P&F Industries Inc (PFIN) 2004 Q1 法說會逐字稿

Welcome to the P&F Industries first-quarter conference call. (OPERATOR INSTRUCTIONS). I would now like to turn the conference over to Jody Burfening. Ma'am, please go ahead.

Thank you, operator. Good morning and welcome the P&F Industries first-quarter 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 would like to remind you that any forward-looking statements made during this call, including those related to the Company's performance for the 2004 fiscal year, are based upon the Company's historical performance and current plans, estimates and expectations. The 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 2004 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 on which they are made, and the Company undertakes no obligation to update publicly or revise any forward-looking statements whether as a result of new information, further developments or otherwise.

With that, I would now like to turn the call over to Richard. Richard?

Thank you, Jody, and good morning, everybody, and thank you for joining us this morning.

In the first quarter of 2004, overall revenues increased .5 percent, $19.6 million with revenue increases at Countrywide Hardware, Green Manufacturing and Embassy Industries offsetting Florida Pneumatic's expected revenue decrease due to its major customer loss mentioned in last quarter's conference call. Also as expected, net income for the quarter decreased 59.9 percent to $236,566 or 7 cents per diluted share primarily as a result of this revenue decrease at Florida Pneumatic.

Before I take you through a more detailed look at the operations of each of our four business units for those first-time callers we have, I would like to just tell you briefly about each of our companies. Firstly, Florida Pneumatic manufacturing is primarily engaged in the importing or manufacturing of approximately 50 types of pneumatic hand tools. Our Countrywide division imports and manufactures hardware products for items such as doors, windows, and fences, as well as other general hardware products. Cross Countrywide is comprised of Nationwide Industries and Franklin Manufacturing.

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

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

Now I will review the quarterly performance of each of the business units. Firstly, Florida Pneumatic accounted for 48 percent of our overall revenues for the first quarter. In this quarter, Florida's revenues decreased 8.5 percent primarily due to the loss of that major customer mentioned earlier, lower base retail sales and promotions in addition to lower comparative sales at our Berkeley Tool and Filter divisions.

Gross profit at Florida Pneumatic decreased 4.5 percent to 32.4 percent due to the loss of a major customer I mentioned earlier again, which had higher than average margins and the strengthening of the Japanese Yen in relation to the U.S. dollar. However, productivity improvements and concessions from suppliers helped to partially offset these negative trends. Of course, Florida Pneumatic's results for the quarter are disappointing, but this was anticipated due to customer loss and the timing of the major retail promotions that we knew about.

Irrespective of this, we have begun various initiatives such as productivity improvements and the development of other new products to help us recover from this slow start in 2004. These efforts along with the improving overall economy should strengthen results going forward.

Also, I want to mention that we were especially pleased by the 324 percent growth in the automotive aftermarket channel which we experienced when compared back to 2003 first quarter. We expect sales to remain strong in this category for the entire year.

Our Countrywide division accounted for 23 percent of revenues for the quarter. Countrywide's first-quarter revenues rose 5.7 percent, due primarily to continued growth in the fencing products line. This was offset by weaker OEM and patio sales in Nationwide, as well as a slight revenue decrease at Franklin as one major customer reduced its orders and following their plans to reduce their inventory levels. However, gross profit at Countrywide improved by 2.6 percentage points due to a more favorable mix and cost savings and material purchases and labor productivity.

As mentioned in our press release, both Nationwide and Franklin began raising customer prices during the quarter to help offset increases in the cost of steel and products predominately made of steel. We expect that this measure will substantially mitigate our current cost increases.

Our Green manufacturing subsidiary accounted for approximately 60 percent of revenues for the quarter. First-quarter revenues rose 9 percent resulting primarily from higher cylinder sales, which reflect the completion of the first 12 months of selling into the log splitter market that we embarked on last year. Also, contributing to the revenue increase were higher sales of the agricultural product line as a major customer substantially increased its export business. Offsetting these gains, however, was a decrease in sales in the access product line as compared to a very strong first quarter of 2003.

Our gross profit margins at Green increased 3/10 of 1 percent to 7.7 percent, primarily due to increased sales which, of course, increased our coverage of fixed expenses. However, during the first quarter, Green also experienced increases in the price of steel which had a negative impact on our results. Consequently we have raised prices at Green 3.8 percent in April, and we expect that this change will offset the effect of product cost increases to date.

So all-in-all, Green did better than expected this quarter, and we are certainly pleased with the Company's continued turnaround, especially as we continue to approach sales levels that typically generate a modest profit for us.

And lastly, Embassy Industries accounted for approximately 13 percent of sales for the quarter. Embassy's revenues increased 23.4 percent due to increased boiler and commercial heating sales, as well as improved baseboard and radian sales -- the results are strong housing starts in our markets. Gross margins for Embassy decreased 8/10 of a percentage point to 29.1 percent due to the weakening dollar in relation to the Euro, which lowered margins on our radian products and an increase in boiler sales, which have lower than average margins for the year.

We're excited by the penetration our boilers have made in the multiunit construction market as strong sales of our new boiler products continue. Of course, Embassy, like our other companies, began to experience increases in the cost of steel as well. Although this impact was immaterial for the quarter, we expect that the higher costs would eventually have a significant impact on margins, and therefore, we raised prices up to 10 percent beginning in the second quarter of this year.

Now I would like to turn the call over Joe Molino who will share additional insights into the results. Joe?

With respect to Florida Pneumatic, I would like to reiterate the results for the first quarter and the projected second quarter could be misleading. Certainly the major customer loss is a disappointment and a contributing factor; however, we fully expect that for the full year sales will be the same or higher in 2003 at this subsidiary. This is based on product introduction schedules and promotional commitments already in place and approved by major customers. Although we do not typically share our sales projections that far out for any of our businesses, we felt in light of the unusual short-term results this was warranted.

Countrywide Hardware continues to perform well, primarily driven by Nationwide's fencing business, which continued to add customers and products. Although its patio and OEM divisions have been lagging, we recently hired a high-level sales executive to revive these products and markets and are optimistic that with additional marketing and product development support these product lines can grow also.

In addition, later in the year, we expect to launch a completely new product line in a new market. We are very excited about this as this new market appears to have characteristics similar to those of the fencing market that we have become so dominant in. Finally, beginning in the second quarter, we will begin to expense tangible benefits from the new co-sourcing arrangement between Franklin and Nationwide as these orders are now coming into the inventory.

The story behind the numbers at Green Manufacturing are of a very real turnaround in the market for all of the Company's products. Unfortunately, it appears that just as we have become optimistic about seeing profitable operations in the near-term, major steel prices have hit us and mitigated to a great extent additional profits that would have fallen to the bottom line as a result of the increases in revenues.

As Richard has noted, we have in turn raised prices to customers as have our competitors. However, we have some concern that the price increases may continue for sometime, and we may be forced to raise prices again. Although our competitors share this problem, it is possible that at some point demand may suffer.

Embassy Industries has also begun a promising turnaround in its operations. All major categories of product showed improvement over 2003 as the result of a 15.9 percent increase in housing starts in the Northeast above the 2003 levels. What is most promising, however, is the 180 percent growth in boiler sales over the first quarter of 2003. We believe this is the result of our hard work during the last several years educating the market about the benefits of our compact value-priced product. We are currently developing an even more efficient version for introduction in the near future. In the interim, we expect boiler sales to remain strong as wholesalers and customers gain some experience with our new product.

Consolidated SG&A grew 3.7 percent for the quarter, which, of course, was greater than the increase in revenues. The primary reason for the increase was higher personnel costs at Nationwide due to increases in staff and compensation levels, as well as due to increases related to additional reporting and control requirements and professional fees at the corporate level. Interest expense decreased from 187,000 to 123,000 due to the decrease in average borrowings from the year earlier period.

Other items affecting cash flow were depreciation and amortization, which were 435,000 and 136,000 respectively for the quarter. In addition, capital expenditures were $226,000.

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

Thank you, Joe. Now I would like to present what we would expect from each of our subsidiaries in the second quarter of this year. We expect overall results for the second quarter of 2004 to be weaker than the prior year's comparable period. Sales in our Florida Pneumatic subsidiary are expected to decrease 25 to 30 percent due to the timing of promotional sales and the phase-out of a major customer. Sales at Countrywide are expected to increase 10 to 15 percent as Nationwide's fencing division continues to grow, and Franklin anticipates receiving a major onetime order from a large customer.

Sales at Green are also expected to increase 15 to 20 percent because as the improvements in the market for both cylinders and access equipment continues. In addition, sales at Green are expected to benefit from the contribution of several cylinder customers brought on during the latter part of last year. Sales at Embassy are expected to increase 5 to 10 percent as well, primarily reflecting the strengthening of the overall market for baseboard and commercial heating products.

Overall our gross profit margins are expected to range from 31 to 32 percent. Our selling general and administrative expenses also expected to increase a little less than 5 percent from the year ago period due to anticipated increased warranty costs at Florida Pneumatic from a particular customer and additional compensation of staffing costs at Nationwide.

Interest expense is expected to decrease about 25 percent due to the decrease in our average borrowings, and lastly, our overall profit is expected to decrease between 40 and 50 percent in comparison with the second quarter of 2003.

Once again like Joe, I would like to stress that our outlook for the year is better than the first half would indicate. We have several large promotions already scheduled with several of our customers, and we believe that many of our marketing and development activities will come to fruition as the year progresses. As always, we will do whatever we can to improve our situation, do prudent cost-setting measures, as well as development of other new products.

Thank you for your participation on the conference call today, and I would like to now hand the call over to any questions you may have.

(OPERATOR INSTRUCTIONS). Andrew Shapiro.

Good morning. A few questions. First, Joe, in trying to calculate out your working capital numbers and issues, it looks as if that the amount of inventory you guys are carrying, your turns, have improved many quarters now in a row, and I am wondering is that a particular trend? Are you doing something different in working capital? Is it an aberration and numbers would be higher or due to Nationwide, what is the --?

Let me address it each subsidiary. That is true. At Florida Pneumatic, I would say we were carrying quite a bit of inventory related to Granger, which required a high level of inventory due to needing to deliver on a very short window. So other things being equal, without that customer, the turns improved.

Secondarily, we do have a constant program of attempting to improve turns in general, and thirdly, we have been shipping a lot more product that we have made internally. Our turns on U.S.-made product are better obviously than our turns on imported products. So that is what is going on at Florida.

Nationwide, since we bought the company, we have had a major effort underway to improve turns, and we are still working that down. In fact, I believe the company is probably -- and I am going to estimate this number -- maybe 50 percent larger than it was when we bought it, but I think we are working off the same levels of inventory. So we feel pretty good about what we have been able to do there, and that is through a concerted effort of the CFO down there.

At Embassy and Green, I think just the fact that revenues are trending up is just improving that situation. I don't think -- certainly we work to keep the inventories down, but I think the results there are just frankly from working at a higher level where we get a little better turn. But there has not really been any particular program to reduce inventories there.

So no noticeable multi-quarter trend?

Yes. No, it has definitely been -- I would say in terms of the multi-quarter effect, it is probably driven more by Nationwide in Florida.

Foreign currency, your forward contracts, what do you have in place I guess relative to last year and present value, and has your view on how you approach this changed as a result of the volatility going on in the currency markets?

The Yen -- you are referring to the Yen, Andrew?

Primarily the Yen. I think that is still your biggest currency exposure. Although I know the Euro impacts one of your smaller divisions. (multiple speakers) Taiwan dollar or something.

Well, we are tied to the Euro a little bit. We are tied to the Taiwanese dollar and, of course, the Yen, which is the biggest part. The Yen, we are essentially covered at this time for the entire year, perhaps maybe up until December. Our philosophy has always been to cover up to know more than six months ahead, and we are essentially at that point right now, and we have done it with pretty favorable numbers. I think we are going to have a good -- I know we will have a good impact from the Yen this year.

As I say, we are pretty much I would say over 90 percent covered already for the year for this year in Yen. And to Euro, we do not hedge. But both are working in our favor as of this time.

I will ask one more question. I do have some more. Let me back in the queue a little later on here, and I will hit the button again. Your April price increases, I think most of the divisions you have cited and put in price increases, it looks like post quarter-end, are these price increases so far taking -- and do you feel now that we are near the middle of May, have them in place that you are keeping your marketshare?

I would say it is too early to tell. But I would say also in each of our industries all of our competitors have done the same as we have, so we would not expect any changes in that regard.

I would agree. Every price increase we have made has stuck, and I don't think we have increased prices anywhere where we were the only ones. So we fully expected the increases to stick.

I will backout out of the queue, but I have more questions, and I will be re-enter. So please come back to us.

Chris Ciper (ph), Bridgestone Corporation.

Good morning. I had a question for you guys on customer concentration. I noticed if you go through your filings, it looks like about 40 percent of your revenue is coming from two customers. It further appears that neither one of those two customers does business with either your Green subsidiary or your Embassy subsidiary. So if you backout those two divisions, which basically don't make any money, you basically have two customers that are 54 percent of your business. And the customer concentration, if you go into the Florida Pneumatic, is huge; it is like 73 percent. Could you guys talk a little bit about what you doing to diversify that risk because I see that as being one of the primary risks in front of the business?

Well, I would say firstly we have had this distorted percentage of concentration for as long as I can remember almost in the business, and we have had a -- we look at it differently. We look at it as a positive. We have been doing business with Sears for well over 20 years at this time. Our business is only growing with them. And not only in our own product lines, but they seem to call us for other related products along the way. So we have a very good and strong relationship with the people at Sears, and the same thing I would say, which is a newer relationship with Home Depot. We are probably selling them -- I am going to guess off the top of my head -- five, six, seven years and perhaps eight years.

And there, too, we are a vendor. We have received awards from them. We are a vendor of excellence. We get calls from them to try to get them into other products. So we have a very strong relationship with both of them.

But having said that, we are always looking to expand and get into other areas. It is just a paradox that there are some big companies out there and we do business. The choice of doing business with them or not doing business with them, I think we would prefer to do business with them, and the concentration is the concentration. We cannot really help it. Sometimes it's a little bit less than more depending on what goes on in some of our other subsidiaries. But we are certainly aware of the problem, but we do not consider it a negative to be honest with you.

Joe, I don't know what you want to add.

I would just add a couple of things. One of the best things we can do to defend our position there is to continue to develop new products. As we have indicated in an earlier call, and I guess this call as well, we have really an unprecedented level of new products coming onstream at Florida Pneumatic, and several of these are going to be patented products. They do not exist anywhere. We will be the only ones selling them.

And to the extent there that the buyers that these customers are excited about these products, we are the only game in town. So that helps defend our position, but we need to continue to do that. And I think we've got a very concerted effort to keep that flow of new products going.

Secondly, just to reiterate it, at Sears we do have a long relationship. But our relationship there is actually kind of special in that we are very involved and have been very involved with various levels of that organization, not just simply the buyer. Our contacts and acquittanceships go way up into the organization, and we are also very involved in how they test products, not only our products but the competitors' products. In fact, in the last couple of years, both at Sears and Depot, we have been successful in actually bumping out other competitors that were sharing some shelf space with us. So we are actually becoming a little more important to them, not less important.

And then lastly, we have done some work with some outside consultants to evaluate this very situation, and we have got a number of strong recommendations from them on programs to put in place to attempt to defend our position and solidify our position further. We are just working through that information right now, but certainly the fact that these are high concentrations is not lost on us. But it is the nature of the business.

And I will say one last thing, since we have got this shelf space, any new product that our sources in Asia develop has immediately a ready opportunity to show up on a shelf in the U.S.. That is something that is very valuable to people that are developing products over in Asia. If it is something new and interesting, we can get a meeting at Sears and Home Depot immediately, and it can be in there quite quickly. Where without those relationships, you cannot really get that big bang on one new invention if you have got to go to 100 small customers. So it is a double-edged sword, but we have been pretty successful at it.

Just to reiterate, it is a double-edged sword. We certainly are not discounting the fact that we do have a high concentration with two customers, but we are sure happy we have them and benefiting from it, and we think we have good positions there. But we are looking always at how to keep our business growing there, but grow our other sides of our business to reduce the concentration if we can.

It seems like that's an important initiative. If you look at this quarter, you lost a 5 percent customer, and your net income is off by 59 percent. It is probably not all related to that customer, but it is a huge impact.

No, it is really not related to that at all to be honest with you.

Can you talk a little bit about Green? And I have some of the same questions on Embassy. Both those divisions, you look at them, you wonder why you are in that business. They have not had great returns over the last eight quarters. The Green, if you look at the last eight quarters, -4 percent operating profit out of the division. Very low gross profit. Extremely people intensive. If you add up those divisions together, they are two-thirds of your employee base. Revenue per employee is very low. You have a fair number of assets invested in those two things, and they don't produce anything.

What is your long-term outlook that makes you say these are great businesses to be in. They are growing. We see the long-term profitability picture there. I guess the question is, how good can it get?

Let's just backtrack a little bit. With Green, as recently as a few years ago, that business was quite profitable for us. We went through a major recession in that market, something like a 55 percent drop in that market. Unprecedented in the history of it.

Secondly, we lost a 25 percent account, and although those accounts are not easy to come by, we have been very successful in clawing our way back here in the last couple of years as you see by the improvement in the topline. So right now we do not see any let up in their ability to grow that business for the foreseeable future. So I think we are going to stay the course, and that revenue is going to drop a lot of profit to the bottom line. Notwithstanding this short-term issue with materials, there is a lot of upside for profitability given every additional dollar in revenue growth, given where Green is functioning in relation to its full capacity.

Embassy, same story. A couple of years ago it was a very profitable business. Northeast housing starts took a bit of a beating, and now it is back. So again, I think it would be premature to do anything other than write it out right now as these are both are on a pretty good trajectory.

So whether in the long run, they fit in with the complete strategic plan, I think that remains to be seen. But for right now, it does not make sense to do anything other than to continue where we are going because the growth prospects in the short-term are pretty good.

I will just say it -- you make a very good point having assets employed and not perhaps getting the return. It is something that we looked at and anguished over for quite a while. But at this point, I think we have lived through the worst of both of those companies, and times seem to be working in our favor, economic times. I believe that we are going to see improvement as Joe has alluded to. And as time goes on, we will reassess. But as of now, I think we have lived through the worst. But you make a very good point. That certainly does not go on noticed by us.

Let me ask you a question in terms of the Florida Pneumatic gross profit margin. You mentioned that you think you're going to be back up to the revenue levels where you were at last year. Do you think we are going to see a big decline here in gross profit margin, or do you think we are going to see it where was at last year as well?

You're not going to see a decline in gross profit margin from what you have got in the first quarter. Maybe you are implying that to get those additional sales in the second half, we are going to have to drop prices. That is really not what is happening. It is really a very unusual timing of promotions. I think we have got three major second-half promotions at one retailer and none in the first half. To everyone's knowledge, that has never happened before at that customer. It's just the yin and the yang of things.

Margins I think overall for the year will be worse than last year. Florida because the Yen is just stronger than it was a year ago. That is just the way it is. So I hope that answers --

Maybe I can be more clear. Last year you guys had roughly 34 percent gross profit margin to Florida Pneumatic. Would you expect that to continue this year?

No. I would not expect 34 percent.

What do you think it will come in at?

I will not project it past what we said for the second quarter. But it will not be as good as last year's. All you have to do is look at the Yen. As a proxy, simply look at the average Yen from one year to the next, and you will get a fair assessment of the impact on us. If you assume something like 10 million a year in Yen purchases, you can for yourself pretty much take a pretty good shot at what happens to Florida's margins.

Have you guys ever disclosed anything about your fencing business? You talk a lot about fencing and how excited you are about fencing. How big is that business?

How big is our fencing portion of Nationwide? It's probably about a $7 million business.

Okay. One final thing and then I am done. Inventory, I know the last call I mentioned that you had seen some improvement in inventory. I guess I have seen the same thing. The question is, how good can it get long-term? I would expect a business like yours to operate with something like 70 to 90 days worth of inventory. You guys are I think this quarter up at around 115 if you look at cost of goods sold as it relates to inventory. Is there an ability to get that number down to some number that is under 100 days at some point, or are you always going to be north of that number?

I think it is a function of the nature of the type of business that we do and the importing that we do. And the importing, clearly it is just a built-in lag time between order placement, shipment and order received. So I don't really think we are going to be able to get it down too much more than that. Actually I think we are doing really really well with those numbers, and the only reason we are at those numbers is because we are averaging the other companies what we manufacture. (multiple speakers)

The only thing I would add is, you have to remember with Sears and Home Depot we are essentially functioning as their warehouse. They are expecting that product to be there when they order it. If it is not there, we will get downgraded. And if you get below a certain bill rate, it does impact your ability to hold onto the account. So we would rather have another 10 or 20, 30 days of inventory than risk losing one of those guys. It is just not worth the risk.

So the 110 to 115, that might be about as good as it gets?

Yes. It could go the other way a little bit because again the built-in lag-time nature of the business.

To some extent, it is also one of the reasons that we defend our position there and keep them from thinking too much about doing things for themselves. We function and we perform that function for them.

(OPERATOR INSTRUCTIONS). Andrew Shapiro.

A few follow-ups if I could. You talked about how you were going to expect your Q2 to be weaker than prior year obviously because we have a hole from which to dig out of. Am I clear in understanding as you put the divisions here together, that while Q2 will be weaker than prior year, that the decline from prior year is already narrowing? And when you talk about by the end of the year you will be on a comparable run-rate, that is talking about a party sizable second half, am I correct?

Yes, you're absolutely correct.

You said one of the reasons is because of some introduction of new products. You used the word that I had not heard in my many years of owning the company that of the word patent. I was wondering historically have you had many patented products, and is this a new twist for the Company, or is just had not been mentioned in the past?

We have always had patents. Maybe perhaps we just have not mentioned them in the past. But we have had patents, many patents.

So what is being introduced now in terms of patented products and things is not some type of secular shift. It is just the standard pattern of your new product introduction activity.

I think that would Joe was alluding to is that some of these products that we are going to have patents in are going to be more meaningful, more significant to the overall scope of our business and the contribution of revenues and profits. We have had many patents in the past, but perhaps they get lost in the shuffle because they are not meaningful revenue generators for us. But the few that we have coming up in this is second half are going to be significantly more important to us. (multiple speakers)

-- expectations for these patented products and others?

Yes, we have higher expectations. I would also add that there are probably maybe also one more development level removed from prior new product introductions, which it tended to be a little bit more tweaks to existing products. We have a couple of real major, in my opinion anyway, major developed products that frankly we don't know if anybody else who is coming out with anything like it. So we think we are going to have a little bit of head start. I think eventually they will get copied, but I do not know that we have come up with anything that I can remember that is this far out ahead of the curve.

Do you expect thus higher than your historic margins from them?

Well, possibly. Since these are new items, I am not even sure the pricing has been 100 percent finalized. Frankly, since they are new under the sun, we are a little bit out there in terms of what the pricing should be. But we have got some comparisons. In some cases, they are substitute products for other things that are out there but just a lot better.

And these are products in which divisions?

Florida Pneumatic.

In Pneumatic. So then they would be products that you would be primarily putting through a Home Depot or a Sears then?

Actually it's across all the channels. We have got versions for each.

Okay. In the Green, having -- this other caller talked about Green and might not been here for the upcycle, then the downcycle. In the downcycle, the operating capacity at Green got down to 35 percent, and I think it was even down that low as only a few quarters ago. What would you say you are operating that factor capacity at in terms of overhead utilization these days? Is it over 50 percent yet?

Close to 50. Yes.

Okay. There is still a lot of absorption to be done?

Absolutely, and again I think unfortunately the improvement is getting lost a little bit with the material cost increases.

Right. In terms of your capital deployment, your debt levels are down at low levels relative to, again, our long history with the Company. You had talked on the last conference call of looking at a few acquisitional products, projects, and that was a higher priority than either additional debt paydown, which on a cost of capital basis we think is not the best use if you were to do that rather than buying back shares.

Where do you stand though in respect to the acquisitions? In what areas do you feel that you might be close in in terms of either another add-on or a bolt-on product or a new division?

As we say, we are always looking for acquisitions, Andrew. I cannot really go into specifics because we are not permitted to by law. But we are working on some things, and we have some hopeful good developments that we are working on. But this is where we are spending our time in the asset deployment area.

I would add this. If we did not feel we were making progress on that side, we would take a harder look at buying back the stock or a dividend or something like that. But I think we feel that we are, and until we feel that the progress is halted or we go the other way, I don't think we are going to consider those other options in the short run.

Yes. Frankly with the tax law changing, Richard, you having through the estate yourself a third of the Company, it is a whole lot more tax beneficial to take a dividend than a salary anyway.

Yes, that is true. Absolutely.

Hopefully you have the tax advisors engaged, and what makes sense for you similarly makes sense from a shareholder standpoint other than the high taxed ordinary salaried concept.

Right. Right, right.

Can you talk a little bit about the two new directors that were recently added to the board, some interesting backgrounds? How did they come into the confines of the board? Is it through independent search, social connection, and was there addition intended in the long run to be replacements as some people are going to be moving off the board, or is it a long-term basic expansion of the board into a larger size?

It was a combination of all those factors. Really with Sarbanes-Oxley and the new rules of the audit committees and independence of directors and all that stuff, we thought that we had to expand our board in order be able to accomplish those goals. So Jeff Franklin, who we just put on the board, is a CPA and an audit -- has that CPA audit background. So he was a very good guy for us to get to. We got to him through a recommendation of one of our board members and had many conversations with him and think he is a very good addition to our board, especially for the purposes that we need him for.

And the other fellow, Mitchell Solomon, has extensive importing experience and product development experience. In the areas that we are spending a large amount of time in, he has good knowledge and experience in those areas. So we thought he would be a good addition as well.

Right. Again, when he came on the board, you guys have bumped up two spots. Is it anticipated the board will stay at this level, or that it will grow back down a spot or two with some departures at all?

I would say over time it will go down. But there is no plans of it right now, but I would say over the next short-term I am sure things will -- you always -- we did it also because we wanted to be able to have a little bit of continuity as time went on because of the age of certain of our members and time allowed.

Okay. So you are anticipating some people are --?

Though I cannot pinpoint who or what, or when or where, but just the natural evolution of events.

It is not a planned -- we are bringing the board up to this higher level because we are going to have a few more standing committees, and this extra heft will be moving us forward?

Well, actually that is exactly what it is. We have to have, as I said, because of Sarbanes-Oxley, we had to have more committees and more formalities, and we need more members of the board to be able to do that so we did not put an unfair burden on the existing members.

Right. Okay. Is there anything other than the conference calls that you guys are contemplating with respect to Investor Relations activities because, again, with the stock at these levels, the cost of capital is quite high on the equity side. You don't have that kind of acquisition currency luxury for us.

Well, I mean there is nothing on the radar screen. I continue to field calls from various funds, and periodically if people have expressed an interest in meeting with us, we will meet with them. But we don't have any roadshow planned or anything like that.

So status quo on that part?

Yes.

Yes. And, of course, as the quarter goes on or as time goes on, we will reassess the price of stock, the use of our funds -- nothing is laid in cement. We are very flexible and fluid, and we will adjust accordingly.

As well as the Investor Relations program. If circumstances change, that can change as well.

Right. I think the key here is either that you guys find another acquisition to get a little bit more, we will call it, divisional cash flow to offset the increasing fixed corporate overhead of being a public company, or you consider your low debt level and your increased cash flow that has to be more aggressive on the buyback if you don't get an acquisition.

Very well said, and I agree with you wholeheartedly.

Thank you.

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

I would like to thank you all for joining us today, and we look forward to speaking to you with our next quarter as we discuss our second-quarter results and our third-quarter expectations. Have a nice day and enjoy the summer. Bye-bye.

This concludes today's teleconference. You may now disconnect.