for any product that we manufacture because we always want to be able to please our customers. So we're very pleased about where the AMES business has been able to manage its inventory.

And we've been -- to me the biggest story is the cash generation that we've been able to do through better inventory management over the last several years.

Brian, you want to add anything to that?.

No, I'll just add, with the efficiency work we've done there we're now able to produce inventory more on demand as in the past. So we've been able to manage inventory through this weather -- or poor weather season, and not has much as we would otherwise. And you can see that reflected in our cash flow..

Okay.

And then just switching over to the plastic side with the Sof-flex investment now that's been in the works for a couple of months, can you just update us on the progress you're seeing there? I think, Ron, you mentioned one customer is currently in the testing phase, but curious on some of your other customers if they're -- also plan on using that product within in the next six to 12 months.

Any update there would be great..

These are investments that are made over years. And the short-term results are encouraging, and we fully expect this to be a technology that will lead to other customers and higher volumes in this business over the years to come.

So we think it has application to all of our customers, and we're in the initial test phase, and we expect to roll it out this -- over the next year..

Okay.

And the last one from me, just on the Telephonics, with its backlog; I was just wondering what the book-to-bill might be, and how do you expect back on to [ph] trends over the next several quarters just given some of the wins that you guys have noted?.

The book-to-bill in the quarter was below one, just a reflection of the timing we were discussing earlier. However, looking forward, we have a lot of opportunities, both internationally and domestic. International opportunities take a little longer to complete and bring to contract. But the outlook is very good for the business..

Great. I'll hop back in the queue..

Thank you..

Thank you..

We'll move now to Robert Labick with CJS Securities..

Yes, it's Chris Moore actually for Bob. Yes, maybe we could just talk a little bit more about the Sof-flex. Generally speaking can you just kind of talk about the difference between this film and the current generation to get a little better understanding..

Thinner, higher performance and you know that has an impact on both weight and use of raw material for our customers. So the intent of it is for us to be able to keep or expand our margins, but to make the product a better performing, lighter weight, easier to pack for our customers to be able to put more into a box, to simplify it.

So it really is the next generation of the flexible film that we are the leaders in. And this has been an ongoing to make it thinner, better-performing. And that's been the story for 20 years in this business..

When you had moved to a thinner breathable film years ago, initially the revenue and earnings in the films declined.

Is this a different situation that we're talking about here?.

We are making these investments to be the leading edge, and have every expectation that we're going to be able to both maintain revenue and increase margins as a result..

Got you. Maybe just switch to Telephonics again for a second, can you talk a little bit more specific about -- just an update in terms of JLTV and the FAA work and -- just to get a sense in terms of where you are on those projects, and what the timing is..

Sure. So right now we have a contract to integrate our NetCom communication system into the HMMWV private sector [ph] vehicle that is now being done by Oshkosh. So this is a long-term, many, many units ultimate opportunity for us. So it's probably a 20-year-plus project.

We're talking 50,000 units for the Army, and 5,000 units for the Marines opportunity. And the whole project, not just our piece of it, but the whole project is a $21 billion projected project. And for us, it would be worth hundreds of millions over a long period of time..

Got you. Okay, all right. Thanks guys..

Thank you..

[Operator Instructions] We'll move now to Justin Bergner with Gabelli & Company..

Good afternoon, Ron. Good afternoon, Brian..

Good afternoon.

How are you doing?.

Good. I wanted to dig a little bit more into Telephonics. The orders are up year-to-date, but the book-to-bill is not just negative for the quarter, but year-to-date. And I guess what I'm trying to figure out is with the backlog at the lowest level in a few years.

Is there anything one-time oriented about how you're booking -- putting orders into backlog? Like is there stuff that could be in backlog, that's not in backlog yet, or how do I get comfort given the very low level of backlog?.

I wouldn't characterize it as low level; still substantially over 400 million..

So things to into backlog when they're confirmed orders. We have not changed the process in which we do that. That has remained the same. In this business timing will affect the backlog, so it goes up and down based on win overs come in. And as I mentioned, we have a lot of foreign opportunity that take time to bring to contract [indiscernible].

There's no issue with the business. We have a lot of opportunity ahead of us. We believe the backlog will go up and down as these orders come in and we fill those orders..

Okay.

I mean, if you take a program like the JLTV, how does that flow into the backlog or how do these longer duration programs flow into the backlog?.

Sure. So right now we just have the initial contract to integrate into their systems. And as we are fully -- win and get in, and the orders come in, those will go into backlog at that time. But we do not recognize them until the orders are confirmed..

Okay, great. I'll switch to Home and Building Products.

As you sort of talk about the sustainability of margins, are you sort of referring to the sustainability of current quarter margins or sort of year-to-date margins?.

Year-to-date margins..

Okay. That's helpful.

And with respect to Clopay Plastics, is this restructuring charge one and done? And if so, when will the cash expenses be incurred, and why is the charge somewhat higher than the initial sort of 5 million referred to a quarter ago?.

Sure. So, first, it's -- one is done, we're not expecting anything else in this year. We always will look at our business and look at opportunities. So I won't say nothing more ever happened in the future.

As far as the cash layout, the cash mostly within this fiscal year some of which may occur in next fiscal year, as we pay out severance, and we will recognize benefits from those mostly starting in next year, fiscal year '17.

We will continue to -- oh, the reason why it's a little higher is we just saw a little more opportunity to take a little more cost out of the business, and as we figured out which products we want to rationalize out and what equipment and people we thought should come out of the business, the number ends up a little higher than we originally anticipated..

Okay. Thanks for that clarity.

Thinking big picture about the business, sort of how would you describe your appetite for M&A today and versus where it might have been six months ago?.

The timing of acquisitions are always uncertain, but the pipeline is fuller than it's been in some time.

And our appetite is driven by our success in managing the businesses that we have, and we are very active in looking to do bolt-ons around the businesses that we think are great platforms with great leadership teams, particularly the Home and Building Products segment..

We have big ambitions and the capital markets are tack on, our bonds availability of credit for us is quite attractive, but the scare resources management and we think we are very good at managing operating businesses, and we have every hope to take on some more businesses and add to the mix.

In the meantime, we'll continue to run the business we have, continue to improve the operating performance, and we'll -- in an economic malaise, we'll try to find some growth in the businesses that we already have, but buying the businesses has become increasingly interesting and priority for us going into the balance of this year and into 2017..

Okay. That's good to hear. And then just finally, could you clarify what the tax rate is expected for this year? I'm not sure I caught that earlier..

Sure. We're expecting 37% this year..

Thanks..

Okay. This concludes the Q&A session. At this time I will turn it back over to management for any additional or closing remarks..

We look forward to speaking to you all in November. Thank you. We'll be working hard to finish fiscal 2016 on a strong note. Bye-bye..

And again, that does conclude today's conference call. Thank you all for your participation..