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

Bob Labick - CJS Securities Justin Bergner - Gabelli & Company Andrew Casella - Deutsche Bank.

Good day and welcome to the Griffon Corporation Fourth Quarter 2017 Earnings Conference 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, Tracy. 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.

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.

Also please be reminded that with the announcement of the Plastics sale transaction, we have classified Plastics as a discontinued operation. Now, I will turn the call over to Ron..

Good morning. Thanks for joining us. Fiscal 2017 has been a transformational year and we are pleased with our results for the fourth quarter and the full year, reflecting the continued strength in our Home & Building Products segment.

Telephonics, our defense electronics business, is positioned to benefit from the expected increase in Defense spending in the next few years. Overall, Griffon’s full year revenue increased 3% on a continuing operations basis. Adjusted EBITDA on a continuing basis was $173 million increasing 3% over the prior year.

Segment adjusted EBITDA including plastics was $225 million in line with our guidance and an increase of 3% over the prior year.

Before turning to my segment level comments, I’d like to provide an update on our process of evaluating strategic alternatives for our Clopay Plastics product segment and on our acquisition of ClosetMaid, along with some color on our capital deployment activities and return of cash to shareholders.

Earlier today, we announced that Griffon has entered into a definitive agreement to sell our Clopay Plastics business to Berry Global for $475 million. The transaction is subject to customary closing conditions and is expected to close in the first calendar quarter of 2018.

As Brian mentioned in his opening remarks, Plastics is now classified as a discontinued operation. So moving forward, we will be reporting our business in two reportable segments, Home & Building Products, which includes the AMES, Clopay Building Products and ClosetMaid businesses and Telephonics. Expect more in the years to come.

The divestiture of Plastics will unlock value for Griffon’s shareholders while providing enhanced opportunities for growth and value creation for Plastics and its customers and employees under Berry’s ownership.

After the Plastics transaction closes, we will evaluate the use of proceeds which should provide a substantial amount of liquidity to either invest in opportunities that diversify Griffon’s portfolio of companies, de-leverage our balance sheet and/or return capital to Griffon’s shareholders.

On October 2, we completed the acquisition of ClosetMaid from Emerson for approximately $200 million or $175 million inclusive of the net present value of the tax benefits. Griffon expects 2018 ClosetMaid revenue and segment adjusted EBITDA of $300 million and $25 million respectively.

ClosetMaid complements and diversifies our portfolio of leading consumer brands and products. We are proud to add the ClosetMaid brand to our family of iconic brands, including AMES True Temper and Clopay. In addition to his Senior Vice President of Operations role at Griffon, Mike Sarrica has been appointed President of ClosetMaid.

Mike, along with the strong leadership team at ClosetMaid, is well-positioned to enhance ClosetMaid’s growth and profitability and we look forward to many years of success there. Also on October 2, we closed on a $275 million add-on offering of our 5.25% senior notes due 2022.

We saw significant demand for the offering and were able to upsize it from its originally announced $200 million offering. We used the proceeds to finance the ClosetMaid acquisition and reduce our outstanding revolver balance. Moving to capital deployment and returning cash to our shareholders.

Since 2011, we have repurchased $262 million of our common stock, which represents 20.4 million shares at $12.81 per share. We have not repurchased any common stock since the first quarter of this year. As of September 30, 2017, $49 million remains under the August 2016 board authorization.

In addition, since November 2011, we have been paying quarterly dividends. This morning, we announced a quarterly dividend of $0.07 per share, a $0.01, or 17%, increase over the prior quarter. Since its inception, our dividend program has grown at an annual compounded rate of 23% per year.

I will provide an update on our segments before turning the call over to Brian for a more detailed discussion of our financial results and outlook. Clopay Doors and AMES saw strong growth during the year with full year 2017 segment revenue improving 7% to $1.1 billion over the prior year level.

Full year 2017 segment adjusted EBITDA of $127 million was a 10% increase over the prior year. We remained very positive on the outlook for Home & Building Products as we continue to grow sales and improve our profitability through product innovation, acquisitions and efficiency initiatives. We continue to see underlying strength in the U.S.

housing market with the slow, but steady multiyear housing recovery contributing to our improved results. Single-family residential construction continues to improve. However, annualized starts remain below historic norms. The best is yet to come. The U.S.

Census Bureau recently reported that home ownership increased 40 basis points from the prior year to 63.9% for a third consecutive quarter of increase. Year-to-date single-family housing starts have increased 9% over the prior year period. These data points further indicate that the housing market continues to improve.

We expect our Home & Building Products segment to further its revenue and earnings growth in the years ahead. Also, AMES has acquired three businesses since the end of the third quarter. On July 31, AMES acquired La Hacienda, a leading United Kingdom outdoor living brand with unique heating and garden decor products for approximately $11 million.

The acquisition broadened AMES’ global outdoor living and lawn and garden business and supports AMES’ UK expansion strategy. The acquisition is expected to generate £14 million pounds of revenue in annualized revenue for the coming year.

On September 29, AMES Australia completed the acquisition of Tuscan Path, a leading Australian provider of pots, planters, pavers, decorative stone and garden decor products, for approximately $18 million.

The acquisition of Tuscan Path broadens AMES’ outdoor living and lawn and garden business and will strengthen AMES’ industry leading position in Australia. Tuscan Path is expected to generate approximately AUD26 million of revenue in the first 12 months after its acquisition. And on November 6, AMES acquired Harper Brush for approximately $5 million.

Harper is a leading U.S. manufacturer of cleaning products for professional, home, and industrial use. The acquisition broadened AMES’ long-handle tool offerings in North America to now include brooms, brushes and other cleaning tools and accessories.

The acquisition is expected to contribute approximately $10 million in revenue in the first 12 months after its acquisition. All three of these acquisitions are expected to be accretive to earnings in our first full year of ownership.

We will continue to search for acquisitions that add both product and geographic expansion, particularly in Australia and the United Kingdom. Let’s move to Telephonics. Fourth quarter revenue increased 11% over the prior year. Full year revenue decreased 5.5% from the prior year, reflecting the current slow pace of U.S.

Defense spending and the timing of international orders. During the year, Telephonics was awarded several contracts and incremental funding on existing contracts of approximately $342 million. Congress continues to indicate an increase in Defense spending, which includes investments into the naval fleet.

Telephonics is well-positioned to benefit from the additional helicopters on these ships and carriers. We also continue to see many international opportunities though these generally take longer to turn into funded orders. We still hope mobile surveillance and border security turns out to be a growth business for us.

In 2017, Telephonics achieved a significant milestone under its multiyear company funded research and development for active electronic scan array technology known as AESA with the first slide of the AESA multimode radar.

This patent pending technology will become the enabler for the MOSAIC line of radar sensors with applications and intelligence, surveillance and reconnaissance. There are number of Department of Defense demonstrations planned for fiscal 2018.

This technology represents a unique application of leading-edge technology to meet current and future surveillance imaging and tracking requirements for a range of environments and missions. We are positioning Telephonics for a better future by leveraging our U.S.

and internationally based incumbent physicians, with market leading technology and battle proven cost effective intelligence surveillance and communication solutions. Turning to plastics, which has now been reclassified as a discontinued operation.

Our full year revenue was $461 million compared to the prior year period of $480 million, driven primarily by lower volume in our European market. Full year segment adjusted EBITDA improved 5% to $53 million compared to the prior year period of $50 million.

2017 overall has been an exciting and transformational year for Griffon and we have acquired several complementary businesses in our Home & Building Products segment, diversifying our product offerings, coupled with the announced sale of our plastics business.

As we shift our sites now to 2018, we are laser focused on integrating our recent acquisitions into the Griffon platform, while we search for new opportunities to grow. I am very pleased with the work of our team and we look forward to the upcoming year. With that, I will turn it back to Brian for a closer look at the numbers..

Thank you, Ron. I will provide results including and excluding plastics, so that you understand how the business performed in 2017 and provide an indication on how the business will look going forward.

Full year 2017 revenue, including Plastics, of $2 billion increased 1.5% over the prior year and segment adjusted EBITDA increased to $225 million or 3% over the prior year. GAAP net income and EPS were $15 million and $0.35, respectively, compared to $30 million and $0.68 respectively in the prior year.

Adjusted net income and EPS were $37 million and $0.87, respectively, compared to $37 million and $0.84, respectively, in the prior year. Fourth quarter 2017 revenue, including plastics, of $550 million increased 10% over the prior year and segment adjusted EBITDA increased to $67 million or 11% over the prior year.

GAAP net loss and EPS were $12 million and $0.29, respectively, compared to net income of $6 million and $0.13, respectively, in the prior year. Adjusted net income and EPS were $16 million and $0.36, respectively, compared to $12 million and $0.27, respectively, in the prior year quarter.

Now, moving to continuing operations results, consolidated full year 2017 revenue increased 3% to $1.5 billion compared to the prior year driven by strong performance in our Home & Building Products segment partially offset by lower sales at Telephonics.

Our full year segment adjusted EBITDA was $173 million, an increase of 3% over the prior year period of $168 million again driven by Home & Building Products. Income and EPS from continuing operations were $18 million and $0.41, respectively, compared to $21 million and $0.45, respectively, in the prior year.

Full year adjusted income and EPS from continuing operations were $19 million and $0.44, respectively, compared to $19 million and $0.43, respectively, in the prior year. Consolidated fourth quarter 2017 revenue increased 15% to $431 million compared to the prior year driven by both the Home & Building Products and Telephonics segments.

The fourth quarter segment adjusted EBITDA were $53 million, an increase of 13% over the prior year period of $47 million driven by Home & Building Products. Fourth quarter income and EPS from continuing operations were $2 million and $0.06, respectively, compared to $4 million and $0.10, respectively, in the prior year.

Adjusted income and EPS from continuing operations were $12 million and $0.28, respectively, compared to $6 million and $0.15, respectively, in the prior year. By segment, Home & Building Products fourth quarter revenue increased 17% to $287 million compared to the prior year quarter.

Full year revenue increased 7% to $1.1 billion compared to the prior year. Fourth quarter revenue increased 17% to $126 million compared to the prior year quarter driven by increased U.S. garden tool and wheelbarrow sales, improved Canadian snow tool sales, UK market expansion and benefits from our acquisitions.

Full year AMES revenue increased 6% to $545 million for the quarter compared to prior year. In our doors business, fourth quarter revenue increased 17% to $162 million compared to the prior year period driven by increased volume, pricing and favorable mix. Full year doors revenue increased 8% to $568 million compared to the prior year.

Home & Building Products fourth quarter segment adjusted EBITDA increased 28% to a record $34 million over the prior year period driven by the benefits of increased revenue and favorable product mix partially offset by increased steel and resin costs. Full year segment adjusted EBITDA increased 10% to $127 million over the prior year.

Turning to Telephonics, fourth quarter revenue increased 11% to $144 million compared to the prior year quarter due to increased revenue from multi-mode radar and dismounted electronic countermeasure systems. Full year revenue decreased 6% to $412 million compared to the prior year.

Fourth quarter segment adjusted EBITDA decreased 6% to $19 million compared to prior year quarter primarily due to program mix. Full year segment adjusted EBITDA decreased to $46 million from $53 million. Fourth quarter orders of $140 million increased from $134 million in the prior year quarter.

Backlog stood at $351 million, with 70% 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 continued effects of sequestration. Based on our pipeline of opportunities, we expect improved orders in 2018 driven by the second half of the year orders.

Moving back to consolidated results, gross profit for the quarter was $115 million compared to prior year level of $104 million. Gross margin for the fourth quarter declined 130 basis points to 26.5% compared to the prior year level of 27.9% primarily driven by unfavorable program mix at Telephonics.

Gross profit for the year was $408 million compared to the prior year level of $401 million. Gross margin for the full year declined 30 basis points to 26.8% compared to the prior year level of 27.1%, with the decrease driven primarily by unfavorable program mix of Telephonics.

Fourth quarter’s selling, general and administrative expenses were $98 million compared to $80 million in the prior year.

Excluding $9.6 million of acquisition costs and Telephonics contract settlement costs of $5.1 million, current year selling, general and administrative expenses were $82 million or 19.2% of revenue compared to $80 million or 21.4% of revenue in the prior year, with the dollar increase primarily due to increased sales activity.

Full year selling, general and administrative expenses were $339 million compared to $318 million in the prior year.

Excluding the $9.6 million of acquisition costs and the $5.1 million Telephonics contract settlement cost, current year selling, general and administrative expenses were $324 million or 21.2% of revenue compared to $318 million or 21.6% of revenue in the prior year, again with the dollar increased primarily due to increased sales activity.

Our effective tax rate, excluding the adjusting items to reconcile to adjusted income for items that affect comparability for the current year and prior year were 39.7% and 41.3% respectively. For the full year of fiscal 2018, we expect the tax rate excluding items that affect comparability to be approximately 37%.

As is always the case, geographic earnings mix and legislative actions may impact rates. For the full year 2017, capital spending was $80 million inclusive of plastics and $35 million excluding plastics. For fiscal 2018, we expect capital spending to be approximately $45 million inclusive of ClosetMaid and excluding plastics.

For full year fiscal 2017, depreciation and amortization was $48 million. We expect fiscal 2018 depreciation and amortization to be $57 million inclusive of and subject to finalizing the purchase price allocation of ClosetMaid.

As of September 30, 2017, we had $48 million in cash and total debt of $979 million resulting in a net debt position of $931 million. We had $192 million available for borrowing under our revolving credit facilities, subject to certain loan covenants.

Corporate unallocated expenses for the full year of 2017 were $42 million including all equity compensation for the company and the effect of discontinuing plastics. We expect approximately $45 million of expenses in 2018. Turning to our guidance for 2018, we expect approximately 22% revenue growth inclusive of $300 million of ClosetMaid revenue.

By segment, we expect Home & Building Products to grow approximately 33%, inclusive of ClosetMaid and the recent AMES acquisition. And we expect Telephonics to decline approximately 10% due to current levels of backlog.

In providing this guidance, we are mindful of the risks and impacts of weather to AMES, the health of the housing market on Home & Building Products, U.S. Department of Defense budgets on Telephonics, and foreign exchange and commodity cost costs on Home & Building Products.

Based on revenue guidance and with consideration of continued improvements in our operations, we expect segment adjusted EBITDA of $205 million in 2018, inclusive of ClosetMaid. This compares to the $195 million in 2017 on a pro forma basis adjusting for the sale of plastics and inclusive of ClosetMaid.

I will now turn the call back over to Ron for his closing comments..

We have been very busy. This is a great moment for us. Fiscal 2017 and the start of this year has proven to be pivotal for us as we have completed five acquisitions and today announced the divestiture of our plastics business. We continue improving our businesses’ profitability while focusing on delivering shareholder value.

As we shift into 2018, we are looking to improve our segment results through sales diversification, efficiency initiatives and refining our operations as we integrate the recent acquisitions. Our expected EBITDA growth in 2018 comes with higher free cash flow, which has us very excited about our future.

Finally, I want to thank our employees around the world for their dedication and perseverance in closing out another successful year. And to the employees of Clopay Plastics, we thank you for the many decades of contribution to Griffon. With that operator, we will open it up for questions..

Thank you. [Operator Instructions] And we will go first to Bob Labick with CJS Securities..

Good morning and congratulations on realizing some strong value in plastics..

Thank you, Bob..

Good morning..

Yes.

So, just starting there and I know that tax legislation may change next year, so we don’t know what you pay in taxes, but what’s roughly, this might be for Brian, a cost basis for plastics so that we can make an estimate of the gain on sale if there is any that you will be paying taxes on?.

Sure. So, we will have approximately $85 million to $90 million of taxes to pay on this. The book basis from a GAAP reporting standpoint is roughly $320 million, but that fluctuates of course with time and fluctuations in exchange rates..

Yes. We are hoping for 20% corporate tax which will change that number significantly. We will see what Congress comes out with..

Yes, absolutely. Okay, thank you. And then shifting over, appreciate the big transformation you are making, it’s very exciting.

On the ClosetMaid acquisition, can you just give us an update on that? You obviously amended the purchase price, I guess the biggest question is does the small changes that occurs there have any impact on the future expectations and future synergies if you could talk around all that for us please?.

Look, we think the combination of ClosetMaid into our company is going to be productive, and be able to both grow revenue and over time take expenses out.

So, we are very optimistic that the $300 million run-rate that we are buying the business at has room for growth, but we also believe that this is a business like everything else that we have been able to do across both our Doors business and the AMES business.

This is better than 10% EBITDA margin target, though we are very focused near-term on the cost of separating it out of Emerson and including it into our company. So, for the year ahead, we budgeted at a $25 million contribution. We expect it to be significantly higher in the years to come..

Okay, great. And then you touched on this a little, but maybe you could expand upon given the proceeds from plastics and then the investment at ClosetMaid, you still have significant liquidity, you have actually added materially to your liquidity.

If you could talk a little bit about what else you see out there? You have made some really nice tuck-in acquisitions in the quarter in HBP.

Is it more like that on the horizon? Are there any opportunities in Telephonics? Are there large opportunities you are looking at, maybe just give us a sense in your kind of roadmap for the next year or two, three?.

Look, this has been an evolution over the 9 years that I have been CEO of a company. We have been transforming the businesses.

We have clearly added around our garage door business to believe in this around the home strategy buying AMES and now buying ClosetMaid and the ongoing tuck-ins that we see for all of those companies really are something that we are excited about. The value proposition for us has been in buying product diversification.

And as we go on this international expansion around the Australian businesses and the UK business, we see a number of ways to continue to grow that segment of our company. That’s been an ongoing set of our strategic initiative.

Telephonics is going through what we view as a multiyear process of Defense spending bottoming with an increase coming in 2020 and beyond and we are positioning the company to be able to be as profitable as it can be through a down cycle in Defense spending, with the inevitable upturn in intelligence, surveillance and reconnaissance products.

The big opportunity for us that the sale of plastic represents, it’s not just the balance sheet strength and liquidity that it’s going to provide. We look at our free cash flow generation and how we look at delivering value for our shareholders over time.

The ability for us to generate not just the EBITDA, but EBITDA minus CapEx and to be able to generate free cash flow is significantly enhanced as we exit a business that while it’s an excellent business, we just don’t have the scale that Berry will be able to provide to that business.

So, this is one of those opportunities where we see this as incredibly opportunistic for us. And we think it’s a fabulous opportunity for Berry to be able to take the company and bring it to a new level.

So we are very excited about what this does for us and the ability for us to invest the capital on our balance sheet into further acquisitions and diversifications remains to be seen, but we are clearly setting that up as how we would like to grow the company in the future..

Perfect. Congratulations, again. Thank you very much..

Thank you..

Thank you..

And we will go next to Justin Bergner with Gabelli & Company..

Hello. Good morning, Ron. Good morning, Brian..

Good morning..

Good morning..

Congrats on a good fourth quarter and getting to the announced sale of Clopay Plastics. I guess my first question was on the sale of Clopay Plastics, I just want to make sure I understood correctly.

So you are expecting $85 million to $90 million of cash taxes and if it’s a $320 million book, does that mean that the taxable book gain was lower to create such a high cash tax expected outflow?.

Yes, that is exactly correct. Our tax base is lower than our book base..

Okay, great.

And then could you – are you able to comment as to whether or not there were any other parties that sort of bid on Clopay Plastics alongside Berry Plastics, I am there are other companies looking at it, but as it relates to the competitive bidding activity?.

We have a definitive agreement with Berry. We are very excited about doing this transaction with them..

Okay, understood.

Secondly, moving on to the quarter, the strength in Home & Building Products, could you breakout for us how much of the strength in AMES was inorganic and perhaps how much of the strength in garage doors related to the pass-through of steel costs versus volumetric effects?.

Sure. I don’t have the exact stats in front of me at the moment. The acquisitions perhaps put a 1 point or 1.5 point on the revenue line. As far as steel costs I don’t have those numbers in front of me, I will have to get back to you, but there was an impact from them..

Okay.

The acquisitions were 100 to 150 basis points for the segment than it would probably be around 300 basis points for AMES in particular?.

I am sorry – I gave you the on AMES number..

It was only 100 to 150 basis points. The organic impact was around 15%. Okay, great. And then just finally looking to the guidance for the September 2018 fiscal year, if I back out the $300 million of ClosetMaid revenue, it looks like you are projecting about 3% growth for the legacy Home & Building Products businesses.

I just want to make sure that was correct.

And if that is the case and if Telephonics revenue sets decline 10%, how does sort of that flattish sort of legacy revenue picture translate into $10 million of EBITDA growth?.

Sure. So, first the organic meaning before the acquisitions growth is about 2% to 3%, with the acquisitions, excluding ClosetMaid, you have another 2% to 3% and then you have ClosetMaid, so just to clarify that. Second, it’s really a matter of leverage.

As these businesses increase sales, we are able to use our existing footprints to leverage and improve margin and earnings. In addition, we continue to innovate on products, which are at higher price points and better profit..

Okay.

And would you expect the Telephonics EBITDA profile to sort of be flattish against the declining revenue, but maybe higher mix or how should we think about the Telephonics EBITDA for the coming fiscal year?.

You will see improved margin in the coming year on that lower revenue. So yes, EBITDA will be plus, minus in the same range we saw in 2017..

Yes, which Justin speaks to the efficiency initiatives that we have already undertaken and as I have said, we are very optimistic about where Telephonics is heading, but 2018 and 2019 are going to be transitional years and the backlog numbers reflect the decline in Defense spending. We see that picking up.

I can’t tell you when it’s going to actually happen, because it’s entirely dependent on budgetary resolutions that at the moment, while there has been lots of talk over the last year about increased Defense spending, infrastructure spending, lower taxes, none of those things have happened. .

In addition, I would just say we have obviously – not obviously, we have not lost any business o any platforms. In addition, we anticipate being able to keep the historical margins that we have had with good management and good program mix on the lower revenue..

Great. Thanks for taking my questions..

Thanks, Justin..

[Operator Instructions] And we will go next to Andrew Casella with Deutsche Bank..

Hi, guys. Thanks for taking my question and congrats on the quarter and the sale. Just wanted to go back to I guess the proceeds and how you are kind of thinking about that. So you are going to get $475 in gross, $90 million of cash leakage that leaves you about 385.

So, I think during the bond deal, you have kind of said you are hoping to pay down the revolver a little bit, I know the K is not filed, so if you could just remind us again what’s drawn on the revolver and then how you are kind of thinking about allocating that 385 between all the different priorities you have laid out in prepared remarks?.

Sure. So, the revolver balance at year end, I believe is about $144 million post year-end with the proceeds from the bond offering we used $60 or $70 million I don’t recall the exact number to pay down the revolver and it goes from there. So assume the revolver goes to zero..

Okay, great.

And then and as far as how you are going to deploy the remainder of the cash, can you walk us through that? I mean, I know the bonds are currently callable, but just kind of priorities there?.

We are going to continue to look for opportunities to grow the company, invest our capital into operating businesses. We have no current intentions of de-leveraging, but we will see what the future holds for us..

Alright, thanks.

And then the next question can you talk us through a little bit about the storms if you guys had any tailwinds or headwinds that you would call out in any of the numbers and then how you are kind of thinking about commodity inflation on the resin and steel and lumber side?.

Sure. So, for our businesses, we didn’t have any significant impact from the hurricanes. AMES does benefit somewhat with cleanup for wheelbarrows, rakes and shovels and things like that. As far as resin and steel, I can’t predict the future.

We have a structure that can handle the current prices and if prices increase we will certainly consider that in our pricing to customers as we have in the past..

Okay. Thanks, again and congrats..

Thank you..

Thank you..

There are no additional questions in the queue. At this time, I would like to turn the call back to Ron for any additional or closing remarks..

Thank you. This has been terrific year and we are very excited about making 2018 as big a success as 2017 and to the new directions that we might be able to take from the sale of the plastics business. Thank you, all..

This does conclude today’s conference. We thank you for your participation. You may now disconnect..