P&F Industries Inc (PFIN) 2005 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the P&F Industries' first quarter 2005 financial results conference call. At this time, all participants are a listen-only mode. Following management's prepared remarks we'll hold a Q-and-A session. [OPERATOR INSTRUCTIONS] As a reminder, this conference is being recorded today, April 28, 2005. 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 first quarter earnings conference call. This is Jody Burfening of Lippert/Heilshorn & Associates. 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 fiscal 2005 are based upon the Company's historical performance and our 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 fiscal 2005 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. Good morning, Richard.

Good morning, Jody, and thank you so much, and thank you all for joining us this morning on our conference call for the first quarter of 2005. I am pleased to report that in this first quarter overall revenues increased 61.5% to $27.3 million from $16.9 million in the first quarter of 2004. Earnings from continuing operations for the first quarter increased by 174% to 1.1 million from 404,741 in the first quarter of 2004. Diluted earnings per share from continuing operations for the first quarter were $0.29 as compared to $0.11 for the first quarter of 2004. Inclusive of Green manufacturing's access equipment results for 2005, and Green's hydraulic, cylinder and access equipment results for 2004, net earnings for the first quarter increased 307.2%, from $963,404 or $0.25 per diluted share, compared to net earnings of 236,566 or $0.07 per diluted share for the quarter ended March 31, 2004.

Before I take you through more detailed look at the operations of each of our four business units, I'd like to review with you what each company does. Florida Pneumatic Manufacturing Corporation is primarily engaged in importing or manufacturing of approximately 50 types of pneumatic hand tools, as well as a broad line of security hardware products.

Countrywide Hardware imports and manufactures hardware products for items such as doors, windows and fences, as well as other general hardware items. Countrywide also imports and manufactures staircase components in kitchen and bath hardware and accessories. Countrywide is comprised of Nationwide Industries and Woodmark International.

Embassy Industries 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.

And lastly, Green Manufacturing was formerly engaged in the manufacture, development and sale of custom designed welded hydraulic cylinders used in heavy industrial and mobile equipment. However, with the disposition of these assets associated with the cylinder business in December 2004, and the disposition of the access product line that included a line of access equipment with a petro chemical industry in February of this year, the remainder of Green's products include merely a post -- a line of post hole digging equipment for the agricultural industry.

Now, I'll take a moment to review the quarterly performance at each of our units. But before I start let me just note that, Florida Pneumatic, as stated in our press release, effective March 31, 2005, Franklin Manufacturing was merged into our Florida Pneumatic subsidiary from Countrywide Hardware. Franklin's first quarter sales of $1.2 million in operating results are included in Florida Pneumatic figures for the quarter and for the comparable quarter from last year. Franklin sales for 2004 were also $1.2 million. The Franklin operation, which had been located in Farmingdale, New York, is now located in Florida Pneumatic's Jupiter facility.

Now, on to the numbers. Florida Pneumatic accounts up to 37% of consolidated revenues for the first quarter. Revenues including those of Franklin Manufacturing for both periods, decreased by 4.9% from 10.6 million in the first quarter of 2004 to 10.1 million in the first quarter of 2005, due to delays in the launching of the large promotion of a significant customer and a further reductions of sales in the first quarters this year versus the first quarter of last year to a previously significant customer. Although this customer had been lost at the end of 2003, there have been several months of residual sales in the first quarter of 2004. This was partially offset by an increase in base sales including new product sales of $900,000. Gross profit at Florida Pneumatic decreased from -- to 31.1% from 31.9% due to the strengthening of the Japanese yen and the Taiwanese dollar. This was partially offset by a more favorable product mix.

Countrywide Hardware accounted for 52% of consolidated revenues for the quarter. Revenues for the first quarter of this year increased by 329% from 3.3 million to 14.2 million, due primarily to the inclusion of Woodmark International revenues of $10 million. Woodmark sales have remained strong since we acquired the Company in June of last year. Gross profit at Countrywide decreased from 36.9% to 32.2%, but with a significant increase in revenues, due primarily to the inclusion of Woodmark lower average margins. Countrywide and Woodmark have had to sustain some cost increases from Asian suppliers, due to increases in the cost of metals, somewhat offset at Nationwide by the continued shift to lower cost suppliers for some products. OEM in patio hardware sales at Nationwide were up 43.5% and 12.8% respectively. Reflecting new customers in OEM and incremental patio hardware sales due to reconstruction following the hurricanes in Florida last year.

Embassy accounted for approximately 9% of revenues for the quarter. Embassy's revenues for the first quarter of this year were essentially flat when compared to the prior year at $2.5 million. Embassy raised prices late in the first quarter of 2005, in order to return to the margin levels that had been reduced by material cost increases sustained in the fourth quarter of last year. These material cost increases were the primary reason that gross margins at Embassy decreased from 29.1% in the first quarter of 2004 to 25.6% for the first quarter of 2005. Although sales of commercial products and boiler sales were weak for this quarter, this was offset by strong, standard baseboard sales as housing starts continued their strength in the primary market for our baseboards to the northeast region.

And lastly, Green Manufacturing subsidiary accounted for approximately 2% of consolidated revenues for the quarter. Revenues from Green Manufacturing continuing operations which only include the agricultural products division increased 17.1% to $525,595 from $448,843 in the first quarter of 2004. This was primarily due to the addition of a new customer at the end of 2004. Margins have decreased from 23.2% in the first quarter of 2004 -- 2005, excuse me, to 17.1%, due to material cost increases, increased overhead and an unfavorable product mix.

Please note that the consolidated financial statements have been reclassified to reflect the loss from continued operations of Green Manufacturing's access (inaudible) division. Which resulted from the disposition of certain assets in February 2005 to a nonaffiliated third party. Net of tax benefits, losses from discontinued operations for the quarter were approximately 145,000 including a net gain of approximately $71,000 in the sale of theses assets. Proceeds in the sale of these assets were used to pay down debt. Disposition was part of a strategy to focus management's resources on other segments of our business in order to add greater shareholder value.

I apologize for throwing so many numbers at you in such a confusing manner, but hopefully Jo Molino, and his presentation now will be able to clarify that as we talk about our first quarter. Go ahead, Joe.

Thank you, Richard. As Richard said, I just wanted to add a little clarification to some of these numbers and some more background around them.

The discontinued operations for the first quarter includes a little over one month of operations for the access business along with the gain on the sale of this segment, as Richard noted. In addition, it includes some expenses related to the wrapping up of our involvement in the cylinder operation. With regard to the comparative balance sheet, all assets related to the access division are shown as one line in both the December 31, 2004 balance sheet and the 3/30 -- and the March 31 balance sheet. Just by way of reminder, there are no cylinder assets included either in the December 31 balance sheet or the March 31 balance sheet.

As we noted in the, excuse me, as we noted in the release, Franklin Manufacturing was merged into Florida Pneumatic on March 31, 2005. There were several strong arguments for this move. First, Franklin and Florida Pneumatics share a customer that is Florida Pneumatics largest -- excuse me, that is Franklin's Manufacturing's largest and Florida Pneumatic's second largest, that being Home Depot. Prior to this change, we had to satisfy Home Depot's very unique shipping requirements from two locations. It will be much more efficient for Franklin to leverage off of Florida Pneumatic's operation in this regard.

Second, Florida Pneumatic's extensive experience in general in warehousing and shipping to customers in the resale sector makes the move a strong operational fit for Franklin.

Third, both Franklin manufacturing and Florida Pneumatic share a large retail orientation from a marketing perspective. Florida Pneumatic has a sizeable group of people dedicated to serving this market, including reps, customer service personnel, internal sales specialists and outside salesmen. Utilizing this organization will enhance Franklin's opportunity to service its current customers, and best of all, have greater growth opportunity.

Once again, Florida Pneumatic's first quarter will not be at all indicative of its full-year results. Due to the timing of several large promotions, Florida Pneumatic's second half will be much stronger than its first half, much like in 2004. I want you to also bear in mind that Franklin is also included in these amounts. Franklin's 2004 sales were approximately 4.5 million. It's sales are generally not seasonal.

Certainly, we continue to be pleased with the Countrywide group, both Nationwide and Woodmark. The fencing product line at Nationwide continues to flourish, but we are also excited about the revival of our OEM business, which we believe will make a significant impact this year as well. This segment has been in decline for several years, and has responded positively to our renewed emphasis.

Woodmark has been all we had hoped for overall. We are especially pleased with the upside potential in the Tampa location, which continue to take market share as it services customers up to 400 miles away in all directions. This is comforting as this location's approach is part of a model for our geographic expansion. With regard to this, we've signed a lease on a facility in San Diego County in California and have hired our first two employees. We expect to begin regular shipments from this location of both, Nationwide and Woodmark products in the third quarter.

SG&A for the quarter grew by 1.4 million, far and away the largest part of this increase was the addition of Woodmark. However, on a percentage basis we continue to gain efficiency as this figure went from 27.7% in Q1 of '04, to 22.4% in Q1 of '05.

Other items of interest for the quarter are interest expense which increased from 122,000 to 427,000, due primarily to the amounts borrowed under our term loans issued to finance the Woodmark acquisition, as well as the issuance and assumption of certain notes also related to that deal. Other items affecting cash flow were depreciation and amortization which were 331,000 and 276,000 respectively. In addition, capital expenditures were $175,000 for the quarter.

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

Thank you, Joe. And now I would like to present to you our expectations for the second quarter for each of our subsidiaries.

We anticipate results for the second quarter of 2005 to be stronger than last year's comparable period. Revenues of Florida Pneumatic are expected to increase by 25 to 30%, due to the timing of certain promotional sales and the continued impact of new product introductions.

We anticipate sales at Countrywide to increase considerably by about 150 to 180% as Nationwide fencing division's growth continues and due to the inclusion of Woodmark. We anticipate sales at Embassy to increase only slightly as many customers bought a significant amount of products ahead of the last -- of the first -- of the late first quarter price increases. We also anticipate sales at Green to increase by 10 to 15% due to customers acquired -- due to customers acquired late in 2004.

We expect gross margins for the second quarter to range from 31 to 32%. Although selling, general and administrative expenses are expected to increase by 35 to 40%, compared to the same quarter in 2004, (indiscernible) with the addition of Woodmark. As a percentage of revenue, our SG&A will decrease from over 27% to approximately 23%. Interest expense is expected to increase by 240%, due to the increase in average borrowings from the Woodmark acquisition and an increase in the average borrowing rate. As a result, we anticipate earnings from continuing operations to increase between 65 and 85% in the second quarter of 2005.

I'd like to thank you all for your participation today, and now we are available to answer any questions any of you may have.

[OPERATOR INSTRUCTIONS] One moment please for our first response. Our first questions comes from Andrew Shapiro with Lawndale Capital Management.

Good morning. I have a few questions and I'll back out of the question queue. I want to give other people a chance. With respect to Countrywide, Woodmark, which now looks like it is the larger portion of your revenue. Two questions. You've been making really good penetration on the fencing side. It's been pretty strong. Do you have a feel to what extent to which your fencing penetration has more to go, or is this now more of a stable point that we're at?

I would say that, Andrew, we've got some legs left there. As I mentioned, I'm sure a few times, Nationwide and fencing in particular strength was the southeast. We have certainly pushed west a little bit, simply with the addition of woodmark in general. But we're still not a real big player on the west coast, which is a huge market, as you can imagine. And really in general, the rest of the country. We still think we have some opportunity in the northeast, the midwest, the northwest. So, I think if we can execute on our geographical expansion strategy, there is quite a bit of opportunity left for us.

Okay. And we've had -- the Company's had good results in the patio side because of the rebuild from the hurricanes of last fall. We're now in May of this year. Do you feel that upswing or that demand driver is now behind us and we're back no normal business?

I'd say, yes, primarily. There may be a little bit of a residual there, but I'd say we're probably past the bulk of the uptick.

What initiatives do you have underway to branch to the, we'll call it, more of a renovation market at Countrywide from a (inaudible) allocation into the new build market?

Well, I guess I'll talk about each of the businesses in general. Our OEM thrust at Nationwide covers both new construction and renovation. It is not particularly driven at one or the other. But we've got opportunity with certain OEM's that we're pursuing where we feel we've got something to offer.

At Woodmark, the sales of their parts is generally a new home phenomenon. However, the sales of the new iron ballaster as a replacement for wooden ballasters is a renovation project. So, we have not generally emphasized that prior to now. The bigger market is certainly new home construction, because you've got the whole -- the whole product line there, the stairs and the rails and all of that. The replacing the ballaster is a much smaller piece of the whole system. But obviously a much larger installed base. So, we do have plans to try to reemphasize that.

And then lastly at Woodmark, the kitchen and bath product line is primarily a remodeling model. And we are -- now that we've kind of gotten our hands around the business, we're just now taking a look at our strategic options there. And tactical moves to try to reenergize that part of the business, which has been very steady for many years for Woodmark. But it's kind of been overshadowed in the last five or so by the growth of the stair business. But now that we've got the P&F team and the folks in Tampa to be involved, we'll throw a number of people together and try to reenergize that group as well.

So, certainly we're working on that. We've just have had other priorities. Not the least of which is integrating Woodmark in general. Because it is substantial. And as you said, it's the biggest piece of the profit at this point.

A last question of Countrywide, Woodmark, and then I'll back out into the queue. With Woodmark's acquisition, that clearly would dilute the margins down to the main and lower margins. I wanted to get a feel for what's been happening in the original Countrywide margins. Are those margins stable? Seeing pressure? Or have they been improving?

I would say stable, but -- for two reasons. We certainly are seeing pressure. The metal prices increasing has hurt us. There's a little bit of customer pressure. However, we've mitigated that completely with the move to less expensive suppliers. And that does continue. And that will continue probably throughout this year. I would say if we go beyond that and prices continue to get compressed and the cost of metal continues to rise, I don't think we'll be able to sustain the status quo as far as margins are concerned.

Great.

I'll just mention one other thing, although Joe keeps mentioning lower cost suppliers, we're not compromising our quality in doing that. We have the same quality that we've had before, just at a better pricing structure.

Back into queue. Please, come back to me because we have some more questions.

[OPERATOR INSTRUCTIONS] Mr. Shapiro, your line is open.

Okay. No one else in the queue. If I could ask a few questions about Florida. You talked On the prior calls about new product rollouts in '05. Have those product rollouts begun? If not, what's the timing for them and which ones do you have the highest expectations for?

The new product rollouts, as we said in the release, have begun. They are throughout the year. There is no one killer rollout, so to speak. It's a lot of smaller ones. So we're not -- I don't think you're going to see any big jump in sales one quarter because we introduced something on a large scale. But having said that, the introductions will continue throughout the year at a very steady pace.

When was this Franklin move made? And should we anticipate any cost saving that come from this? Or is it just more of a tactical revenue enhancement?

The move was made, according to the press release, the end of the first quarter, March 31, the move was officially made.

Was it effective by then or are people just moving throughout all of March?

Yes. No. It's affective by then. Really, it's -- really it's more of an operating efficiency more than anything else. That we did it, but we didn't do it so much for a cost saving but more for an operations -- operating efficiency.

I would say that, just to add to that, that there'll be some savings. Whether it's going to be particularly noticeable in the bottom line given all of the other events, I don't know. But certainly it was a positive move on the cost side. And I would say you'll have a slight improvement in results in Florida as a result, and probably a reduction in improvement -- excuse me, a reduction in results at Embassy in general. As Franklin was -- even though it wasn't part of Embassy legally, in the last two years, it was certainly absorbing some of Embassy's overhead, and even though they'll make some adjustment. Not all of that loss absorption can be regained. But net to P&F, it's a positive -- certainly more than 100,000, probably less than $200,000 on an annual basis.

It creates excess capacity. Franklin was in New York, co-habitating there with Embassy. It's created some excess capacity. Is that excess capacity creation operationally and facility-wise and all of that efficient that you have any intended dispositions or other of value on locking on that real estate?

Certainly it's a valuable piece of real estate. We're looking at trying to lease out that additional space. It's certainly a little more than Embassy needs at the moment. But we're evaluating that.

Green reported individually here in your release. And you talked about it. It is merely one little component now. If I recall, isn't it going into one of the two segments? I can't recall which one it was. And when does that, I guess, start being reported that way?

Well, Green is functioning by itself out in Ohio at this point. It's really business as usual. However, we're certainly evaluating strongly moving it into one of our operations, namely the Tampa operation of Nationwide, because it does have a little bit of a marketing channel overlap there. We have not made that final determination yet. We're still exploring all of our options there. But right now that would be the longer term plan.

Okay. Do you have a -- I don't know if I picked it up in your script or not. But, the depreciation and amortization numbers, so we can calculate EBITDA for the first quarter?

Yes, at the end of my comments, I indicated depreciation was 331,000 and amortization was 276. So, certainly somebody could calculate EBITDA.

I got it now. I just wanted to catch that. I'll back out of the queue again. (inaudible) Maybe someone has warmed up. If not, I do have some more. Thanks.

[OPERATOR INSTRUCTIONS. Our next question comes from John Goldberg, Goldberg Advisors.

Hi, could you talk a little bit about any opportunities or any developments at Sears?

Sure. Sears has indicated to the world that they will be converting a number of K-Mart stores to Sears stores. The number we've heard is about 400. We have got confirmation that those 400 stores will carry Sears Craftsman tools, and that between now and the end of the year, approximately 100 of those K-Mart stores will be converted. We don't have a schedule from them on conversion. But certainly we have some sense of what it would take to stock those stores. And maybe a rough idea of follow on sales. It's very difficult to know what incremental sales will be generated. Not knowing exactly what stores, what locations. But certainly it is a positive development on that side.

But having said that, there is certainly a lot of internal structural changes going on as the two companies sort out who's managing what and what direction they are going to go. So it is a little bit of a double-edged sword in that we know we're going to pick up some business. On the other hand, I think the transaction has slowed down their -- many of their initiatives.

How many Sears stores are you in right now?

All 850.

So what is your average annual sale per store per store, per Sears location?

Off the top of my head, I don't know the answer. But I would say -- let's do some quick math here.

You could not really make an assessment like that. Because some stores are farm stores, some stores are smaller stores, some stores are bigger stores. They don't really do it that way. We really couldn't give you -- we would just be taking a gross number and dividing it which would be really a meaningless number.

You're looking at 15 or 20 million a year in revenue and 850 stores. But I'm not sure what that means, as Richard said, it's really a tiered situation. I'm sure the top couple of 100 stores probably drive half the revenue.

So the stores that are going to be converted, the 100 this year, and the 400 overall, those would be considered large stores relative to the average Sears?

I guess whatever the typical size of a K-Mart is. I'm assuming they'll be able to carry the full line of Craftsman tools. Honestly, I don't know that.

It's really too early to tell. They have not told the world what they are going to do. Are they going to be more soft goods driven, more hard goods driven. They really haven't indicated to their suppliers yet what they are going to do yet. So we couldn't really give you -- the only thing we can tell you, it is going to be a plus for us. That's the only thing we can say.

All right. Thank you.

You're welcome.

We have a follow-up response from Mr. Shapiro.

Okay. A few questions left. How big is your automotive segment in your mix in Florida Pneumatics?

Oh, somewhere between 1.5 million and 2 million on an analyzed basis.

And, I just got the proxy and have been reading through it. Also the 10-K described it. There's some amounts of compensation that are -- I'm pleased that they are performance-based and a percent of the profits have improved, et cetera. But there's a growing amount of the compensation on Richard that has become nontax deductible by the IRS. And that amount has gotten to be large enough now, it's several cents a share in earnings per share, using your tax rate and all that would be an impact to the bottom line.

And just from an advisory point of view from the Company, as well as, frankly, personally, I don't understand why the board would move to reducing the percentage amounts to reduce the comp to deductible levels. And yet then substitute that amount maybe with a special dividend to everyone. Richard, you own a third of the Company. And you would get a lower tax rate on your dividend income than you do ordinary income. And everyone would save FICA. And the Company would have a larger EPS income in here. You get a multiple on that savings. It would all benefit from the stock price, you included. You would get benefited from a lower tax hit and a higher after-tax income. Is this something that the comp committee can sit down with you on and rejigger to keep you aligned with us all, as your ownership should do anyway, and benefit all parties, except of course the IRS authorities?

Andrew, this something that you seem to talk about a lot.

Actually, this particular issue is a new one as the comp has now gotten to be a point well above deductibility standards. This is a new one, Richard.

Okay. Whatever. You've mentioned it on many, many occasions. We have looked into it in the past. And regardless of your comments, or regardless of your phone calls to whomever, we have been reviewing this ourselves. We're not in a position to talk about it. But, we're examining it.

Even though from a personal -- on your thing -- I would hope you might lean on your advisors to become a little more competent on the issue. Because, on an after-tax basis, frankly, it doesn't make any sense for you, let alone for the Company.

It's not a personal thing. It's what's best for the Company, not what's best for me.

Well, if that's the case then the answer is pretty obvious for all.

Maybe to you Andrew, but not to me. So we're looking into it. And that's all I can tell you. It is way premature to talk about it. We're looking into it. There are certainly issues that you would not be involved in understanding. And we'll come to our own determination with the use of consultants and everybody else which we have used in the past to do things properly and legally.

Great. I would just want to add something that makes more obvious and more efficient sense for the Company.

Understood.

Great. Thank you.

[OPERATOR INSTRUCTIONS] There are no further responses at this time. I would now like to turn the call back over to management for any comments or ANY closing remarks.

Thank you all for joining us today. And we look forward to continuing giving you good reports like we have today, and we have for the last many quarters. And we hope that we can do the same as we meet again in a few months with our second quarter results and third quarter expectations. Thank you to all and have a nice day.