Ron Kramer - Chief Executive Officer Brian Harris - Chief Financial Officer.

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

Good day, and welcome to the Griffon Corporation First Quarter 2017 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Brian Harris, Chief Financial Officer. Please go ahead sir..

Thank you, Eric. Good morning, 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 website.

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 the 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 our 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 morning, and thanks for joining us today. We are off to a solid start to the year. Our first fiscal 2017 quarter reflected overall margin expansion with notable improvements in our Plastics and Home & Building product segments. I am very pleased with the execution of our team during the quarter.

We continue to focus on efficiency improvements throughout our businesses and the underlying trends in our businesses remain positive. Revenue was $467 million compared to the prior year period of $494 million with the decrease primarily from an expected decline for Telephonics.

While down 5% for the quarter, revenue met our internal expectations and we anticipate as the year progresses, we will be on track for 2% to 3% consolidated revenue growth. Our first quarter segment-adjusted EBITDA was $54.4 million, up 5% from the prior year.

As I previously mentioned, improved profitability was driven by our Home & Building Products and Plastic segments. Before turning to our segment level comments, I would like to provide an update on recent news within the company and capital deployment activities and return of cash to shareholders.

Earlier this month, we announced that Mike Sarrica has been promoted to Senior Vice President of Operations for Griffon.

Mike has been the President of Ames since January 2014 and in his new role will support the day-to-day operational oversight of all of our businesses and the due diligence integration and synergy evaluation of potential merger and acquisition targets. Replacing Mike is Mark Traylor, who has been appointed President of the Ames Companies.

Mark has been Chief Operating Officer of Ames since 2015 having joined us through the acquisition of Southern Patio in 2011. We are pleased to have Mike and Mark in their new roles and we are confident they will continue to perform at a high level.

Moving to our capital deployment and return of cash to shareholders, in the first quarter of 2017, we bought 129,000 shares for a total of $2.2 million or $17.06 per share. In the last five plus years, we’ve repurchased 20.4 million shares representing approximately one-third of our 2011 outstanding shares.

As of December 31, 2016, $49 million remains under the August 2016 Board authorization. In addition, earlier today, we announced a quarterly dividend of $0.06 per share.

This return of cash to shareholders remains a focal point in our strategy for total shareholder return as we carefully and regularly assess our use of capital to balance organic growth and grow through acquisition with shareholder returns through repurchases and dividends.

Looking forward, we expect increasing free cash flow generation as our businesses continue to improve performance and capital expenditures return to normalized levels. Also on January 17, we’ve settled our $100 million 4% convertible notes for a total of $174 million comprised of $125 million in cash and 1,954,993 shares of common stock.

We’ve borrowed on our revolving line of credit for the cash portion of the settlement. Now I’d like to discuss our businesses before turning the call back to Brian for a little more discussion of our financial results and outlook. Let’s start with Home & Building Products.

On December 30, 2016, Ames Australia acquired Hills Home Living for approximately $6 million. Hills, which was founded in 1946 is a market leader in the supply of clothesline, laundry and garden products. The Hills acquisition adds to Ames existing broad category of products and enhances our lawn and garden product offering in Australia.

We continue to believe there is an underlying strength in US housing market with the slow but steady multi-year housing recovery contributing to our improved results. The US Census Bureau shows 2016 single-family residential construction starts of 781,000, which increased 9% over 2015 but are well below historical norms.

Also according to the National Association of Realtors, 2016 existing home sales increased to $4.8 billion 4% over 2015. We remain very positive on the outlook for Home & Building Products segment. Telephonics, during the quarter we received several new bookings totaling $52 million.

Segment backlog remains healthy and ended the quarter in line with our own expectations of $384 million, 79% of which is expected to be realized in the next 12 months giving us good visibility for the balance of fiscal 2017.

Despite the lower revenue in the quarter, it’s important to note that this segment can fluctuate from quarter-to-quarter and we expect revenue and margin to improve throughout the balance of the year.

Telephonics’ core portfolio of Maritime Surveillance Radars, Identification Friend or Foe Systems and Border Protection Systems continue to gain interest from domestic and international customers. We are quite excited about the future of that business.

Plastics, we are pleased to see margin expansion and operational improvements taking hold in the Plastics business as our EBITDA margin improved by 310 basis points over the prior year quarter. Our investment in SOFLEX has been progressing and we continue to work towards our first customer launch later this year.

With that, I’ll turn it back to Brian..

Thank you, Ron. First quarter revenue was $467 million, a 5% decrease compared to the prior year. By segment, Home & Building Products revenue increased 1% while Plastics and Telephonics decreased 7% and 19% respectively all in comparison to the prior year quarter. Gross profit for the quarter was $116 million consistent with the prior year period.

Gross margin increased 140 basis points to 24.9% compared to 23.5% in the prior year first quarter. Quarter selling, general and administrative expenses were $89.7 million or 19.2% of sales, compared to $91.3 million or 18.5% of sales in the prior year. Segment-adjusted EBITDA increased 5% to $54.4 million.

By segment, Home & Building Products increased 7%, Telephonics decreased 22% and Plastics increased 23% all in comparison to the prior year quarter. For 2017, we continue to expect full year segment-adjusted EBITDA of $225 million or greater. Our effective tax rate was 5.5% compared to 19.2% in the prior year quarter.

Tax rates for the quarters ended December 31, 2016 and 2015 included net benefits of $4.3 million and $2.6 million respectively, primarily related to the adoption of recent FASB guidance which requires the company to recognize excess tax benefits from the vesting of equity awards within income tax expense.

Excluding these benefits, the effective tax rates for the quarters ended December 31, 2016 and 2015 were 38.3% and 38.6% respectively. For full year fiscal 2017, we continue to expect our tax rate excluding any period items to be approximately 38%. As is always the case, geographic earnings mix and any legislative actions may impact rates.

GAAP net income in the first quarter was $12.3 million or $0.29 per diluted share, compared to the prior year period of $10.8 million or $0.24 per share.

Excluding the earlier mentioned tax benefits, adjusted net income was $8 million of $0.19 per share, compared to $8.2 million or $0.18 per share in the prior year period, an increase on a EPS basis of 6%. First quarter capital spending was $22.5 million.

For the full year 2017, we continue to expect capital expenditures to be in the range of $80 million to $85 million, which includes the previously announced investments in Plastics capacity and equipment upgrades. Depreciation and amortization for the first quarter 2017 was $18.4 million.

For fiscal 2017, we expect depreciation to be approximately $65 million and amortization to be approximately $8 million. As of December 31, 2016, we had $52.3 million in cash and total debt outstanding of $965 million and had $311 million available for borrowing under our credit facility subject to certain loan covenants.

As in the past, the first six months of our fiscal year as free cash flow usage mostly related to seasonal inventory build at Ames. Accordingly, we expect strong, free cash flow generation in the second half of this year. I’ll now turn the call back over to Ron for his closing comments..

I am pleased with the performance this quarter and we are off to a solid start to the year. We are committed to building shareholder value.

Looking ahead for the remainder of 2017, we are excited about the progress we’ve made in our operational improvements and are well positioned to take advantage of future increased infrastructure and defense spending, look forward to lower corporate taxes. We have performed well and we have accomplished a great deal over the last few years.

I am very optimistic about our future. With that, operator, happy to take any questions..

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

Good morning. Congratulations on a nice start to the year..

Thanks, Bob. Good morning..

So I just want to start, if you could please just remind us of your manufacturing footprint and just start taking big picture, how that might – how you might be impacted by any potential border tax changes? How you are positioned for – who knows if it’s ever going to happen, but just remind us how you are positioned in that regard?.

Well, we are predominantly an American manufacturer and while we have operations in Germany, Brazil, Australia, Canada, the majority of our Home & Building Products and our garage core business is entirely a US manufacturing business.

Ames, which I am proud to say has been manufacturing in this country since 1774 and we’re one of the oldest continuous operations. We are uniquely positioned to benefit from whatever initiatives come out of the current political dialogues about supporting American manufacturing.

We have not only been a manufacturer in the United States, we have survived and prospered through a lot of very difficult dumping from foreign manufacturers, whether from China or Mexico.

So, whatever comes out of this, it’s incrementally going to help us and we look forward to both a better US economy and to be able to expand margins as a result of it..

Okay. That sounds great. And then, just, can you give us an update on the winter season? Some parts of the country have had lots of snow, some have had none. Just where do you stand right there? I know it’s an important seasonal aspect for your snow shovel sales..

Sure. So in Canada, we had a much stronger season than the prior year. The US has been roughly flat in terms of winter sales. That’s normally the case. Normally when it snows in Canada, it normally doesn’t drop in to the US and often when it snows in the US, it doesn’t snow in Canada..

Got it. Okay.

Great, and then just, sticking , I guess, well, this could be probably for Home & Building Products and maybe Plastics as well, but just, commodity update for this year, is it bit of a headwind or will you be able to pass through any? Or how is that looking for the prospects for the year?.

So, steel is higher than it was in the prior year. We’ve had certain price adjustments to reflect that impact and our operations continue to improve. We are able to leverage both the Troy expansion that we did last year and continue to leverage the benefits we got from the Ames consolidation that we did a few years before..

I just add to that, that pretty much as we expected the recovery and the growth of top-line in the economy is not nearly as buoyant as we expect it to be in the future when a lot of initiatives are passed to create both jobs and increase spending.

So, commodity prices for us while a variable, we are optimistic that the top-line growth throughout the entire US economy is still ahead of us..

Okay, great. One more and I’ll jump back in queue. Just in regards to the Plastics, there was some volume decline you noted.

Was that - is that related to any potential timing of changeover to SOFLEX? Or is there something behind that? And where do you see volumes this year?.

The majority of the volume decline was in Europe and that’s really reflective of their overall economy there. Brazil continues to improve and North America though down slightly was pretty much on expectation..

Okay, great. Thank you..

Thank you..

[Operator Instructions] And we’ll go next to Justin Bergner with Gabelli & Company..

Good morning and good job on the nice operational quarter..

Good morning..

Thanks, Justin..

I want to dig into Telephonics a bit. I guess, the backlog declined quarter-on-quarter, but the press release did indicate there was some factors relating to the timing of various international contract awards.

Are you expecting then that the March 31 backlog, based upon the comment in the press release will look materially better than the $384 million that we – I guess, you guys reported just now?.

Justin, the exact timing of when the backlog will increase is not in stone, however we do expect it to improve over the balance of the year..

Okay and what level of backlog in the Telephonics business becomes a level that starts to be concerning to Griffon as it relates to its revenue growth and trajectory?.

Well, I’d say, let’s remember that, we still have a sequester that’s in place. So, our level of backlog is a function of the defense spending and we are very optimistic that one, defense spending is going to go up, sequester is going to go away, demand for our intelligence, surveillance and reconnaissance products should increase.

We believe we have major opportunities as a result of the conversation about increasing the size of the US navy will require additional helicopters which will require additional radars. Custom and border patrol remains a significant opportunity for us and we are quite excited about the prospects.

So, our backlog numbers in our minds is, this is a trough in the defense cycle and we are very optimistic that the future should see increased defense spending overall and we should be a beneficiary of it..

Great, that’s a very helpful perspective. Switching over to Plastics, the margin this quarter was notably strong.

Were there any sort of temporary or commodity timing factors that helped the margin for Plastics? Or should we think of the profitability of this quarter as something that can be replicated in future quarters?.

First part of your question, there is nothing unusual. I think this is really good progress on operational improvement and our Plastics business was been a focus for us to be able to become more profitable based on volumes and the pricing that is really always going to be somewhat reflective of resin prices. So there is no one-time event.

And we still have work to do on improving our German operation, but we are very encouraged about the progress we’ve made, the quality of the people that we have in the organization.

And we believe that this level of margins is sustainable, but not always predictable that it’s going to remain at these levels quarter-to-quarter, year-over-year, but we’re at the higher end of our own expectations of what margins in this business can represent..

Great. That’s helpful perspective as well.

One final question, as it relates to balance sheet and capital structure, now that you’ve executed, I guess, the cash settlement of the converts, what are the priorities for capital allocation and does repurchase including a potential sort of repurchase of the Goldman stake sort of remain a meaningful potential source of – or sort of use of cash flow in the current fiscal year?.

We’ve tried to build the balance sheet to create optionality and I think that’s served us well for our investors who’ve been with us for a long period of time. We’ve created shareholder value over any measurable period.

We believe that our business today is at a inflection point of being able to generate increasing free cash flow over the next several years based on running the businesses we have into an improving economy with an ever more efficient operating profile. The natural deleveraging of that will create – creates optionality for us.

Our goal is to find ways to invest that capital that are going to improve the shareholder value. Our hope is that that’s through acquisitions. But the reality is, is that acquisitions have been both difficult to source and expensive to create value which led to us buying back a significant amount of our own stock over a period of time.

We will always be opportunistic and have been on buying back stock and the likely scenario is that we are going to look to both build up cash on our balance sheet, potentially buyback stock, potentially increase dividends and always look at creating value for our shareholders..

That’s helpful.

Does that mean that, sort of – I know that Griffon Corp is interested in making appropriate acquisitions, I mean as we look at the environment today versus three to six months ago, are the sort of acquisition opportunities becoming more prevalent or less prevalent as you sort of take them and filter them through your different screening processes?.

The predictability of when things can get done is always unknown, we are very busy and we see plenty of opportunities. The key to our advantage as an acquirer of companies is not financial, it’s operational and we believe that we can take businesses and improve them.

Finding opportunities to do that and look at what we’ve done, which is to buy small, value-enhancing tuck-ins around the businesses that we already own and that has worked quite well for us. We see that ongoing in Australia. We are hopeful in the UK as our biggest customer in Australia, Bunnings expands into that market.

We are committed to support their growth there and that is likely to lead us to want to find acquisitions in the UK that fit into our Home & Building Products segment. Domestically, we are very excited about some of the opportunities we see coming across our desk.

But until we have something that’s actionable, what you should assume is that we are going to just run the businesses we have into an ever increasing free cash flow story..

Great. Thank you, Ron for taking my questions..

Thanks, Justin..

And with no questions remaining in the queue, I’ll turn the call back to Mr. Kramer for any additional remarks..

Thanks and we look forward to speaking to you again in May..

And this concludes today's call. Thank you for your participation. You may now disconnect..