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Edited Transcript of GFF earnings conference call or presentation 1-Aug-19 8:30pm GMT

Q3 2019 Griffon Corp Earnings Call

JERICHO Aug 27, 2019 (Thomson StreetEvents) -- Edited Transcript of Griffon Corp earnings conference call or presentation Thursday, August 1, 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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* Andrew P. Casella

Deutsche Bank AG, Research Division - Director

* Julio Alberto Romero

Sidoti & Company, LLC - Equity Analyst

* Justin Laurence Bergner

G. Research, LLC - VP

* Kai Shun Chan

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

* Robert James Labick

CJS Securities, Inc. - President & Director of Research

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Presentation

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Operator [1]

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

It is now my pleasure to introduce your host, Mr. Brian Harris, CFO. Thank you, Mr. Harris, you may begin.

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

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Thank you, Jerry. 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. 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, and welcome, everyone. Our results for the third quarter reflect solid execution with revenue growing 11% from a combination of organic growth and contributions from our CornellCookson acquisition. This performance was driven by continued demand for our diversified products in our Home & Building Products and Defense Electronics businesses and reflects our team's excellent execution through the first 9 months of fiscal 2019.

We expect these trends to continue for the balance of this year. We generated $60 million in free cash this quarter, following our normal seasonal cycle of generating cash in the second half, substantially improving our quarter and year-to-date results from the prior year periods due to the benefits of our portfolio reshaping and integration activities.

We anticipate healthy free cash flow in our fourth quarter, helping to drive down our net debt-to-EBITDA leverage to near 5x as calculated by our debt covenants.

Our third quarter 2019 segment adjusted EBITDA increased 11% to $65 million, and our third quarter 2019 adjusted diluted earnings per share was $0.31, 15% higher than the prior year period of $0.27.

I'd like to spend a minute that I'll -- touching on our multiyear strategic integration activities, starting with our previously announced CornellCookson facility expansion in Mountain Top, Pennsylvania. This project remains on track as we work to increase our manufacturing capacity to support volume growth, improve operational efficiencies and bring new products to market. Clopay is seeking incremental contributions from the CornellCookson acquisition. These include increased cross-selling opportunities and leveraging the increased scale in the supply chain.

At AMES, we continue to see the benefits of combining the resources and sales teams of the AMES and ClosetMaid business, while also working to add new products to their pipeline.

Moving to capital allocation, our strategic actions have led to an enhanced free cash flow profile. This is exactly what we discussed over the past 2 years. And we expect our performance to continue to improve in the years ahead. As a result, our enhanced free cash flow generation and reduction of debt will allow us to delever our balance sheet over the next few years to get below our target of 3.5x net debt to adjusted EBITDA.

Additionally, as part of the Griffon growth strategy, we continue to evaluate strategic acquisitions to drive long-term growth. We remain disciplined in our approach and our focus on ensuring that any acquisition will be highly aligned with our existing platforms. As we announced earlier today, our Board authorized a $0.0725 per share dividend payable on September 19, 2019, to shareholders of record, August 22, 2019. This marks the 36th consecutive quarterly dividend paid to shareholders. And it has grown at an annualized compound rate of 20% since 2012. While we believe our common stock has a compelling value, we prioritized deleveraging, we did not buy any shares this quarter. And we have $58 million remaining under our existing Board authorizations.

Before turning it back to Brian, I'll spend a couple of minutes providing some additional comments on our operating segments.

Let's start with Home & Building Products. Third quarter revenue increased 13% to $495 million due to the contributions from the CornellCookson acquisition and 5% organic growth, driven by a favorable mix and pricing and increased volume, which was partially offset by unfavorable foreign exchange.

Segment adjusted EBITDA increased 16% to $57.8 million, driven primarily by increased revenue and partially offset by increased material and tariff costs at both AMES and CBP.

We continue to see strong demand for our products across the segment and realize benefits from the diversity of our products in markets served. We also are continuing to work with our customers and suppliers to mitigate the effects of price inflation, including due to tariffs.

Let's turn to Defense Electronics. Telephonics third quarter revenue increased to $79.7 million compared to the prior year period of $76.4 million. Segment adjusted EBITDA from continuing operations decreased to $7.3 million from $8.8 million in the prior year. Book-to-bill for the quarter was almost 1:1. And backlog at the end of June 30 was $384 million, up sequentially from Q2 and from the prior year.

Looking ahead, our confidence in the outlook for our Defense Electronics business remains high. We have a healthy pipeline of U.S. and international opportunities. Notably, we continue to see strong bidding and opportunities in India and Greece for our subsystems, supporting Lockheed's MH-60 Romeo helicopter. This increased activity continues to support our expectation that Telephonics will return to growth in 2020 and beyond. It's a great business with an excellent future.

Now I'll turn it back to Brian for more details on the financials. Brian?

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

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Thanks, Ron. We reported consolidated revenue of $575 million and gross profit of $154 million, both increasing more than 11% in comparison to the prior year quarter. Gross margin was steady at 26.9% when compared to the prior year quarter. Third quarter selling, general and administrative expenses, excluding items that affect comparability, were $118 million, up 10% from the prior year primarily due to acquisitions.

As a percentage of sales, SG&A, adjusted for items that affect comparability, decreased 20 basis points year-over-year to 20.5%. Third quarter GAAP 2019 income from continuing operations was $14.1 million or $0.33 per share compared to the prior year period of $7.4 million or $0.18 per share. Excluding items that affect comparability from both periods, current quarter adjusted income from continuing operations was $13.5 million or $0.31 per share compared to the prior year of $11.3 million or $0.27 per share.

Our effective tax rate, excluding items that affects comparability, for the quarter was 34%. Capital spending was $10.4 million compared to $11.5 million in the prior year quarter. We continue to expect CapEx for fiscal 2019 to approximate $55 million.

Depreciation and amortization for the quarter totaled $15.6 million. As of June 30, 2019, we had $58 million in cash and total debt outstanding of $1.17 billion, resulting in a net debt position of $1.11 billion. We have approximately $207 million available for borrowing under the revolving credit facility, subject to certain loan covenants. As a reminder, we generally observed use of cash in the first half of the year followed by cash generation in the second half of the year. Corporate and unallocated expenses, excluding depreciation, were $12 million in the quarter. Our revenue and EBITDA guidance, which we only give once a year during our November earnings call, remains at $230 million plus of segment adjusted EBITDA and $2.2 billion in revenue, while maintaining a bias to the upside.

We also note that the guidance now includes the incremental impact of the 25% 301 tariffs announced in May, the impact of headwinds from Brexit related to our AMES U.K. business and the anticipated delay of the India contract for Telephonics with MH-60R radars shifting into FY 2020. Also, we continue to 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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Thanks, Brian. I am very pleased with the progress we're making and the trends we see across all of our businesses, which is reflected in this quarter's operating results. We continue to make strides on our integration and efficiency initiatives as we work to expand margins and drive increased cash generation. The trends we see in our underlying businesses will continue to be supportive of these, and we're confident in our market outlook and our ability to drive long-term shareholder value.

Operator, we're ready for any questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is 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 another nice quarter.

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

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I wanted to start with tariffs. Obviously, you mentioned it's -- the May tariffs are built into your guidance and if you guys were on twitter this afternoon, there's been a potential tariff increase on September 1 as well, if you've had a chance to look at all, I know it's quick, but could you tell us how that may or may not impact your business going forward?

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

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Clearly, anticipated. This has been in the pipeline, and it's immaterial to our business. So I'll note that the cost of everyone's t-shirts and socks and footwear are going to be going up.

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

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Got it. Well, I'm glad. Right. I mean you make every -- or majority of your stuff here and everything. So it should be potentially even an advantage in that regard for you. I want to talk about the organic growth. It's been terrific at Home & Building Products, so it's, kind of, bouncing between AMES and doors, but very solid mid- to- upper single digits. Can you talk about, I know, the key drivers there. Is it share gains at existing locations? Is it going into new distribution? Is it new categories? Just lay out your formula for success and continued organic growth going forward, please.

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

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Sure. So it's really a combination. We've had both pricing and mix benefits as well as volume increases in businesses like ClosetMaid. We are gaining market share across our other businesses. We just continue to see good demand for our products and don't see any change in that looking forward at the moment.

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Robert James Labick, CJS Securities, Inc. - President & Director of Research [8]

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Okay, great. And then the margins particularly in Home & Building Products are very strong again. And I think you've talked about 12% plus segment level margins. You're getting awfully close in a lot of quarters now. Is -- can you just talk about the margin expansion opportunities? And that's the 12% is the goal? Or is that just a step along the continuum of growth?

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Brian G. Harris, Griffon Corporation - Senior VP & CFO [9]

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Yes, I think you used the right word. It's a step along the continuum of growth. We have been building the company for the long run. We've made investments throughout the business. The pivot that we have been executing after the sale of our Plastics business and the purchase of first ClosetMaid and then CornellCookson are recent. We've owned Cornell for a little over 1 year. So the goal when we set out to buy both of those businesses was we'd communicated that we were buying companies that were running at 8% and 9% EBITDA margins and that we saw a path to continue to improve their operations. That goal is -- has been going well. And that's the first stop. So getting our businesses from where they were prior to the acquisitions to now where they are, we give guidance once a year. We will revisit all of the risks and opportunities and talk about where we're going to be for fiscal 2020. But we feel very good about one, the businesses that we bought. The businesses that we have fit together quite well with them. We have the leading brands for essential products in every category that we're in. Over time, we expect to be able to deliver the margins that are consistent with having the best products and the best brands.

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Operator [10]

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The next question is from Julio Romero, Sidoti & Company.

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

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So just to keep, I think, on Bob's question, seeing very good margin in Home & Building Products, seeing better leverage. You called out a material and tariff impacted all. I mean can you try to quantify that at all? Just curious what the underlying margins could have been in the quarter, ex some of the headwinds?

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Brian G. Harris, Griffon Corporation - Senior VP & CFO [12]

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Well, so for the materials and the tariffs, we had significant headwinds initially, and we had set price or put our price increases to offset those amounts. And we have done so. The newest tariff -- that side -- the tariff that came out in May, which increased the 10% to 25% on the 301 tariffs, has begun to affect us slightly in third quarter and will continue. That amount, unmitigated, is about $20 million annualized. We're working with our customers already and actually started that process when we passed their increases related to the 10% tariffs. And we expect to continue -- complete rather that exercise by the end of the calendar year. So we'll see some impact from that in our fourth quarter as we work on putting through those price increases.

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Ronald J. Kramer, Griffon Corporation - Chairman of the Board & CEO [13]

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But the bottom line to the tariffs has been and will continue to be whatever that policy impact is going to be we will mitigate and pass on. And your takeaway is correct. Without them, our margins would be better. But until they're gone, they're here.

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

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Okay. That's helpful. And steel -- raw steel price has declined in the first half. And you turn your inventory about 4x a year. Can you talk about how maybe declining steel price has affected your margins in the first half, and how do you see it, kind of, playing out in the second half?

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

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Steel is just one component of our overall cost structure. Somethings like steel are slightly down but other items, particularly, labor are up. And overall, our costs are up. So it's just 1 element.

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Operator [16]

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We have a question from Justin Bergner, Gabelli Research.

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Justin Laurence Bergner, G. Research, LLC - VP [17]

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A couple of questions here. First off, what was the free cash flow number in the third quarter that you said earlier? Came at me a bit fast?

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

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$60 million, third quarter free cash amount.

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

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6-0? Okay. All right. That's a quick one. Secondly, as I look at Home & Building Products, the plus-2% volume, was that positive in both legacy Clopay and AMES? Or was it more AMES positive and Clopay negative? I think Clopay was negative on a legacy basis for volumes last quarter?

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Brian G. Harris, Griffon Corporation - Senior VP & CFO [20]

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They were both positive.

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Justin Laurence Bergner, G. Research, LLC - VP [21]

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Okay. And then in terms of mix, could you elaborate a little bit more on where and in what capacity you're seeing mix improvement?

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Brian G. Harris, Griffon Corporation - Senior VP & CFO [22]

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Sure. It's really across most of our product lines on the Clopay side. We continue to see improvements in the garage door mix, but particularly on the retail side and additional commercial sales. And then on the AMES, ClosetMaid side, we continue to see the benefits of improvements and innovation in our products. And selling our brands at the higher end of opposed to the entry point-type products that we are slowly phasing out with more mid- and high-tier products.

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Justin Laurence Bergner, G. Research, LLC - VP [23]

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Okay. And with respect to AMES and the ClosetMaid synergies, where do things stand as we, sort of, get closer to fiscal year 2020 and additional upside there? We already seen some of that upside?

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Ronald J. Kramer, Griffon Corporation - Chairman of the Board & CEO [24]

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Yes. We are on track to what we laid out as being a multiyear improvement and integration, couldn't be happier about where we're with the ClosetMaid acquisition, and what it is going to do for us long-term in being able to combine with AMES to drive both revenue growth and expense reduction. So we've settled along that -- these are businesses that are going to be very complementary over time. We're encouraged about what we see the trends in the business to be. But over time, the ability to innovate, the ability to take cost out of the combined business gives us a real platform of growth. And we expect our margins and free cash flow to continue to reflect that.

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Justin Laurence Bergner, G. Research, LLC - VP [25]

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And are the cost synergies mainly in the sourcing side? Are they broader than that?

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Ronald J. Kramer, Griffon Corporation - Chairman of the Board & CEO [26]

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All over.

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Brian G. Harris, Griffon Corporation - Senior VP & CFO [27]

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But remember, we bought ClosetMaid. It was $300-plus million revenue business that was running at an 8% margin. We said we were going to get it into a blended margin towards our 12% goal. We've got plenty of work still to do in getting there. But over time, both the revenue enhancement as well as the consolidation of putting the AMES business together with it, we're confident that we'll get it there.

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

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Okay. That's helpful. Last question on the Telephonics business. You clarified that the revenue -- sort of, once in your guide of $2.2 billion is still valid. But I think it was the MH-60 India opportunity, sort of, pushing right into next year. Is it possible for you to give us any sort of, indication as to how much revenue there was expected to be in 2019 when you're, kind of, think about things a quarter or 2 ago?

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Brian G. Harris, Griffon Corporation - Senior VP & CFO [29]

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Yes, it was in the low-single-digits area, and then...

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Ronald J. Kramer, Griffon Corporation - Chairman of the Board & CEO [30]

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Small, small. Maintained and it was rendered. So this was always about '20, '21 and '22. Then the Telephonics profile of growth, we're feeling very good about what we see ahead of us, not just next year but what we see happening over the next 5 years.

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Brian G. Harris, Griffon Corporation - Senior VP & CFO [31]

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Yes. Actually, Justin, sorry. I meant the revenue would be in the high single digits, EBITDA was low single digits. I misspoke.

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Operator [32]

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We have a question from Josh Chan, Baird.

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Kai Shun Chan, Robert W. Baird & Co. Incorporated, Research Division - Junior Analyst [33]

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My first question is on AMES. I think you mentioned that volumes were up in the quarter, which -- we -- you're hearing a lot of companies blame whether in this earnings cycle. And so could you just talk about what you saw there in terms of, did you gain share? Is inventory in good shape, and things like that in that core AMES business?

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Ronald J. Kramer, Griffon Corporation - Chairman of the Board & CEO [34]

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Look, weather is a fact. That's not an excuse. We -- the things that are in our control, whatever we get drawn at us, clearly, if others are telling you that they had weather problems. We had the same weather. We were able to deal with it, which means that we're nowhere near our peak of either revenues or profitability with that business. And any quarter, there's always going to be something.

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Kai Shun Chan, Robert W. Baird & Co. Incorporated, Research Division - Junior Analyst [35]

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Right. Okay, I appreciate that color. And then on the tariff side, would you say that you've fully offset the tariff impact with pricing this particular quarter? And then just to clarify your point earlier, Brian, about the fourth quarter, did you mean to say that basically based on timing, there might be a temporary headwind in the fourth quarter before everything gets normalize again from a tariff perspective, just want to make sure everything is in the right place here.

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Brian G. Harris, Griffon Corporation - Senior VP & CFO [36]

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Sure. So let me just break it down to pieces. The original tariffs that were out there in September of 2018 and the threat of those tariffs that caused commodity cost to go up even earlier from that, that has all been completely mitigated. That process -- it was completed at the end of our second quarter, at the end of March. The tariffs that were announced in May, the incremental 15% tariff, we're working on mitigating that now. There is a lag between going into place in May and our finalization of passing on that price increase.

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Kai Shun Chan, Robert W. Baird & Co. Incorporated, Research Division - Junior Analyst [37]

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Right. And the cost impact would start to increase in the fourth quarter, but the pricing impact, kind of, maybe a little bit later than that is what you are saying?

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Brian G. Harris, Griffon Corporation - Senior VP & CFO [38]

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Correct.

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Kai Shun Chan, Robert W. Baird & Co. Incorporated, Research Division - Junior Analyst [39]

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Okay. All right. And then my last question is on -- just, kind of, preliminarily, looking at fiscal 2020, I don't know if you want to give some, kind of, pluses and minuses in terms of what you -- the framework that you see going into the next year, either relative to growth versus your long-term target and I would assume that you'd expect margins expansion in 2020, all right? So just some comment on how you're preliminarily looking at 2020 would be great.

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

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The answer is, we give guidance once a year. And we'll talk to you about it in November.

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Operator [41]

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(Operator Instructions) We have a question from Andrew Casella, Deutsche Bank.

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Andrew P. Casella, Deutsche Bank AG, Research Division - Director [42]

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I think in the past, you, kind of, talked about how tariffs can counterintuitively actually help you guys win market share. Just curious, if you started to see that? Or if you're seeing any tailwinds or anything prospectively as far as market share gains potentially showing up in the numbers?

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Ronald J. Kramer, Griffon Corporation - Chairman of the Board & CEO [43]

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We continue to perform very well despite of whatever delays and disruptions in the market related to tariffs. We've been able to mitigate them. We've been able to pass them along. And we expect to continue to do so. Our businesses are performing quite well, take a look at the numbers.

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

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Yes, I would say that our success is more based on our ability to service our customers. We have great brands on products that people want. And that is worth a lot for our customers. And I think that's supporting our success.

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Andrew P. Casella, Deutsche Bank AG, Research Division - Director [45]

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Okay. And then just, again, on the tariff impact for the quarter, when they were raised in May, did that hit immediately? Or it was a lag until the actual cost on, kind of, that $20 million annualized run rate started showing up?

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

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So yes, it pretty much started immediately. The $20 million will run us $4 million to $6 million, depending on the quarter, so pretty evenly over the course of the year. So there were some impacts in Q3, not that large. And it'll grow in Q4. We'll be mitigating that, the unmitigated impact. And we'll be mitigating that, as I said earlier, by passing through price increases, which we expect to complete that process by the end of the calendar year.

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Operator [47]

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There are no further questions at this time. I'd like to turn the floor back over to Mr. Ron Kramer for closing remarks.

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

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Thanks. We feel really good about what we've accomplished year-to-date. And we'll be working hard to finish up this fiscal year, which will be ending September 30. And we'll be speaking to you in November, but things are going quite well. And we expect them to continue. Thanks a lot. Bye-bye.

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Operator [49]

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This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a good evening.