P&F Industries Inc (PFIN) 2003 Q3 法說會逐字稿

Welcome to the P&F Industries third quarter conference call. At this time all participants are in a listen-only mode. Following management's prepared remarks, we'll hold a Q&A session. To ask a question, please press star followed by one on your touchtone phone. If anyone has difficulty hearing the conference, please press star 0 for operator assistance. As a reminder, this conference is being recorded today, Wednesday, November 12, 2003.

I would now like to turn the conference over to Miss Jody Burfening. Please go ahead, ma'am.

Thank you, operator.

Good morning, and welcome to P&F Industries third quarter earnings 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, I'd like to remind you that any forward-looking statements made during this call, including those related to the company's performance for fiscal 2003, are based on the company's historical performance and on current plans, estimates, and expectations. They 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 the 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 in which they are made, and the company undertakes no obligation to update publicly or revise any forward-looking statement, whether as a result of new information, further developments, or otherwise.

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

Thank you, Jody.

Good morning to everybody. Thank you for joining us today on our conference call. This morning I will discuss our results for the third quarter, then Joe Molino will review our results year-to-date. And finally, after that, I will present our expectations for the fourth quarter and answer any questions you may have.

On a consolidated basis in the third quarter, revenues increased 12.4% to $23.7 million, and I am pleased to report that the growth came from all of our subsidiaries. However, Countrywide continued to outperform our expectations with sales, rising cost of 14%, driven by a stronger than expected housing start market in the Southeast. We also recorded strong revenue growth at our Florida Pneumatic subsidiary. Net income for the quarter increased 5.2% versus 2002 to $817,692, or 23 cents per share on a diluted basis.

Before I take you through a more detailed look at our operations for each of our core business units, I'd like to review what each of our companies do for our first-time listeners.

Florida Pneumatic Manufacturing Corporation is primarily engaged in the importing and manufacturing of its approximately 50 types of pneumatic hand tools. Our Countrywide subsidiary imports and manufactures hardware products for items such as doors, windows, and fences, as well as other general hardware products. Both Countrywide is comprised of Nationwide Industries and our Franklin manufacturing company.

Green Manufacturing in Ohio is engaged primarily in the manufacture, development, and sale of custom-design, welded hydraulic cylinders used in heavy industrial and mobile equipment applications. Green also manufactures a line of access equipment for the petrochemical industry, as well as a line of posthole digging equipment for the agricultural industry.

And lastly, Embassy Industries manufactures and sells various hydronic heating products, as well as radiant heating and gas-fired boilers, primarily in the Northern tier of the United States.

Now with that, I will review the quarterly performance of each of these business units.

Florida Pneumatic accounted for 52% of our overall revenue for the third quarter, increased promotional -- excuse me, increased retail promotional sales by two major customers resulted in revenue growth of approximately 11%. The gain was partially offset by lower revenue from industrial accounts that reduced their inventories. The result of these lower margin promotional sales, combined with price concessions we gave to a major account in the fourth quarter of last year, caused gross profit to decrease by approximately 3.3 percentage points.

On a more important note, we recently learned that Florida Pneumatic will lose its third largest customer effective the beginning of next year. Earlier this year, this account was put out to bid to several major suppliers, and the customer selected the vendor strictly on pricing and quote and took the lowest price available at the time.

Although we do not like to lose customers, that's clear, we realize that maintaining this account would have meant completely eliminating our margins while converting to an inferior product, and neither of these options reflected our marketing and profit objectives, and, therefore, we chose to forfeit the act. I should note that we expect this account should be at approximately $4.4 million in revenue in 2003, and we, of course, have taken measures to recapture this lost revenue at this time.

And Florida Pneumatic and its management is committed to developing new opportunities for growth, while continuing to reduce cost to mitigate the impact of this event. I should say that we are making some progress with other accounts in that area that limited us in the past, which now we can go after.

Countrywide accounted for 22% of revenues for the quarter. Revenues rose nearly 14% as strong OEM results more than offset continued weakness in the retail hardware segment. Likewise, gross profit increased 3 percentage points, primarily due to a favorable product mix which was partially offset by lower overhead absorption.

We continue to be very pleased with the performance at Countrywide. Our OEM business is very strong, in particular the fencing product line which continues to add customers and products and is benefiting from better than expected housing starts in our core markets in the Southeast. These strong results were partially offset by continued weak sales in the retail channel, which was compounded by lost sales to a major account that declared bankruptcy in the first quarter of this year.

In a related news regarding Countrywide, I'm pleased to announce the appointment of Chris Kliefoth who joined us as President of Nationwide this past quarter. Chris brings to us a position of more than 20 years of manufacturing product sales and management experience, as well as extensive industry knowledge and a fresh perspective to our business. We are very pleased to welcome Chris to our company.

Our Green Manufacturing subsidiary accounted for approximately 50% of revenues for the quarter. Third quarter revenues rose approximately 16%, due primarily to a favorable response to the new log splitter cylinder product introduced earlier this year, and to a lesser extent, general improvement in our cylinder product line. This growth was partially offset by continued weak sales in our access product line. Gross profit at Green did increase by 2.5 percentage points, due primarily to the increased sales and overhead absorption, which was partially offset by an unfavorable product mix.

We are encouraged by the performance at Green this quarter, as the increase was produced without the benefit of an improving market and despite continued weak access sales. We would like to point out that this quarter's revenue increase represents the highest growth in any quarter for several years. All in all, the future looks better at Green at this time.

Lastly, Embassy Industries accounted for approximately 11% of our sales for the quarter. Its revenues increased approximately 11%, due primarily to higher baseboard and boiler sales. This was partially offset by weaker radiant sales, which was impacted by product shortages as we transitioned to a new and improved tubing during the last quarter. Gross margins at Embassy weakened by 2 percentage points due to an unfavorable product mix.

The Embassy business has made some progress in 2003, I'm pleased to report, despite continued weakness in the heating market, and our new falcon commercial line of heating products continues to be favorably received by the marketplace. We remain optimistic about our boiler and commercial business growth, even though we expect the near-term profit impact to be nominal, due to a low base of sales. Furthermore, although baseboard sales have improved, this mature market continues to be extremely competitive.

Now I'd like to turn the call over to Joe Molino, who will review our financial performance for the nine months ending September 30. Go ahead, Joe.

Thank you, Richard.

As Richard discussed the specifics of the quarter, I'll focus on the year-to-date trends in further detail.

Revenues for the nine months ended September 30, 2003, increased 14.2%, $64.9 million, compared to $56.8 million for the year-earlier period. Net income for the nine months ended September 30, was $2,376,816, or 66 cents per share on a diluted basis.

The comparison to the first nine months of 2002, as you'll remember, is affected by the $3.2 million after tax writedown of goodwill associated with the Green acquisition that was made retroactive to January 1, 2002. Excluding this one-time charge, that income for the nine months ended September 30, 2002, was $2,290,167, or 64 cents per share on a diluted basis.

For the nine months ended September 30, 2003, revenues at Florida Pneumatic increased 9%, going from $30.9 million to $33.7 million. This increase for the year has been promotionally driven, with multiple events at our two largest customers, and also a substantial one in a new automotive retail customer.

The lower priced promotional sales, as well as the price concession given late last year to a major account, mitigated the revenue growth impact on the bottom line, as gross margins for the year decreased 37.3% to 34.7%. The margin impact would have been worse if not for continued productivity improvements in cost reductions from suppliers.

For the first nine months ended September 30, 2003, revenues at Countrywide Hardware increased 53.5%, $9.9 million to $15.2 million. Obviously, having Nationwide Industries for the full nine months is the major reason behind the improvement.

However, underlying this growth is growth in the fencing division of over 40% on a comparative basis, along with flat-to-weak sales in patio, window, and the overall retail category in general. Gross margins at Countrywide increased from 31.3% to 34.9% as the higher margin fencing business becomes a larger and larger portion of total sales.

The next six months are the very slowest of the annual cycle in fencing, so the overall growth rate at Countrywide will swell, and margins will soften in the next few quarters. However, we are excited about several new engineering projects underway and opportunities to reduce costs significantly in 2003.

For the nine months ended September 30, 2003, revenues at Green decreased by 1.6% from $9.5 million to $9.3 million. Of course, the explanation is the major customer loss in the first quarter of 2002 hurting in comparison. Without this, overall revenue would be up several percentage points for the nine months, and cylinder only revenue up more than that.

Gross margins at Green have increased from 8.8% to 9.4% for the first nine months of the year, due primarily to an improvement in product mix. We are very much encouraged at Green, as Richard mentioned, as we continue to hold on to current customers, as we add new ones each quarter. We see improvement continuing for 2004. Finally, at Green, productivity remains quite strong.

For the nine months ended September 30, 2003, revenues at Embassy increased 2.1%, from $6.5 million to $6.6 million, due primarily to increased baseboard and boiler sales. While this is encouraging, baseboard had a particularly weak 2002, and hence the comparison, and the market is still extremely competitive with limited ability to add customers. We're hopeful, however, that many of our cost reduction efforts for 2003 will have a meaningful impact on 2004.

Gross profit at Embassy increased from 30.6% to 29.9%. Although shifting product mix had an impact, so did the rising euro, which increased the cost of radiant heating [INAUDIBLE].

Consolidated SG&A expenses for the nine months ended September 30,2003 increased 15.3%, from $13.2 million to $15.2 million, due primarily to the increased costs associated with the 14.2% increase in revenue for the nine months. As a percentage of revenues, SG&A is 23.4% for the nine months.

However, it should be noted that included in the increase are the growing costs that satisfy the Sarbanes-Oxley regulations. At this point, these costs are growing faster than revenue.

Interest expense for the nine months ended September 30, 2003 increased 11.5% from $497,838 to $555,265. Although interest rates were generally lower than a year ago, the Nationwide acquisition debt increased average borrowing out standing.

Other items affecting cash flow were depreciation and amortization, which were $1,307,990, $425,714 for the nine months, respectively. For the quarter, these [INAUDIBLE] were $428,216 and $138,957.

Finally, for the nine months, capital expenditures totaled $799,955, and for the quarter, $153,800.

I would now like to turn the call back over to Richard. Richard?

Thank you, Joe.

I'll now report to you what we expect from our subsidiaries in the upcoming fourth quarter of this year.

For this quarter we expect overall results to improve slightly, due to revenue increases at all subsidiaries, as well as some cost reductions. At Florida Pneumatic, revenues are expected to decrease approximately 5%, due to price concessions given to a major customer in the fourth quarter of last year, which we have referred to in the past.

Countrywide's revenues are expected to increase between 5% and 10%, due to continued growth in the OEM and retail segments. Revenues at Green are expected to increase between 5% and 10% as several new accounts begin to order products and the access product line begins to strengthen. And lastly, again, revenues at Embassy are expected to be flat relative to the fourth quarter of last year.

We expect gross profits for the fourth quarter to be between 29% and 30%. In selling, general, and administrative, expenses as a percentage of revenues are expected to be approximately 23%, which is in line with the year-to-date average. Interest expense should decrease compared to the fourth quarter of last year as outstanding borrowings and interest rates are lower than they were a year ago. As a result of all this, we anticipate overall profits will increase for the quarter between 10% and 20%.

Our results for the first nine months of this year indicate that our businesses are performing well in an environment that remains very challenging. We are optimistic about our prospects of continued growth in the fourth quarter and after.

Our marketing objective, new product introductions, and cost-cutting measures are beginning to show results. We have every reason to believe that we will continue to do so.

Thank you for listening to our presentation today, and we will be happy to answer any questions you may have at this time.

Ladies and gentlemen, if you wish to register for a question for today's question-and-answer session, you will need to press star and then the number one on your touchtone phone. You will hear a prompt to acknowledge your request. If your question has been answered, and you wish to withdraw your polling request, you may do so by pressing star and then the number two. If you are using a speaker phone, please pick up your handset before entering your request. One moment, please, for your first question.

Your first question comes from Andrew Shapiro with Lawndale Capital Management.

Good morning. Bunch of questions. I'll just ask those on Florida Pneumatic and this lost customer, and then back into the question queue.

I'll have to ask you to speak up. We can hardly hear you.

Can you hear me better now?

A little bit. If you could just speak up, please.

Okay. Some questions on Florida Pneumatic, then I'll back into the question queue for some others I do have.

Can you -- you've mentioned the margins on this customer that's going to be lost, or that is lost, starting in Q1, where low margins that, when they put it out -- the product for new bids, it took away all the rest of the margins. Can you give us a better handle then, instead of just its revenues, what kind of gross profit contribution dollars did this lost customer contribute in the year?

Andy, I'll answer that.

The reason we didn't get any more specific was, frankly, there's a lot of speculation in what the actual loss margin will be. Certainly there is a standard margin for this account. But, as you know, that number is driven by every other product that goes through the factory and also that is imported.

In addition, the impact is going to be affected by what we do as a result of losing the account, and how we might restructure the business. And then lastly, the impact is going to be mitigated by other things that we're working on. So we felt that throwing out a number was going to do more harm than good.

It was a, you know, it was a customer that was comfortably, you know, right in the range of our business. It wasn't a low margin customer. I'm not sure if that's what you were implying. And it's certainly going to hurt. But we didn't feel we could throw out a number and add to anybody's understanding.

And that's because there's a substantial amount of fixed overhead absorption that's within your gross profits?

No question about that.

Okay. Following on this is that -- was Florida capacity constrained, at present, with respect to this customer opening up capacity, or not?

No. Not in any way. That didn't factor into the decision.

So since you weren't capacity constrained, have cost cuts been identified, or have you monetized an estimate, or targeted an amount that you're going to seek in terms of some fixed cost cuts to go along with your new revenue growth initiatives?

We are in the in the process of formulating our 2004 budget. And absolutely, we're going to be taking a look at what was directly related to that business and what wasn't, and what we also have that we're expecting to bring on board next year. And certainly, we are doing that, but I can't give you a number right now.

Okay.

Andy, the only thing I might add to that -- this is Richard. The only thing I might add to that is, though it sounds very ominous that we lost a large customer, Florida Pneumatic's prospects for next year are certainly not bad. I just want to get you to understand that.

And that's taking into account the lost customer?

Absolutely.

Okay. On Countrywide, your quarterly performance was a nice increase in terms of revenues. The press release cited that you had lower overhead absorption. I was wondering how you had that with such a sizeable increase in revenue.

It's really an accounting anomaly. We reduced inventory substantially over that period. And given the way overhead -- inventory overhead absorption works, when that happens, you actually have a hit to earnings, other things being equal.

If inventory increases or production increases, you generally are spreading fixed overhead over more and more units, and, therefore, each individual unit is a little more profitable. So the opposite happens. It's a good thing that we're reducing inventory, albeit that isn't going to continue forever. You know, it's somewhat temporary. But in order to explain the change in margin, we felt we had to say that.

Okay. I'll back out into the queue. I do have some questions on Green and some other items, if you'll please come back to me.

Go ahead. Absolutely.

Once again, ladies and gentlemen, as a reminder, to register for a question, please press star and the number one on your telephone keypad now.

We do have a follow-up question for Mr. Andrew Shapiro with Lawndale Capital Management.

Great. Well, I guess no one else is --

I guess we did a very good job of presenting the facts, huh, Andy?

Well -- On Green, can you give us, Joe, during the recession, Green had substantial reduction in its capacity utilization, impacting greatly its margins.

Yeah.

With the increase in the business, et cetera, can you just give us a status as to what, I guess, percent of capacity, or the number of shifts present, versus what you could be operating at Green, that you'd estimate Green's operating at today?

You know, at -- when we were at our peak, we were operating two full shifts, and I guess half of a third. At our trough it was just one shift. Right now we're at one shift, and I want to say 20 percent of another shift.

And at your trough you kind of talked about it being around 35% of capacity?

Yeah.

What would you say in numbered terms?

You know, no more than 40. And what makes it a little more complicated is the growth. Some of this growth is now coming from cylinders that we're importing, inventorying, and then re-shipping. So that doesn't chew up a whole lot of manufacturing capacity.

So there's still a bunch of overhead absorption that falls to the bottom line on increase in volume?

Absolutely.

And your projected growth in this division, is it similarly mixed with import versus manufactured, as this last quarter, or is there -- ?

I would say probably. It's a little hard to say for next year, but --

I would think for the next quarter, Andy, I think that our access line is going to be a little bigger, a little more active. So it will be a little less important. This may be a little bit better in our favor.

Yeah, the log splitter business is a highly seasonal one. There's not a lot of fourth quarter revenue there. So, really, we're not going to see any growth in that affecting anything until really the second quarter of next year.

Okay.

But having said that, the manufacturing business is also growing.

Yeah. And so you'll start absorbing more overhead and dropping stuff to the bottom line?

Correct.

Have the product shortages at Embassy you referred to regarding the tubing, is that the flexible tubing, and have those been alleviated?

No, it wasn't a product shortage, Andy, it was a product improvement. We phased out one product, and we introduced a new product. And so the timing, because of the European holiday in August, our supplier was closed a little longer than they expected to be. So the timing just was off by a little bit. But it wasn't a shortage. It was just the timing of the new product, which we're in now.

Okay. So I'd spread out the release --

We said shortages, but it really, I guess at the end of the day, really wasn't -- it's not a shortage in that way.

Yeah. Is that the flexible tubing?

That's the flexible tubing, yes.

So then all things are operating -- you're on schedule now?

-- everything is fine. We have inventory, we're selling it, we're getting good market acceptance on it, yes.

You referred to the increase in Sarbanes-Oxley cost, basically, we can broadly define that as the cost of being a public company, were exceeding your revenue growth. Can you give an estimate of what your annual costs of being a public company are? Is it $1 million, $2 million? What do you think the costs are with the variety of compliance items you have to do? Not just Sarbanes-Oxley, but just, you know, you have to have a public company audit and a variety of other things.

It's less than a million dollars.

I would say three-quarters of a million is a round number.

A lot of money. Yeah, 30-some odd percent -- 250 K of that is coming out of your pocket, Richard.

Andy, I'm well aware of it.

Okay. Can you give the depreciation and amortization? You know, the noncash items, so we can calculate EBITDA for the quarter?

I just did, but I'll do it again.

Oh, I'm sorry. I missed that.

For the quarter, depreciation was $428,216, and amortization was $138,957.

I'll back out of the queue. I'm sure, well, I'm not sure, let's hope some others might be here.

Go ahead and finish your questions, Andy, while you're at it.

All right.

It's okay, you can finish them.

Did you buy any stock during the quarter?

Yeah, 10,000 shares.

Putting your outstanding at around where?

3 million,730.

Great. That's all for now. Thanks.

Okay.

There are no further questions at this time. Please proceed with your presentation or any closing remarks.

Thank you so much for listening to our call today. Certainly, I want to emphasize that though it's certainly not good news that we're losing a large customer, certainly, we have other plans, and we plan on moving forward and doing well next year, despite that.

So, thank you for your support, and we look forward to speaking to you with our year end results early next year.

Ladies and gentlemen, that concludes your conference call for today. We thank you for your participation and ask that you please disconnect your lines at this time.