Good day, and welcome to the Griffon Corporation First Quarter 2013 Earnings Conference Call. As a reminder, today's conference call is being recorded. At this time, I'd like to turn the conference over to Mr. Doug Wetmore, Griffon's Chief Financial Officer. Please go ahead, sir.

Thank you, Lisa, and good afternoon, everyone. With me on the call is Ron Kramer, our Chief Executive Officer. And before we get into the details of the call, there are certain matters that I want to bring to your attention. First, as Lisa mentioned, our call is being recorded and will be available for playback, the details of which are in our press release issued earlier today and are also available on our website. Second, during our call, we may 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 SEC. Finally, some of today's prepared remarks will adjust for those items that affect comparability between reporting periods. And these items are laid out in our non-GAAP reconciliations, which are included in our press release. And with that, I'll turn the call over to Ron.

Good afternoon, everyone. First quarter results were in line with our expectations, showing continued improvement in our operations as the global economy slowly recovers. Specifically, Telephonics had another great quarter benefiting from cost control and operating efficiencies, as well as a more favorable product mix. Plastics continue to show improvement from the initiatives undertaken to address the manufacturing inefficiencies arising from our capacity expansions in Germany and Brazil. And Home and Building Products benefited from enhanced profitability in our Doors business. However, ATT revenues decreased 22% due to the lack of snow and the resulting lower snow tool sales. Retail customers also continue to hold high levels of snow tool inventory carried over from last year, further affecting the snow tools sales volume. The weather is obviously beyond our control, but Ames is undertaking several initiatives to improve its operations, which I'll discuss in a moment. Consolidated revenue of $424 million decreased 6% compared to the prior-year quarter, and consolidated segment adjusted EBITDA was $43 million, increasing 3% compared to $41.6 million in the prior-year quarter. First quarter net income was $0.01 per share compared to $0.04 in the prior year. Adjusted earnings were $0.05 compared to $0.07 in the prior-year quarter. I'd like to take a moment to go through each of the operating businesses and then Doug will take you through the financial results in more detail. Telephonics first quarter revenue totaled $96 million, decreasing 8% compared to the prior-year quarter. The decline was primarily attributable to an absence of contract manufacturer revenue for CREW 3.1 in the current quarter. Notwithstanding the revenue decline, Telephonics continued its strong profitability performance achieved throughout fiscal 2012, with current EBITDA of $16.4 million and an EBITDA margin of 17%, increasing 200 basis points over the prior-year quarter. Telephonics margins continue to…

Thanks, Ron. Consolidated revenue totaled $424 million in the quarter, decreasing 6% compared to the prior year quarter. Telephonics revenue was $96 million in the current quarter, which is a decline of $8.5 million compared to the prior-year quarter. The 2011 quarter included $5.9 million of revenue related to the CREW 3.1 program where we serve as a contract manufacturer. There was no CREW 3.1 revenue in the current quarter. Excluding CREW 3.1 revenue, Telephonics core revenue decreased 3% from the prior year, primarily due to lower shipments of Advanced Radar Surveillance Systems, which was partially offset by increases in Romeo Radar and Secure Digital Intercommunications revenue. Our Telephonics segment adjusted EBITDA was $16.4 million, an increase of 4% from the prior-year quarter, while segment adjusted EBITDA margin increased 200 basis points compared to the prior year quarter. Telephonics' improved profitability has been a function of the favorable product mix and manufacturing efficiencies, combined particularly in the current quarter with lower selling, general and administrative expenses related to the timing of proposal and research and development activities. Telephonics' operating results have also materially benefited from cost reductions resulting from the voluntary early retirement plans undertaken and other restructuring activities over the past 2 years, through which we eliminated 185 positions at Telephonics that have not been replaced. Importantly, as I previously stated, the improvements to the Telephonics cost structure are not only contributing to current profitability improvements, but also make the business more cost competitive in bidding on future business opportunities. In the current quarter, Telephonics was awarded several new contracts and received incremental funding on current contracts. At December 31, 2012, backlog reached a record $467 million, up from $451 million at September 30, 2012, giving us confidence in Telephonics' near- to medium-term operating outlook. Turning to Plastics. First…

We're pleased with our performance this quarter and believe that we will perform even better as the economy improves. Telephonics poised to grow, Plastics will continue its turnaround, and we expect Home and Building Products to benefit from the recovery in housing, as well as from our Ames restructuring initiatives. We believe that over the long term, our businesses have room to grow and will outperform their competition. We have ample resources to invest in these businesses to support their growth and are optimistic about the prospects. We see excellent growth opportunities both in the existing businesses and through a strategic acquisition, particularly with smaller tuck-ins that could meaningfully boost profitability. The foundation of our business is solid. As we look out over the next few years, we believe that we can sustain organic revenue growth, expand our EBITDA margins, improve our return on equity and significantly increase our earnings per share. I'm very excited about our future. And with that, operator, why don't we open it up for questions?

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

Just -- let's jump in with Telephonics. First, the Fire Scout program, that was a nice award, and it -- I think it's certainly ahead of our expectations. I was wondering if you could just speak a little more about the program and your expectations for that now for this year? And then remind us of the potential size of the program over the next several years, as it relates to opportunity for Telephonics?

We had always said that we thought that the initial orders would come sometime in fiscal year '13. This, by our own expectations, happened far sooner. I think it speaks to the importance of an already funded program. And this is the beginning of what we hope to be a very long-lived set of opportunities for Telephonics. The initial award -- down-award to us was $200 million on a $2 billion contract to Northrop. And our initial order is the start against that $200 million order, which, we've always said, was going to be over a period of years. The importance of that technology and our proven ability and cost effectiveness is why we won the award. And we think this is going to have significant, long-term growth for Telephonics. And it's Fire Scout and there's a number of derivatives of Fire Scout that will happen over time. So it's always a guess as to when additional programs will come our way. This one, we had very little baked into our forecast for 2013. And this is helpful. Our order book is, as we discussed, is significantly higher at the end of this quarter than, I think, many people who follow us were expecting. And we feel very optimistic about Fire Scout, the program, our technology and the longer-term implications for Telephonics growth.

Okay, great, that's very helpful. And you've indicated in the call in November the steps you've taken to improve the margins in Telephonics. And I believe, though, that you also indicated that there may be some retraction from the highs of last year. However, you showed a further improvement of 200 basis points. Could you tell us kind of an expected or sustainable range for margins in...

I'll say it again, we don't expect them to go up from here. And the range for this business has steadily improved. I was looking back, and when you look at Telephonics over time, we've grown this business. Company's going to celebrate its 80th birthday this year, which is quite remarkable. And in the last 4 years, we've grown our top line 20%, and we've grown our EBITDA line 50%. So this is a business that we view as incredibly well managed. Joe Battaglia and his team have done the right things. The environment around defense has changed continually in 80 years, and it will change continually for the next 80 years. It's an important business, its technology is proven, and its growth rate is going to be dependent on a lot of things out of our control. What's in our control is making sure it's the most efficient business. And some of the growth initiatives that we have are significantly higher margin, particularly the joint venture, which is a technology licensing. But that's very far out in the future. But these are the kinds of things that we think about that we're planning and that will become obvious. Short term, controlling cost, doing plant consolidations, rightsizing people have all been the right decisions to have made for this business. And that those decisions 2-plus years ago are just starting to show the impact. And you see it over the last several quarters.

And Bob, I made a comment in my comments that may have been lost a little bit. But some of it has to do with the timing of proposal and research and development activities. So the first quarter profitability, the EBITDA margin of 17%, is aberrational a little bit within the year. So you're going to see some flux. I have said in the last few calls, you shouldn't build out into your model, Telephonics being sustained, at least at the present, at the high EBITDA margins that they have achieved. I think it's -- you're probably looking at something in the neighborhood -- form your judgment of what that means, for the full year 2013, in the neighborhood of the EBITDA margins achieved for fiscal '12. So you're going to see some fluctuations in the next couple of quarters, because of spending in bid and proposal costs.

Okay, great, that's helpful color. Just jumping over to the Home and Building Products. With the restructuring announced with Ames, just want to know how that kind of moves into the bigger picture. As we see your recovery a few years out, you've often said that HBP can be $1 billion-plus business with 10%-plus EBITDA margins. Does this move that margin goal with these savings to 11%, 12%? Or how do you look at the business now once you get the -- this restructuring behind you?

Yes. I think the upside will take care of itself. What we're trying to do is rightsize the business for what's obviously been an incredibly volatile weather pattern that's affected that part of the business. We've said that we think that there's a recovery that we now clearly see in our Door business and that the revenues have yet to really show significant growth. So the increase in profitability, as a result of doing the mega-plant, is obvious to us. And we put the same focus on the Ames business on the assumption that weather never normalizes and how do we make the most money we can in that business. And then, ultimately, what the profitability turns out to be will take care of itself. So we still target a blended 10% margin for that business, and we still think that there's upside. But until we see a normal weather pattern that we can get our arms around as to what's the top line going to be, this is the most conservative way for us to approach making sure that we maximize our profitability in a difficult environment. And we've experienced a number of quarters in owning Ames, where we have had significant impact by having spring that was washed out and by having 2 consecutive years of record-high temperatures impacting snow. You have to go back to 1860-something, in order to get to 1863, in order to get to the same winter pattern that we just experienced. I'm willing to take the upside that by getting the cost structure into the most efficient footprint that, over time, we'll continue to generate nice returns on this investment.

Yes. And I think it's important. We've always recognized that we conceded that the weather was beyond our control, but we also said that we were going to take those steps and address those initiatives that were within our control and cost-cutting and streamlining the manufacturing footprint of Ames True Temper, one of those things that is in our control. And even if we further anomalous weather periods, we will have reduced our cost base and improve the profit of Ames True Temper and the Home and Building products business at current operating levels. And if we get an uplift from that, a return to normal, whatever the new normal is, we should benefit from that measurably.

Okay, that's terrific. And then just going over to films, the progress has been fantastic in the margin improvement and, particularly, if you account for -- if you back up the impact from resin in the quarter. Can -- is there still expected growth beyond what you have? And then also, I guess, the second part would be, can you talk about the market dynamics in Europe, if there's any market share shifts and any opportunities for you there?

Let me -- there's a couple of questions embedded in that. Let me deal with -- the top line is growing nicely. And the issue has always been we want profitable growth, not just top line growth. And for the sake of having a larger revenue base. So rightsizing the mix in the business has been a priority and is going to continue to be a focus. So we still like the growth prospect. And as we mentioned, Europe is slower, and Brazil went from a business that we were losing money in to stabilize -- to actually making money. And I give that -- that's a management story. And the management there has done the job that we hired them to do, which was to take the business, right the investments that we had made, get the manufacturing efficiencies improved. And we continue to think that, that's going to be the story over the balance of this year and going forward. North America continues to be the leading part of the volume increase and the leading part of the profitability story for Plastics. Germany will go through a change in market dynamic. Kimberly-Clark has announced that they're exiting that market. That should benefit our Procter & Gamble relationship, but that remains to be seen. And so we feel like it's a business that is going to improve. There's going to be a rightsizing of the product mix and the customer base that we should continue to focus on. And ultimately, the goal here is to have a 10%, or better, EBITDA margin business at not less than the revenue level that we're currently operating on. And we think that it's -- high single-digit growth is the best that you're going to look at in a recovering European economy, that this business will get to benefit from. Doug, do you want to add anything?

No. I think the -- we -- remember, there was a 7% volume growth there that was kind of masked by the unfavorable currency. The currency has a tendency to even out over the long term, but we -- they focus on volume and they focus on selling profitable product. And as Ron was very complimentary of the management in Plastics, I will only repeat those comments.

Resin is going to -- resin has been a headwind. So it's real, and it shows you at some level that there's an expectation of a recovery in the global economy.

And we'll now go to Tim Quillin with Stephens, Incorporated.

So on Ames True Temper, and clearly, we are having unusual weather, and there's no doubt about that. And you're taking action on cost regardless, but have you been able to ferret out any evidence that there's something else besides weather happening there?

Look, I'll tell you, we are sensitive to GDP growth in that business more than we are sensitive to housing. And -- but our recovering housing market helps the Ames business. GDP has been anemic, and we have not seen the big infrastructure spending. And remember the phrase, shovel-ready? We bought a shovel company, and there's been no infrastructure development in the United States in the last several years. Unemployment is still 7.8%. So the Ames business hasn't lost market share. The Ames business is suffering from a recovering U.S.-dominant economy. And in Canada, where we own Garant, which is the leading market share company in Canadian snow shovels for 2 years running, there's been record low snow. So we're not -- we consider all that bad luck. We don't think it's a bad business. As a matter fact, we think is it's a good business. We announced that we brought Les Ireland in to run the Ames business, comes from Stanley Black & Decker. We have a long-term view of positioning this company for an improving economy. And we think it's brands, we think it's quality, and we think it's relationships with its customers. And its growth potential will be recognized. Now that's not going to happen in 2013. And we've said clearly that our guidance for the year remains what it was in November. And I can assure you, in November, we thought there was going to be a winter. There wasn't. And hopefully, there'll be a spring and that will benefit us. And maybe we're being conservative, but it has been a volatile business. We try to look at this as where we're going to be long term. We think Ames is complementary to us in our segment, to having the Door business and having the customer relations. But that business will improve as volume improves. We haven't lost market share. We don't -- we think this is entirely a reflection of what's going on in the economy.

And then on the $8 million in restructuring charges and the $20 million in planned CapEx there, what is the -- remind me what the time frame for that is going to be.

It will be between this fiscal year and fiscal '14, Tim. The capital spending is probably fairly evenly spread over that period of time so as to model, $10 million a year. But as I said, the guidance that we -- I bumped it a little bit from what we previously provided in November. Our spending will be $65 million to $70 million this year. That includes the spending associated with the Ames initiative. The restructuring charges will -- there's very clear accounting guidance for that in terms of recognition of the severance-related costs and the asset-related costs. Those will be in discrete periods over the course of the next, let's say, 6 to 7 quarters. Because those will span into the first half of fiscal 2014. I'd like to be somewhat sensitive to the affected employees, so I won't give you a calendarization of that right now.

Okay, that's fair. I've had a few people wondering if, over the past few months, wondering if your Garage Door business shouldn't be seeing a little bit more growth right now, giving -- given some early signs of a -- albeit slow housing recovery. But it seems like other housing-related companies have had maybe a little bit faster start. Can you kind of reconcile that a little bit?

I think our seasonality is an issue. I think that we see the improvement in both volume. We see the improvement in both our dealer network and in our big-box customers. I think you got to separate the difference between what's a -- an absorption and moving a lot of single-family homes into speculative hands that are renting them and the multi-family impact. We are in the beginning of a housing recovery. It -- the housing markets in this country have not recovered. We have a front-row seat on it. Telephonics has its issue in looking at defense. Clopay Building Products is -- in our Garage Door business, is a absolute finger on the pulse of what's really happening in housing. And you're at the early stages of the recovery in that market.

And you have to remember, too, that the Garage Door is actually the last piece that's bolted on to a new home. And new housing starts now typically should trigger garage door sales in the next 2 quarters, let's say. So I think, when we're speaking 3 months from now, and ideally more likely 6 months from now, we'll tell you whether the housing starts that you hear about right now are actually leading to increased garage door sales.

And if their housing finishes.

Yes, yes. And go back to the same comment when you have the levels of unemployment that we have and you have the amount of pent-up demand that's out there. When it starts to shift, we should see significantly higher volumes. We're not expecting that. We're not projecting that. It's not in our guidance for this year. But we certainly believe that the earnings power of not just Home and -- the Door business and the Home and Building Products segment is significantly beyond what we're looking at in 2013.

And the capital initiatives and the plant restructuring that we undertook with respect to the Door business in the years 2009 to 2011, ideally, position us from a cost and efficiency standpoint to really be able to leverage that uptick in housing if it does indeed come to pass.

T Right, right. And then on Telephonics, I mean, it's -- I think Telephonics may be the only government contractor to build backlog in the December quarter. And that may not be an exaggeration, so it was very impressive. Was the order for Fire Scout, was that in -- they come after the quarter in January?

Yes.

So then that's a $33 million order, is that right?

The initial, yes.

The initial order is $33 million. So knock on wood, it could be a decent bookings quarter in the March quarter as well or maybe not as big of a disaster as other government contractors might be looking for. But -- and you alluded -- what's that?

No one's immune from a sequestration that's uncontrolled. And so we're not going to be Pollyannaish about it. We think Telephonics products are mission critical, proven and funded. And our visibility in '13 is clear. And then what happens beyond that is -- if we don't come to an agreement on budgets and providing for national defense, everyone's going to suffer. We think Telephonics is well positioned, and we've been saying this now for the last several years, that our concentration on Intelligence, Surveillance and Reconnaissance is our competitive advantage.

Right, right. Now you're doing a great job of dodging the bullet so far. And then, what are you thinking on acquisitions right now? Do you continue to evaluate things? What's going on there?

We are focused on operational improvement. And while I would love to believe that there's an acquisition out there that -- we clearly have the financial capacity and we clearly have the undrawn, both bank and the ability to come back to the bond market, it's not where my focus is. I want these businesses to be able to get to the maximum amount of profitability, cash flow and we've got -- what we've dealt with some difficult issues over the last few years. We are -- clearly, each of our businesses is getting better month-over-month, quarter-over-quarter. And we think that there's still a level of improvement. So part of the strategy for us is focus on the operations, continue to build our operating excellence. And the acquisitions will come as a result of that.

Yes, fair enough. And last question was, what was Ames' year-over-year growth in 1863?

That was a very strong year, Tim. It was actually a very weak winter.

That was the bad-weather year, yes. All right.

Listen, everyone talks about owning businesses for the long run. We think that these businesses, we think we have them moving in the right direction operationally. We think our capital structure provides an enormous amount of flexibility. We've invested in the businesses. Our CapEx will start to go off. Our free cash flow will start to rise in 2014 and beyond. We like where these businesses are positioned. We want to continue to build the operating performance, and the weather will have an impact one way or the other in that happening.

[Operator Instructions] And we'll go to Marty Pollack with NWQ Investment Management.

Yes. If I may, just a couple of questions, one on the Plastics business. I guess, there was a time we would talk about EBIT margins and the possibility that those margins could move up in the high-single digits. At this point, as we're talking about EBITDA margins, I mean, can you kind of translate back what you might be thinking about is the potential for the Plastics business? The 10% margin is currently, obviously, the -- assuming that you didn't have the resin problem, you would have shown a margin of about 5.5%. But is that 10% suggest a run rate that you would you be comfortable in the EBITDA line? Or should it actually be higher, if you're targeting, perhaps, higher EBIT margin itself? That would be the first question.

I think the first step, Marty, is to get to the sustained annualized basis of an EBITDA margin of 10%. But I think Ron has been pretty clear that, that's the first step. Because that's getting us back to where we were. But then, the next step is to build upon that and continue to improve the profitability as well as the return on the underlying assets deployed.

Okay. And secondly, if I may, on the Telephonics, it's quite amazing that considering so much of the business actually could run off in 1 year's time, you've been able to be able to grow the backlog. But as you look at the impact of sequestration and it seems that, at some point, the backlog is going to decline as much as you will have fairly good visibility of earnings in 2013. Should we just assume that backlog will be kind of dropping off more precipitously just simply because 70% of your business, you're saying, of that backlog is basically be visible through what will happen in 2013? So are we replacing that backlog with some orders that will keep that number fairly elevated?

Look, I think if you look at the pattern, we've increased our backlog consistently for the last 5 years. And we believe that our outlook is, for 2013 and beyond, that things might shift to the right as a result of whatever is going to happen in March. But our products are necessary. Our replacement business is ongoing. And this is not a company and a technology that is subject to boots on the ground. It's not a consumable, and that this is part of the budget that is going to have to continue to be funded. Now how many, at what timing? But to your question, there's no reason for us today to sit and project that we're going to have a downturn in our backlog. And the empirical evidence is each year, we have improved our backlog; each year, we've improved our revenue; and we've significantly improved the profitability of this business.

It appears there are no further questions at this time. Mr. Kramer, I'll turn the call back to you.

Thanks, and we look forward to reporting on our continued performance in May.