P&F Industries Inc (PFIN) 2005 Q2 法說會逐字稿

Welcome to the P&F Industries' second quarter financial results conference call. [OPERATOR INSTRUCTIONS] I would now like to turn the call over to Miss [Seema Brin]. Please go ahead, ma'am.

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

Before we get started, let me remind you that any forward-looking statements made during this call including those related to the Company's performance for the 2005 fiscal year are based upon 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 2005 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 statement whether 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 so much and good morning to everybody, and thank you for joining us today on our conference call. I am very pleased to report that in the second quarter of 2005, overall revenues increased 70.8% to 30.9 million from $18.1 million in the second quarter of 2004. Income from continuing operations increased 76.2% to $1.4 million compared to $808,000 in the same period last year. Diluted earnings per share from continuing operations for the second quarter increased to $0.37 per share as compared to $0.22 per share for the second quarter of 2004. Inclusive of Green Manufacturing's access equipment results for 2005, and their hydraulic cylinder and access equipment -- excuse me. Inclusive of Green's -- yes, hydraulic cylinder and access equipment results for 2004 reported as discontinued operations, net earning earnings for the second quarter increased 110.8%, to $1.5 million, or $0.38 per diluted share, compared to net earnings of $704,000, or $0.19 per diluted share for the second quarter of last year.

Before I take to you a little more detailed look of the operations of our business units, I would like to review what each business units does. Firstly, Florida Pneumatic Manufacturing is primarily engaged in importing or manufacturing approximately 50 types of pneumatic hand tools and Franklin Manufacturing division, a line of door and window security hardware. Countrywide Hardware imports and manufactures hardware products for items for items such as doors, windows and fences as well as other general hardware products. Countrywide is comprised of Nationwide Industries and Woodmark International. And with the acquisition of Woodmark in June of last year, Countrywide now also imports and manufactures staircase components and kitchen and bath hardware and accessories. And lastly, 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 of course, as most of you are aware if you follow our company our last subsidiary, Green Manufacturing, was engaged primarily in the manufacture, development, and sale of custom designed, welded hydraulic cylinders used in heavy industry and mobile equipment. And, with the disposition of these assets associated with the cylinder business in December of last year and the disposition of the access product line that included a line of access equipment for the petrochemical industry in February of this year, the remainder of Green's products included a post hole digging equipment for the agricultural industry. And, with the sale of these post hole digging equipment line in July of this year, just the last month, we have completed the final stage of the disposition of each of the three business units of Green Manufacturing.

Now, I will review with you the quarterly performance at each of these business units. At Florida Pneumatic, which accounted for 39% of our consolidated revenues for the second quarter, revenues increased 24% to $12 million compared to $9.6 million in the second quarter of 2004 principally due to an increase of approximately $2.8 million in retail promotions during the period as well as approximately $798,000 related to new product introductions.

This was partially offset by a decrease in base sales of approximately 1 .2 million attributed to the adoption of a program to reduce inventory levels by a significant customer leading to a decrease in purchasing activity of approximately $587,000 for the quarter as well as a decrease in automotive revenues of approximately $190,000.

Gross profit margin at Florida Pneumatic decreased to 27.8% from 34.8% in the same period last year, due primarily to the impact of lower margins related to retail promotions and also due to the weakness of the US dollar in relation to the Japanese yen and the Taiwanese dollar.

Countrywide Hardware accounted for 52% of consolidated revenues for the quarter and their revenues increased 190.7% from $5.6 million to $16.2 million, primarily due to the including of Woodmark International revenues of $9.9 million for the quarter. Woodmark sales have exceeded our expectations, as well as their profit, since it was acquired in June of 2004. Gross profit margin at Countrywide decreased to 40 -- from 40.6% to 35.9% on a significant increase in revenue, due primarily to the inclusion of Woodmark's lower average margins. Countrywide and Woodmark have had sustain some cost increases from Asian suppliers due to increases in the cost of metal, somewhat offset at Nationwide by the shift to lower-cost suppliers for some of these products.

Strength in stair part sales continue to benefit from the housing boom, and are substantially offset weakness in demand for kitchen and bath products, both in the home remodel and mobile home markets. OEM and patio hardware sales at Nationwide were up to 26.2 % and 19.4% respectively, reflecting new customer -- new OEM customers and incremental sales in our patio business due to reconstruction following the hurricanes in Florida of last year.

Embassy Industries accounted for approximately 7% of revenues for the quarter. Embassy's revenues for the second quarter decreased 6.5%, or $157,000, when compared to the prior year at $2.4 million. Revenues from baseboard products declined, due primarily to decreased construction activity in the New York City area which, of course, represents a significant market for us.

In addition, some customers bought inventory ahead of the price increase that was instituted late in the first quarter of this year. Selling prices of certain baseboard heating products and boilers were increased late in the first quarter to offset rising cost of materials. Such price increases, which averaged approximately 7%, impacted revenues in the second quarter of this year by approximately $150,000.

Our boiler sales increased in the quarter due to the timing of certain jobs, and we remain actively engaged in the bidding process for several large products, the nature of which can cause revenues to fluctuate quarter to quarter. The increase in the gross profit percentage from heating products from 28 to 29.4% in the second quarter of this year was due primarily to a favorable product mix and the impact of an increase in selling prices late in the first quarter, which offset increases in steel and other raw material costs.

And lastly, our Green Manufacturing subsidiary contracted for approximately 1.6% of consolidated revenues for the quarter. Revenues from Green Manufacturing continuing operations, which only include the agricultural products division which was also discontinued as of Q3, increased 7.2% to $506,000 from $472,000 in the second quarter of 2004. This was primarily due to the addition of a new customer at the end of last year.

And, margins have decreased from 18.3% the second quarter of last year to 15.5% this year due to material cost increases and increased costs associated with the temporary outsourcing of our manufactured products.

You should note that the consolidated financial statements have been reclassified to reflect the discontinued operations of Green Manufacturing's hydraulic cylinder and access equipment divisions which resulted from the disposition of certain assets in December of 2004 and February 2005 to non-affiliated third parties. Net of tax benefits, earnings from discontinued operations for the quarter were approximately $60,000 which were primarily the result of additional consideration received from certain cylinder sales.

And of course, on July 14 of this year, Green sold the remainder of this business, comprising its agricultural division including machinery and equipment, for $530,000 and received cash proceeds of $225,000 in two promissory notes, aggregating $305,000 in principle after closing. Proceeds from the sale of these assets were used to pay down debt. And, I should note that this disposition was part of the strategy of focussed managements resource on the segments of our business that possess the best prospects for growth and overall profitability. And now, I would like to turn the call over to Joe to go over the 6-month results through June 30. Joe?

Thank you, Richard. Since Richard is focusing on the quarterly information as he said, I will focus on 6 months. Revenues for the 6 months ended June 30, 2005 increased to 66.3% to 58.2 million from 35 million for the first six months of 2004. Net income from continuing operations for the six months ended June 30 was approximately -- or was $2,533,962, or $0.65 per share on a diluted basis, as compared to net income $1,213,406, or 34% -- $0.34 per share on a diluted basis for the six months ended June 30, '04.

The first half of the year was obviously up significantly from last year, primarily as a result of the Woodmark acquisition. Revenues at Countrywide, of which Woodmark is a part, are up 242.3% for the first six months of 2005, improving to 30.4 million from $8.9 million. Woodmark's 19.9 million in sales were obviously all incremental to the first half of 2005.

Sales of staircase components continued to benefit from strong housing starts and, as Richard said, this is offsetting weakness in kitchen bath products targeted at the mobile home and remodel -- targeted at mobile homes and the remodeling market. Nationwide sales also increased 18.4%, to 10.5 million, up from 8.8 million for the first six months of 2004. Fencing products led the way here which were up $700,000, driven by housing starts.

OEM and patio hardware product sales increased 640,000 and 270,000, or 32.7% and 16.5% respectively. This was due to the addition of new customers in OEM and greater sales with patio products resulting from the reconstruction following the hurricanes in Florida last year. The gross margin at Countrywide decreased from 39.2% to 34.2% in the first six months of 2005 as compared to 2004. This decrease was almost exclusively the result of the inclusion of Woodmark's lower average margins in the consolidated Countrywide numbers. If we look at Nationwide by itself, those margins alone were 38.7% for the first six months of 2005.

Revenues in Florida Pneumatic increased 8.8%, to 22.1 million, for the six months ended June 30, from 20.3 million for the prior year. There were approximately 1.8 million in incremental promotional sales in the period as well as approximately 1.8 million in new product sales for the first half. This was offset by a decrease in base sales of approximately 1.1 million, due primarily to an inventory reduction program at a major customer that reduced purchases by approximately $830,000. Additionally, automotive sales decreased by approximately $290,000. Gross margin decreased from 33.3% to 29 .3% year to date at Florida Pneumatic. The increase in promotional sales relative to base sales and well as the weak US dollar in relation to the yen and the Taiwan dollar drove this change in margin.

Revenues at Embassy decreased 4.2% to 4.7 million for the first six months of 2005 from 4.9 million in the first six months of 2004. This decrease was driven by several factors. First, there was decreased construction activity in the New York City area in the second quarter, a major market for us. Second, boiler sales were also weak, but we are actively engaged in the bidding process for several large projects, the nature of which could cause revenues to fluctuate as Richard mentioned. The reduction in gross margin from 28.6% to 27.4% was due primarily to increases in steel and other raw material. This prompted an increase in selling prices late in the first quarter.

Revenues at Green increased by 12% in the first six months of 2005, to a million 32 thousand from 921,000 for the prior period, six months. This increase was primarily due to the addition of a new customer. Gross margin at Green decreased to 16.3% from 20.7% due primarily to increases in raw material costs, which were not able to be recovered through price increases, as well as increased costs associated with the temporary outsourcing of manufactured product.

Consolidated SG&A expense increased 3.4 million, or 35.7% for the 6 months, and 13 million from 9.6 million for the year-earlier period. Much of this increase relates to the inclusion of Woodmarks 2.9 million in SG&A. In addition, increased compensation of about 500,000 company-wide tied to higher profitability was also a factor. Increases in professional fees related to corporate compliance work and reporting requirements were offset by certain warranty expenses -- reductions in certain warranty expenses as well as certain non-recurring legal expenses for the prior year.

Interest expense for the six months increased 257% to 929,000 from 260,000. This was primarily due to amounts borrowed under the Company's term loan facility and financed the Woodmark transaction as well as the issuance and assumption of certain notes related thereto. Other items affecting cash flow were depreciation and amortization, which was $641,687 and $552,500 respectively for the six months. For the quarter, these amounts were $310,239 and $276,250 respectively. Finally, capital expenditures were 293,318 for the 6 months and $117,858 for the quarter.

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

Thank you, Joe. I would like to just take a moment to present what we expect for our subsidiaries for the third quarter of 2005. Consolidated revenues are expected to range from 30 million to 31.5 million in the third quarter, decreasing 9 to 14% from the comparable period last year. Revenues at Florida Pneumatic are expected to decrease between 15 and 25%, ranging between 12.7 million and 14 million, due to the nature and timing of promotional sales and anticipated decline in purchasing activity by a significant customer that is engaging in reducing its overall inventory levels we mentioned earlier and partially offset by the impact of new product introduction at Florida as well.

We anticipate sales at Countrywide to remain flat or decrease slightly, ranging from between 14.4 million and $14.7 as a result of the timing of an unusually large number of shipments of their stair parts in early July, 2004 which negatively affects the comparison to the prior year period. We anticipate sales at Embassy to increase 5 to 10%, ranging between 3 million and 3 million point -- $3.1 million due primarily to an increase in boiler sales. Sales at Green will be insignificant in the third quarter due to the sale of the ag business in mid-July. Green's entire business operations will reclassified as discontinued operations going forward from this point on.

We expect gross profit margins for the third quarter to range from 31 to 32% and our selling and general administrative expenses are expected to increase 3 to 7% compared to the same quarter in 2004, primarily to support business growth. As a percentage of revenues, SG&A expenses are expected to increase from 20% to approximately 22% as a consequence of less absorption of fixed expenses due to the revenue decrease.

Interest expense is expected to increase 20% as a decrease in average borrowing is more than offset by the increase in the average borrowing rate. As a result, we anticipate net earnings for the third quarter of 2005 to be approximately flat, slightly down in relation to last year's comparable period, ranging from 1.4 million to $1.6 million.

Earnings from continuing operations, however, are expected to be approximately 10 to 15% less than the comparable period last year, ranging from 1.3 to 1.4 million principally as a result of a reduction in revenues. But, I want to emphasize and re-emphasize to everybody on this phone call that our third quarter last year was the highest earnings period in the history of P&F for any quarter and though we will not meet those numbers in the third quarter of this year we will still have a very strong and impressive earnings quarter for our Company. I want nobody to lose sight of that fact.

So now, that is the end of our report and we will be happy to take any questions anybody has.

[OPERATOR INSTRUCTIONS] Your first question comes from Andrew Shapiro with Lawndale Capital Management.

Hello, this is [Daniel Perlin], actually, for Andy. He couldn't be on the call.

I am having trouble hearing you. Could you please speak up.

This is [Daniel Perlin] from Lawndale Capital. I am phoning in for Andrew Shapiro. I wanted to get a little more clarification on the guidance if possible, please. 31 to 32% gross margins is pretty high, even if you strip out the lower margin business from Green last year. So, year-over-year you would be looking for a pretty big increase despite a pretty big decrease year-over-year in revenues. Could you just kind of help us understand how you get there?

You are saying that last year's third quarter gross margin was less?

Yes.

I didn't look at that specifically. Obviously, Green is out of both of those sets of numbers.

Right.

We did have -- we have instituted a price increase at Embassy. That would be, probably, part of it.

Okay.

We have improved margins at Nationwide as a result of -- and we have mentioned this several times -- shifting a great deal of production to new sources at much better margins. We have also, and this is probably to a lesser extent, increased some prices at Woodmark. But I would say the number one driver there is, most likely -- the Nationwide adjustment, the Embassy adjustment, and then lastly, I believe -- and I would have to check this, but I believe -- for the third quarter we are in much better shape on the yen vis-a-vis last year's third quarter. But, that is probably just a guess on my part.

Right.

But, I feel that is probably thrown into the mix as well.

Yes, because when I strip out Green from last year I get 29.3% gross margins, right?

Yes.

But, Florida Pneumatic obviously you are looking for revenue declines there. Last year, you actually had a customer come out of the mix as well and Florida Pneumatic's gross margins went down to 27, or whatever, percent.

Right.

Are you expecting Florida Pneumatic's gross margins to have as precipitous a decline again this year because of the customer slipping?

Well, that customer slipping would be out of the comparisons. Are you talking about the customer that was lost at the beginning -- or the end of '03, beginning of '04, -- or are you talking about something else?

Well, I am not entirely sure because of my notes. But, I do know my model shows that your gross margins went to 26.7% in the third quarter of last year.

That could be several factors. It could have been some very large promotional activity at that point.

Yes.

I believe the yen was probably at its peek.

Yes.

And, I would suspect the yen is probably a good 5 basis points cheaper, which might translate to much as a 5% change in cost for us --

Okay.

-- in this third quarter. So, I would say that is probably what is going on with Florida Pneumatic.

All right.

But, that would be the yen. I mean, I haven't looked at that specifically.

All right. On Nationwide and Woodmark, I was wondering if you would update us on kind of the OEM fencing and patio business -- [inaudible] doing really pretty strong. And, I am just trying to get a gauge of the sustainability of this. Is it existing demand or is it new distribution or what is it?

Okay. On the patio side, it's clearly just the hurricane effect.

Yes.

There is no new customers there that that I am aware of of any material nature, nor do we anticipate there will be. I mean, that business segment is definitely on the down side of its life cycle.

Yes.

But having said that, we will have this temporary boost for a while and until everybody gets their patios fixed down in Florida, we will probably still have some benefit there. So, I don't know how much longer it is to go, but certainly I can't imagine it would last another year.

Yes.

Then on the OEM side, we have been successful in rejuvenating that. There is one significant customer that we have been working on and chipping away at.

Yes.

And, we are adding SKU's with them on a regular basis. I do see that as sustainable.

Yes.

To what extent the growth rate will be going forward, I can't say, but that is what you are seeing there is primarily related to a very large new account that really was just brought on for the first time at the beginning of '05. And, we are working very closely with them, and expect in the long run to do very well with them.

So I see -- I definitely see having some -- that having some legs to it. In addition to that, we are working on other OEM business. We have somebody very much focused on that as their full-time job on the road -- just OEM customers. So, I think that will be much more sustainable in the long run.

Okay, and then the fencing?

Fencing. Fencing - we still continue to benefit from the growth in overall housing starts. We also see some benefits to our west coast expansion. We didn't really talk about that, but our office is open on the west coast now. We have a salesman out there -- headquartered out of there, a general manager, and we are taking orders. How full the warehouse is at the moment, I don't know.

I think at the moment we are probably still shipping a lot of product from the other location to fill, but I do know orders have been placed with suppliers too -- shipped directly to the west coast, so that is up and running, and I think fencing will definitely benefit from that.

How many employees have you guys got there now, on the west coast.

We have two, at the moment --

It is two, still?

-- and those will grow as the business grows. And, a lot of support staff for that operation are back in Tampa and Dallas. So, I do expect fencing to benefit from that. That is fairly uncharted territory for us on the fencing side. So, we feel pretty good about that as being able to continue -- help us continue the fencing growth. But as a reminder, fencing generally peaks by the end of the third quarter, and fourth quarter you will see fall off, but that is typical for fencing -- but, not fall off in relation to the prior year, but it will slow from the second quarter to the third quarter.

On the last call we chatted a little bit about energizing your efforts in the renovation market versus the new-build market, and I was wondering if you could give us an update on that as well as at Woodmark, the balustrade and the kitchen and bath area. I was wondering if you could update on the progress you are making there, and when do you expect that to have an impact?

The renovation market is a relatively small part of our business, as I think we have said. We do very little renovation in stair parts, and I don't know that we have got a particular focus on that at the moment. I do know that we're focusing on the kitchen and bath parts in renovation, and we have got some initiatives we are working on, the largest of which really needing a full-time eastern US salesperson, which is something we are working on. And frankly until we have that going, I think that is probably going to slow us down a bit. But, we are working on that.

As far as remodeling, in Nationwide -- now, again. The OEM business is not really a remodeling business The patio business is not really a remodeling business, and fencing is certainly not a remodeling business. So I -- I am not -- maybe we misled in stating that we had a big remodeling business. We don't. I mean, certainly it is part of the business, but it is very small part of our operation and really I would say, outside of kitchen and bath, is probably fairly immaterial.

Right.

We see our growth really in the new construction market.

Yes. I don't think you misled anything. It is just more that maybe the renovation market might be a good -- to offset the cyclicality eventually.

It is also a self-fulfilling sort of situation when the housing [inaudible] does slow down, people do end up renovating more. So, that will come up. That is what we have seen. But right now, and until that happens, I think we are best investing in the construction market.

Okay. I think we will -- I will step back out of the queue and let some people in and then come back with some more.

Okay.

[OPERATOR INSTRUCTIONS] There are no further questions -- actually, no, we have another question from the line of Andrew Shapiro with Lawndale Capital Management.

Okay. The Florida Pneumatic business -- I was wondering if you could talk a little bit about what you think the sustainability of your new product development is? Any metrics you can give us on what percentage of your product line you have now overhauled and the percentage of your customers you feel are kind of now into with the new product line?

Well, overhaul -- I don't know that we were said we were overhauling the product line, although I am going to color on that in a minute. Product development is on going. We have -- we go back and forth to our sources in Asia on a regular basis, as well as our US sources which include lots of design engineers. And, we have got plenty of products on the board --a very long list. As far as what percentage of our customers have we introduced new products to? As a percentage of customers, I would say it is a very large percent.

Certainly, we have introduced new products that have been accepted at both Sears and Home Depot and right there, that is 60% of our customer base. And certainly, we have introduced new products into the industrial channel. So as far as the customers, I would say just about all of them are enjoying some of the new product introductions. As part -- as a percentage of total revenue, what would new products be? I guess we would probably back into the numbers this year, but I suspect it is not more than 15 or 20%. As far as product overhaul, we are working on redesigns -- actually some fairly large redesigns on older products at the moment, and we are excited about that. But, that is not really something that will impact '05.

Okay, and what about on the promotions. I mean, you have been doing a bunch of promotions. One of them slipped into this quarter from last quarter. Do you have any more large ones ahead this year?

Yes, we do. We have promotions throughout the year. As we have said many times, it is somewhat difficult to predict when they will happen. We -- and again, they are driven primarily by our two large retail accounts. And, we meet with them regularly to schedule these and learn of scheduling of these. And yes, there are more planned. And, I think we alluded to in the release the inventory reduction program that is taking place, which is substantial at a major customer will be greatly offset -- not completely but greatly offset -- by some major promotions in the quarter. So, those are going on, and will continue to go on.

Frankly, if you look back historically -- if you go back 5 years or so -- there were very few promotions, or it was a small percentage of the retail business. And, it appears to us that the promotional work or activity is in some ways replacing every day items or what we call base sales. So, even though it is the same products in lots of cases, they are going out as promotional items as opposed to just sitting on the shelf as everyday items. So, it is starting to get a little confusion, frankly, about what is a promotional item and what is an everyday item. And, it seems like the retailers have sort of shifted emphasis and are using more promotional work to get the same sales that everyday items used to generate.

Is the promotion -- I mean, it is not big price discounts is it? It is just kind of pro marketing and advertising stuff in a big way.

No, there is steep price discounts.

Okay.

We have to offer very sharp pricing. We definitely get lower margins on our promotional products. And, perhaps, it is another way of getting the suppliers to these retailers to lower prices. But, there has been a steady increase in that and we expect strong promotional activity going forward. We certainly don't see it going the other way.

Okay. I guess I kind of missed the the aspect you just said about the fact that you thought that you are going to have promotions offsetting the large inventory reduction.

Yes.

So are you saying that you don't expect the margin swing -- downswing at Florida Pneumatic to be as significant as one might have anticipated?

Well as I said, I think we are looking pretty good on the yen for Q3. We locked into very favorable rates a few months ago on the third-quarter product.

Yes.

So I think that is helping us regardless of the promotional activity.

Okay.

But, yes, in general the promotions will be at lower margins than base sales.

Okay. How is the move for Franklin been -- moving south.

Well, it is essentially complete. We really don't have any operations here in New York at this point, other than several salespeople. We are shipping every day out of our Jupiter location, so it is really finished. We are still backfilling some staff, supplementing some staff, but the transition is done.

Okay and finally, on the automotive side, I think you said that you hadn't really had many accounts in '05.

Right.

And, is there any plans to restimulate account growth?

Well, yes. The answer is yes. We are working on some things. We have some other priorities at the moment and limited human resources. We have got some other things where we think there is bigger bang for our buck.

But having said that, we are not abandoning that market. It is just that we had a couple of really nice, new, exciting introductions last year that, I think, really excited the channel and certainly added some inventory fill -- that we just didn't have anything like that. We don't see the business going away. It is just that we don't really -- we didn't really have anything exciting for '05 there to generate the kind of buzz that I think we had last year.

All right. Okay. I will back out and come back with some more questions, then.

[OPERATOR INSTRUCTIONS] Once again, you have another followup question from Mr. Shapiro's line with Lawndale Capital Management.

Okay. It is back to us, again. Embassy -- last quarter it looks like you had a bunch of pre-buying in baseboards because of the price hikes that you were announcing. And, I am just curious to know to the extent you think that the pre-buying has been digested in the channel yet or not?

You are asking if we expect depressed sales going forward until they work through that inventory.

Yes, I am just trying to get a better feel for -- go ahead.

I would say -- Richard and I were just conversing, we both agree -- that we think that is over at this point. We don't anticipate that that -- that pre-buy wasn't at such a level that it would still be affecting sales at this point.

Yes. Now just out of interest -- what your longer expectations for this business might be? I mean, it is kind of a lumpier business, it seems, by looking at the boiler business and how you kind of get moved around a little bit by the bigger orders in the northeast. And, I am just kind of wondering, given that it has also got the real estate associated with it, how you see this within the context of your boiler portfolio that you have been reshuffling recently?

Well, certainly the growth prospects overall there are probably not as strong. The heating business is a mature market. Baseboard does not grow with inside housing starts like we see --

Yes.

-- with the growth of, let us say stairs and iron balusters.

Yes.

We do -- we are excited about the boilers and I think -- in the boiler is still a million dollars revenue line item. I think if that number gets closer to 2 million, these what we call large jobs will start canceling each other out to the point where the revenue will be a lot smoother. The size of those jobs won't increase. They will still be 2- and 3-hundred-unit jobs. But, when we are double the revenue line -- double the revenue number -- I think the quarter-to-quarter fluctuations won't be as great.

Right.

And, the same thing goes for the commercial product line which we are also [seeing] a little more or a lot more I guess the last year or two.

Right.

That also tends to be quote -- driven and job driven -- which is not something we have a lot of experience with, in terms of -- dealing with our expectations, but as that business grows, that will smooth out as well.

Right. What about progress on the real estate up there that you have largely vacated? Are you still planning on leasing that out? And, have you done so yet, or are you thinking -- I think it is a pretty low-cost basis piece of property. Have you considered selling it?

Yes I mean, it is only 15,000 square feet at best. I think any impact from that lease would be minimal to P&F on a consolidated basis, but we are still actively trying to get that done.

Okay. Sears -- was that the customer that is impacting you right now with the inventory clearance?

Yes.

Okay.

The Kmart folks that came in and largely are calling the shots at the very top there are working with a different inventory model than Sears had. And, they have made it clear that they are going to get those inventory figures down in their warehouses and distribution centers. And, until those numbers get down to the level they are comfortable with, they are going continue to reduce revenue -- or purchases.

Obviously ,it can't go on forever. We are getting very good information about sell-through at the store level. Those numbers have not gone down. In fact, those are up over the prior year. So, it is clearly an inventory reduction issue. It is nothing to do with the relationship, nothing to do with the sales of our product to the end user. But, we do have to get through this period until they get to the inventory levels they are comfortable with and then it will be business as usual.

Right. I think you had mentioned last quarter you were in -- what, 850 Sears stores. You had 15 to 20 million in revenues, and that K-mart is looking at converting 100 this year. Have they given you any clarification beyond this kind of inventory draw down of where they think you will be after that?

Well, to -- they have indicated that that 100-store conversion has been reduced. I was hearing a lower number there --

Yes.

-- how they are slowed that process down, and there is some question about where that will ultimately go. So, I think it would be over-estimating to say that all 400 of those that we had talked about are going to get converted over anytime soon. I don't think that is going to have a big impact on our business. So, that is a wait-and-see. I don't see that as being upside for us right now.

Okay. Just kind of stepping back a little bit -- you have been digesting the Woodmark deal. You have been selling off some non-core assets and, pretty soon, you are going to have your debt reduced to more manageable levels. Your EBITDA, and all of that, has been doing pretty well. I am curious to know what your priorities for cash are -- whether you are kind of looking at potentially a new division all together or tuck-in acquisitions or perhaps a dividend?

Well I mean, the Board always looks at all of those options. I would say that a new division is probably out of the question -- you mean something that is not related to what we are doing?

Yes.

Yes, that -- I don't see that as a possibility. We are really focused on what we have got now. I don't see any benefit to picking a new industry for us. We have liked the upside in what we have got. So, I think the tuck-in is the more-likely scenario. And, we are active at the moment, not pursuing anything aggressively. However, we are open to people that come to us with ideas. But, we are focused on getting that debt level down a little bit more.

Right. Kind of a targeted level --

Certainly, we are not tuning down opportunities, but we haven't been out there aggressively.

Is there a targeted level of debt you are looking at or --

No.

Not really. I mean,I think the way we view it is if an opportunity comes along and we like it, we would work with our capital providers and say -- hey this is what we want to do, can we finance the deal?

Uh-huh.

I think we will continue to do that until we can no longer borrow at the rates that we think are acceptable. And, I think we are a ways off from that.

Yes. Could you give me the D&A number? I missed that.

The depreciation and amortization?

Yes.

Yes, for the 6 months, depreciation was 642,000 and for the -- and amortization was 553,000.

Okay, and for the quarter?

310 and 276 respectively.

All right. Thanks. Two final questions. I guess inferred in your guidance is that Green is going to continue to benefit you in the third quarter.

Yes.

How much further after that?

We believe several years. We have got a --

You have got a contract with them.

-- we have got a five-year agreement with the purchaser of the cylinder business to get commissions on revenues. So -- and also, to a lesser extent, we have got a two-year agreement with the purchaser of cylinders -- excuse me, the access business --

So, it is kind of continuing discontinued?

Excuse me?

It is kind of continuing discontinued?

Yes, we worked out some upside arrangements -- just the way the deals were structured and it certainly looks like we are going to get some of that. And as I said, the cylinder deal -- it goes out five years, so that will carry us through the end of '09 or '08.

Right.

I think it will be a little less each year, but certainly a few hundred thousand in commissions are possible.

Just one final question related to -- you mentioned with Nationwide that you are shifting a bunch of your sourcing. And, I am curious to know kind of broadly across the Company, do you feel comfortable with your sourcing broadly, or is Nationwide the kind of thin end of the wedge and that you will be looking closer at sourcing from lower-cost areas even more now?

That is an ongoing project.

Yes, I mean we continually look at source -- we look at sourcing regularly --

Right.

-- and are also looking for better opportunities. I am not sure I am completely following you.

Like any other company that has --

All right. Yes, I mean, I understand it is ongoing. I am just wondering if -- I mean, there is a fair amount that you get from Japan and Taiwan right now. And I guess the question is are there cheaper prices that you need to book to?

Okay. I would say if you were to look out a couple of years, you will see us doing more sourcing from China and that is from Japan and Taiwan, if that is your question.

I think those are all the questions we had. Thank you.

Okay.

Sure.

Thank you. I would now like to turn the call over back to management for closing remarks.

I thank you all for being on the conference call today and we look forward to speaking with you again with our third quarter results and our fourth quarter expectations. Have a good day. Thank you.

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