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Edited Transcript of GFF earnings conference call or presentation 2-May-19 8:30pm GMT

Q2 2019 Griffon Corp Earnings Call

JERICHO May 21, 2019 (Thomson StreetEvents) -- Edited Transcript of Griffon Corp earnings conference call or presentation Thursday, May 2, 2019 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Brian G. Harris

Griffon Corporation - Senior VP & CFO

* Ronald J. Kramer

Griffon Corporation - Chairman of the Board & CEO

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Conference Call Participants

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* Donovan Michael Chaney

Wells Fargo Securities, LLC, Research Division - Director and Senior High Yield Bond Analyst

* Julio Alberto Romero

Sidoti & Company, LLC - Equity Analyst

* Justin Laurence Bergner

G. Research, LLC - VP

* Robert James Labick

CJS Securities, Inc. - President & Director of Research

* Timothy Ronald Wojs

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

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Presentation

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Operator [1]

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Greetings, and welcome to the Griffon Corporation's Second Quarter 2019 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Brian Harris. Please go ahead.

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Brian G. Harris, Griffon Corporation - Senior VP & CFO [2]

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Thank you. Good afternoon, everyone. With me on the call is

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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 adjust for 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.

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Ronald J. Kramer, Griffon Corporation - Chairman of the Board & CEO [3]

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Thanks. Welcome, everyone. We're off to a great start in the first half of fiscal 2019 as our second quarter results continue to reflect the benefits of our strategic portfolio reshaping and efficiency initiatives. Our performance was driven by robust demand for our diversified product offerings in Home & Building Products, and our team's solid execution across our businesses.

Second quarter 2019 revenue increased 15% to $550 million compared to the prior year period, and our segment-adjusted EBITDA increased 23% to $54 million. Both the revenue and segment EBITDA improvements were driven by our Home & Building Products segment, as I mentioned earlier, which had a 20% increase in revenue, 8% of which was organic with the balance from our June 2018 CornellCookson acquisition. Segment-adjusted EBITDA reflects the increased sales in the quarter as well as the effects of our continuing integration and efficiency initiative efforts.

Across our organization, we are executing our strategy to optimize our businesses and seeing excellent results. At AMES, we continue to identify opportunities to gain market share and improve productivity through combining the resources of AMES and ClosetMaid, while also making investments in new product innovation. Clopay is beginning to see the benefits of the CornellCookson acquisition through leveraging its increased scale in the supply chain, improving productivity and finding opportunities to cross-sell by leveraging the complementary nature of its products across the 2 businesses. To that end, we have ample resources to invest in our businesses to capture these opportunities. Our previously announced CornellCookson facility expansion of our Mountain Top, Pennsylvania facility speaks to the opportunity ahead of us and our commitment to invest in our business to realize that. This project remains on track as we look to bring on an additional 90,000 square feet of manufacturing space, which will support volume growth, improve operational efficiencies and deliver new products into the pipeline over the next 2 years.

Moving on to capital allocation. Our efficiency initiatives and business integration plans will contribute to enhanced long-term free cash flow generation, which will drive our deleveraging efforts over the next few years. We continue to evaluate strategic bolt-on acquisitions to drive long-term growth. However, we remain disciplined in our approach and are focused on ensuring that any acquisition will be highly aligned within our existing businesses and immediately accretive.

As we announced earlier today, our board authorized a $0.0725 per share dividend payable on June 20, 2019, to shareholders of record on May 24, 2019. This marks the 35th consecutive quarterly dividend paid to shareholders and it has grown at an annualized compound rate of 20% since 2012. We still have $58 million remaining under our existing Board-approved buyback authorizations. We continue to believe our stock is a compelling value story but we're laser focused on executing on our strategic plan, which will drive higher profitability and free cash flow over the coming years to delever to our 3.5x target.

Let me now spend a few minutes and provide some additional comments on each of our operating segments.

Starting with Home & Building Products. Second quarter revenue increased 20% to $475 million due to the contributions from the CornellCookson acquisition and 8% organic growth driven by increased volume, new product introductions and pricing. Segment-adjusted EBITDA increased 23% to $49 million driven primarily by revenue partially offset by increased input cost, including raw materials and the effects of tariffs. We continue to see strong demand for our products across the segment and realize benefits from the diversity of our products in the markets in which we operate.

Turning to Telephonics, our Defense Electronics business. Second quarter revenue decreased to $75 million compared to the prior year period of $82 million. Segment-adjusted EBITDA from continuing operations increased to $4.9 million from $4 million in the prior year. Backlog at the end of March 31 was $378 million. We continue to remain confident in the outlook for Telephonics. We have a healthy pipeline of U.S. and international opportunities, including a $50 million-plus opportunity for foreign military sales of MH-60R radar communication systems with India. We're seeing increased activity in quotes and bidding. And during the quarter, we saw strong conversion resulting in a rising backlog with a book-to-bill of 1.15x. This increased activity continues to support our expectation that Telephonics will return to growth in 2020.

I'm going to turn it over to Brian for more details on the financial results. Brian?

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Brian G. Harris, Griffon Corporation - Senior VP & CFO [4]

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Thanks, Ron. Beginning with a brief recap of our consolidated performance. In the second quarter, revenue of $550 million increased 15% and gross profit increased 13% to $138 million, both in comparison to the prior year quarter. Gross margin decreased 40 basis points to 25% compared to the prior year quarter.

Second quarter selling, general and administrative expenses, excluding items that affect comparability, were $112 million, up 8% from the prior year primarily due to acquisitions. As a percentage of sales, SG&A, adjusted for items that affect comparability, decreased 130 basis points year-over-year to 20.3%.

Second quarter 2019 GAAP income from continuing operations was $6.5 million or $0.15 per share compared to the prior year period of $2 million or $0.05 per share. Excluding items that affect comparability from both periods, current quarter adjusted income from continuing operations was $6.4 million or $0.15 per share compared to the prior year of $2.7 million or $0.06 per share.

Our effective tax rate, excluding items that affect comparability, for the quarter was 34%. Capital spending was $9 million compared to $11 million in the prior year quarter. We continue to expect CapEx for fiscal 2019 to approximate $55 million.

Depreciation and amortization totaled $15.5 million for the second quarter. As of March 31, 2019, we had $58 million in cash and total debt outstanding of $1.22 billion, resulting in a net debt position of $1.16 billion. We had approximately $176 million available for borrowing under the revolving credit facility, subject to certain loan covenants. Corporate and unallocated expenses, excluding depreciation, was $11.2 million in the quarter.

Our annual guidance for 2019 given during our November earnings call remains unchanged at $230 million plus of EBITDA and $2.2 billion in revenue. We still expect free cash flow to exceed net income for the year.

Now I'll turn the call back over to Ron.

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Ronald J. Kramer, Griffon Corporation - Chairman of the Board & CEO [5]

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I'm very pleased with our performance in the second quarter of fiscal 2019. We're excited about the trends we see across all of our businesses. We see margin improvement through the consolidation of our recent acquisitions and continued efficiency initiatives driving long-term shareholder value. We're executing well and we're confident on our outlook.

Operator, we are happy to take any calls.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from Bob Labick, CJS Securities.

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Robert James Labick, CJS Securities, Inc. - President & Director of Research [2]

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Congratulations on a nice quarter. Wanted to start with your organic growth. Obviously, 8% is very attractive. I was hoping you could kind of dig down a little bit and kind of give us a sense of what areas that's in? How much is new product introduction and kind of share gains versus pricing? And how should we think about that going forward? Because that's certainly a nice number and higher than what we were anticipating.

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Ronald J. Kramer, Griffon Corporation - Chairman of the Board & CEO [3]

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Sure. So the organic growth was driven by the AMES business this quarter. It was the combination of all those things, frankly, volume, new product and mix. CBP business, excluding CornellCookson, was flat for the quarter, mostly related to a tough comp in the prior year. Looking forward, we continue to expect organic growth of 5% to 6% in our Home & Building Products space for the year. No change there.

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Robert James Labick, CJS Securities, Inc. - President & Director of Research [4]

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Okay. Great. And then just moving over, I think, you touched on this quickly in your prepared remarks. But the Mountain Top expansion, if you could just talk about the progress there and remind us of the benefits and the timing of when you'll have new products out of that facility?

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Ronald J. Kramer, Griffon Corporation - Chairman of the Board & CEO [5]

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Sure. It's progressing as planned. Construction has started. As far as the new products, they'll start in 2020 and this is a multiyear effort to get those products rolled out. These new products are revenue enhancing, of course, and margin enhancing, and we're looking forward to their rollout. We're very excited about that.

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Robert James Labick, CJS Securities, Inc. - President & Director of Research [6]

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Okay. Great. Last one for me then. Just kind of on the synergy update, given that you have a lot of in-hand margin opportunities over the next, I guess, 12 to 24 months. If you can give us a sense on integration of management teams, looking to purchase commodities together and other synergies that you have in your road map ahead?

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Ronald J. Kramer, Griffon Corporation - Chairman of the Board & CEO [7]

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It's early days. We view the integration of CornellCookson into Clopay and ClosetMaid into AMES as multiyear journeys to get to 12% or better at the EBITDA line, and we're very confident that, that's where we're headed in both of those businesses.

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Operator [8]

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Your next question comes from Julio Romero, Sidoti & Co.

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Julio Alberto Romero, Sidoti & Company, LLC - Equity Analyst [9]

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So I wanted to ask about the seasonality of revenues in CBP. Can you just speak on that? And maybe what's a fair estimate for the back half of the year?

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Brian G. Harris, Griffon Corporation - Senior VP & CFO [10]

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Sure. For CBP, second quarter is generally [end] with (inaudible) this year is its lowest quarter. So as the year progresses, we expect increased revenue into Q3 and even more so into Q4 is their general trend.

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Julio Alberto Romero, Sidoti & Company, LLC - Equity Analyst [11]

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Okay. And could you just maybe speak to price-volume mix in the quarter in maybe the AMES business, if you could?

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Ronald J. Kramer, Griffon Corporation - Chairman of the Board & CEO [12]

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Sure. For the AMES business, all those things contributed. We don't give specifics. But they all contributed significantly, I'd say, roughly in line with each other. But it's -- and actually I should say volume was significant in the quarter and the other 2 were mostly in line with each other. So let's call it 50% volume with the balance of the other 2.

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Operator [13]

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Your next question comes from Justin Bergner, [G.] Research.

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Justin Laurence Bergner, G. Research, LLC - VP [14]

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I guess within Clopay building products, you mentioned that organically it was flat, but it was lapping a tough comp. Beyond the tough comp, are you seeing any sort of deceleration in new or remodeling demand for garage doors? Because if it was flat organically, there was probably some price, so volumetrically, it was probably a little negative. So maybe a little clarity there would help.

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Ronald J. Kramer, Griffon Corporation - Chairman of the Board & CEO [15]

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The answer to your question is, no, we're not. The weather patterns were a big impact for that business in the quarter. We're very encouraged about the trends we're seeing for the spring and April is off to an excellent start.

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Justin Laurence Bergner, G. Research, LLC - VP [16]

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Okay. That's good. With respect to CornellCookson, I mean, are you able to evaluate sort of the ramp for the product among commercial customers? Or are you effectively capacity-constrained prior to the Mountain Top expansion?

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Brian G. Harris, Griffon Corporation - Senior VP & CFO [17]

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So we currently have capacity -- enough capacity to meet the current demand. We're expecting increased demand on both our current products and we're rolling out new products. In addition, we're expanding the facility to help us be more efficiently -- operationally by adding bays and staging space.

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Ronald J. Kramer, Griffon Corporation - Chairman of the Board & CEO [18]

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And we have a West Coast facility in Goodyear, Arizona that we think has much work ahead of it to get to a level of operating efficiency and that will further drive the profitability of that segment. So this is as much about an operational improvement story than it is about us having to grow the top line of that business. We think we can make substantially more money on the existing levels of revenue. And we think by being more efficient and applying many of the things that Clopay has done in its own integration over the last 10 years to become the leading residential business, we're very optimistic about what we're going to be able to do to improve the CornellCookson business profitability from where we acquired it and over time, in addition, grow the revenue stream.

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Justin Laurence Bergner, G. Research, LLC - VP [19]

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Okay. That makes sense. Are you able to break out any financial metrics, revenues or EBITDA margins for CornellCookson this quarter? Maybe qualitatively, directionally discuss where the business is at?

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Ronald J. Kramer, Griffon Corporation - Chairman of the Board & CEO [20]

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Well, I think going back historically, when we bought it, we said we were buying it at a 9% or less EBITDA margin, and we continue to see it on a path to being better than 12%, and we're not there yet.

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Brian G. Harris, Griffon Corporation - Senior VP & CFO [21]

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We still expect $200 million for the year, and I believe the quarter revenue was $48 million.

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Justin Laurence Bergner, G. Research, LLC - VP [22]

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Okay. In terms of bolt-on acquisitions, is there any change to your strategy? Obviously, there seems to be a preference for debt paydown. But in terms of what you might be looking at, at present, what types of buckets do they fall in?

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Ronald J. Kramer, Griffon Corporation - Chairman of the Board & CEO [23]

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Broadly, we like consumer businesses that were landscape and lifestyle, home improvement, outdoor living. And there's a whole host of both products. We've expanded our Australian business substantially through acquisition. We intend to do the same thing in the U.K. We're off to a good start there. And what's -- obviously, from Brexit and some of the other pressures, a difficult economy that could be opportunistic for us to be able to be a dollar investor into what's going on there. So we actually see a number of different categories that are of interest, a number of different companies that are out there. Pricing is always a challenge. And competition against an unlimited amount of private equity capital chasing assets is something that we're constantly competing against. But we feel really good about where our businesses are, how they're performing and I think our proven ability to take the businesses that we bought and make them better. And over time, we expect to apply that to other products and other businesses.

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Operator [24]

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Your next question comes from Tim Wojs from Baird.

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Timothy Ronald Wojs, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [25]

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Nice job. I had a couple questions. I mean maybe first in the AMES business. I was just curious if you had any color just on how the season developed for you. Just a lot of -- I don't know if you want to call it, weather whirlwinds or whatever, we had snow here last week in Milwaukee. So how maybe the season developed for you there? And then I'm not sure if you get access to or could see POS data, but any sort of comments on kind of what you're seeing from a sellout perspective just as you kind of get into the March, April, May type time frames?

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Brian G. Harris, Griffon Corporation - Senior VP & CFO [26]

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Sure. So we did see a good loading, which is -- which drove some of the volume in the quarter. We don't see POS necessarily this early, but as the quarter progresses, May is only a key month and when that -- if good weather occurs in May, then we'll see better replenishment, I should say, and that will drive the second -- the third quarter, rather.

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Timothy Ronald Wojs, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [27]

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Okay. Okay. Great. And then from the raw material perspective, I think steel and oil has kind of come off a bit of the -- from the highs. How are you guys kind of balancing raw materials going forward? And is there any kind of expectation that there might be a little bit of benefit on the raw material side as you kind of look through the calendar year here?

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Brian G. Harris, Griffon Corporation - Senior VP & CFO [28]

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So year-over-year, raw materials are still up. Whether they'll fluctuate a little bit here or there is always possible. We have many input costs. So one goes up, one goes down across many different companies and many different locations geography-wise. So I don't expect any particular benefit from any given item.

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Ronald J. Kramer, Griffon Corporation - Chairman of the Board & CEO [29]

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And the other thing that I would add is, if you remember going into this year, we had talked about $70-plus million of potential negative impact from tariffs and other things. And I'm happy to say that we've worked our way through all of it and that's no longer a concern of our outlook.

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Timothy Ronald Wojs, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [30]

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That's great. That's encouraging to hear. So good luck on the second half here.

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Operator [31]

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Your next question comes from Nishu Sood from Deutsche Bank.

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Unidentified Analyst [32]

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This is actually [Maurice] in for Nishu. A quick question on Clopay. You mentioned unfavorable volume mix. What kind of a mix is it? Could you tell us more about it? Is it product mix, is it lower-priced products or...?

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Brian G. Harris, Griffon Corporation - Senior VP & CFO [33]

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Yes. So that's exactly right, lower priced products. So basically, we had a tougher comp to the prior year Q2. It's generally our lightest quarter to begin with. And as Ron mentioned earlier, we had a bit of weather impact, particularly in February in the Midwest.

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Unidentified Analyst [34]

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And do you see that more in the new construction market given that some of the dealers are starting to build more towards the lower end?

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Ronald J. Kramer, Griffon Corporation - Chairman of the Board & CEO [35]

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Yes. I think as you have looked and we've tried to explain, less than 10% of our overall, throughout all of our businesses, is new home construction related. So this is really just deferred purchases that we see -- that had a bit of a weather impact in the quarter that have snapped back into the third quarter. April was a very positive month.

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Unidentified Analyst [36]

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Great. And then on ClosetMaid. I think last quarter, you mentioned a timing impact. And now given the strong growth this quarter, I would imagine that some of the strength was driven by that? I just wanted to confirm.

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Brian G. Harris, Griffon Corporation - Senior VP & CFO [37]

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Yes. The timing was correct and it did come through in the second quarter, and we're seeing nice volume there.

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Operator [38]

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(Operator Instructions) Your next question comes from Donovan Chaney, Wells Fargo.

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Donovan Michael Chaney, Wells Fargo Securities, LLC, Research Division - Director and Senior High Yield Bond Analyst [39]

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Could you guys talk about working capital for just a minute? It looks like there was kind of a good-sized receivables usage this quarter that drove debt a bit higher, I'm assuming. I just want to understand to what extent that's normal seasonal usage that should come back later in the year versus perhaps a more permanent investment in the business?

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Brian G. Harris, Griffon Corporation - Senior VP & CFO [40]

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Sure. So you (inaudible) just about right. So our history and we expect it to continue in the first half of the year as a cash-usage period for us. In the second half of the year, we expect significant free cash flow. So you'll see those receivables come back into the business via cash. And that cycle will continue again and again in the years to come.

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Operator [41]

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There are no further questions at this time. I would like to hand the floor back to yourself, Brian.

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Brian G. Harris, Griffon Corporation - Senior VP & CFO [42]

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Thanks, everyone, for joining. And we look forward to a great second half of the year, and we'll speak to you next quarter.