Brian Harris - CFO Ron Kramer – CEO.

Lee Jagoda - CJS Securities Justin Bergner - Gabelli & Company.

Good day and welcome to the Griffon Corporation Third Quarter 2017 Earnings Conference Call. Today's conference 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.

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 our 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 and thanks for joining today's call. We are pleased with our third quarter results, strong demand in Home & Building Products' resulted in its 8% increase in revenue and record segment adjusted EBITDA.

Plastics revenue and EBITDA remain consistent with the prior year quarter and Telephonics revenue and EBITDA decreased from the prior year quarter. We remain positive on the earning power of businesses and are confirming our 225 million segment adjusted EBITDA guidance for fiscal 2017.

Before turning to our segment level comments, I'd like to provide an update on recent news, capital deployment activities and return of cash to shareholders. On July 31, AMES acquired La Hacienda Limited, a leading United Kingdom outdoor living brand of unique heating and garden decor products, for approximately $11.0 million.

The acquisition broadened AMES' global outdoor living and lawn and garden business and supports its UK expansion strategy. The acquisition is expected to generate $18 million in annualized revenue and to be accretive to Griffon earnings in its first full-year of operations.

Also in July, AMES represented the Common Wealth of Pennsylvania, at the White House Made in America product showcase. Founded in 1774, AMES is the third oldest brand in America and the nation's leading manufacturer of landscape and gardening tools.

AMES has a rich history of building America and manufacturing in the United States, and we're very pleased to be featured and it's an exciting moment for our employees to be recognized on a national level.

Griffon, is in a unique position to benefit from enhanced economic growth, domestic infrastructure and national security spending, and tax reform, and we remain optimistic that all these are going to happen. Moving to our capital deployment and return of cash to shareholders… We've not repurchased any common stock since the first quarter.

As of June 30, 2017, 49 million remains under the August 2016 board authorization. In addition earlier today, we announced the quarterly dividend of $0.06 per share. Consistent with the seasonality of our businesses, Griffon's first half of the year had free cash usage and the second half of the year is expected to generate significant free cash flow.

Griffon's businesses provided $40 million in free cash flow in the third quarter resulting in $6 million of free cash flow year-to-date, which is a $10 million increase over the prior year-to-date period.

We expect significant additional free cash flow generation in the fourth quarter and ultimately that's the story about the years to come with Griffon generating increasing amounts of free cash flow.

Now, I'd like to provide an update on our segments before turning the call over to Brian for a more detailed discussion of our financial results and outlook.

Let's start with Home & Building Products, Clopay doors and AMES saw a strong growth during the quarter and we remain very positive on the outlook for Home & Building Products, as we continue to grow sales and improve our profitability through efficiency initiatives and product innovation.

Segment revenue was up 8% during the quarter while segment adjusted EBITDA was up 3.3% for a record $33 million. This improvement in EBITDA was achieved despite an unusually cold and wet spring in North America and a headwind from higher steel costs. So, while the performance is excellent, the potential here is even better.

We continue to see underlying strength in the U.S. housing market with the slow, steady multiyear housing recovery contributing to our improved results. Single-family residential construction continues to improve, however annualized starts remain below historical norms. The U.S.

Census Bureau indicated 2017 year-to-date June single family residential construction starts increased 8% over the 2016 period; also according to the NAR, National Association of Realtors, June 2017 annualized existing single family home sales increased to 4.9 million or a 0.6% improvement over the comparable 2016 data.

These data points further indicate that housing market continues to improve. We expect Home & Building Products to further its revenue and earnings growth in the years ahead. Turning to Telephonics, the results this quarter reflect the current slow pace of U.S. Defense spending and the timing of international orders.

During the quarter Telephonics was awarded year two of a multiyear indefinite delivery, indefinite quantity production contract by Lockheed Martin for automatic radar periscope detection and discrimination, radar retrofit kits, which is valued at approximately $37 million. This contract supports the retrofit program for the U.S.

Navy's MH-60R Seahawk helicopters. We're expecting initial deliveries to begin in spring 2018. Though sequestration continues to be in effect, there have been some recent indicators that Defense spending will be increasing.

For instance, the House Budget Committee mark up with the fiscal year 2018 defense budget proposes elevated spending consistent with the House and Senate Armed Services Committees, National Defense Authorization Act, the budget proposes a base budget of $621 billion inclusive of National Security Spending, an increase of 11% over fiscal 2017.

In addition, the budget included $75 billion for the global war on terrorism and Border and Homeland Security. Telephonics with its highly sophisticated technology and product offerings along with their incumbent positions and field proven capabilities is well positioned to ultimately benefit from these improved levels of spending.

In addition, there're many international opportunities such as the recent $350 billion, 10 year U.S. Saudi weapons deal which Telephonics expects to participate in. Turning to Plastics, we continue to execute well on our breathable films strategic initiatives focusing on innovation and capacity expansion.

We continue to see additional breathable film opportunities as more products switch from non-breathable, white film to breathable printed films for baby diapers. This supports our ongoing investment in breathable and print capacity and innovation. With that, I'll turn it over to Brian for a closer look at the numbers..

Thank you, Ron. Consolidated third quarter revenue increased 2.4% to $473 million compared to the prior year level $462 million. Increased revenue in the quarter was driven by strong performance in our Home & Building Products segment with Plastics revenue being consistent with the prior year and partially offset by lower sales for Telephonics.

Third quarter 2017 consolidated segment adjusted EBITDA declined to $53.2 million compared to the prior year period of $57.8 million. We continue to expect fiscal 2017 segment adjusted EBITDA of $225 million driven by a continued improvement in our Home & Building Products' segment.

As usual, we are mindful of risks related to timing impacts on Telephonics revenue, fluctuations in resin pricing and foreign exchange rate, and in the case of the fourth quarter timing of winter snow tool load in sales.

By segment of Home & Building Products third quarter revenue increased 8% to $277 million compared to prior year period of $256 million. AMES revenue increased 11% to $136 million compared to prior year period of $122 million.

Despite the second consecutive year with a cold and wet spring in North America, AMES sales improved from market expansion and the December 2016 Hills acquisition in Australia and increased AMES U.S. lawn tool, hose reel and wheelbarrow sale. In our doors business, revenue increased 5% to $140 million compared to the prior year period of $133 million.

The doors business benefit from the increased volume and pricing. Home & Building Products' segment adjusted EBITDA increased 3% to a record $33 million and compared to $32 million in the prior year period driven by volume and partially offset by increased steel cost.

Turning to Telephonics, segment revenue decline to $82 million compared to $92 million in the third quarter 2016 due to a lower volume of multi-mode radar systems, partially offset by increased electronic countermeasure devices and IFF systems revenue. Segment adjusted EBITDA of $7 million declined compared to prior year period of $12 million.

This decrease was a result of decreased revenue I just noted along with unfavorable program mix and the impact of revised estimates to complete remaining performance obligations on certain radar and communications program. Third quarter orders of $50 million declined from $61 million in the prior year quarter.

Backlogs stood at $355 million or 79% expected to be fulfilled over the next 12 months. Recent levels of orders and backlog are due to timing of U.S. and international orders and the continued effects of sequestration. Like last, year we expect the significant sequential improvement in our fourth quarter.

In our Plastics segment, third quarter revenue of $115 million and EBITDA of $13.3 million were consistent with the prior year quarter. Moving back to consolidated results gross profit for the quarter was $116 million compared to the prior year level to $119 million.

Gross margin for the third quarter was 24.5% compared to the prior year level of 25.8% with the decrease primarily driven by Telephonics. Third quarter's selling, general and administration expenses were $90.7 million and compared to $88.9 million in the prior year, resulting in 19.2% of sales in both years.

Our effective tax rate excluding the prior year restructuring and certain tax items that affect comparability for the current and prior year third quarters is 36.4% and 37.5% respectively. For the full-year fiscal year 2017, we continue to expect a tax rate, excluding items that affect comparability to be approximately 38%.

As is always the case, geographic earnings mix and legislative action may impact rates. GAAP net income in the third quarter was $9.6 million or $0.22 per share compared to the prior year period of $7.6 million or $0.18 per share.

Excluding certain tax items in both periods and the restructuring in the prior year adjusted current quarter net income was $7.4 million or $0.17 per compared to $11 million or $0.26 per share in the prior year. Third quarter capital spending was $16.6 million for the full fiscal year of 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 third quarter of 2017 was $19 million for full-year fiscal 2017, we expect depreciation to be approximately $67 million and amortization to be approximately $8 million. As of June 30, 2017 we had $69 million in cash and total debt outstanding of $997 million resulting in a net debt position of $928 million.

We had a $172 million available for borrowing under our revolving credit facility subject to certain loan covenants.

Consistent with Griffon's historical cash flow patterns, the first six months of the fiscal year we used cash and the second half of the year is expected to generate significant free cash flow, which we noted earlier started in the third quarter. I'll now turn the call back over to Ron for his closing comments..

As we finished 2017 we're positioned to deliver on our full year EBITDA commitments as we continue to grow and improve our operations through innovation and efficiency initiatives. Our businesses are poised for further growth and enhanced profitability.

All of us are hard at work to make our existing businesses better while actively looking for new acquisition opportunities. We're very excited about our prospects. And with that, operator we'll open it for questions..

Thank you. [Operator Instructions] And at this time we'll take a question from Bob Labick with CJS Securities..

Hi, this is actually Lee Jagoda for Bob Labick, good afternoon. So, Ron just starting with Telephonics, it sounds like there's some timing aspect and some push out to Q3 and Q4 in some of the product lines.

Can you talk about whether it's more new products waiting to kick in or existing programs accelerating?.

I'd say it's more timing of international orders, that's becoming increasingly part of the mix as well as run off of existing programs, as expected, and timing of orders is going from one quarter to another, but the overall direction, the fundamentals of the business remain very sound.

The talk of increased defense spending and the reality of it flowing down to subcontractors like Telephonics, is going to be measured over a period of years. And we fully expect Telephonics to benefit from the ultimate increase in defense spending.

The reality is, is that our near term positioning is more tuned to international orders and the timing of the receipt of orders is less predictable for us on a quarter-to-quarter basis.

But on an aggregate basis, we continue to believe that we're in very good shape for the programs that were on to get new funding, but that's going to be measured in years not in quarters and for the international orders to continue to improve..

And clearly there's been some increased chatter in news flow around international conflicts and the border wall. I think U.S. Security and I'm sure it's a sensitive topic in terms of we can't disclose certain things.

But are you seeing RFPs and other indications of more near term interest related to those issues?.

We clearly believe that our products play a role in border security. The funding for that is caught in a very complicated government budgeting and political process that includes both fixed barriers, as well as technology, as well as people. So, we think Telephonics has a role to play.

We think we're a cost effective provider and when this decision-making gets done, and the initial funding for increased border security has really just started, we hope to be a beneficiary. We believe we have products that really do solve a big part of the problem and on a very cost effective basis.

And we're hopeful that that's the way Custom and Border Patrol, Homeland Security sees it..

And I would just add to that, we have many international orders, were terms are negotiated, we are just really awaiting funding..

And then switching gears to the Home & Building Products piece, sort of a multi-part question around La Hacienda.

First and foremost, can you discuss sort of its positioning within the UK market obviously it's small, discuss where you guys see yourselves within three to five years in the UK? And then lastly, with regard to La Hacienda, is there any opportunity to bring that product line to the U.S.?.

I'll start to answer it by telling you that we've had as a corporate objective that we've discussed about wanting to expand our presence in the UK, it's a very large lawn and garden market.

We've been following our biggest customers in Australia and support of their business of going into the UK, when Bunnings bought Home Base we had already been looking for acquisition opportunities.

The market there is diverse with lawn and garden centers and other retailers an important part of our long-term strategy and the way I would describe the UK for us is look at what we did in Australia with a multiyear period of buying, consolidating, building and investing around branded products and we've built a very nice business in Australia to compliment our North American business, Canada and the U.S.

around AMES. Our intent is La Hacienda is meant to be the first of what we hope to be many acquisitions, small and large to expand our footprint in that market.

The specific La Hacienda product is something that we see as being potentially a introduction into other markets, but that's not the intent to buying the Company, it's really to support its existing position, it's a entrepreneurial run company.

We've had good luck in bringing private owners into our public company environment, nurturing the growth of their business, expanding their management capacity and the Goodwin brothers who founded this business in 1989 are now joining a bigger team with bigger resources, and we hope that they run and help us build the bigger business in the UK..

At this time, we will move to Justin Bergner with Gabelli & Company..

First question would just be to clarify some comments you made, I think you said that the orders in Telephonics were $51 million versus $60 million. Was that year-on-year or sequential comment? And then the big order that you described from Lockheed Martin I think of $37 million.

Is that in the backlog? Or is that -- would that show up in the future backlog?.

Brian?.

Sure. The order is in backlog and that would be current year quarter versus prior year quarter comparison..

Okay, so that order would have been I guess close to three quarters of the orders you received..

Yes..

Okay, as you sort of look out to the rest of the fiscal year I guess segment EBITDA has been relatively flat for the first three quarters and you are expecting it to sort of increase by I don’t know roughly $5 million in the fourth quarter hit that 225 number.

And you are also sort of lapping a good fourth quarter in the last fiscal year in Telephonics.

So just help me understand sort of what parts of the business are going to materially pick-up in the fourth quarter?.

We continue to see Home & Building Products' improve and we continue to believe that Telephonics’ fourth quarter sequentially is an improvement the same as last year from third to fourth quarter..

Okay..

Plastics continues to be on the trajectory, pleased with their results, and we are hopeful that there is more coming in the years ahead as they continue to position themselves to benefit from the Sof-flex investments that are already been made and will continue to be introduced..

Okay, with respect to the steel cost headwinds in Home & Building Products.

Were those sort of both on the AMES and Clopay side? And was that more of the lag issue? Or is that going to persist in future quarters?.

We will still continue to see headwinds from steel in the fourth quarter. It's more doors than AMES, but it does affect both of them..

Okay, and on Plastics do you -- are you getting your gain in share with your Sof-flex capability, and sort of if so, I guess it seems to be bringing your volumes to more flat from prior declines.

Sort of does it have the ability to meaningfully affect your volumes into positive territory?.

So, Justin, the Sof-flex is something that's hasn't fully rolled out by our first launch customer. We expect them to launch in first half of calendar '18. What we're seeing as many customers moving from white or unprinted film that's non-breathable to breathable printed film, that's where we're strong.

And that is where a lot of our investment that we've made and continue to make right now, we're going to benefit from that. So our volume overall is little flat, most of that's driven by Europe volume that is not doing well; however, in North America and in Brazil we continue to see growth..

And then just want to follow-up there. When you say it hasn't fully rolled out with the launched customer.

Are there meaningful opportunities beyond that one launch customer? Or does sort of the upside drop off materially beyond that one launch customer?.

No, there're opportunities beyond that launch customer. We have other customers looking at it now, but one customer is not just looking, they're updating their production, they're updating their packaging and marketing to actually roll it out..

We're still at the early stages of the introduction of the Sof-flex technology and the products to thinner film and the potential is to be game changing. But this is going to be measured again over period of years not over any immediate quarter-over-quarter growth..

And does that Sof-flex introduction with the one customer going to be focused on Europe or sort of global opportunity it present?.

We're not disclosing that at this time at the request of our customer..

[Operator Instructions] And it appears. We have no further questions in the queue. I'll hand things back over to Ron Kramer for additional or closing remarks..

Thank you. We'll be working very hard to finish up the year and look forward to speaking to everyone again in November..

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