P&F Industries Inc (PFIN) 2003 Q2 法說會逐字稿

Welcome to the P&F Industries' second-quarter conference call. At this time all participants are in a listen only mode. Following management's prepared remarks we will hold a Q&A session. To ask a question please press start followed by the 1 on your touchtone phone. If anyone has difficulty hearing the conference, please press star zero for operator assistance. As a reminder, this conference is being recorded today, August 12, 2003.

I would now like to turn the conference over to Mr. Nesbett. Please go ahead sir.

Good morning and welcome to P&F Industries conference call. With us today from management are Richard Horowitz -- Chairman, President, and Chief Executive Officer and Joseph Molino, Chief Financial Officer.

Before we get started let me remind you that any forward looking statements made during this call including those related to the company's performance for the 2003 fiscal are based upon the Company's historical performance and (indiscernible) current plans, estimates and expectations that are subject to various risks and uncertainties including but not limited to the impact of competition, product demand, and pricing. These risks could cause the Company's actual results for 2003 fiscal year and beyond to differ materially from those expressed in any forward looking statements made by or on behalf of the Company. Forward looking statements speak only as of the date of which they are made and the Company undertakes obligations to update or publicly revise any forward-looking statements whether it is a result of new information, further developments or otherwise.

With that I'd like to turn the call over to Richard Horowitz. Go ahead, Richard.

Thank you, John, and thank you all. Good morning and thank you all for joining us today. In the second-quarter 2003 we saw revenue growth in three out of four of our subsidiary areas. While our overall revenues showed a solid increase, net income did not increase as much due to factors such as several low market promotions at our retailers, unusual freight charges at one of our subsidiaries, and increase interest expense and taxes. All of our subsidiaries, however, showed signs of improvement in one aspect or are another and I'll take you through all that shortly.

But first I'd like to turn the call over to CFO Joe Molino to discuss the financial performance for the quarter.

Thank you, Richard. Revenues for the second-quarter increased 16.5 percent to 27-- 21.7 million compared to 18.7 million for the second-quarter of 2002. Net income for the second-quarter was $1,012,896 or 28 cents per share on a diluted basis, compared to $959,499 or 27 cents a share on a diluted basis for the second-quarter of 2002.

One of the primary reasons for income -- net income -- not improving as much as revenues were unanticipated shipping charges to reconfigure orders for a large promotion to a major customer from Florida (indiscernible). This reduced the profit on this already low margin program significantly.

Revenues for the six-month ended June 30, 2003, increased 15.3 percent -- 41.2 million -- from 35.8 million for the second-quarter of 2002.

Net income for the six-month ended June 30, 2003, was $1,559,124 or 44 cents per share on a diluted basis. The comparison to the first six months of 2002 is affected by the $3.2 million after-tax write-down of the goodwill associated with the (indiscernible) acquisition that was made retroactive to January 1, 2002.

Excluding this onetime charge, net income for the six-month ended June 30 2002 was $1,513,161 or 42 cents per share on a diluted basis.

Looking at subsidiaries, revenues to Florida Pneumatic increased 12.8 percent 10.9 million to 9.7 million for the prior year. Although this revenue growth was mitigated by a four percent gross margin decrease one needs to bear in mind the price concession granted granted late last year would have generated a significantly lower gross margins if not for significant cost reductions that were made.

We also did not anticipate pricing pressure from this customer again for some time. I would also like to point out that at this point almost half of the direct labor hours in the plant (indiscernible) specialized (indiscernible) sales. These sales output product of the highest quality and with the fastest throughput of anywhere in the facility. Two and a half years ago we had no such sales.

Revenues at the Countrywide Hardware are up 49 percent in the second-quarter of 2003, improving the 5.7 million from 3.8 million in the prior year second-quarter. The real story here is sales to the fencing (ph) market which has been experiencing over 40 percent growth. At this point in the year it is nearly half of our OEM revenues. This will drop somewhat in the second half as the best part of the selling season is over for the fencing market.

Margins here are also among the best in hardware. Revenues at Green Manufacturing decreased by 4 percent for the second-quarter to 3.0 million to -- 3.2 million -- from 3.2 million for the second-quarter of 2002. As mentioned in the press release, normal sales growth is encouraging. It is unfortunately been (indiscernible) by a 14 percent decrease in sales (indiscernible) non cylinder related access sector however.

But just as important productivity is still improving as we continue to have a flow of new ideas many of which are now coming from operators on the factory floor. Revenues at Embassy increased 5 percent to 2.1 million for the second-quarter of 2003 from 2.0 million for the second-quarter of 2002.

We are encouraged by the improvement in rating sales from this time last year, however, the baseport (ph) market continues to be very competitive. A major phase of our cost reduction analysis has been recently completed and we're pleased with the potential savings that have been identified. In fact, some projects are already under way (indiscernible) overhead improving efficiency. We expect this to continue through the remainder of the year and 2004.

Consolidated SG&A expense increased 17 percent for the quarter to 5.2 million from 4.4 million from the year earlier period. Much of this increase relates to the increase in revenues noted and more specifically advertising and promotional effort. However, some of the increase not tied to revenues and profits are expenses related to the growing reporting and controlled environments that satisfy the Sarbanes Oxley regulation. We do expect that at some point these expenses will level off but we're not confident for it to win.

Interest expense for the quarter increased 20 percent to $195,688 from $162,650 for the prior year second-quarter. This was primarily due to increases in total average borrowings.

Other items affecting cash flow was depreciation and amortization which were $444,546 and $137,949, respectively, for the quarter.

Finally, capital expenditures for the quarter were $ 350,704. Now I'd like to turn the call back over to Richard.

Thanks, Joe. Before I take you to a more detailed look at each of our operation subsidiary business units I would like to briefly review what each one of our companies does for those of you who are first-time blisters here.

Our Florida Pneumatic Manufacturing Corporation is primarily engaged in importing or manufacturing approximately 50 tons of pneumatic hand tools. Countrywide Hardware imports and manufactures hardware products for items such as doors, windows and fences as well as other general hardware products and of course Countrywide is comprised of Nationwide Industries and Franklin Manufacturing. Our Green Manufacturing subsidiary is engaged primarily in the manufacturing development and sale of custom-designed, welded hydraulic cylinders -- used mostly in heavy industrial and mobile equipment applications. Green also manufactures a line of access equipment for the petrochemical industry and a line of (indiscernible) equipment for the agricultural industry.

And, lastly, our Embassy subsidiary manufactures (indiscernible) (indiscernible) heating products (indiscernible) all of these are primarily used in (indiscernible) of the United States.

Now I will review the operations of each of these business units. Florida Pneumatic which accounted for approximately 50 percent of our local revenues for the second-quarter had two large promotions by two major customers along with another large promotion and a new automotive aftermarket customer alluded to earlier which helped to increase our second quarter revenues by 13 percent. However, as Joe mentioned, our gross profit decreased 4 percentage points due to the lower margin promotional sales combined with the price concessions we gave to a major customer in the fourth quarter of last year. Additionally the cost of importing Japanese products increased due to the (indiscernible) second quarter this year than it was in the second-quarter last year.

Partially offsetting these gross profits effects were productivity improvements and cost reductions from our suppliers.

Florida Pneumatic continues to hold its own in the sluggish economy. We brought in a new automotive aftermarket customer I just mentioned and we're quite pleased with the result of our first promotion with them and we continue to expand our lean manufacturing initiative given our productivity to record levels for this facility.

On a somewhat more somber note, I should also mention that Florida Pneumatics' President of 15 years -- Charles Swank -- passed away on July 12th of this year. Charlie was a wonderful man and a great leader of our Florida Company and made invaluable contributions to P&F for many many years and will be sorely missed by our organization.

Over his many years with the Company, Charlie developed a large and experienced management team and as we mentioned in our press release, it is from this talented group that we have promoted Bart Swank the president of the subsidiary after July 30th. Bart has over 20 years' experience in the pneumatic tool industry and now leads an organization in which P & F has a great deal of confidence.

Countrywide accounted for 20 percent of revenues for the quarter. Second-quarter revenues increased 49 percent due primarily to the acquisition of Nationwide Industries in early May of last year. This gave us an additional month of revenue compared to last year's second-quarter (indiscernible). Also contributing to revenues for the quarter were strong sales affecting market although this was partially offset by relatively weak sales and (indiscernible) traditional retail business.

In Franklin's retail product line many accounts in general and one major account in particular had slow (indiscernible) due to their slow business which contributed to a 22 percent decline in this portion of the hardware business. However, gross profit in our Countrywide subsidiaries did increase four percentage points due primarily to the inclusion of Nationwide's higher margin OEM business for the entire second quarter of this year.

Overall we continued to be very pleased with Countrywide Hardware. Unfortunately the channels of distribution for Franklin is (indiscernible) retail hardware line are much more competitive than those of Nationwide's OEM business. In addition, the retail hardware line is being negatively affected by the residential housing market in the Northeast. We do however expect continued growth in the OEM segment particularly in the fencing product line which is well positioned to take advantage of the long term strength in the residential market in the South.

And lastly or not lastly excuse me our Green Manufacturing subsidiary accounted for approximately 14 percent revenues for the quarter. Second-quarter revenues decreased 4 percent due entirely or principally to depressed conditions in the access sector. This was partially offset by increased sales in the refuse market for the hydraulic cylinders.

Gross profits at Green increased from 9 to 10 percent due primarily to reductions in labor and overhead. And as Joe mentioned earlier, Green's revenues were down slightly overall but we're very encouraged by the 12 percent increase in cylinders sales for the second-quarter of 2003.

This is the first quarter since the third quarter of 2000 that we have seen growth in this segment. So we are anxiously optimistic -- cautiously optimistic. In addition we continue to increase operational efficiencies at Green as we await improvement in heavy equipment market conditions.

And, lastly, Embassy Industries accounted approximately for 10 percent of our sales for the quarter. Embassy revenues for the second quarter increased 5 percent due primarily to increased revenue heating sales. Gross margin at Embassy increased to 32.4 percent from 29.9 percent due primarily to a change in product mix combined with improved operating efficiencies.

And also at Embassy we introduced our new Falcon commercial line of TV products during the quarter and have recently entered into contractual relationships with several manufactures (indiscernible) organizations to begin promoting and selling this new product line.

This product line includes the complete line of heating systems and commercial closures and many standard and custom applications. We have also begun selling recently the improved radiant tubing with increased flexibility which will allow (indiscernible) radiant installation in. Customer feedback so far has been very positive on this product.

And we do expect initiatives on these products to have a positive impact on sales in the future.

Now I'd like to present what we expect from each of our subs at the third quarter of 2003. For the third quarter we expect overall results to improve due to sales increases at all subsidiaries and in continued improvement in operating efficiencies. Revenues at Florida Pneumatic are expected to increase between 10 and 20 percent due to heavy promotional sales of two major customers. Our Countrywide's revenues are expected to increase 5 to 10 percent as the continued strong growth in the OEM segment is tempered by the flat sales in the retail area. Revenues at our Green subsidiary are expected to increase between 10 and 20 percent driven by cylinder revenues, particularly our new log splitter cylinder product line.

And, lastly, revenues at Embassy are expected to increase between 10 and 20 percent due to improved market conditions.

(indiscernible) gross profits for the entire Company for the third quarter to be between 28 and 29 percent and our selling, general, and administrative expenses as percentage of revenues are expected to decrease from 22.2 present level or 1 or 2 percentage points due to an overall increase in sales and reduced overhead.

Our interest expense will (indiscernible) due to generate low interest rate compared to third quarter of last year and as a result of all this, we anticipate overall profits will increase between 25 and 35 percent for the quarter.

So as you can see, we're looking forward to a positive third quarter while the effects of our labors through these challenging economic times should show through. We've been working hard to improve our business and will continue to do so (indiscernible) the results of our marketing initiatives, new product introductions and various cost-cutting measures throughout our Company purshing this Company forward. Thank you for your participation today.

And now we would like to answer any questions you may have.

Timothy Stabos (ph) of Stabos (ph) Asset Management.

Good morning. The cyclicality of the Company, I mean, you got to feel good about where the company is at from a profitability standpoint, considering where we are in economic cycle here. How do you feel about that?

Well as we mentioned, we do feel good considering the economic times that we're living in right now. If anybody can manage to stay above water they're doing well so if they show improvement which we have, obviously, it's more encouraging.

Sorry to see the loss of Mr. Swank. Is Bart Swank the son of Charlie Swank?

That's purely a coincidence. The last name is the same. No, no, he is -- only joking. Yes no -- that is his son but that -- I wouldn't -- we would not have given him the job if he was not very very qualified to do the job.

And I would add to that Bart's been part of the senior management team there for a period of time and was in the inner circle running the Company with Charlie.

What were the ages of the two gentlemen, if I may?

Charlie was in his late 60s and Bart's in his early 40s.

If you know offhand, I can pull this myself, but what was the net income per share for the third quarter of last year? Do you have that on hand or no? You don't? That's okay.

Sorry, we don't have that here.

I'll pull it off Edgar, 25 and 35 percent increases (indiscernible)

22 cents a share.

You got it, okay -- I'll let Lawndale go if they're around to ask a question about the (indiscernible) which we all know and love very much.

Andrew Shapiro of Lawndale Capital Management.

I'm happy to be on the call for the first time I think in several quarters because I've always traveled when you have had this but I am here and can you, Joe, tell us -- I don't think there was any reference to any shares bought back during the quarter ended June but what has been the Company's buyback activities and what are the shares outstanding now?

I know that in the past -- five to six weeks, we probably purchased 25 to 30,000 shares. I didn't have -- I don't to be honest -- I don't know if any of that took place prior to June 30, but, I think some of it did.

And the price ranges -- is that what it was bought at? You're going to be putting out a 10-Q in another day and it's going to have the actual dollar amount? You have that average cost?

If I were guessing, I'd say 6 3/4 -- something like that would be a fair guess as an average.

Scaled up, so that's accretive. And given where the book value of the Company is and given where you guys have your prospects of growth and your current book values is this an -- capital allocation area for you that would have increasing focus or are you stepping up your acquisition bent again? Where would be an increasing focus of your time between the two?

In terms of -- I don't think it's going to be an increasing focus, but it is not going to be a decreasing focus. We're going to be out there and when the shares are in a range that we feel where they're undervalued we will continue to purchase them as they are available.

Okay and in terms of the reference to increase cost of public regulatory etc you guys referred to -- are you seeing -- has the Company borne all of the increased cost that it expects to see here in this increased environment and are you expecting to see further increase cost here being public?

I would say the chances are we may see some further increased cost. We're currently undergoing a study here, trying to determine if we even have enough internal manpower to do all the internal control work that apparently is going to be required. If you have been following the goings-on, you will (indiscernible) a bit of a reprieve in terms of when it actually has to comply with some of the internal.

Internal requirements -- we've got till 2005 but having said that, we're not going to be waiting until 2005 to begin work on that. It's becoming clear although we haven't completely decided that we may have to outsource some of the internal control work which will incur -- force us to incur some additional fees.

Okay and that's actually all I have. On the other front I am sorry to hear of the passing of Mr. Swank and having talked with Bart I am sure he is very capable of handling that division. I will back out of the queue for others to ask questions.

Jack Howard of Stihl (ph) Partners.

I was just curious if you can comment on what your bank availability is right now?

Well just to remind you, the revolver line -- the full availability is 12 million, the acquisition line's full availability is 15 million and we got some additional availabilities for foreign exchange purchases. On -- I am going to be off by a million or so but we got about 5 or 6 million outstanding on the revolver 7 on the revolver -- excuse me. And about six on the acquisition line. So do the math on what's left. That leaves us with 8 left on acquisition on the revolver and I guess 9 on the acquisition line.

And when you do share buybacks, is that carved out of the revolver or the acquisition side?

Well I mean, technically, as long as we're borrowing I guess it is coming out of the revolver but it's a little hard to keep score that way when we just write the check and the money is funded when it needs to be. Cash flow is actually going to be quite positive the remainder of the year. So it really won't be coming out of the revolver as that will be paid down the rest of the year.

And in the deal side of things, are you guys looking at a lot of potential acquisitions and what -- how do you see pricing out there?

We're looking at several as we typically are, although, honestly, I don't think there's a lot to choose from right now. It just appears that people don't seem to be motivated to sell the way they were a few years ago. I think sellers -- unless they have a real driving need whether it be a personal situation or something unusual in the business -- I think, uniformly, they feel that if they wait a year, they will get a better price. Maybe a better multiple and a multiple and possibly a bigger EBIT number. So we're not seeing a lot of people interested although we are having conversations with several.

And in the latest acquisition, were there any synergies with regards to hardware? Were you able to carve out any duplicate expenses or was it really just a financial purchase?

I will answer both those questions. There were not a lot of overhead savings because as you know or should have I'd say that both businesses are in separate locations. So that overhead can't be saved. However, we have sourced -- each is sourced from the other vendors, obviously, getting the better deal that was available. And we've done some work trying to move some product -- standard products -- through one channel moving from 1 channel to another.

Your point about being a financial purchase, I don't think it was a financial purchase in that we were already in the hardware business and we like the hardware business and saw this is another part of that and we continue to like the hardware business and look for other acquisitions out there. And I still have some hope that, in the long run, we will have some savings on the overhead side. It just doesn't make sense right now.

We do have a question now from Andrew Shapiro of Lawndale Capital Management.

Yes, Richard, you know you own a third of the Company -- owned it for quite some time, I own a big chunk of the Company, Stihl Partners and others own a big chunk, clearly is that for every dollar that's spent being been public thirty-three cents of that's coming out of your pocket. How does that make you feel?

Are you trying to ask me if we're continuing to explore going private?

Yes.

Is that the question you're asking me, look at it on a continual basis. For the obvious reason but it does not make financial sense. If it made financial sense for us to do it, we would do it and obviously being a one-third owner, I would do it faster than you. So it doesn't make sense. So I mean -- and it is something that we continue to look at.

Why do you and the board feel that it doesn't make sense?

Because the earnings level that we have in this Company with the amount of debt that we would have put onto the Company, it basically makes it a breakeven company and we would not be able to grow through acquisition, etc.. And the collective wisdom of the board and myself is we want to try still to make the Company grow and we can't row if we're totally leveraged up. We can't grow.

You can't use the stock currency and, given how deeply discounted it is, there's not a likelihood at present for stock currency to be used for acquisitions for a long time so we've lost that advantage.

No we have lost that advantage but we have the advantage of having cash. And we don't have -- if we were private, we would not have that advantage. We would be the Company as we are and we want to expand the Company. It's just a philosophical difference between perhaps you and I in terms of what we want to do with the business. I still feel that P&F can grow to be a much bigger business (indiscernible)

Let's take the two extreme ranges. One extreme range is a total buyout which would put on too much leverage than stores and the Board's opinion and I respect that and there is -- we will call it the status quo which you don't have any stock currency. And you do have a decent lot of availability and cash flow generation etc. going on and that would be doing some form of more aggressive buybacks within the constraints of the market rules which would mean like a Dutch tender.

We looked into a Dutch tender years ago. Actually if my memory serves me correctly and I wouldn't swear with my accuracy we had a Dutch tender about 5, 6, 7 years.

No. I've been a shareholder for almost 10 years -- it's been longer than that, then.

I'm not so sure, Andrew.

(MULTIPLE SPEAKERS) preferred you took in the debt that for the common stock I think (indiscernible)

(MULTIPLE SPEAKERS)

And we looked into doing it I remember my memory so little foggy on it but it's just I -- your motive is clear and obvious Andrew and I understand and I appreciate it but we feel we have a philosophical difference.

Actually I don't think we're on different playing fields, my motive is not liquidity, my motive is to increase the return on assets and the return on equity generated by the business. And when you have the assets generating the returns that they're generating out there and if they're not acquisitions and in an appropriate multiple your stock is so discounted you can buy your own assets which is what you're looking to do is to buy assets cheap. You can buy your own assets cheaply and then the returns on my investment in this Company will increase further. I'm not looking for the liquidity that you think I am.

Whatever it is we buy it, when the stock is available, we buy it. And we have I believe two people (indiscernible) one or two people that continually call us when there is stock available. As you know, owning a third of the Company that (indiscernible) chunk of the company and our board members etc. etc. there's not an awful lot of slope out there at any one time anyway. So I mean between everybody, between Fidelity, all these people, there is not a lot of float... (MULTIPLE SPEAKERS)

Which is why the tender, the Dutch tender method is probably the only efficient means of trying to do something.

I will look into that again, that Dutch tender, because I know we looked into it once before (indiscernible) or something, I am a little foggy on that but I promise we will look into that.

Yes it's just be a middle ground where you can acquire efficiency a larger chunk of stock and then you're not -- and you have to determine and analyze internally at what price level it makes economic sense versus other opportunities out there. And then choose whether it's 5, 10, 15, 20 percent of the stock that you go for, which would probably put us at a more appropriate range and might gain you the opportunity to have stock as currency to use down the road.

Okay we will revisit that situation one more time. Because it is probably something we haven't looked at in a while but...

And it's only -- you get a lot of acquisition opportunities previously that you guys were looking at and if that isn't as high on the plate just because of pricing and multiples, then your stock -- given where it is and what you've been doing and now the turnaround in the trough, you've got a very attractive business that's undervalued right in front of you that's all.

I appreciate what you are saying but we're not not looking at acquisitions because of pricing and all that stuff, it is because of availability. It's just that the market is not as robust as it's been.

Well, there's this company I know called P&F that is out there and it's very cheaply available.

Where are they listed? Are they a public company? (MULTIPLE SPEAKERS. LAUGHTER)

There are no further questions at this time. I will now turn the call back over to management for any closing remarks.

Thank you all for taking the time and interest in P&F today and we look forward to speaking to you on third-quarter numbers sometime towards the end of the year in November. Thank you again so much.