Greetings and welcome to the Griffon Corporation Third Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Mr. Brian Harris, CFO. Thank you, Mr. Harris. You may begin.

Thank you, Jerry. Good afternoon, everyone. With me on the call is Ron Kramer, our Chairman and 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 today's remarks will address those items that affect comparability between reporting periods. These items are explained in our non-GAAP reconciliations included in our press release. Now, I'll turn the call over to Ron.

Thanks, and welcome, everyone. Our results for the third quarter reflect solid execution with revenue growing 11% from a combination of organic growth and contributions from our CornellCookson acquisition. This performance was driven by continued demand for our diversified products in our home and building products and defense electronics businesses and reflects our team's excellent execution through the first nine months of fiscal 2019. We expect these trends to continue for the balance of this year. We generated $60 million in free cash this quarter following our normal seasonal cycle of generating cash in the second half substantially improving our quarter and year-to-date results from the prior year periods due to the benefits from our portfolio reshaping and integration activities. We anticipate healthy free cash flow in our fourth quarter helping to drive down our net debt to EBITDA leverage to near five times as calculated by our debt covenants. Our third-quarter 2019 segment adjusted EBITDA increased 11% to $65 million and our third-quarter 2019 adjusted diluted earnings per share was $0.31, 15% higher than the prior year period of $0.27. I'd like to spend a minute touching on our multi-year strategic integration activities starting with our previously announced CornellCookson facility expansion in Mountain Top, Pennsylvania. This project remains on track as we work to increase our manufacturing capacity to support volume growth, improve operational efficiencies, and bring new products to market. Clopay is seeking incremental contributions from the CornellCookson acquisition. These include increased cross-selling opportunities and leveraging the increased scale in the supply chain. At Ames, we continue to see the benefits of combining the resources and sales teams of the Ames and ClosetMaid businesses while also working to add new products to their pipeline. Moving to capital allocation. Our strategic actions have led to an enhanced free cash…

Thanks, Ron. We reported consolidated revenue of $575 million and gross profit of $154 million both increasing more than 11% in comparison to the prior-year quarter. Gross margin was steady at 26.9% when compared to the prior-year quarter. Third-quarter selling, general, and administrative expenses excluding items that affect comparability were $118 million, up 10% from the prior year primarily due to acquisition. As a percentage of sales, SG&A, adjusted for items that affect comparability, decreased 20 basis points year-over-year to 20.5%. Third-quarter GAAP 2019 income from continuing operations was $14.1 million or $0.33 per share compared to the prior year period of $7.4 million or $0.18 per share. Excluding items that affect comparability from both periods, current quarter adjusted income from continuing operations was $13.5 million or $0.31 per share compared to the prior year of $11.3 million or $0.27 per share. Our effective tax rate, excluding items that affect comparability, for the quarter was 34%. Capital spending was $10.4 million compared to $11.5 million in the prior year quarter. We continue to expect CapEx for fiscal 2019 to approximate $55 million. Depreciation and amortization for the quarter totaled $15.6 million. As of June 30, 2019, we had $58 million in cash and total debt outstanding of $1.17 billion, resulting in a net debt position of $1.11 billion. We had approximately $207 million available for borrowing under the revolving credit facility subject to current loan covenants. As a reminder, we generally observe the use of cash in the first half of the year followed by cash generation in the second half of the year. Corporate unallocated expenses excluding depreciation were $12 million in the quarter. Our revenue and EBITDA guidance, which we only give once a year during our November earnings call, remains at $230 million-plus of segment adjusted EBITDA and $2.2 billion in revenue while maintaining a bias to the upside. We also note that the guidance now includes the incremental impact of the 25% 301 tariffs announced in May, the impact of headwinds related to our Ames UK business, and the anticipated delay of the India contract at Telephonics for the MH-60R radars shifting into FY 2020. Also, we continue to expect free cash flow to exceed net income for the year. Now, I'll turn the call back over to Ron.

Thanks, Brian. I'm very pleased with the progress we're making and the trends we see across all of our businesses which is reflected in this quarter's operating results. We continue to make strides on our integration and efficiency initiatives as we work to expand margins and drive increased cash generation. The trends we see in our underlying businesses will continue to be supportive of these and we're confident in our outlook and our ability to drive long-term shareholder value. Operator, we're ready for any questions.

[Operator Instructions] Our first question is from Rob Labick, CJS Securities. Please, go ahead, sir.

Thank you and congratulations on another nice quarter.

Thanks Bob.

I wanted to start with tariffs. Obviously, you mentioned the May tariffs are built into your guidance. I don't know if you guys were on Twitter this afternoon but there's been a potential tariff increase on September 1st as well. If you've had a chance to look at all, I know it's quick, but could you tell us how that may or may not impact your business going forward?

Clearly anticipated. This has been in the pipeline and it's immaterial to our business. Though, I'll note that the cost of everyone's t-shirts and socks and footwear are going to be going up.

Got it. I'm glad. Right. You make a majority of your stuff here and everything so it should be potentially even an advantage in that regard for you. I want to talk about the organic growth. It's been terrific in Home and Building Products. It's kind of bouncing between Ames and Doors, but very solid mid to upper single-digits. Can you talk about the key drivers there? Is it share gains at existing locations? Is it going into new distribution? Is it new categories? Just layout your formula for success and continued organic growth going forward, please.

Sure. It's really a combination. We've had both pricing and mix benefits as well as volume increases. In businesses like ClosetMaid, we are gaining market share. Across our other businesses, we just continue to see good demand for our products and don't see any change in that looking forward at the moment.

Great. And then the margins, particularly on home building products, were very strong again. I think you've talked about 12% plus segment level margins. You're getting awfully close in a lot of quarters now. Can you just talk about the margin and expansion opportunities? Is 12% the goal or is that just a step along the continuum of growth?

I think you used the right word. It's a step along the continuum of growth. We have been building the company for the long run. We've made investments throughout the business. The pivot that we have been executing after the sale of our plastics business and the purchase of first ClosetMaid and then CornellCookson recently. We've owned Cornell for a little over one year. So, the goal when we set out to buy both of those businesses was, we communicated that we were buying companies that were running at 8% and 9% EBITDA margins and that we saw a path to continue to improve their operations. That goal has been going well and that's the first stop. So, getting our business from where they were prior to the acquisitions to now where they are. We give guidance once a year. We will revisit all the risks and opportunities and talk about where we're going to be for fiscal 2020. But we feel very good about the businesses that we bought. The businesses that we had fit together quite well with them. We have the leading brands for essential products in every category that we're in. Over time, we expect to be able to deliver the margins that are consistent with having the best products and the best brands.

Okay. That's great. Thank you very much.

Thank you.

Your next question is from Julio Romero, Sidoti & Company. Please, go ahead, sir.

Hi. Good afternoon, everyone.

How are you doing?

Very good. Just piggybacking on the last question. We're seeing very good margin in home and building products. Seeing better leverage. You called out a material and tariff impact. Can you try to quantify that at all? Just curious what the underlying margins could have been in the quarter ex some of the headwinds.

For the materials and the tariffs, we had significant headwinds initially and we had set price or put our price increases to offset those amounts. We have done so. The tariff that came out in May which increased the 10% to 25% for the 301 tariffs has begun to affect us slightly in the third quarter and will continue. That amount unmitigated is about $20 million annualized. We are working with our customers already and actually started that process when we passed through increases related to the 10% tariffs. We expect to complete that exercise by the end of the calendar year. So, we'll see some impact from that in our fourth quarter as we work on putting through those price increases.

But the bottom line to the tariffs has been and will continue to be whatever that policy impact is going to be, we will mitigate and pass on. Your takeaway is correct. Without them, our margins would be better. But until they're gone, they're here.

Okay. That's helpful. Steel price has declined in the first half. You turn inventory about four times a year. Can you talk about how maybe declining steel price has affected your margins the first half and how do you see it playing out in the second half?

Steel is just one component of our overall cost structure. Some things like steel are slightly down but other items, particularly labor, are up. Overall, our costs are up. So, it's just one element.

Okay. Helpful. I'll hop back in the queue. Thank you.

Thank you.

You have a question from Justin Bergner, Gabelli Research. Please, go ahead, sir.

Yes. Hi, Ron. Hi, Brian. How are you guys?

Doing well.

A couple of questions here. First off, what was the free cash flow number in the third quarter that you said earlier? It came at me a bit fast.

$60 million.

Six zero. Okay. That's a quick one. Secondly, as I look at your home and buildings products, the plus 2% volume was that positive in both legacy Clopay and Ames? Or was it more Ames positive and Clopay negative? I think Clopay was negative on a legacy basis per volume last quarter.

They were both positive.

Okay. And then in terms of the mix. Could you elaborate a little bit more on where and in what capacity you're seeing mix improvement?

Sure. It's really across most of our product lines. On the Clopay side continues to see improvements in the garage door mix because they're on the retail side and additional commercial sales. And then on the Ames/ClosetMaid side, we continue to see the benefits of improvements in innovation in our products and selling our brand at the higher end compared to entry point type products that we are slowly phasing out with more mid and high-tier products.

Okay. With respect to the Ames and ClosetMaid synergies, where do things stand as we sort of get closer to the fiscal year 2020 and additional upside there? Are we already seeing some of that upside?

We're on track to what we laid out as being a multi-year improvement in integration. Couldn't be happier about where we are with the ClosetMaid acquisition and what it is going to do for us long-term in being able to combine with Ames to drive both revenue growth and expense reduction. So, we've said all along that these are businesses that are going to be very complimentary over time. We're encouraged about what we see the trends in the business to be. But over time the ability to innovate, the ability to take cost out of the combined business gives us a real platform of growth and we expect our margins and free cash flow to continue to reflect that.

And are the cost synergies mainly in the sourcing side or are they broader than that?

All over. Remember, we bought ClosetMaid. It was a $300 million-plus revenue business that was running at an 8% margin. We said we were going to get into a blended margin toward our 12% goal. We've got plenty of work still to do in getting there but over time both the revenue enhancement as well the consolidation of putting the Ames business together with it, we're confident that we'll get it there.

Okay. Thank you. That's helpful. Last question on the Telephonics business. You clarified that the revenue once a year guide of $2.2 billion is still valid despite I think it was the MH-60 India opportunity pushing right into next year. Is it possible for you to give us any sort of indication as to how much revenue that was expected to be in 2019 when you were thinking about things a quarter or two ago?

Yes. It was in the low single-digits area.

Small in 19. This was always about 20, 21, and 22. The Telephonics profile of growth, we're feeling very good about what we see ahead of us. Not just next year, but what we see happening over the next five years.

Actually, Justin. Sorry. I meant the revenue would be in the high single-digits. EBITDA was low single-digits. I misspoke.

Okay. That's helpful. Thanks, guys.

We have a question from Josh Chan, Baird. Please, go ahead, sir.

Hi. Good afternoon, Ron and Brian. Good quarter.

Thank you.

Hi, Josh.

Hi. My first question is on Ames. I think you mentioned that volumes were up in the quarter which you're hearing a lot of companies blame the weather in this earnings cycle. Could you just talk about what you saw there in terms of did you gain share? Is the inventory in good shape and things like that in the core Ames business?

Look. Weather is a fact. It's not an excuse. The things that are in our control, whatever we get thrown at us. Clearly, if others are telling you that they had weather problems, we had the same weather. We were able to deal with it, which means that we are nowhere near our peak of either revenues or profitability with that business. In any quarter, there's always going to be something.

Right. Okay. I appreciate that color. And then on the tariff side, would you say that you've fully offset the tariff impact with pricing this particular quarter? And then just to clarify your point earlier, Brian, about the fourth quarter. Did you mean to say that basically based on timing there might be a temporary headwind in the fourth quarter before everything gets normalized again from a tariff perspective? I just want to make sure everything is in the right place here.

Sure. Let me just break it down into pieces. The original tariffs that were out there in September of 2018 and the threat of those tariffs that caused commodity costs to go up even earlier than that, that has all been completely mitigated. That process was completed at the end of our second quarter at the end of March. The tariffs that were announced in May, the incremental 15% tariff, we are working on mitigating that now. There is a lag between it going into place in May and our finalization of passing on that price increase.

Right. And the cost impact would start to increase in the fourth quarter, but the pricing impact can maybe be a little bit later than that is what you're saying?

Correct.

Okay. All right. My last question is just kind of preliminarily looking at fiscal 2020, I don't know if you want to give some plusses and minuses in terms of the framework that you see going into next year either relative to growth versus your long-term targets? I would assume that you would expect margin expansion in 2020, right? Just some comment on how you're preliminarily looking at 2020 would be great. Thanks.

The answer is we give guidance once a year and we'll talk to you about it in November.

All right. I tried. Thanks for your time, guys.

[Operator Instructions] We have a question from Andrew Casella, Deutsche Bank. Please, go ahead, sir.

Hey, guys. Thanks for taking my question. Nice quarter. I think in the past you've kind of talked about how tariffs can counter intuitively actually help you guys win market share. Just curious if you started to see that or if you've seen any tailwinds or anything prospectively as far as market share gains potentially showing up in the numbers?

We continue to perform very well in spite of whatever noise and disruptions in the market related to tariffs. We've been able to mitigate them. We've been able to pass them along. We expect to continue to do so. Our businesses are performing quite well. Take a look at the numbers.

I would say that our success is more based on our ability to service our customers. We have great brands on products that people want and that is worth a lot for our customers. I think that's supporting our success.

Okay. Thank you. Just again on the tariff impact for the quarter. When they were raised in May, did that hit immediately, or it was a lag until the actual costs on the $20 million annualized run rate started showing up?

Yes. It pretty much started immediately. The $20 million will run us $4 million to $6 million depending on the quarter so pretty evenly over the course of the year. There was some impact in Q3, not that large and it will grow in Q4. We'll be mitigating that. The unmitigated impact, and we'll be mitigating that, as I said earlier by passing through price increases which we expect to complete that process by the end of the calendar year.

Okay. Great. Thanks so much.

There are no further questions at this time. I would like to turn the floor back over to Mr. Ron Kramer for closing remarks.

Thanks. We feel really good about what we've accomplished year to date, and we'll be working hard to finish up this fiscal year, which will be ending September 30. And we'll be speaking to you in November. Things are going quite well, and we expect them to continue. Thanks a lot. Bye-bye.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a good evening.