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Edited Transcript of GFF earnings conference call or presentation 14-Nov-18 9:30pm GMT

Q4 2018 Griffon Corp Earnings Call

JERICHO Dec 6, 2018 (Thomson StreetEvents) -- Edited Transcript of Griffon Corp earnings conference call or presentation Wednesday, November 14, 2018 at 9:30:00pm 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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* Andrew P. Casella

Deutsche Bank AG, Research Division - Director

* Douglas G. Clark

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Julio Alberto Romero

Sidoti & Company, LLC - Equity Analyst

* Justin Laurence Bergner

G. Research, LLC - VP

* Michael Jason Rehaut

JP Morgan Chase & Co, Research Division - Senior Analyst

* Nishu Sood

Deutsche Bank AG, Research Division - Director

* Robert James Labick

CJS Securities, Inc. - President

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Presentation

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Operator [1]

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Greetings, and welcome to the Griffon Corporation Fourth Quarter 2018 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Brian Harris, Chief Financial Officer.

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

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Thank you, Omer. Good afternoon, everyone. With me on the call is Ron Kramer, our Chairman and Chief Executive Officer. Our call is being recorded and will be available for playback, the details of which are in our press release issued earlier today.

As in the past, our comments will include forward-looking statements about the company's performance, based on our views of Griffon's businesses and the environments in which they operate. In providing this guidance, we are also mindful of the risks and impacts of weather to AMES, the health of the economy on Home & Building Products, the U.S. Department of Defense budgets on Defense Electronics and foreign exchange fluctuations. 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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Good afternoon, and thank you for joining us on today's call. Our fiscal 2018 results begin to reflect the strategic actions we've taken to grow Griffon. Full year revenue increased 30%, to $2 billion, reflecting the impact of our acquisitions; and our Segment adjusted EBITDA from continuing operations was up 24%, to $213 million.

I'll come back to our operating performance in a moment. But first, I'd like to take a few minutes to share some of our key takeaways as we focus on fiscal 2019. It's been nearly 2 years since we began to strategically reshape our portfolio with the goal of driving increased cash flow and improving our profitability. Our strategic actions included the acquisition of ClosetMaid in October 2017, the sale of our Plastics business in February 2018 and the acquisition of CornellCookson in June 2018. These actions, along with the 5 bolt-on AMES acquisitions made over the last 20 months, have created an operating structure with stronger free cash flow and a diversified portfolio; highly attractive, leading brands in each of their respected categories.

The integration process is proceeding as planned. AMES and ClosetMaid have been combined under one leadership team, and the integration of ClosetMaid into AMES is progressing. ClosetMaid's first year performance was right on target with our expectations. We're confident about the long-term prospects of this acquisition as part of AMES. We expect significant future improvement in the operating performance of these combined businesses.

CornellCookson. We're delighted with the integration that we've seen into Clopay. The CornellCookson acquisition has delivered the performance we expected since its acquisition in June. Our familiarity with the CornellCookson business and personnel prior to the acquisition, along with a highly-aligned strategic and cultural fit of the businesses, are expediting this transition. We continue to see CornellCookson as a fantastic complement for our Clopay doors business. Clopay is the leading residential garage door manufacturer in North America, and it also serves the market for commercial panel doors. With the CornellCookson acquisition we've added to Clopay, the U.S. leader in commercial rolling steel products, we expect this powerful combination to accelerate profitability in the years ahead.

Although we spend more time on our larger acquisitions, the bolt-on ones are also making an important impact. Over the past 2 years, we acquired Kelkay and La Hacienda in the United Kingdom. With these businesses, we've now established the U.K. as our fourth home market. We have a strong management team at AMES U.K. that has made tremendous progress in a relatively short period of time, and we have high expectations for these businesses in the years to come.

Our other smaller acquisitions in the United States and in Australia are helping to strengthen our position in those markets through expanding our product portfolio and increasing our market presence. We've been able to identify and acquire these businesses at attractive valuations and seamlessly integrate them into our operations. As we continue to integrate these acquisitions and realize revenue and margin improvement opportunities, we expect to steadily increase Home & Building Products EBITDA margins.

We remain positive on the outlook for our Home & Building Products segment despite the concerns recently expressed by others about the U.S. housing sector. We continue to grow revenues and improve our profitabilities through product innovation and category expansion, efficiency initiatives and acquisition integration. There has been no slowdown in these trends subsequent to our fiscal 9/30 year-end.

Moving to our capital allocation strategy. We take a multipronged approach with the goals of driving both organic and inorganic growth, deleveraging our business and returning cash to shareholders. As a result of our portfolio reshaping, we have enhanced our free cash flow generation and, in fiscal 2019, we expect free cash flow to exceed 100% of net income, with a significantly reduced capital expenditure profile. We are keenly focused on directing our capital to reduce our net debt-to-EBITDA leverage from its current 5.5x, calculated as defined in our credit agreement, to 3.5x over the next few years. As part of our growth strategy, we will continue to target strategic bolt-on acquisitions while remaining disciplined with our valuation and hurdle rates.

Further, as we've demonstrated throughout the years, we will continue to return cash to shareholders, primarily through our quarterly dividend program. Earlier today, our board authorized a $0.0725 per share dividend payable on December 20 to shareholders of record on November 29. This is a 4% increase over the prior year quarterly dividend and our seventh consecutive year of increasing dividends. Since its inception, our regular dividend program has grown at an annual compound rate of 20% per year. And additionally, in April this year, we returned cash to shareholders via a $1 per share special dividend.

Next, I'd like to provide a brief update on our segments, so let's start with Home & Building Products. Full year sales increased 48%, to $1.7 billion, driven both by the contributions from the recent acquisitions and 7% organic growth. Segment adjusted EBITDA grew by 40% to $177 million driven by the increase in revenue, partially offset by the effects of higher input costs, including tariffs and commodities, and incorporation of the acquisitions initially operating at lower margins than our existing businesses, as expected. We continue to see strong demand for our products across the segment. It is important to note that as a result of our strategic repositioning and the steady evolution of our products, we have significantly diversified our businesses across product lines and markets. As a result, the residential new construction market is not the primary driver of our door business.

For AMES, our product portfolio continues to focus on professional and consumer tools and outdoor lifestyle products. We estimate that less than 10% of our combined Home & Building Products businesses serve residential new construction. The vast majority of the growth in Clopay sales and margins has been focused on repair and remodeling activity and our investments in product design and production capacity that enabled us to better serve existing homeowners who desire premium high-end doors as part of their remodeling. Additionally, with the recent acquisition of CornellCookson, our doors portfolio now includes increased commercial door solutions, further diversifying our offering. Lastly, the addition of ClosetMaid to AMES has increased our reach into the home through sales in that business, principally driven by the general health of the economy, rather than construction cycles.

Let's turn to Telephonics, our Defense Electronics business. Fiscal 2018 revenues, as expected, decreased to $326 million, compared to the prior year of $412 million. Segment adjusted EBITDA from continuing operations declined to $36 million from $46 million. Backlog at the end of September was $345 million, which is slightly down year-over-year. Book-to-bill for the full year was approximately 1:1, showing that bookings and sales are stabilizing. Overall, we remain confident in the outlook of our Defense Electronics segment as we have a healthy pipeline of U.S. and international opportunities to capture increased spending within the intelligence and surveillance sector, particularly as it relates to naval and army readiness, which has been increased under the budget appropriations.

Overall, we're extremely positive about the untapped earnings potential across all of our businesses.

I'll turn it over to Brian to go through the financials with a little more detail.

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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 fourth quarter, revenue of $546 million increased 27%, and gross profit increased 30%, to $148 million, both in comparison to the prior year quarter, the increase primarily due to acquisitions. Gross margin increased 62 basis points to 27.2% compared to the prior year quarter. Fourth quarter selling, general and administrative expenses, excluding items that affect comparability, were $109 million, or 20% of sales compared to the prior year period of $83 million, or 19.3% of sales with the increase in SG&A primarily due to acquisitions.

Fourth quarter GAAP 2018 income from continuing operations was $1 million, or $0.02 per share, compared to the prior year period of $4.3 million or $0.10 per share. Excluding items that affect comparability from growth periods, current quarter adjusted income from continuing operations were $15.7 million or $0.38 per share compared to the prior year period of $12 million or $0.28 per share.

For the fiscal year, revenue of $2 billion increased 30%, and gross profit increased 30% to $530 million, both comparisons of the prior year, with the increase primarily due to acquisitions. Gross margin was 26.8%, consistent with the prior year. Full year selling, general and administrative expenses, excluding items that affect comparability, were $418 million, or 21.2% of sales, compared to the prior year period of $324 million, or 21.3% of sales.

Fiscal 2018 GAAP income from continuing operations increased to $33.3 million, or $0.78 per share, compared to the prior year period of $17.8 million, or $0.41 per share. Excluding items that affect comparability from both periods, current year adjusted income from continuing operations was $32.1 million, or $0.76 per share, compared to the prior year period of $19 million, or $0.44 per share. Our effective tax rate, excluding items that affect comparability, for the current and prior year, were 33.8% and 39.7%, respectively.

For the full year fiscal 2019, we expect to normalize tax rate to approximately 33%. As is always the case, geographic earnings mix and any legislative action, including new guidance on tax reform matters, may impact rates.

Capital spending, net, was $49 million, compared to the prior year capital spending of $80 million, which included capital spending supporting the Plastics business. For fiscal 2019, we expect capital spending to be approximately $50 million.

Depreciation and amortization totaled $56 million for fiscal 2018, and we expect the full year 2019 depreciation and amortization to approximately $63 million, of which approximately $10 million is amortization. The increase in D&A is primarily due to the acquisitions.

As of September 30, 2018, we have $70 million in cash, and total debt outstanding of $1.1 billion, resulting in a net debt position of $1.05 billion. We have $310 million available for borrowing under our revolving credit facility, subject to certain loan covenants, and we expect net interest expense of approximately $66 million for fiscal 2019.

Corporate and unallocated expenses, excluding depreciation for fiscal 2018, were $45 million. For 2018, this included company-wide equity and ESOP compensation expenses totaling $16 million. We expect 2019 to be in line with 2018.

Finally, regarding our guidance for fiscal 2019, we expect total revenue to increase 12%, to $2.2 billion, compared to $2 billion in 2018. The full year contribution of the CornellCookson acquisition is expected to be 7%, and organic growth is expected to be approximately 5%. The Home & Building Products segment growth is expected to increase approximately 14%, with organic growth of between 5% and 6%, and Defense Electronics segment is expected to be consistent with 2018.

Fiscal 2019 Segment adjusted EBITDA is expected to be $230 million or better, or 8% growth versus 2018. The full year contribution of CornellCookson acquisition is expected to be approximately 6%, and organic growth is expected to be 2% regarding EBITDA. Our organic EBITDA sees some lag of price realization in offsetting increased input costs, integration innovation-related investments for the ClosetMaid and CornellCookson acquisitions and Defense Electronics EBITDA consistent with 2018 EBITDA levels.

Consistent with our acquisition expectations, we expect fiscal 2019 CornellCookson revenue and EBITDA to be approximately $200 million and $18 million, respectively. Our guidance does not include the potential 15% increase in Section 301 tariffs expected in January 2019. We would expect to pass these through additional costs if and when they become effective.

Now with that, 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 excited about our future growth and want to thank our 7,000-plus employees for their dedication and perseverance. Our strategic actions represent the culmination of 10 years of hard work. During this time, Griffon has evolved from a decentralized holding company to a more strategic and focused buyer and builder of businesses. We have a talented team, both at the corporate and operating company level, which is the key to the success of our company. We have the opportunity to improve margins further by leveraging procurement, distribution and warehousing, manufacturing and administrative functions, coupled with revenue-enhancement opportunities. We're just starting to see the benefits of these businesses together within our portfolio. We're committed to long-term value creation for our shareholders. Griffon has never been in a better a strategic position.

Operator, we'll now take questions.

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Questions and Answers

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Operator [1]

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

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Robert James Labick, CJS Securities, Inc. - President [2]

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It's obviously been a wonderful and transformational year for you.

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

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Thanks, Bob.

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

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Thank you.

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Robert James Labick, CJS Securities, Inc. - President [5]

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I just wanted to start with that. Obviously, you're still in the process of integrating 2 exciting acquisitions in ClosetMaid and Cornell, and then obviously the bolt-ons as well. But could you talk about some of the synergy opportunities and the timing for these? It seems like you have a lot of opportunity in hand for margin growth. So give us a sense of how long that takes to play out and where your efforts are focused.

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Ronald J. Kramer, Griffon Corporation - Chairman of the Board & CEO [6]

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It's really 4 companies that are going to become 2, and let's talk about them separately. So you have ClosetMaid going into AMES, and you have CornellCookson going into Clopay. They're very different businesses that have some similarity in their customer base, but the opportunities for us are really separate. The ability for the AMES business to be able to take the home organizational category and be able to provide the levels of service, the levels of innovation that we think we're able to do with that business really is about the longer-term revenue enhancement. And the margin improvement story for us has been about taking ClosetMaid, which was a -- when we bought it was a $300 million revenue business that was not performing nearly at the margin expectations that we want it to. This was meant to be a multiyear journey. We fully expect to be able to improve the margins of ClosetMaid as part of AMES. And then separately, the Clopay business, which is the leading U.S. residential garage door business, and we went through, hopefully, in detail that people understand, of how diversified that stream of revenue is and how uncorrelated it is to the new home construction business. To be able to combine that with the leading commercial door business, at a time where the growth of distribution centers and commercial and institutional demand for those types of rolling steel doors, is a broader complement. So we're thinking about a multiyear ability to save on things like steel purchasing, wood purchasing, wire purchasing, facilities rationalization in terms of distribution centers. And all of those things come from taking what we've proven we can do in diverse businesses like Plastics, manage through cycles and improve both revenues and reduce expenses. So we're just getting started in the ability to grow the margins of those businesses. If I had to put a number on it, I would tell you we want to get to better than 12% at the EBITDA line, and we think that's within our near-term capability. That's far from what our long-term desire is, but it's a long way from where the acquisitions that we bought were running when we bought them. So hopefully, that gives you some flavor as to how much upside we see within our control.

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Robert James Labick, CJS Securities, Inc. - President [7]

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Yes. That's great. Very helpful. I appreciate that. And then jumping over to Telephonics, obviously you gave an outlook for -- consistent with this year for the most part, but also talk about the pipeline. What does it take to turn pipeline into backlog? And how are you looking at things beyond fiscal '19 there?

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Ronald J. Kramer, Griffon Corporation - Chairman of the Board & CEO [8]

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Sequestration was a 5-year exercise in a reduction in revenues and, accordingly, a reduction of profitability. Telephonics has been and will continue to be the leader in the intelligent surveillance and reconnaissance products, particularly maritime radar products. We saw a revenue decrease as the defense budget was contracted. The turn in the defense budget really started in December of 2017. The flow-through from that, we expect to impact 2020 and beyond. We believe we're at the bottom of the cycle, but that's a cycle that's been 5-plus years in the making. We see 2019 consistent with 2018. We see improvement in 2020, and we see growth beyond that. It is a fabulous business. It is desirable for us to build on it. We really see it as a gem of a business at the bottom of a cycle, and we're excited about the programs and the investments that we've made during this downturn and fully expect to build back to a much higher level of both revenues and profitability in the future.

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Operator [9]

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Our next question comes from Julio Romero, Sidoti & Company

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Julio Alberto Romero, Sidoti & Company, LLC - Equity Analyst [10]

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So Clopay had a nice 10% organic growth in the quarter. Could you give us a quick breakdown of maybe price, volume, mix and what you expect going forward to '19?

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Brian G. Harris, Griffon Corporation - Senior VP & CFO [11]

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Sure. So price and mix and volume all played a part, with price and mix playing a larger part than volume in the quarter. We continue to see that business growing at a similar pace that we've seen in the past. Across our Home & Building Products business, we expect to see a 5% to 6% organic growth. Roughly I'd say half is price related, with the balance being related to volume. And that would, more or less, be equal across our businesses.

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Julio Alberto Romero, Sidoti & Company, LLC - Equity Analyst [12]

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Got it. And then just ClosetMaid, I saw you had called out a $311 million contribution in the year. Do you have the EBITDA contribution for that business during 2018?

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Brian G. Harris, Griffon Corporation - Senior VP & CFO [13]

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So when we bought the business, we put out there that it was roughly a $25 million EBITDA business in the first year of ownership, and we met that expectation.

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Julio Alberto Romero, Sidoti & Company, LLC - Equity Analyst [14]

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Got it. So maybe, you had that business under your belt for the past year. What have you learned after 1 year of having that business there? And what's a fair revenue and EBITDA expectation for 2019?

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Brian G. Harris, Griffon Corporation - Senior VP & CFO [15]

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So again, we've combined that business with AMES, and we won't be separating out revenue or, really, EBITDA for that business in the future. However, I'd really refer back to Ron's comments of -- we've combined in these businesses, we see a lot of opportunity. We have margin improvement opportunities that we're going to be going after, particularly in this year. And the combined Home & Building products, in this case, we're talking about AMES and ClosetMaid business, the benefits from those efforts will start showing themselves in '20 and beyond.

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Ronald J. Kramer, Griffon Corporation - Chairman of the Board & CEO [16]

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And just -- Julio, it's Ron, just to add to that. When you look at AMES, ClosetMaid is part of AMES. That will be $1 billion-plus revenue, part of our Home & Building Products business. And we have every expectation of those blended margins growing to 12% in that business.

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Julio Alberto Romero, Sidoti & Company, LLC - Equity Analyst [17]

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Got it. And then maybe just taking a step back here. I know you called out some -- there's multiple avenues for growth and hitting your financial targets: leveraging and manufacturing, procurement, G&A. But what do you guys view as the near-term opportunity that we should expect to flow through to the income statement? What's kind of the low-hanging fruit that would come first?

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Brian G. Harris, Griffon Corporation - Senior VP & CFO [18]

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So the first item we'll chase is procurement, and we've already actually started that process. And obviously, we'll continue that through '19. But the majority of efforts really will show the benefits, as I mentioned, in '20, as we have to go after some of these items in '19. And there's costs associated in doing so.

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Operator [19]

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Our next question comes from Justin Bergner, Gabelli & Company.

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Justin Laurence Bergner, G. Research, LLC - VP [20]

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First question would be, it seems like -- I infer that the fourth quarter, of the 4% organic growth in Home & Building Products, it seems like, from your comments, that less than 2% of that was volume related. But it appears that as you look out to the next year, you see the volume component sort of stepping up a bit, maybe closer to 3%. Can you sort of help us understand maybe what the volume growth was in '18 and why it should stay the same or [slowly] accelerated in '19?

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Ronald J. Kramer, Griffon Corporation - Chairman of the Board & CEO [21]

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Sure. So in the quarter and in 2018 overall, AMES' volume was impacted by timing and weather, basically. So we don't expect that to reoccur. So that's correct. So we've had roughly 2% organic in the AMES business for the year, and we expect that to increase to roughly 3% going forward, as that will normalize. That was the area that really impacted that. And then Clopay Building Products, at roughly 11% organic growth, we don't expect that type of volume to continue necessarily. But of course, the business is very strong, and we have roughly half and half of price versus volume growth.

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

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Okay. So just to make sure I understand; you're saying the fiscal year just completed, the volume growth in AMES was about 2%, and the volume growth of Clopay was about 5%?

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

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No. That's not actually what I meant, if that's what it came across. So I'm saying organic growth in AMES was 2%, impacted by weather. CGP's organic growth was 11%, which was driven by price, mix and volume. And I'm simply saying, going forward, we see the price increasing, related to input costs, commodities, tariffs et cetera, along with volume, there's about 50-50, for the 5% to 6% growth that we said.

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Justin Laurence Bergner, G. Research, LLC - VP [24]

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Okay. Just 1 or 2 more questions. On -- when you're referring to the 10% of your business that was exposed to new construction, were you referring to Home & Building products as a whole or just Clopay?

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Ronald J. Kramer, Griffon Corporation - Chairman of the Board & CEO [25]

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As a whole. Just to be clear, as a whole.

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Justin Laurence Bergner, G. Research, LLC - VP [26]

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Okay. So for Clopay, it might be a little bit higher than that 10%, for Ames, it might be a little bit less?

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Ronald J. Kramer, Griffon Corporation - Chairman of the Board & CEO [27]

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That's -- so yes. Clopay itself -- Clopay Building Products, excluding Cornell, is plus/minus 15% for new construction. And Ames, including -- actually I'd just say the ClosetMaid business by itself, is high teens new construction.

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Justin Laurence Bergner, G. Research, LLC - VP [28]

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Okay. Got it. And then lastly, you've mentioned the headwinds to margins looking out into fiscal year '19 between integration expenses and sort of input costs. So the integration expenses then, those will run through the adjusted numbers in '19. Is that an appropriate inference? And is it possible to sort of quantify roughly how much those headwinds will be in each of those 2 buckets?

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

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So, we have included in our guidance all items related to negotiating price increases with our customers, productivity initiatives, our supply chain automation, expense control, all the impact of the tariffs, the commodities, freight, labor and the cost to go -- make investments to go after margin improvement. So we put all -- we bake all these things, and we look at them. We risk weight them into our budgets. So to pull out a specific number is not really appropriate, and we don't really want to disclose exactly what we're going to be investing, but going back to the first part of your question, yes, we expect to absorb that into our adjusted EBITDA number of $230 million.

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Brian G. Harris, Griffon Corporation - Senior VP & CFO [30]

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And the only thing I'd add to that is when we give guidance, we give it for credit investors. We're nowhere near the peak earnings, and we try to get -- be realistic about the ups and downs that could affect our business over any given 1-year period. And we think we've always consistently set the bar at places that we've been able to meet or exceed. And given all the clouds of uncertainty about the economy, the political risk that's out there, we're still very confident about what we see in our business, and I will just say that we are nowhere near the peak earnings power of these businesses.

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Operator [31]

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Our next question comes from Nishu Sood, Deutsche Bank.

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Nishu Sood, Deutsche Bank AG, Research Division - Director [32]

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If we look at the margins in the HBP-built business, year-over-year a decline of about 110 basis points, I believe. Part of that is acquisitions. Is that all of that decline? How would -- if we looked at it on a kind of a legacy business or on a like-for-like basis, did margins improve ex the acquisition dilution?

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Ronald J. Kramer, Griffon Corporation - Chairman of the Board & CEO [33]

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Excluding the CornellCookson and the ClosetMaid acquisitions, margins remained in line, really, with the prior year, basically resulting from increased in sales, offset partially by commodity, tariffs and other input costs.

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Nishu Sood, Deutsche Bank AG, Research Division - Director [34]

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Got it, got it. Okay. And then there was some mention of tariffs, I believe. And can you just walk us through what the impacts have been? And is that part of the price cost headwinds that you're mentioning for next year? And also the acceleration in the price cost, I think it was a little -- it sounds like it's weighing a little bit heavier on margins this quarter than last quarter. Was that just the flow-through in terms of the amount of time the input cost takes to kind of flow through inventory and hit the income statement? So I apologize. That's a few questions, but yes, just generally around those topics, please.

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

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I will try to tackle all that. So in '18 overall, we estimate that we took on about $25 million before being mitigated -- costs related to tariffs as well as steel, aluminum, raw material input cost increases. We've mitigated that through increased sales, good mix and some price increases being passed through so far. So we continue our process of working with our customers on price increases, so some of that has been completed, I would say about half has been completed, and we will continue the process through the end of our fiscal second quarter, which would take us through the end of March of 2019. So the impact of the lag that I'm describing will certainly hit fourth quarter a little bit, and it will also continue to hit us in Q1 and Q2. And then we will be -- we expect to be done with our price negotiations by then and have mitigated the impact of tariffs, current tariffs to be specific, not the additional potential tariffs, and our raw material and other input cost increases. And of course, with that, we continue to work on our supply chain automation and expense controls. So we're working it on both ends.

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Nishu Sood, Deutsche Bank AG, Research Division - Director [36]

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Got it. So $25 million...

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Ronald J. Kramer, Griffon Corporation - Chairman of the Board & CEO [37]

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And just to add to -- and if and when the additional tariffs kick in, we'll pass those costs along, like we've dealt with every other input costs, freight costs, labor costs that we've had to work through. So we will work our way through this, and we're quite confident of our ability to manage any incremental tariffs.

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Nishu Sood, Deutsche Bank AG, Research Division - Director [38]

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Got it. So it's $25 million that you'll have worked through? Or is it the -- or is that half of what you will need to work through? I'm not quite sure I...

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Brian G. Harris, Griffon Corporation - Senior VP & CFO [39]

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No problem. $25 million is what we estimate we had in 2018, and we estimate that the 29 (sic) [2019] impact, meaning annualizing all the tariffs and commodity increases, is roughly $70 million. So that will be flowing through over the course of the year. We are working on, as I said, negotiating with our customers to complete our price increases. Some of them are done, some of them are in process, and that we'll continue to work them, and they'll continue to come to a conclusion between now and the end of our fiscal second quarter, which ends in March. And again, that will be done via those price increases, and of course, we -- looking inwards as well. Supply chain, we look to our vendors too, via supply chain, and we have automation and expense controls internally as well, to offset that impact.

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Ronald J. Kramer, Griffon Corporation - Chairman of the Board & CEO [40]

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And that's approximately 4% of our Home & Building Products segment sales.

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Brian G. Harris, Griffon Corporation - Senior VP & CFO [41]

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That's correct. So we expect pressure in the first and second quarter to be alleviated in the third and fourth quarter. And obviously, that will affect top to bottom results and leave us with what I would say -- if I'm looking at last year versus this year, we'll have a similar type of earnings over the course of the year is the best way of putting it.

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Operator [42]

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Our next question comes from Andrew Casella, Deutsche Bank.

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Andrew P. Casella, Deutsche Bank AG, Research Division - Director [43]

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I wanted to dive into Nishu's topics real quick. So just to be clear, the $25 million that you quoted, is that just a tariffs impact, or is that tariffs plus commodities? And then, Ron, I know you mentioned $70 million. What does that represent overall? And then obviously, the follow-on would be, in the event that on January 1 these tariffs step up to 25%, do you have any way to kind of bookend what exactly that quantum could be as far as a headwind?

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Brian G. Harris, Griffon Corporation - Senior VP & CFO [44]

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Sure, sure. So yes. So $25 million is both tariffs and input costs, mainly steel and aluminum is where we saw.

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Ronald J. Kramer, Griffon Corporation - Chairman of the Board & CEO [45]

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And wood.

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Brian G. Harris, Griffon Corporation - Senior VP & CFO [46]

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And wood, sorry. Thank you. And the $70 million is related to tariffs and those same input cost increases. It does not assume the future. The January expect -- or not expected, potential January 15% increase that is -- could be coming. Roughly I would say $15 million of the 2019 annualized number is tariffs, and the balance would be the input costs that I mentioned. And as far as what that means regarding the 15%, that would be $20-plus million of additional costs, that we would expect to mitigate by passing on price increases to our customers, which we are currently discussing with them now in anticipation of it happening in January.

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Andrew P. Casella, Deutsche Bank AG, Research Division - Director [47]

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Okay. And then as far as free cash flow guidance, and I know you went through the numbers pretty quickly. But when we think about Segment EBITDA for fiscal '19, your forecast is -- or guidance is $230 million. The unallocated items about $45 million, so that implies EBITDA of about $185 million. You have CapEx of $50 million, cash interest of $60 million. And then I know your overall free cash flow guidance was expected to exceed 100% of net income. I just wanted to see if there were any other cash inflows or outflows or any restructuring charges that we should be mindful of? And then the follow-on would be how you're expected to kind of deploy that capital? I know in the past when we've kind of seen the shares at these levels, I know you've kind of gone after them in the open market. But I know you're obviously focused on producing leverage. So just if you could walk us through how you're going to treat that?

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Ronald J. Kramer, Griffon Corporation - Chairman of the Board & CEO [48]

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Sure. There's no other charges. You got the numbers right. And our expectation is that we're going to run the businesses. We have a solid execution plan that we've been going down. We expect to generate increasing amounts of cash. We expect to build it up on our balance sheet, and we expect that to be a natural deleveraging.

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Andrew P. Casella, Deutsche Bank AG, Research Division - Director [49]

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Okay. Great. And then final question, just as I think about the pricing discussion that you're having with customers, so on January 1, if those tariffs come in place, do you have a mechanism to put those through immediately? Or how quickly could we see you mitigate that? I know you kind of called out some pressures in first fiscal quarter '19, second fiscal quarter '19 but just trying to understand how quickly you can react to the other 15%.

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Ronald J. Kramer, Griffon Corporation - Chairman of the Board & CEO [50]

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We are working hard, expecting that the tariffs are going to be in place, and we are making ourselves more efficient, and we're in negotiation with our customers on passing them along, so there'll be a lag on the input costs being able to be offset by price increases, and we've fully taken that into account in our consideration of what the calendar year 2019 could look like.

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Brian G. Harris, Griffon Corporation - Senior VP & CFO [51]

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Yes. And I would just add to that. So when we were saying we expect to complete our price negotiations by the end of the March, the second quarter which ends in March, so that's really the lag. So we'll call it 90 days from January 1, which is the expected increase date, to the end of March.

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Operator [52]

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Our next question comes from Doug Clark, Goldman Sachs.

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Douglas G. Clark, Goldman Sachs Group Inc., Research Division - Equity Analyst [53]

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My first one is specifically on the AMES business, the organic component. I know you talked about 2018 having 2% type volume growth. But if I look in the fourth or -- yes, the fourth quarter, in particular, it looks like organic growth was actually a negative 3% to 4%. So I know you mentioned kind of weather and timing, assuming that that's kind of what went into the fourth quarter. Can you just extrapolate a little bit as to what caused that negative year-on-year decline?

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Brian G. Harris, Griffon Corporation - Senior VP & CFO [54]

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Sure. So that was mostly driven by the U.S. business, and it's related to Q3 weather, which then bleeds into Q4 with less restocking because they had stock. And then it also has to do with the timing of winter stocking, which can fluctuate from year to year. So last year, we had a little more winter in our fourth quarter. This year, it looks like some of that will bleed into the first quarter. But it's normal for that timing to fluctuate a bit. And you're right, roughly, on your organic number.

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Douglas G. Clark, Goldman Sachs Group Inc., Research Division - Equity Analyst [55]

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Okay. Great, great. That was helpful. And then on the kind of the raw inflation piece, the $25 million versus $70 million. I guess I just want to understand a little bit better the cadence of that because, especially if -- tariffs aside, if I'm actually looking at the raw material complex, things like steel, aluminum and wood, the incremental acceleration or growth on those underlying commodities was earlier in 2018. So I guess I'm just a little curious why the disproportionate impact is in 2019. Is that based on kind of how you source and the lag perhaps that the price increases kind of flow to you or perhaps something that I'm missing?

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Brian G. Harris, Griffon Corporation - Senior VP & CFO [56]

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Well, you're generally correct in what we're saying. So there is a lag between the time the price actually goes up and the time it goes through our P&L, which one of the other questions touched upon. So yes. So it did start earlier in the year on the commodity side, so once there was a whisper of tariffs, plus there's natural economic factors are pushing commodities up. And as the year went on, that starts to bleed actually into our P&Ls and then the tariffs came later in the year.

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Operator [57]

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(Operator Instructions) Our next question comes from Michael Rehaut, JPMorgan.

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Michael Jason Rehaut, JP Morgan Chase & Co, Research Division - Senior Analyst [58]

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Wanted to circle back to the acquisition synergies that you referred to and just getting a better sense of the cadence of that. You talked about, I believe, getting the acquisitions up to corporate average, and -- but it seems like 2019 is still more of a transition year. So I just wanted to make sure I understood that and what you're expecting in terms of any -- particularly from the costs side, any cost synergies as you integrate Cornell into Clopay and AMES into -- I'm sorry, ClosetMaid into AMES?

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Ronald J. Kramer, Griffon Corporation - Chairman of the Board & CEO [59]

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First, I'll say that nothing has changed from the time that we made the acquisitions in the guidance we gave as part of that. We have always been looking at these acquisitions as being revenue-enhancing and opportunities for cost reductions which would improve margins over a multiyear period. So there is no surprise to us that this is going to take longer than a year. There's nothing that's changed. The environment that we've been operating in, particularly since we closed on CornellCookson in June, has changed quite dramatically, and our outlook on our business is exactly the same.

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Michael Jason Rehaut, JP Morgan Chase & Co, Research Division - Senior Analyst [60]

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No. Understood. I guess the question was just more oriented in terms of the cadence of those savings and maybe a little more granularity as those are achieved. I guess second question, just on 2019, and appreciate the detail around the raw material and tariff impact for this past year and the upcoming year. From a pricing standpoint -- appreciate the lag there as well -- but I was just hoping to get a sense of what the overall benefit you got from the price increases in 2018? And I know that, that benefit will be more fully realized at the end of 2Q '19, but what would that mean from a full year perspective in '18, as well as what you expect in '19?

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Brian G. Harris, Griffon Corporation - Senior VP & CFO [61]

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So there's quite a bit there. So as I said, in '18, we had a combination of the price increases helping, along with improved mix and sales. In '19, we described the lag and we baked in the effect into our $230 million-plus guidance. Once we have completed our price increases and have completed our supply chain initiatives automation expense controls, which we'd expect to do during '19, we expect to completely mitigate the effects of the tariffs and commodity costs and other input cost increases. I'm not sure if that answers your question, but that's how we do it.

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Michael Jason Rehaut, JP Morgan Chase & Co, Research Division - Senior Analyst [62]

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No, okay. One last quick one, if I'm able to, just on the Defense Electronics business, understanding how long of a tail that is, as you've described the cycles of spending. But the fourth quarter revenue number was pretty well below what we were looking for. I was just curious if it was a surprise to you in terms of the quarter results itself, given the year-over-year drop, if there was anything behind that, and any more detail around that would be helpful.

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Ronald J. Kramer, Griffon Corporation - Chairman of the Board & CEO [63]

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Timing of orders, things that could have happened in the fourth quarter that we expect to happen in the first quarter. But the lag that we continue to see in defense spending as it flows through from a budgetary standpoint is slower than we expected, and part of that is -- should be, what you take away from it is, the outperformance of our Home & Building Products businesses to be able to meet our $210 million EBITDA guidance and exceed it, to $213 million. So we are very, very confident about what the long-term prospects for Telephonics and being able to regain its revenue base. As things flow through, the Trump-related budget increases, that's a 2020 and beyond story. And the near-term performance of our Home & Building Products business was better than we even thought it was going to be over the period of time that the Telephonics business was less than we thought it could be.

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Brian G. Harris, Griffon Corporation - Senior VP & CFO [64]

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I would just add to that, our products will remain on all of the platforms. We have not lost a platform. Everything is really about timing in this business and when orders come through. So we continue to have a very strong pipeline, we expect backlog into '19 improving, and that will ultimately roll itself into improved revenue and earnings in '20 and beyond.

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Michael Jason Rehaut, JP Morgan Chase & Co, Research Division - Senior Analyst [65]

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And I'm sorry. Did you give a backlog number and an order growth number for 4Q? I apologize if I missed it.

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Brian G. Harris, Griffon Corporation - Senior VP & CFO [66]

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Yes. Backlog at the end of the quarter was $345 million, and we had a book-to-bill of roughly 1:1.

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Operator [67]

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Our next question comes from Justin Bergner, Gabelli & Company.

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Justin Laurence Bergner, G. Research, LLC - VP [68]

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I was just curious, as you deal with these tariffs and input costs headwinds, is it possible to sort of bucket what percentage you expect to recover from price, what percentage you expect to recover from supply chain and what percent you expect to recover from other drivers?

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Ronald J. Kramer, Griffon Corporation - Chairman of the Board & CEO [69]

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Justin, I'd go back, and -- each year, we try to take a look at the outlook in front of us. And if you remember last year, we talked about increasing commodity costs, increasing freight costs and increasing labor costs. And the tariffs are just one more bit of what management teams like us spend our time navigating. This recovery in this economy is gone on in spite of lots of different challenges. We continue to believe that we can mitigate whatever gets thrown at us. We set our expectations properly. We have a group of businesses that we have put together. This is very much a growth by acquisition expertise at the corporate level and the operating level. And the ability to take the ClosetMaid acquisition and combine it with AMES to be able to offset all of those things that are going to continue to be pressures for anyone who's a manufacturer -- higher input costs, higher freight costs, higher labor costs -- is what defines whether you're able to be competitive. We think we have a proven record. We think the opportunity in front of us on that side of our business is for us to execute. The result of that is much higher free cash flow, a natural way for us to delever. And on the Clopay-CornellCookson side, the strategic positioning of the leading residential and the leading commercial business is -- we've owned the business since June. 2019 was never meant to be what we were shooting for. Long term, we see ourselves as being able to combine the businesses that we've got. And the result of that is going to be a steady improvement of operating performance across each of the businesses that we have. And our longer-term goals is clearly that we want to run and build a significantly bigger company, based on the success of getting all of those things right. Near term, what you should expect of us, is just to run the businesses increasingly better. 2019 is, for us, the year to prove that the acquisitions that we've made can perform in what very well may be an uneven economy. We've dealt with a lot harder economic circumstances over the last 10 years. We feel really good about our ability to deal with each of those buckets of cost inflation, of tariffs, of whatever else is going to come at us, and run our businesses.

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Justin Laurence Bergner, G. Research, LLC - VP [70]

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Okay. That's very helpful. And then just lastly, did I hear at the beginning of the call that you said that, going forward, the primary form of capital return would be the dividends?

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Brian G. Harris, Griffon Corporation - Senior VP & CFO [71]

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Yes. That is correct.

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Justin Laurence Bergner, G. Research, LLC - VP [72]

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Okay. So share repurchases are probably going to be less impactful going forward?

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Ronald J. Kramer, Griffon Corporation - Chairman of the Board & CEO [73]

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Depends on the price of the stock. Look, we didn't buy stock in this last quarter because it is clear that there is a negative sentiment that has nothing to do with the underlying intrinsic value of our business. We will sit back and we'll watch the markets. If you put in perspective, we have bought back over $300 million worth of stock over a multiyear period. And we've paid out $100 million, plus or minus, in dividends. That's why our leverage is where it's at after buying 2 really good businesses. Our choice is to grow this company, our ability to deal with rationalizing at times an irrational stock market. We have the capacity to buy back stock. We choose not to, not because we don't see value in our stock, but we clearly see a market that doesn't want to hear about our story relative to the Home & Building Products negative cloud that there are people you're suggesting. We're not suggesting that, that can't happen. We're simply telling you it hasn't happened to us. Our performance this quarter, our trends in our businesses remain strong.

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Operator [74]

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Ladies and gentlemen, we have reached the end of the question-and-answer session. And I would like to turn the call back over to Ron Kramer for closing remarks.

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Ronald J. Kramer, Griffon Corporation - Chairman of the Board & CEO [75]

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Thank you. Griffon is in a strong position as we head into fiscal 2019. It's been a great year. We look forward to many more. Thank you, and goodbye.

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Operator [76]

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This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.