Good day, and welcome to the Griffon Corporation Fiscal Third Quarter 2014 Earnings Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Doug Wetmore, Griffon's Chief Financial Officer. Please go ahead, sir.

Thank you, Cameron, and good afternoon, everyone. With me on the call is Ron Kramer, our Chief Executive Officer. There are certain matters I want to bring to your attention before we get into the details of the call. First, as Cameron 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 statements are subject to inherent risks and uncertainties that could cause actual results to differ materially from those expressed. And 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 various filings with the Securities and Exchange Commission. Finally, some of today's prepared remarks will adjust for those items that affect comparability between reporting periods, and those items are laid out in the non-GAAP reconciliations, which are included in our press release. Now I'll turn the call over to Ron.

Good afternoon. I'm very pleased with our performance this quarter. Specifically, our earnings growth sequentially and year-over-year resulted from strong contribution from our Plastics business, which benefited from both solid revenue growth and continued progress on operating efficiency improvements. Telephonics continued to perform well in a challenging defense budgetary environment and notwithstanding a difficult revenue comparison with the prior year quarter that included $20 million of ICREW revenue, where there was none in the current quarter. Lastly, we continue to grow our Home and Building Products businesses through a combination of core growth and through the acquisition of the Cyclone Tools business in Australia. At a consolidated level, we reported revenue of $505 million, down 1% compared to the prior year quarter. Excluding the ICREW, revenue increased 3%, reflecting sales momentum in our Home and Building Products businesses and Plastics, partially offset by the revenue decline in Telephonics. Segment adjusted EBITDA of $49.6 million increased 6% against the prior year and reflected the results of efficiency improvement initiatives across the organization. Earnings per share were $0.29 compared to $0.06 last year. I'd like to make a few comments on each of the operating segments. I will start with Home and Building Products. Revenues totaled $254 million, increasing 6% compared to the prior year quarter. Clopay Door revenues increased 8%, primarily due to increased volume and a favorable product mix. Ames revenue increased 3% due to the inclusion of the results from Northcote, which we acquired in December 2013, and the Cyclone Garden and Tools business, which we acquired in May of this year. Segment adjusted EBITDA was $19.6 million, which is a 9% decrease compared to the prior year quarter, notwithstanding the sales growth, as we continue to refine our manufacturing efficiency at Ames. We continue to believe we're in…

Thank you, Ron. Consolidated revenue totaled $505 million in the quarter, decreasing 1% or $4.8 million in comparison to the prior year quarter. That reduction in revenues stems from the conclusion of Telephonics' contract manufacturer of electronic warfare components, from which the prior year quarter included $20 million of revenue. And excluding that contract manufacturer revenue from the prior year comparative, consolidated revenue would have increased 3% over the 2013 quarter. Plastics posted the strongest growth. Revenue increased 7% compared to the prior year. The increase reflects a 5% volume increase and a 3% increase attributable to the pass-through of increased resin cost in customer selling prices. Remember, we pass through those increases or decreases on a lag basis. The balance of the revenue variance from last year's quarter was attributable to a combination of product mix and foreign currency translation. Plastics EBITDA totaled $14.9 million, increasing 23% from the prior year quarter, with that improvement driven by the strong volume growth and continued efficiency improvements. Resin had no material impact on EBITDA in the quarter. Plastics EBITDA margin increased 130 basis points to 10% of sales compared to 8.7% in the prior year quarter. Home and Building Products revenue totaled $254 million, increasing 6% compared to the prior year quarter. Ames revenue increased 3%, primarily due to the inclusion of the Northcote and Cyclone Garden and Tools acquisitions, the benefit of which was partially offset by decreased Ames sales in North American lawn and hose reel sales, primarily due to cold and wet weather conditions during the quarter. Door revenue increased 8%, primarily due to increased volume and favorable product mix. Segment adjusted EBITDA totaled $19.6 million for Home and Building Products, down from $21.5 million in the prior year quarter. That decrease was influenced by unfavorable sales mix…

Thanks, Doug. We're very pleased with this quarter's results and encouraged to see our efforts to improve efficiency driving earnings growth. Although our process is far from complete, we continue to build on the momentum already achieved, and we anticipate we will continue to see progress incrementally each quarter in the years ahead. We're committed to shareholder value creation and are confident that we can make investments for organic growth, pursue additional acquisitions and return value to our shareholders via quarterly dividend and share repurchases. We're very optimistic about our prospects. Thank you. With that, operator, we'll open it up for your questions.

[Operator Instructions] And we'll take our first question from Robert Labick with CJS Securities.

Just wanted to start with films. You obviously highlighted another terrific quarter. You've put together a great streak here. You've had -- gave us, earlier, that 10% margin target. You've reached it on average for the last 3 quarters. But as you pointed out, too, there's some higher- and some lower-margin areas. And could you talk a little bit about Brazil or Europe or wherever is below the North American average and what you're doing -- or what you can do to drive those margins up?

Well, we continue to look for volume, which comes from both more business from our existing customers, as well as trying to compete for new business. And we continue to try to make our manufacturing process as efficient as possible. And the result of both increased volume and better management of our own internal cost should allow us to continue to improve those operations.

Okay. Not sure you'll answer this, but you had given those 10% targets. You've reached those now. Do you have a new medium-term target that you guys are focused on?

No, we've -- I'd say that we continue to believe that we can run the business efficiently and continue to grow. And as we pick up in volume and there is still a recovery that we believe is in the early stages in the consumer markets in the United States, which we should benefit from, the international markets are -- have done better, Germany and Brazil, but there's still plenty of room for improvement on both top line and on bottom line. So I don't know where our peak margins are going to be. What I'm certain of is the 10% target was aspirational when we said it. We've gotten ourselves there, and we're not going to rest, and we're going to see just how profitable we can make this business.

Okay, great. And then shifting over to Home and Building Products. You had some nice tuck-ins there. You've had some good growth. You're still suffering, I guess, a little bit from the restructuring and the inefficiencies. Is there any way to quantify the impact of the inefficiencies on margin in the quarter? I know that may be difficult. That and maybe freight were the 2 big expenses you called out as...

Bob, we've seen freight costs going up in, I think, a lot of companies that you may follow. So that's an element of it. And we said on the last call, it's really difficult to parse what portion of the margin erosion in the current quarter is directly attributable to the reorganization and consolidation initiative, but it clearly is the big driver. Meanwhile, we're trying to do that and accomplish all of that while, at the same point in time, trying to disrupt customer service as little as possible. And sometimes, that leads to higher incidences of freight costs because you're expediting deliveries to customers. But as we said, we're on track to deliver it. We expect the project to be completed by the end of calendar 2014. So we'll probably still feel the effects of this through the first fiscal quarter of our fiscal 2015. But we also continue to believe that we're on track to deliver the $10 million of savings, and we're on track from a spending perspective on those initiatives, as well.

Okay, great. That's helpful. And then I think the acquisition that you -- most recent one you made was after the last conference call. Maybe could you just give us a little background on the Cyclone acquisition and how it fits into the portfolio?

Sure. Cyclone was a division of ITW in Australia. We now have assembled 3 businesses with -- before we bought Ames, Ames bought a business called Westmix in Australia. We added to that by the acquisition of Northcote. And we saw an opportunity to continue to build out our position in the Australian Home and Building Products business around the existing customer base, which is both Bunnings and Masters. And we saw that the ITW set of brands were very much consistent with the Ames philosophy, have been in the Australian market for a very long period of time, very well respected. And we thought that we can take that business and put it in the same subsidiary with our Northcote pots and planter business, as well as our cement mixer and wheelbarrow business, and give us a full product line to be able to service the Australian market, which got us to a certain scale and to a level of profitability that we think is a very interesting mix for us. And going forward, we continue to look at the Australian market and look for other places where we can buy other pieces of businesses opportunistically.

And we'll take our next question from Philip Volpicelli with Deutsche Bank.

With regard to Home and Building Products, have you guys provided a margin target where you'd like to be? Historically, you've been 9%, 10% range on the EBITDA level. Is that the goal to return to that level? Or what's kind of the near-term target there?

Look, I'd say that -- let's focus on maintaining the revenues in that business, and growing revenues is part of the strategy. And clearly, we're seeing that. We believe this is a 10% or better EBITDA margin business, not next quarter, but the efforts that we're doing over the long term is positioning this business for us to be able to grow both the top line and to be able to wring out the manufacturing efficiencies. And both businesses, I'm very confident that the management teams -- the Clopay Door business led by Steve Lynch has done a tremendous job of taking that business and improving margins, going back from the depths of the financial crisis, when we had a door business that went from $600 million top line down to just under $400 million. And we've built it back. We've built market share, we believe, and we've clearly been working at building margin. On the Ames side, Mike Sarrica has been in place for 6 months. I'm very encouraged with the moves that he's made and what he's been able to accomplish short term. Long term, we believe that there is a better-margin business in Ames that we're going to get by getting our manufacturing footprint into better shape. That was the purpose behind the restructuring. And as an overriding comment, we've been doing this with each of our businesses. This quarter highlights that the moves that we made in Plastics 3 years ago are really starting to pay off now. The moves that we made in the door business are starting to be reflected at the earnings line. Telephonics has gone through a significant expense reduction in their manufacturing in anticipates -- in anticipation of sequestration. So the Ames business, we continue to believe we can do a lot better than we have done, and we believe that we've got the management teams in place and the strategies in place that we should be able to continue to drive margin improvement throughout Home and Building Products.

I think the other thing to add for the Ames, we're not just moving equipment around and rotating it, but we're positioning it and upgrading it as appropriate and building it to put in place the capacity to deal with the growth and to service those customers. So it's really going to be transformational to a very great extent for the Ames business.

Okay, great. And then in the marketplace, there's been some concern about a slowdown in the housing market, a slowdown in repair and remodel. Obviously, your Clopay Door business is probably the one closest to that, more so than Ames. What kind of commentary can you give us about what you've seen in terms of order trends post the end of the quarter?

We -- let's go back a year ago, when the headlines were proclaiming how great the housing market was. I think if you go back and look at our comments, we told you that we didn't think it was nearly as good as people were suggesting that it might be. I'd make the comment today that I think the headlines are wrong. I think the housing market's not nearly as bad as the recent headlines are saying that it is. And we see our trends continuing to be quite strong and at our expectation. So we have always looked at this as being a sluggish, uneven, fragile recovery throughout all of our businesses, and we've positioned ourselves accordingly. So with that as our expectations, we think we're right where we're supposed to be.

[Operator Instructions] We'll go next to Steve Percoco with Lark Research.

Following up on your last comments. The stock has obviously had a rough July, and I wondered, given that the performance is in line, that you're happy with the way things are going, is it all housing? Or do you have any comments on what may be driving it?

We bought back 750,000 shares this quarter. We bought back $115 million worth of stock in the last 3 years. We like the way our businesses are positioned. And when we're able to be in the market, we will be. One month of performance in the stock market is something that's somewhat out of our control. Our businesses are doing quite well, and price of the stock on any given day doesn't necessarily reflect intrinsic value or earnings power.

[Operator Instructions] We'll go next to Justin Bergner with Gabelli & Company.

My first question just relates to your guidance. I guess you're keeping your EBITDA guidance unchanged, but you will have acquired the ITW business in Australia for 4 months of the year. What is -- what should I think about as the modest offset to that EBITDA that's being gained by that acquisition?

Well, Justin, there was a couple of things that changed. First of all, we lowered the expectations for Telephonics. We had thought that the core revenue would grow at low single digits, and we've now said that, that will be flat. So there's an impact there. The second thing, as it specifically relates to, really, both the Northcote and the ITW businesses -- the Cyclone business, they're highly seasonal. And remember, the Southern Hemisphere, their big months are really October, November, December, January, February, March, as they serve as their spring and summer. And so I think we mentioned on the last call that we didn't expect to really see the earnings benefit of, at the time, Northcote, but also, it really applies to Cyclone until, really, our fiscal 2015 because that's when the big business for them takes place.

Okay. So then is it safe to say that, despite sort of the higher guidance in Home and Building Products, at least in the organic portion, that higher revenue isn't necessarily going to mean higher EBITDA than you anticipated a quarter ago?

No, that was just an element. I mean, they're contributing, but it's fairly nominal at this point in time. And again, it will be more pronounced in the first and second quarters of our fiscal year, but the other real driver is -- we also said that the sales of the door business are increasing. We bumped that up a little bit, recognizing the strong sales that we achieved during the quarter just completed. But also, as Ron alluded to just a moment ago, the activity through July has continued at a fairly high level, and that's taken into account in the guidance. So keeping the segment adjusted EBITDA, remember, we said it's approximately $190 million, so that does give you a little bit of variability, and we've taken that into account in maintaining the guidance as we did.

Okay. My other unrelated question is in regards to Telephonics. I mean, given the decline in backlog this quarter and given some of your concerns going forward about sort of the defense pot, even if sort of you're well positioned within that pot, should we expect the backlog in defense to continue to decline from here sort of maybe not quarter-by-quarter but over a 6- to 12-month period, if conditions in defense stay the same?

The order book, it does get a little lumpy from 1 month to the next because there are times when it's just when the order is placed by the customer. We have said that some of the -- there's a little more international. Sometimes it takes a little bit longer to book those orders than it did for a U.S. domestic order or contract. So there's a number of factors at work. We think -- and don't take a snapshot of any 1 month, but we still think that the trend for Telephonics is still very solid overall. The September 30 number, I think, was -- no, the March number was a record number. So it's coming down from the $486 million that we had at March 31 to $444 million, but I think we're still just about where we were at September 30 last year. I think the key thing, from an order book perspective, is just the time frame -- or the amount that's realized in the next 12 months is actually reducing a little bit. I think we were looking at about 68% to 70% at September 30. Now we're looking at about 64%, 67%, something like that. So things drift a little bit to the right, but, overall, very confident still long term.

And then just a quick follow-up on that. Are you willing to comment sort of on what percentage of your Telephonics revenue is international now, and what percentage of the backlog in comparison is international?

The international piece is about, off the top of my head, is about 15%. We disclosed that in the 10-K, and I haven't looked at our 2013 10-K for a little while, but I think it's about 15%.

Is the backlog running above that?

I don't have the backlog by domestic versus international, and I wouldn't be inclined to break that out in any event. Justin, I just think the final point is, remember, we said the Telephonics core business is going to be flat, which suggests that the book-to-bill is essentially flat, at least over a sustained period of time.

And that concludes our question-and-answer session. Mr. Kramer, I'd like to turn the call back to you for any additional or closing remarks.

Thanks. We think we're very well positioned, and we think that we're well on our way to finishing off this fiscal year. And we look for our momentum to build into next year. So we look forward to speaking to you in November.

Ladies and gentlemen, this does conclude today's teleconference. We thank you for your participation.