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Griffon Corp (NYSE:GFF)
Q4 2019 Earnings Call
Nov 13, 2019, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings and welcome to the Griffon Corporation's Fourth Quarter Fiscal Year 2019 Earnings Call.

[Operator Instructions]

I'll now turn the conference over to your host, Brian Harris, Griffon's Chief Financial Officer. You may begin.

Brian G. Harris -- Senior Vice President and Chief Financial Officer

Thank you, Ashley. 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 address those items that affect comparability between reporting periods. These items are explained in our non-GAAP reconciliations included in our press release.

Now, I will turn the call over to Ron.

Ronald J. Kramer -- Chairman of the Board and Chief Executive Officer

Thanks and welcome everyone. I am very pleased with our strong results for our fiscal fourth quarter and full year growth. Our 2019 revenue increased 12%, organic growth was 5%, driven by strong demand across our portfolio, in both our Home and Building Products and Defense Electronics business.

We generated $69 million in free cash flow during 2019, which reflects solid operating results coupled with the benefits of Griffon's portfolio, reshaping and integration activities, our improved free cash flow profile has allowed us to lower net debt to EBITDA to 4.8 times which is down from the prior year end of 5.5 times. We remain focused on our goal of driving leverage down to 3.5 times.

Let's go through some strategic updates. So first, let me spend a few minutes providing an operational update, including some comments on the initiative for AMES in our ClosetMaid business and an update on our CornellCookson facility expansion project. We announced earlier today the development of a next-generation business platform for the AMES and ClosetMaid US businesses to enhance the growth, efficiency and competitiveness of these operations. The goal is to further enhance our profitability.

As part of this initiative, multiple independent information systems will be unified into a single data and analytics platform, which will serve the entire AMES US enterprise. This platform will improve business tracking, enable faster decision-making and improve AMES' ability to predict and respond to external factors with improved lead times. Given the seasonal and weather-dependent nature of the AMES businesses, these enhancements in tracking and prediction, will allow us to improve our service and speed up the velocity of our operations.

In addition, this initiative will consolidate manufacturing and distribution, better leveraging the investments in talent and infrastructure at our key sites. We'll also see benefits from reduced fixed cost and a streamlined facilities footprint. The final piece of this next-generation platform is an investment in plant automation. We remain committed to being a US manufacturer of US products. Deploying the latest manufacturing and distribution automation, keeps us competitive in the face of global competition, and it provides a solid foundation supporting the high-mix, fast-flow operational activity necessary for our customer channels, including the growing e-commerce channel. This strategic initiative is expected to be completed by the end of calendar 2022. When fully implemented, we expect annualized cash savings of $15 million to $20 million, and a reduction in inventory of $20 million to $25 million. To execute on this strategic initiative, we will invest approximately $40 million in capital and incur approximately $35 million of cash and non-cash charges, as onetime expenses. In addition to the growth, efficiency and competitive benefits, this initiative is intended to enhance our operating margins and expand our free cash flow.

Moving to CornellCookson. Our previously announced $14 million Mountain Top, Pennsylvania facility expansion, remains on track to be completed at the end of this calendar year. This project will increase our manufacturing capacity to support volume growth, improve operational efficiencies and bring new products to market. Let us move to the capital allocation story. Griffon's free cash flow profile has benefited from solid operating performance and the strategic actions taken to reshape the portfolio and integrate the acquisitions that we've made. This has enabled us to make substantial progress, toward deleveraging our balance sheet, as we work toward our 3.5 times net debt-to-EBITDA.

We continue to maintain ample flexibility to source and evaluate strategic bolt-on acquisitions to drive long-term growth. We remain disciplined in our approach and are focused on ensuring that any acquisition would be value-enhancing and immediately accretive. As we announced earlier today, our Board authorized a $0.075 per share dividend, payable on December 19, 2019, to shareholders of record on November 27, 2019. This marks the eighth consecutive-year of increasing the dividends paid to shareholders, which has grown at an annualized compound rate of 18%, since initiated in 2012.

Before turning it over to Brian, I will provide some additional comments on each of our operating segments. Let us start with Home & Building products. Full-year revenue increased 13% to $1.9 billion, driven by favorable mix and pricing, increased volume and the contribution of the CornellCookson acquisition, offset somewhat by the unfavorable foreign exchange. For full fiscal-year 2019, sales grew organically by 6%. Despite the uncertain global macro-economic backdrop affecting our home markets, we continue to see steady demand for our products across the segment and are realizing benefits from our market and product diversity.

Adjusted EBITDA for the year grew 19% to $211 million, driven by increased revenue and efficiency initiatives, along with the contribution from the CornellCookson acquisition. EBITDA margin of 11.2% improved by 50 basis points year-over-year, reflecting steady progress toward our 12%-plus EBITDA goal.

Turning to Telephonics, our Defense Electronics business returned to growth with full-year revenue increasing 3% to $335 million. Adjusted EBITDA from the continuing operation was $35 million compared to $36 million in the prior year. This decrease was attributable to the program mix, which was partially offset by reduced operating expenses. During the quarter, we received the $36 million contract awards from Lockheed Martin for multi-mode radar spares and helicopter common cockpit, electronics supporting the LAMPS program. We also announced the $23 million contract for an IFF system from Huneed Technologies to support South Korea's naval modernization program. This marks the second contract of fiscal 2019 for this product, and we are pleased with the continued global traction we are seeing across Telephonics diversified portfolio of products and customers

Bookings for the full year were $350 million, resulting in a book-to-bill ratio of 1.05. Backlog at the end of September 30, was $389 million, a 4% increase from the prior-year period. We're pleased with these results, particularly given that we are expecting sizable program awards for MH-60 R systems from India and Greece that are now expected to be awarded in fiscal 2020.

Looking ahead, we remain confident in the outlook for our Defense Electronics business, and our pipeline of opportunities continues to expand both in domestic and foreign applications. We're very excited about what we see going on in Telephonics.

With that, I going to turn it over to Brian for some more details on the financial results.

Brian G. Harris -- Senior Vice President and Chief Financial Officer

Thank you, Ron. I'll start by highlighting our consolidated performance in the fourth quarter. We reported revenue increasing 5% to $574 million, all of which was organic and gross profit increasing 8% to $160 million, both in comparisons of the prior-year quarter. Gross margin increased 70 basis points to 27.9%.

Fourth quarter selling, general and administrative expenses, excluding items that affect comparability were $118 million, up 7% from the prior-year, primarily due to acquisition. As a percentage of sales, SG&A adjusted for items that affect comparability were in line with the prior-year quarter.

Fourth quarter GAAP 2019 income from continuing operations was $16 million or $0.37 per share compared to the prior-year period of $1 million or $0.02 per share. Excluding items that affect comparability from both periods, current quarter adjusted income from continuing operation was $17 million or $0.40 per share compared to the prior-year of $16 million or $0.38 per share.

Our effective tax rate, excluding items that affect comparability for fiscal 2019 was 34.3%. The rate was negatively impacted by geographic mix in comparison to our expectation for up 33%. Over time as our businesses generate increased revenue and profitability, we expect to see our tax rate decrease. Capital spending was $18 million in the quarter compared to $17 million [Phonetic] in the prior-year quarter. Capital expenditures were $45 million for the full year 2019, compared to $50 million in the prior year.

Depreciation and amortization totaled $60 million for the fourth quarter and $62 million for the full fiscal year. As of September 30, 2019, we had $72 million in cash and total debt outstanding of $1.1 billion, resulting in a net debt position of $1 billion. We had approximately $279 million available for borrowing under the revolving credit facility subject to certain loan covenants. Corporate and unallocated expenses, excluding depreciation, were $12 million in the quarter and $46 million in the year.

Now I would like to turn our annual guidance. We expect total revenue for the fiscal year 2022 to increase 2% to 3% compared to fiscal 2019. Fiscal 2020 adjusted EBITDA is expected to be $250 million or better, excluding both unallocated cost of $45 million and one-time charges related to the strategic initiative. We expect to continue to generate free cash flow in excess of net income, inclusive of capital investments and spending related to the strategic initiative.

Capital expenditures for the fiscal year 2020 are expected to be $60 million, again includes the strategic initiative investment. Depreciation and amortization is expected to be $64 million of which $10 million is amortization. We expect net interest expense of approximately $65 million for fiscal 2020. Our expected normalized tax rate will be approximately 33% in 2020, as is always the case geographic earnings mix and any legislative action, including new tax guidance on tax reform matters, may impact rate.

I'd like to note that our results in fiscal 2019 exceeded both our guidance and our internal expectation. Our guidance for fiscal 2020 similar to last year reflect some restraint, which we feel is margin given the global macroeconomic uncertainty affecting our home market.

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

Ronald J. Kramer -- Chairman of the Board and Chief Executive Officer

Thanks, Brian. Our fiscal 2019, was the first full year of operation after reposition Griffon's portfolio of businesses. Our objective was to significantly enhance shareholder value by improving margins and generating stronger free cash flow. In 2019, we generated $69 million in free cash flow and continuing net income of $46 million, while reducing net leverage from 5.5 times to 4.8 times. Our EBITDA margin excluding unallocated costs improved by over 30 basis points to 11.1% while organic revenue increased by 5%.

We had an excellent year. We have significant top and bottom-line growth opportunities ahead of us, such as the exciting initiatives we've kicked off at CornellCookson, and the AMES plan that we've outlined, the building momentum at Telephonics with backlog up year-over-year, and a growing pipeline of new business opportunities.

These opportunities are driven by the hard work and dedication of our 7,200 plus employees, and I'd like to thank them for all of their efforts and our shareholders for their continued support. We are proud of what we've accomplished this year, and we're excited about our prospects to continue to deliver exceptional returns to our shareholders in the years ahead.

Operator, we'll take any questions.

Questions and Answers:

Operator

Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] Your first question comes from Bob Labick with CJS Securities. Please go ahead.

Bob Labick -- CJS Securities -- Analyst

Thank you. And good afternoon and congratulations on a nice quarter and fiscal '19.

Ronald J. Kramer -- Chairman of the Board and Chief Executive Officer

Thank you.

Brian G. Harris -- Senior Vice President and Chief Financial Officer

Thanks, Bob.

Bob Labick -- CJS Securities -- Analyst

I know you just mentioned this. I just wanted to ask if you could expand a little bit. Obviously, you had a really strong year in '19 that exceeded expectations. And your guidance appears a bit conservative for 2020, you mentioned some restraints there. So maybe you could just walk us through some of the potential headwinds that you see out there and then some of the upside potential, where you may be conservative if things don't turn out as bad as you might think?

Ronald J. Kramer -- Chairman of the Board and Chief Executive Officer

Look we give guidance once a year. We've always said that we try to balance all the risks and opportunities. We clearly all live in uncertain times and we feel that the balance across our businesses, we're performing well. We believe the earnings power of our businesses is always potentially higher than what guidance is in any one year. We've been showing that consistently over a period of years. We think 2020 is shaping up to be a better year than 2019 was.

In 2019, we significantly outperformed our guidance. We've every expectation that our teams are working hard, but you set a bar once, we go into a fiscal year that starts on October 1, each year. We react to things that are moving the landscape of issues that have been out there over the last year are still unsettled, most importantly trade and tariffs are still there. We're hopeful that it will be resolved. So we went into our planning cycle this summer when we started the year on October 1. We're going to take the worst-case scenario view. And if you're going to give guidance, you should be able to be have confidence, you're going to be able to exceed guidance.

So for now, we're very pleased about what we did in 2019. We like the way the year ahead of us shaping up. But we've got a long way to go till November of 2020, and I'll remind you, there will be an election by the time we have our year-end call next year. So being on the conservative side taxes, we rather under-promise and overperform.

Bob Labick -- CJS Securities -- Analyst

Got it. Okay. No, that's great. And then the new announcement this afternoon about the AMES initiative sense really exciting. And obviously, it seems like it'll be a terrific payback when you're done. And I'm sure you guys -- you're giving yourselves a couple of years to do it. Can you talk about some of the risks of implementing a change this big and what you have in the plans to mitigate any risks for making these changes?

Ronald J. Kramer -- Chairman of the Board and Chief Executive Officer

Look, I think you have to look at it relative to our track record over a period of years in a number of different businesses, we are very good at looking at ourselves. We're never satisfied, and we're always looking for a room for improvement. The ClosetMaid acquisition has unlocked a whole series of potential improvements, enhancements, and refinements to the AMES company. Consolidating ClosetMaid intense was something that we talked about a year ago.

We've only owned the ClosetMaid for two years. We sit here now with ClosetMaid fully integrated into AMES. I'm talking to you from our new AMES corporate headquarter in Orlando, Florida. We see the ability to both grow the business, expand the footprint and at the same time take costs out of redundant pieces of both parts of the company that are all about margin improvement, free cash flow generation, and positioning the Company for the next five years. We see significant opportunities. And in the range of degrees of difficulty, we've been here before. I'll remind you all from where we were with our garage door business 10 years ago at the debt to the housing crisis, we consolidated plants, we went through a strategic revitalization, the benefit we're starting to enjoy in the process of building the Company. We are in the AMES business combined with ClosetMaid with this plan with the goal of significantly expanding, what we do in terms of customer service and the end goal of having a platform that's more profitable than the business that we have today.

And I'll say simply that we think this is the next step in the evolution. There is nothing about this, that is defensive. This is all offensive. And it's about building a pipeline of innovation, it's about attracting talent, and it's about being the most efficient manufacturer of the essential products and leading brands that we represent.

Bob Labick -- CJS Securities -- Analyst

Got it. Okay, terrific. And then kind of last one for me is on the product side. You've been I think kind of upgrading and enhancing the product mix over the past multiple years, but certainly, recently in the last year as well you've got some margin out of it and some better mix. Can you just talk about where you are in terms of new product initiatives and how you feel about the current products mix, and what's going to continue to drive organic growth going forward?

Brian G. Harris -- Senior Vice President and Chief Financial Officer

Sure. So we are constantly investing in our products and innovating our products. We expect our mix to continue to improve over time. And that's really across all our businesses. So for instance, in our ClosetMaid business, we've recently launched some products. We have something called StormDefender and entry defender in our CornellCookson line, and also a micro grill, that's been a very big hit with architect. They like the esthetic of it. And that's part of the reason why we expanded our CornellCookson facility. So we will continue to innovate. Our customers want the innovation, it helps them sell products and do well as well as we do.

Bob Labick -- CJS Securities -- Analyst

Great. All right. Thank you so much.

Ronald J. Kramer -- Chairman of the Board and Chief Executive Officer

Thanks, Bob.

Operator

Your next question comes from Julio Romero with Sidoti and Co. Please go ahead.

Julio Romero -- Sidoti and Company -- Analyst

Hi. Good afternoon, everyone.

Brian G. Harris -- Senior Vice President and Chief Financial Officer

Hi, Julio.

Julio Romero -- Sidoti and Company -- Analyst

First question I had was on the fiscal '20 guidance. Can you maybe walk us through that revenue outlook? I know 2% to 3%, certainly, there is some conservatism built-in. But can you maybe try to bucket that into which businesses may potentially do above that growth rate and which businesses less likely to do so?

Brian G. Harris -- Senior Vice President and Chief Financial Officer

Sure. Frankly, we see it 2% to 3% across our businesses. So it's as simple as that.

Julio Romero -- Sidoti and Company -- Analyst

Okay, fair enough. And in terms of this past year's performance, obviously, you outperformed what you were looking for. And you mentioned going into the year that one of the big drivers there is going to be procurement savings, steel purchasing, wood purchasing, wire purchasing. Can you maybe try to quantify for us the benefit you saw from procurement in 2019?

Brian G. Harris -- Senior Vice President and Chief Financial Officer

I'm not sure that -- I think it's more about operational improvement. There is no pattern of commodity. We view this is being about the operating margin expansion story that we laid out at the time that we bought ClosetMaid two years ago, and the CornellCookson transaction that happened, subsequent to that. So this is the early days for us on the integration story in both sides of that segment of our business. So this is really more about our view of the business conditions, continuing to be improving the housing market. We've said it consistently now for the last several years. It is a slow unremarkable continuing improvement in repair and remodel.

The recession obsession and the conversation about the downturn in the housing markets couldn't have been more inaccurate over the last year, and we said that we looked at the trends in our own business. And while the headlines were screaming about the decline in housing, we were saying consistently quarter-over-quarter and our year-over-year of trends in our business has been and remain good. We still think the best part of the housing recovery is ahead of us and the repair and remodel trends that we see in the consumer markets continue to be strong. So this is not about any commodity cost, one-time effect.

If anything, now that I'm on the top, I'll go the other way. Look at the impact, the trade, and tariff, how much it hurt us this year. That's how much better we would have done if not true, having to deal with those one-timers.

Julio Romero -- Sidoti and Company -- Analyst

Okay, understood. And on the strategic initiatives that you rolled out, one thing that call my eyes I was the inventory reduction numbers you're looking to do. Can you just maybe give us some color on to some of the initiatives there? I mean I assume there's going be some SKU reductions may be carrying less inventory. But if you could give us any additional color, there would be helpful. Thank you.

Brian G. Harris -- Senior Vice President and Chief Financial Officer

Sure. So where we look at our SKU count, but this is really about being more efficient in manufacturing, and being able to produce things and having better data from our consolidated information systems that will allow us to produce lower levels of inventory, yet still serve our customers at the same level that they had seen -- they see now.

Julio Romero -- Sidoti and Company -- Analyst

Okay. So kind of information system driven more efficient type of work there.

Brian G. Harris -- Senior Vice President and Chief Financial Officer

Correct. And as we mentioned, there'll be some warehouse consolidation and small footprint to having things in one place instead of multiple places that will help us as well.

Julio Romero -- Sidoti and Company -- Analyst

Okay. Thanks very much. I'll hop back in queue.

Ronald J. Kramer -- Chairman of the Board and Chief Executive Officer

Thank you.

Brian G. Harris -- Senior Vice President and Chief Financial Officer

Thank you.

Operator

Your next question comes from Justin Bergner with G.research. Please go ahead.

Justin Bergner -- G.research -- Analyst

Good afternoon, Ron. Good afternoon, Brian.

Ronald J. Kramer -- Chairman of the Board and Chief Executive Officer

Hi, Justin.

Brian G. Harris -- Senior Vice President and Chief Financial Officer

Hi, Justin.

Justin Bergner -- G.research -- Analyst

A nice finish to the year. Just want...

Ronald J. Kramer -- Chairman of the Board and Chief Executive Officer

Thank you.

Justin Bergner -- G.research -- Analyst

Sure. To start off, I may have missed one or two details in the guidance. Did you actually guide for the corporate cost below that $250 million plus of segment EBITDA?

Ronald J. Kramer -- Chairman of the Board and Chief Executive Officer

Yes. So $45 million.

Justin Bergner -- G.research -- Analyst

Okay. And is it safe to say that the cost of the strategic initiative that will run through the P&L are going to be excluded in that $250 million-plus of adjusted EBITDA?

Brian G. Harris -- Senior Vice President and Chief Financial Officer

That is correct. The $250 million excludes those costs.

Justin Bergner -- G.research -- Analyst

Okay, great. And over what time frame, will those costs be incurred?

Brian G. Harris -- Senior Vice President and Chief Financial Officer

Yes. So profit is three years and the cost will be incurred over the three-year period, more or less evenly.

Justin Bergner -- G.research -- Analyst

Similarly with cash or is the cash more front-loaded?

Ronald J. Kramer -- Chairman of the Board and Chief Executive Officer

That will be more or less even as well.

Justin Bergner -- G.research -- Analyst

Okay, great. Stepping away from some of those nuanced questions. If we look back on 2019, you obviously got a pretty big benefit from price and mix, and there is an element of price that was more or less passing through tariffs or inflation immediately or in a lag. I mean how much of the lower revenue guide just reflects the fact that the need to price through inflation and tariffs won't repeat?

Ronald J. Kramer -- Chairman of the Board and Chief Executive Officer

Our overall guidance includes many, many factors. So I can't pinpoint it to that one factor. So overall, considering the economy, considering oil price and considering all gains or changes in what we're going to sell, we feel 2% to 3% is a prudent amount.

Brian G. Harris -- Senior Vice President and Chief Financial Officer

And I'd also say that it's not about the pricing as much as about the mitigation of the impact of all the issues you outlined. This is about the management teams being able to adapt in a new environment of increased costs to be able to take cost out of the business, and the pricing is with a lag. So this is more about our own operating efficiency than it is about the price pass-through.

Justin Bergner -- G.research -- Analyst

Sure. But I mean, I guess if I look at your revenue guidance of 2% to 3% and compare it to the volume growth of 3% that you did in Home & Building Products this year, so obviously the lion's share of your revenue. Should I think of that, you know, that volume number perhaps just modestly decelerating in the price mix sort of coming down materially from this year's levels? Or is it going to be sort of more volume also come down materially in that 2% to 3% guide what you delivered this year, in your view?

Ronald J. Kramer -- Chairman of the Board and Chief Executive Officer

We're seeing the 2% to 3% being a combination of both volume and mix as we look into 2020. So we see volume -- steady volume continuing with some improvement and we expect mix to improve. So it's both [Indecipherable]

Justin Bergner -- G.research -- Analyst

Okay. Got it. And then lastly, what would cause you to sort of deviate from the de-levering path at this point? And what size bolt-on acquisition would you be open to in the context of continuing up the de-levering path?

Ronald J. Kramer -- Chairman of the Board and Chief Executive Officer

We've been very clear. We have a very clear value-enhancing stockholder appreciation that in the environment that we are operating in to improve our operations on the strategic plans that we've outlined will be a natural deleveraging of our balance sheet, which we proved this year, the earnings capability and free cash flow generation could allow us to deliver faster than any expectation that could have been out there a year ago. So let's remember, we were at 5.5 times levered going into this year. The acquisition story for us is about running the business as we already own increasingly better, executing the plan that we are going to start with the AMES business to enhance their profitability, and as a result significantly enhance the free cash flow in years 2023 and beyond. And this is about positioning the Company for long-term growth.

And I'll bring it back to you that the -- what we have plenty of balance sheet capacity to buy things, we like what we're doing, running the things we already own and investing in the businesses that we already have leading positions in. So the ability of us to be able to invest over a period of years $75 million and expect to generate $15 million to $20 million a year in cash returns as a result of that is the best acquisition profile that we can ever possibly have in terms of looking to go outside.

So the desire to grow the Company for us right now is to get what we already own increasingly better, generate higher free cash flow. The result of that is going to be a very nice cash flow generation, earnings-per-share growth story. And we performed very well for our equity holders and we performed very well with a full appreciation that the best part of our earning is still ahead of us and that's not based on an improvement in the market. And that even with the 2% to 3% top line growth, we expect to be able to significantly grow the cash flow profile of the business, leading to the de-leveraging, leading to a better valuation of our sum of the parts.

Justin Bergner -- G.research -- Analyst

Okay, understood. Thank you.

Operator

[Operator Instructions] Your next question comes from Tim Wojs with Robert W. Baird & Co. Please go ahead.

Tim Wojs -- Robert W. Baird -- Analyst

Hey, gentlemen. Good afternoon. A nice finish to the year.

Brian G. Harris -- Senior Vice President and Chief Financial Officer

Thank you.

Ronald J. Kramer -- Chairman of the Board and Chief Executive Officer

Thank you.

Tim Wojs -- Robert W. Baird -- Analyst

Maybe just on the Telephonics business, you did mention a couple of nice orders and I think that -- those were both in the fourth quarter. If you look at your bookings over the last maybe 12 to 18 months in terms of how those bookings to convert to revenue, have you seen any changes or any sort of deviations versus historical precedent? In terms of, are you, are you winning larger orders that might take a little bit more time to kind of convert to revenue? Or would you say that the conversion from backlog is pretty consistent with what you've seen historically?

Brian G. Harris -- Senior Vice President and Chief Financial Officer

In general, we think it'd be consistent. It runs in the mid-60s through the mid-70s in conversion for the year going forward.

Tim Wojs -- Robert W. Baird -- Analyst

Okay. And can you remind me how big or frame how big the MHR-60 orders could be?

Brian G. Harris -- Senior Vice President and Chief Financial Officer

The India and Greece orders that we referenced is $75 million-plus.

Tim Wojs -- Robert W. Baird -- Analyst

Okay.

Brian G. Harris -- Senior Vice President and Chief Financial Officer

And we expect that in this fiscal year.

Tim Wojs -- Robert W. Baird -- Analyst

Okay, great. And then...

Ronald J. Kramer -- Chairman of the Board and Chief Executive Officer

Yes. The timing and predictability of the [Indecipherable] sales is really the biggest change. We see a multi-year buildup in that side of the business, and '20, you've heard me say it before that we thought we bottomed last year, ending this year with an increase in backlog is the direction forward. Pay attention for the backlog growth, it doesn't happen month-over-month. But quarter-over-quarter, we think you're going to see the churn in 2020. And we're very excited about what the next several years are going to look like for on a portion of ISR in the defense contracting world.

Tim Wojs -- Robert W. Baird -- Analyst

Okay, great. And then as you think about your return to growth this year in the Telephonics business. How do you -- how should we think about just kind of the revenue drop through in terms of the leverage you should be able to get on kind of incremental sales?

Ronald J. Kramer -- Chairman of the Board and Chief Executive Officer

So we do expect improved margin as the sales go up. So we don't give a particular formula for it, but our margin now is lower than we've seen historically. And we have a plan over the next several years to get back to a 13%, 14% margin on higher revenue.

Tim Wojs -- Robert W. Baird -- Analyst

Okay, great. And then just one last quick clarification question. So, Brian, I think you said that the savings from the AMES strategic initiatives. What kind of come through ratable over the next couple of years? I just want to make sure that, that includes fiscal' 20.

Ronald J. Kramer -- Chairman of the Board and Chief Executive Officer

No.

Brian G. Harris -- Senior Vice President and Chief Financial Officer

No. That was the expense I was referencing before. But we will see the savings benefits starting in '21.

Tim Wojs -- Robert W. Baird -- Analyst

Okay.

Brian G. Harris -- Senior Vice President and Chief Financial Officer

And we'll see it full-year annualized in '23.

Tim Wojs -- Robert W. Baird -- Analyst

Okay, great. Thank you very much. Appreciate the time.

Brian G. Harris -- Senior Vice President and Chief Financial Officer

Thank you.

Ronald J. Kramer -- Chairman of the Board and Chief Executive Officer

Thank you.

Operator

We have reached the end of the question-and-answer session. I will now turn the call back over to Mr. Ron Kramer for closing remarks.

Ronald J. Kramer -- Chairman of the Board and Chief Executive Officer

Thank you very much. We're very excited about what we accomplished in 2019. And we are hard at work to make 2020 an even better year. So thank you all. Bye-bye.

Operator

[Operator Closing Remarks]

Duration: 30 minutes

Call participants:

Brian G. Harris -- Senior Vice President and Chief Financial Officer

Ronald J. Kramer -- Chairman of the Board and Chief Executive Officer

Bob Labick -- CJS Securities -- Analyst

Julio Romero -- Sidoti and Company -- Analyst

Justin Bergner -- G.research -- Analyst

Tim Wojs -- Robert W. Baird -- Analyst

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