Good day, and welcome to the Griffon Corporation's Second Quarter Fiscal 2012 Financial Results Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Doug Wetmore, Chief Financial Officer. Please go ahead, sir.

Thank you, operator, and good afternoon, everyone. With me on the call is Ron Kramer, Griffon's Chief Executive Officer. Before we get into the details of the call, there are certain matters that I want to bring to your attention. First, I'll mention, again, that this call is being recorded and will be available for playback. Details regarding the playback are provided in our press release issued earlier today and are also available on our website. Second, during our call, we will make certain forward-looking statements about the company's performance. Such forward-looking statements are subject to inherent risks and uncertainties that could cause actual results to differ materially from those expressed. For additional information concerning factors that could cause actual results to differ from those discussed in our forward-looking statements, you should refer to the cautionary statements contained in today's press release, as well as the risk factors that we discuss in our filings with the Securities and Exchange Commission. And finally, some of today's prepared remarks will adjust for those items that affect comparability between reporting periods. These items are all laid out in our non-GAAP reconciliations, which are included in our press release. Thank you, and I will turn the call over to Ron.

Good afternoon, everyone, and thanks for joining the call today. Our second quarter reflects a strong performance from Telephonics, ongoing improvements in our Plastics division and a stable Home and Building Products business. We're performing well in uncertain times. Telephonics is operating in a business environment where a strong commercial market opportunity and many of our mission-critical defense programs give us a degree of insulation from the Defense budget environment. Telephonics revenue in the quarter increased modestly compared to the prior year quarter, with core revenue, excluding sales associated with the CREW 3.1 program for which we are a contract manufacturer, grew 6%. In Plastics, we've made progress but headwinds from a tougher business environment in Europe and in Brazil are affecting our pace of improvement. We experience continued momentum and increased market share with revenue growing 10% compared to the 2011 quarter, with higher volumes across all regions. In Home and Building Products, 5% growth in our door business, as well as the inclusion of the Southern Patio acquisition helped to offset the performance from weather-related categories. Home and Building Products revenue decreased 3% from the prior year quarter. Consolidated revenue increased by 1% to $482 million compared to the prior year quarter. Earnings per share in the quarter were $0.04 compared to a loss of $0.24 in the prior year. Our consolidated segment adjusted EBITDA was $40.4 million, 8% below the prior year quarter. I'd like to take you through each of the operating segments in greater details so that you can understand the direction in each that they're headed and why we are confident about the long-term prospects for all of our businesses. Let's start with Telephonics. Revenues grew by $500,000 over the prior year quarter and continued to perform extremely well with core revenue growth of…

Thanks, Ron. Again, consolidated revenue in the quarter increased 1% to $482 million. And revenue in the quarter reflects the first full quarter of contribution of the Southern Patio acquisition, which was completed in October 2011. Despite challenging revenue at Home and Building Products that was weather-related, we were pleased with the overall growth driven by Plastics and Telephonics. Telephonics strength derives from its technology leadership position in a variety of categories and from the continuing demand for ISR systems. The growth was notably strong in the quarter. As has been the case for the last several quarters, Telephonics revenue associated with the CREW 3.1 production impacts reported growth in what we consider our core business. As Ron mentioned, we're a contract manufacturer for the CREW 3.1 product. Excluding sales associated with the CREW 3.1 from both the current and prior year quarter, it was just under $14 million in the current quarter, just under $20 million in the prior year quarter. Revenue in Telephonics core business grew 6% in comparison to the prior year quarter and continuing the strong performance achieved in the first quarter of this fiscal year. Telephonics second quarter adjusted EBITDA was $15.3 million, increasing 19% or $2.4 million compared to the prior year quarter. Segment operating margin increased 200 basis points compared to the prior year quarter. Telephonics improved profitability was primarily a result of favorable product mix. And the improved profitability also reflects the benefit of the voluntary early retirement plan and other restructuring initiatives undertaken in the latter stages of fiscal 2011 and earlier this fiscal year. As we had anticipated in our last earnings call, Telephonics backlog at the end of the second quarter increased significantly to $434 million compared to $380 million at December 31, 2011. Plastics revenue in the second…

Thanks, Doug. We think we're very well positioned for today's business environment and for what is likely to be continued uncertainty regarding the overall economy. Telephonics is poised to grow, plastics will continue to improve and the Home and Building Products business will improve as housing recovers. We see very good growth opportunities both in existing businesses and through a strategic acquisition, particularly with the smaller tuck-ins that can meaningfully boost profitability. In any improvement in the global economy, we expect to see our profitability expand. All of our businesses are growing, and we believe they will continue to outperform their competition. We have ample resources to invest in these businesses to support their growth, and we remain excited about their prospects. We've not only built a strong business, but we have a talented management team in each of our businesses that we expect to take us forward and create value for our shareholders. With that, I'd like to take your questions.

[Operator Instructions] We'll take our first question from Arnie Ursaner with CJS Securities.

Obviously, guys are somewhat disappointed by the rate of improvement you're seeing in Plastics profitability. Just remind us what is causing the issue? And you mentioned the term normal efficiencies hopefully returning. What do you believe your margin will be in this segment exiting this year?

Fair question. The base of the expansion was brought on in Germany, and we were experiencing separately through an expansion in Brazil high rates of scrap as we learn the manufacturing of new product for new customers as part of our expansion. While it's gone slower, we're pleased with the results that we'd seen. And don't lose sight of the fact that we made all of our customer commitments. Our top line has met all expectations, and the improvements in efficiency and in run lengths and in profitability, month over month and quarter-over-quarter, continue to improve. So we like the glide path. We, of course, would like the profitability to have come quicker. But the goal for that has been and continues to be to ramp that business to a 10% EBITDA margin. And we feel very comfortable that we're on the right path to that.

Do you believe you'll exit the year with that type of margin in place?

I'm sorry, I didn't hear the question.

Do you believe you'll be at that level exiting this year?

We think that we're going to be there. And I don't want to give you certainty. It's gone slower. We think that month over month, quarter-over-quarter, we're getting towards there. And we're comfortable by the end of this year that we should see ourselves growing towards that number, but fully expect that it may take us into 2013 before it's achieved.

And Arnie, as well we've also mentioned in our comments that we're seeing a bit of a slowdown both in the European and Brazilian markets, which is also factoring into our forecast for the balance of this year. And also, since December, we have also seen an uptick in the cost of resin, which while we pass it on, it's always passed on in a delayed basis. And because of that, during the period of rising resin price, our margins get compressed a little bit. Ultimately we catch up for that, but there is a delay or lag in that pass-through, which is all being taken into account in our providing the updated information.

Right. It leads right into my next question. Can you remind us what percent of your revenues come from Europe and what is embedded in your view for the back half of the year in terms of rate of growth overall for your European business?

Europe in fiscal 2011 was about 46% to 48% of Plastics sales. And North America is about 42% to 44%, with Brazil basically accounting for the difference. And I might be off by 1% or 2%, but Europe is slightly bigger than North America. And it's basically -- remember, first of all we started to achieve the growth in Europe last year in the third and fourth quarters from the new business that we won, so we are seeing the -- we'll have more difficult comparisons in the second half of the year. But I think the economic circumstances in the markets that we're serving in Europe, and we've talked in the past about a slowdown in Brazil, are working their way into our forecast. And I think while -- we're just taking a more conservative view of the economic circumstances in Europe given the current environment that they're operating in.

We'll take our next question from Tim Quillin with Stephens.

Could you remind us what -- and maybe on a normalized basis, what percent of revenue of Ames True Temper the snow shovels represent?

We've never broken out the individual product lines. But obviously, the second quarter of the year and at the latter stage of the first quarter of our fiscal year, snow was a big element of that. I think it's safe to say it's probably, on an annualized basis, in the range of the high teens to low 20s of the overall Ames True Temper sales. And that's all snow-related activity.

And I'd add to that, at a higher EBITDA margin than what we do in that business on a blended basis, so the impact of lack of snow probably hit us by more than $5 million at the EBITDA line for the quarter.

Got it. And have you -- did you see any benefits in the March quarter? Are you seeing any benefits so far this quarter from increased sales of landscaping equipment? I mean, I think weather can work both ways, are there any good things happening?

Yes. As I said, April was fantastic. One month doesn't make a quarter and obviously -- look, we bought this business with a very long-term view. There's going to be great weather quarter, there's going to be lousy weather quarters. And that's going to have an impact, but it doesn't change the investment thesis. We like the business. We think we've got products that are important to our customers. We're going to be extraordinarily competitive on winning business going forward. We like the way we are positioned. And the weather is going to continue to throw us curve balls. At the moment, the weather is going our way.

Right. And did you say what -- how much revenue and/or EBITDA Southern Patio contributed in the quarter?

No. The only thing we've talked about publicly is, Tim, is that the year prior to acquisition Southern Patio had revenues slightly in excess of $40 million. It is a seasonal business, and this quarter just completed is one of the more significant quarters, but we've not broken out the profitability of that.

Right. Okay. Very good. And Doug, can you break out your depreciation and amortization forecast by segments? The $68 million total, how does that go into each of the segments?

Tim, I don't have that information. I've got the full year basis on total. I'd be happy to break that out for you. And if anybody else has the interest in that information on the call, if you give me an hour after the call, I'll have the information, but I don't have it readily available now.

And no worries. And on -- so Telephonics had what looked like a pretty exceptional bookings quarter. Can you give us a flavor of some of the bigger chunks of order flow it saw?

Well, look the biggest growth in the business continues to be radar-related. And they have excelled with the most significant being that $330 million contract for the Romeo.

A portion of that contract, it was announced and only a portion of it rolled into our order book at the end of the quarter.

And which, I guess, brings up the question of on the $330 million, what will be -- what's the expected timing of revenue, and how will that -- how will you take that into backlog?

Well, just remember, we only put things into funded backlog that are going to go into production within the next 12 months. What the importance of this contract is, and I can't emphasize enough, how pleased we are and how well positioned Telephonics is. This is many years of a very strong visibility on our forward backlog. So this could be a 5-year-plus contract. And we expect it to come in over that timeframe with the goal being if you look at the backlog, forget about quarter-over-quarter but year-over-year, Joe Battaglia and his team have done just an extraordinary job of building backlog year-over-year and building our revenue base. We see our product categories continuing to grow, and we believe that our backlog, though I don't want to give you a number because it's so cautionary in the environment that it's in, but the history here has been that these products are wanted and mission-critical and with the base of a $330 million expansion, we think that there are other contracts that are going to come for this, and that we're going to be able to continue to build on that base going forward.

Right. And Ron, I hate to parse words, but you said 5 years plus. I mean, is there a specific term of the contract?

It basically runs through the middle of 2017, Tim, so roughly 5 years. And in terms of the ability to project the revenue, say, by year, it's difficult because there is flex on the part of the customer in terms of when those radar units are drawn down.

And what of -- what was booked in the March quarter?

Right around $20 million. So it's just an element of the increase in the book.

Okay. And is that kind of your anticipated one-year revenue or do you expect a little bit more than that in terms of revenue in the current forward 12 months?

I think it would be higher than that, but again as Ron said, we're booking it based on the plans to put it into production. It -- realistically there's probably a little bit more that will come in over the course of the next quarter or 2, but that's really at the discretion of our customer in terms of when they place that, it's really beyond our control if they have the contract.

Yes. And can you give us a little update on Fire Scout? And it probably is not going to necessarily impact you, but there was a halt on the -- or grounding of the program. Where do you see -- what do you see in terms of the next potential orders there?

That's a good question about -- we know that they were grounded for a period of time because one Fire Scout went down in Afghanistan about a month ago. There was a period of investigation to determine whether it was an accident or operational failure or whether it was in fact shot down. Quite frankly, I haven't seen the final determination of what caused it, but I believe the units that are actually deployed are now back in the air. And we don't think that, that will have any long-term implications for us.

And in terms of your expected timing of order flow for Fire Scout, when do you expect the next order?

It's conceivable that we'll get some benefit in the current year in the third and fourth quarters. But that's still a bit uncertain because obviously it does depend on the timing often poured by our customer. But it will ramp up, again, more significantly in fiscal 2013 for us.

Got it. And just a couple more programs, if you could give an update on what you're seeing, if anything, under the MSC program, and then what your expectations are for your counter-IED work?

The counter-IED work is really -- we expect that we'll have some continued demand for spares. It really is -- it flexes. I think there's going to be some kidding out of the Afghani army, which we may benefit from. But obviously as the troops draw down, the need to supply those devices to our troops will obviously diminish. So I can't really forecast that.

And MSC, we continue to go through testing and we continue to believe that it's a very big opportunity and has a growth profile that remains quite strong and we not look at adding anything significant in this quarter, though we've got a lot of near-term visibility that we hope to be able to add to the backlog.

We'll take our next question from Zahid Siddique with Gabelli.

A couple of questions. One on -- within the Home and Building Products. Could you comment on -- if the garage doors was profitable?

Yes, we have positive EBITDA in that business. Remember, we don't break out the EBITDA of the components of the Home and Building Products business. But yes, they did make money.

And year-over-year, quarter-over-quarter, we actually have seen improvement, but I would not take that as a -- I wouldn't extrapolate from that a meaningful housing improvement. We think we are maintaining or increasing market share because we've done a very good job running that business. We've seen volume increases, which does give us some level of confidence that there is an early start to what, hopefully, is a recovery in the housing markets. And that we think with the overhead reductions and the positioning for Clopay that it has the potential, as housing continues to recover, to expand its margin significantly beyond the 5%, 6% range that it's been operating. So it's making money. We think it will make a lot more money as volume increases.

I think the other 2 things just to bear in mind, 1 is we're still -- year-over-year comparison, this is the final quarter where we get the benefit of the mega plan savings, which began to roll into our profitability in the third fiscal quarter of last year. But we also think that there's additional opportunities to drive further savings that are derivative of that project. And the second thing, just from a sales perspective, and this is the positive to the weather, because the weather was so good during the January to March timeframe, it is possible -- we're not quite yet in a position to determine for sure, but we may have been the beneficiary of people who might have otherwise held off doing work on garage doors, did it earlier in the year because the weather was accommodating.

Sure. How much does a garage door typically cost on average?

Well, you can go anywhere from $150 to $18,000, Zahid. It depends on a number of factors, including geographic region, whether you need insulation capabilities, whether it's a wood door or a metal door. I really wouldn't even hazard a guess in terms of what the average.

Why, are you shopping?

No, I'm actually not. I rent, so I guess my owner probably would be.

As people ultimately go from rentals into absorbing and then as that process leads to new construction, look we're going to be a beneficiary of it. We like where we have the business positioned, we're the #1 branded company. We extend -- we expect to stay there. We have the brand, and we have the distribution relationships that are important to us. Housing in America will come back. Clopay is going to be a beneficiary.

Okay. And then I wanted to follow up on the tax rate. If I heard you correctly, you expect roughly 55% for full year, is that correct?

No, 52% to 54%. And quite frankly, it's basically being driven by the reduced expectations for the pretax income. And it's -- quite simply, it's you've reduced the denominator but the numerator in terms of the permanent items and so forth stays the same. So our effective tax rate is going to be higher than normal. It doesn't mean we're paying more taxes, it's just a percentage relationship. One of the key things for us to drive down that effective tax rate is to further improve our pretax income.

And just to put a little bit of clarity to it, what happens and the reasons it looks so unusual is that we're making money in North America, we're losing money on a tax basis in Europe and Brazil. The losses outside the United States are not deductible against U.S. So thereby, with the lower consolidated pretax and not having the deductibility, we are effectively increasing our tax rate on American operations, thereby driving the tax rate and then throw in nondeductibility of restricted stock and that's how you get above 50%. Look, this is -- well, so that's factually accurate. As the business is and as our pretax grow into 2013 and beyond, the tax rate will come down.

What about the dollar value, what should we -- what's your forecast for full year dollar tax value, and then -- and for 2013, the dollar value of tax?

We don't, we don't project.

No. We prefer not to comment on that.

Okay. And last question, on the guidance, I guess, you brought or you reduced the guidance at the EBITDA level, but you are comfortable still that you will -- at the top line, you'll do $1.9 billion to $2 billion?

Yes, and Zahid, let me give you -- the business is growing. So our revenues are increasing. EBITDA is obviously significantly affected by the headwinds that we -- were out of our control, lack of snow and related sales in the quarter. And that impact flows through into our fourth quarter, which we've already taken into account when looking out as a result of inventory that we are holding and that will be production that we won't be doing based on that, that revenue in the quarter. And then in addition, we're taking the view that Europe and Brazil are going to take time to ramp up. The confidence level is that there's a revenue increase, that's going as expected. The profitability, while better than last year we still think is given the circumstances we're doing as well as we can do. And that we're pleased with the progress and expect that to continue to flow through the meaningful increases in 2013 and beyond.

[Operator Instructions] We'll go next to Philip Volpicelli with Deutsche Bank.

My question is with regard to Ames True Temper. I think, Ron, you mentioned that you had record sales in April. Can you give us a sense of the magnitude of increase year-over-year? Is it a single-digit increase, is it a double-digit increase?

Yes, it was a double-digit increase, a fairly significant double-digit increase. But we just assumed not begin the practice of providing month-to-month commentary.

And the point of even saying it is that I go back to weather is a factor, it's out of our control, there's going to be good weather, there's going to be bad weather. If you remember, a year ago we went through our third quarter where it rained substantially, gave us a terrible environment to sell lawn and garden, not just us, all the other customers and manufacturers in the segment. And this quarter, this month, is an outstanding start to a quarter that will be affected one way or the other by the weather pattern.

And I think the other thing to remember is if you recall the snow in the United States last year, we really got a heavy dose of it at the latter part of March. So that snow lingered on the ground for an extended period of time, which ended up delaying the spring lawn and garden season. So it not only -- I mean, we had a great snow year last year, but it did have the cascade effect on delaying lawn and garden. This year, we had a weak snow season, but we're the beneficiary of, at least, in April and, as Ron said, if Mother Nature cooperates, will continue. But that's just speaks to the seasonality and the volatility of the Ames True Temper business in the short term due to weather.

And part of this is through our investment thesis, which remains intact, why we don't want Griffon highly levered, why we think Ames is better owned in the mix of businesses that we have. And we're going to continue to run it with a long-term view.

Right. And then If I remember correctly on the last call, when you went through the line reviews with your largest retailer, you were unable to get price increases. How has the price raw material relationship evolved in the first quarter? Are you facing some pressure there?

As I mentioned in my comments, we saw some price increase -- cost increases in both sides of the Home and Building Products business. And we've got initiatives to improve our efficiency and take costs out and mitigate those cost increases as best as we can. And we try as best as we can to negotiate with our customers on a fair price for the product. But it wouldn't be appropriate to talk about individual price negotiations.

And there are no further questions left in the queue. Mr. Kramer, I'll turn the call back over to you for any closing remarks.

Thank you, all, for participating, and we'll look forward to speaking again in August.

And ladies and gentlemen, this does conclude today's conference. We appreciate your participation. You may disconnect at this time.