P&F Industries Inc (PFIN) 2005 Q3 法說會逐字稿

Welcome to the P&F Industries third quarter 2005 financial results conference call. At this time, all participants are in a listen-only mode. Following management's prepared remarks, we'll hold a Q&A session. To ask a question, please press star, followed by 1, on your touch-tone phone. If anyone has difficulty hearing the conference, please press star, 0, for operator assistance. As a reminder, this conference is being recorded today, Thursday, November 10th, 2005. I would now like to turn the conference over to Jody Burfening. Please go ahead, ma'am.

Thank you, operator. Good morning, and welcome to P&F Industries third quarter earnings conference call. With us today from management are Richard Horowitz, Chairman, President, and Chief Executive Officer, and Joseph Molino, Chief Financial Officer. Before we get started, I'd like to remind you that any forward-looking statements made during this call, including those related to the Company's performance for 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 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 good morning to everybody and thank you all for joining us this morning on our conference call. In the third quarter of 2005, overall revenues decreased 5.6 percent from $32.6 million from $34.6 million in the third quarter of 2004. Earnings from continuing operations for the third quarter decreased by 24.7 percent to $1.2 million compared to $1.6 million in the same period last year. Diluted earnings per share from continuing operations for the third quarter were $0.32 per share as compared to $0.45 per share for last year's third quarter. Inclusive of Green Manufacturing's results, the 2005 and 2004 reported as discontinued operations, net earnings for the third quarter decreased 5 percent to $1.5 million, or $0.39 per diluted share compared to net earnings of $1.6 million or $0.44 per diluted share for the third quarter of 2004. Just as a footnote, I want to mention to you that the third quarter of 2004 represented the highest quarterly earnings in the history of our Company as a basis of comparison with this year's quarter.

Our consolidated earnings from continuing operations for the third quarter fell just short of our expectations, while consolidated revenues came in slightly above our guidance. As anticipated, revenues declined at Florida Pneumatic, while Countrywide saw revenue growth at a higher growth than expected. Embassy reported revenues slightly below our expectations, as well. Consolidated gross profit margin for the third quarter was 30.2 percent, below our expectations for the gross profit margin that was projected to range from 31 percent to 32 percent. Consolidated SG&A expenses were 5 percent greater than the prior year's quarter, in line with our expectations for a 3 to 7 percent increase. As a result, earnings from continuing operations for the third quarter of $1.2 million were well below our expected range -- slightly below, I'm sorry, our expected range of $1.3 million to $1.4 million.

However, in contrast, our year-to-date results were very favorable compared to the prior year period. Consolidated revenues increased by approximately 31 percent to $89.8 million from 68.7 million in 2004. Earnings from continuing operations grew by approximately 35 percent to 3.7 million from 2.7 million in the same period last year. And we attribute this strength -- the greatest part of our strength of our continuing operations performance during the first 9 months to the addition of Woodmark, whose sales and earnings have exceeded our expectations since we acquired it in June of last year. I apologize for all these words and confusing numbers and details. However, with all the activity that this Company has had in the last 18 months, which has all been very positive for the Company, we're obligated to give it to you in this form. So it may be a little confusing and we'll try to answer any of those questions when we go to the Q&A later.

Before I take through a more detailed look at operations for each of these 3 business units, I'd like to review what each one does. Florida Pneumatic Manufacturing Corporation is primarily engaged in importing or manufacturing of approximately 50 types of pneumatic hand tools. Our Countrywide Hardware division imports and manufactures hardware products for items such as doors, windows and fences, staircase components, kitchen and bath hardware and accessories, as well as other general hardware products. Countrywide is comprised of Nationwide Industries and Woodmark International. And lastly, Embassy Industries manufactures and sells baseboard heating products, as well as radiant heating products and gas-fired boilers, primarily in the northern tier of the U.S. And of course, as I imagine most of you must know, subsequent to the close of the third quarter on October 11th of this year, Embassy sold substantially all of its nonreal estate assets to Mestek Incorporated of Westfield, Mass. We'll get into a little more detail about that in a few minutes.

And then Green Manufacturing was engaged primarily in the manufacture, development and sale of custom design, welded hydronic cylinders -- hydraulic cylinders used in heavy industrial and mobile equipment. In December, 2004, we disposed of the assets associated with this cylinder business. In February, 2005, we disposed of the Access product line, that included had a line of Access equipment for the petrochemical industry. And lastly, in July of this year, we disposed of the posthole digging equipment line, thereby completing the final stage of the disposition of all of Green's assets.

Now, I'll review with you the quarterly performance at each of our business units. Florida Pneumatic accounted for 43 percent of consolidated revenues for the third quarter. Revenues decreased by 18 percent to 14 million compared -- in the third quarter of this year from 17 million in the prior-year quarter, due to approximately $1.7 million less in retail promotions and a decrease in base sales of approximately $1.7 million, reflecting decreased purchasing activity from a significant retail customer, as well as a decrease in automotive revenues, due primarily to a lack of new accounts in 2005 that would typically make large purchases to stock inventory. These declines were partially offset by an increase of approximately $282,000 related to new product introductions in the retail and industrial channels. Revenues from 1 significant customer decreased by approximately $4.8 million in the third quarter, principally from the aforementioned decline in retail promotional sales and base business sales, reflecting an inventory reduction program at their division. This significant customer has reported to us that in-store unit sales of our tools have increased approximately 18 percent over the past year, which gives us confidence that our revenues will begin to improve once the customer obtains its targeted level of inventory.

And lastly, at Florida Pneumatic, gross profit increased to 26.8 percent from 26.5 percent in the same period last year, due primarily to the impact of lower margins related to greater retail promotional sales than the prior-year period. Countrywide Hardware accounted for 48 percent of consolidated revenues for the quarter. Revenues for the third quarter of 2005 increased by 7.5 percent from $14.7 million to $15.8 million, primarily reflecting a revenue increase at Nationwide of approximately $890,000 in addition to higher revenue at Woodmark of approximately $221,000. Gross profit at Countrywide increased from 32.9 to 33.8 percent, primarily on favorable product mix in fencing revenues and a shift by Nationwide to lower cost suppliers for some products, partially offset by some cost increases -- continuing cost increases from Asian suppliers due to increases in the cost of metals, consistent with the second quarter. During the quarter, staff (indiscernible) sales continued to increase, benefiting from the strong new housing starts, and substantially offsetting weakness in demand for kitchen and bath products sold into the home, remodeling and mobile home markets.

At Nationwide, fencing sales grew by approximately 17 percent, while OEM hardware sales were up by approximately 47 percent, reflecting the addition of new OEM customers. Embassy Industries accounted for approximately 9 percent of our revenues for the quarter. Revenues for the third quarter were $2.9 million, and they were essentially flat with the prior year, as was its gross margin at approximately 28 percent. As mentioned earlier, we sold substantially all of Embassy's nonreal estate assets to Mestek, Inc., after the close of the quarter for a total purchase price of $8 million subject to adjustments, plus the assumption of certain liabilities and obligations by Mestek. . We received net cash proceeds of $7.2 million at closing, with $800,000 held in escrow subject to post-closing adjustments and certain indemnification provisions. The sold assets include, among other things, machinery and equipment, accounts receivable, inventory and certain intangibles. Certain assets were retained by Embassy, including cash and our real estate. We expect to record a gain on the sale of these assets in the fourth quarter of this year, and a gain on the remaining assets for some time thereafter. We believe that the heating equipment business is no longer a strategic fit with the remainder of P&F's operations, and we are pleased that we were successful in receiving a premium over the book value of these underemployed assets from this transaction. The proceeds from this transaction were used to pay down short-term and long-term debt.

Management intends to focus its efforts on further investment in our tool and hardware businesses. These segments of our business, of course, possess the best prospects for continued growth and overall profitability. We should also note that the consolidated financial statements have been reclassified to reflect a discontinued operations of Green Manufacturing, which resulted from a disposition of certain assets in December, 2004, February, 2005, and July, 2005, to nonaffiliated third parties. Net of taxes, earnings from discontinued operations for the quarter were approximately $290,000, which were primarily the result of the gain on the sale of certain assets of the Agricultural Products Division sold in July of this year, as well as additional contingent consideration received related to the disposition of Green's cylinder business, offset by operational losses of Green during the quarter. Since we began to divest these 2 operations in late 2004, that were not performing in accordance with our strategic goals, we should note that we have received nearly $17 million to date in cash related to the sale and disposition of both Green and Embassy. And as mentioned before, we anticipate generating additional cash in the future from the possible sale of Embassy's former operating facilities, as well as the collection of various notes and possible receipt of certain contingent consideration over the next several years related to certain of these recent dispositions. These positive steps and resulting cash proceeds have been used, and are expected to continued to be used, to strengthen our balance sheet. Having said all this in a very big mouthful, and I apologize for that, I'd now like to turn the phone call over to Joe Molino, who will review our financial performance for the 9 months ended September 30th. Joe?

Thank you, Richard. As Richard said, I'd like to give some additional perspective for the 9 months. Richard had noted revenues were up for the 9 months 31 percent. Hardware revenues were the main driver of this, obviously. Hardware revenues were up 96 percent for the 9 month period, going from 23.6 million to 46.2 million. Revenues certainly have been impacted by the inclusion of Woodmark for a full 3 quarters, as opposed to only 2 in 2001. Actually, only 1 through September 30, 2004. Woodmark does continue to benefit from what has been a strong new home construction market driving sales, the stair part. This has more than offset weakness in demand for kitchen and bath products sold to the mobile home and remodeling markets. However, in addition to Woodmark, Nationwide's sales have been up as well, over 19 percent year-to-date. Fencing growth continues, but we're also very pleased that our new OEM segment, excuse me, that our OEM segment is up 37 percent this year, with the addition of an added significant new customer, a national building products manufacturer -- excuse me, a company in the building products manufacturing industry, and we've also had very strong growth in our Nationwide's largest customer, which is also an OEM account.

Gross margin in the hardware segment for the first 9 months decreased from 35.3 percent to 34 percent. This decrease is due primarily to Woodmark's average gross margin being around 31.5 percent, to Nationwide's 39 percent. And obviously its inclusion for a full 3 quarters, as opposed to 1 in the prior year. It should be noted, however, there's been no erosion in gross margin at Woodmark or Nationwide during 2005. Revenues at Florida Pneumatic were down 3.4 percent to 36 million from 37.3 million for the first 9 months of the year. At Florida Pneumatic, there was a $3.5 million decrease in base sales, that was offset by a $2.1 million increase related to new product introduction. A large portion of the decrease in base sales was related to an inventory production program at a major customer, which also had a large impact for the quarter as Richard mentioned. We do believe this program is winding down and should have less of an impact going forward.

Gross margins at Florida Pneumatic for the year decreased from 30.2 percent to 28.3 percent. This decrease in gross margin was due primarily to the impact of the drop in base business vis-a-vis the promotional business which does have a lower gross margin. In addition, the weakness of the U.S. dollar in relation to the Taiwan dollar compared to the prior year was a factor. Revenues at Embassy decreased 2.1 percent to 7.6 million for the first 9 months of 2005, from 7.8 million for the first 9 months of 2004. In spite of increases in housing starts generally, especially in the Northeast, construction activity in New York City, which is a significant market for us, is down for the year. However, a bright spot, boiler sales, are up 17 percent year-to-date. These sales are driven more by the awarding of certain large bids, which way not coincide with general housing trends in the short run. The reduction in gross margin in heating from 28.3 percent to 27.5 percent was due primarily to increases in steel and other raw material costs, and the larger mix of boilers in total sales. Boilers as we've mentioned a number of times, have lower margins that the rest of the product line.

Consolidated SG&A expense increased 22.6 percent for the 9 months to 20.1 million from 16.4 million for the year earlier period. Almost 80 percent of this increase relates to the addition of Woodmark. Much of the remaining increase is related to higher compensation tied to greater profitability, increased revenues, and increased freight costs. This was partially offset by lower warranty expenses. Overall SG&A was 22.4 percent of revenue for the 9 months, down from 23.9 percent for the previous period. Interest expense for the 9 months increased 112 percent to approximately $1,478,000 from $697,000 in the prior period. This was due primarily to significant borrowings under the term loan facility to acquire Woodmark last June. In addition, there were greater average borrowings on the revolving credit facility and an increase in interest rates in comparison to the prior year.

Other items affecting cash flow were depreciation and amortization of intangibles, which were $939,222 and $828 ,750, respectively, for the 9 months. For the quarter, these amounts were $297 ,535 and $276 ,250. Finally, capital expenditures were $434 ,470 for the 9 months and $141 ,152 for the quarter. I'd now like to turn the call back over to Richard. Richard?

Thank you, Joe. The last piece of business, is I'd like to present to you what our 2 remaining operating subsidiaries will do in the fourth quarter of this year. Consolidated revenues are expected to range from 24.4 million to 25.4 million in the fourth quarter, decreasing by approximately 7 to 10 percent from the four quarter of last year. Revenues at Florida Pneumatic are expected to decrease 12 to 17 percent, ranging between 12.1 million and 12.8 million, due to the timing and extent of promotional sales and a decrease in purchasing from the significant customer that we've talked about many times, that continues to reduce overall inventory levels, offset somewhat by the impact of new product introductions. We anticipate sales at Countrywide to remain flat or slightly decreasing, ranging between 12.3 million and $12.6 million. We expect gross margin for the third quarter to be -- excuse me, we expect gross margins to be approximately 31 percent.

Selling, general and administrative expenses are expected to increase by 12 to 15 percent compared to the same quarter in 2004 to support our business growth, including investing in our new West Coast expansion operation. As a percentage of revenues, SG&A is expected to increase from 21 to 25 percent as a result of less absorption of fixed expenses, due to the increase in revenues -- decrease in revenues. Interest expense is expected to remain unchanged, as the decrease in average borrowing is offset by the increase in the average borrowing rate. As a result, we anticipate earnings from continuing operations to be approximately 40 to 60 percent less than the comparable period last year, ranging between $0.5 million to $0.7 million, principally reflecting a reduction in anticipated revenues, and certain higher sales and marketing expenses. We expect net earnings for the fourth quarter of this year, which include earnings from discontinued operations to result from the gain of the sale of Embassy's assets to be flat or increase up to 20 percent compared to last year's fourth quarter.

In conclusion, we are excited about the conversion of our underperforming assets into cash, as well as our more focused emphasis on our tool and hardware businesses. We believe that our strength and balance in cash flow should provide us with further opportunities to expand our operations in the coming year, and certainly we are, even though the numbers may belied at, we are certainly very happy with our Company and we're very looking forward to next year. That's the end of our report, and now we'd be happy to answer any questions anybody may have.

[OPERATOR INSTRUCTIONS] Lynn Perry, Wylen Management.

Hi. This is Jamie Wylen. Just wanted to ask a question about the Embassy transaction. You were very specific in stating that you sold nonreal estate assets of Embassy. Could you tell us what the real estate assets of are Embassy? What they're on the books for, what you believe they're currently worth, and what your plans are for that?

Yes, I can address some of those questions. Embassy operated in a 75,000 square foot facility in -- here in Farmingdale, New York, which also happens to be where our headquarters is located. We have a small office in that facility. The building is suitable for many types of tenants. It's in an industrial area, a very busy area of Long Island, and we certainly don't anticipate any problem trying to sell the business -- excuse me, sell the facility. As we mentioned in our earlier press release, regarding the sale, the Mestek people will be here for at least another 6 months, 6 to 9 months potentially. However, we are actively marketing the building. I would prefer not to speculate on what it might be worth. But we're told that the market is fairly -- is fairly good for trying to sell this kind of building in this environment.

What do you have it listed for?

The book value on the building?

Well, that and what do you have it listed for on the market?

We are listing -- .

$6.75 million.

$6.75 million is what we're listing it for. It is on the books for actually negative book value.

You need a partner? Go on, sorry.

When you include the mortgage on the building, what's left of the operation has negative book value. The mortgage on the building is about $1.5 million. The building itself is probably worth around $650,000 in book value on the books.

Okay. And you can sell it even before these guys move out?

Yes.

We can sell it, but obviously no one can take occupancy until after they move out.

It's likely no one would take possession until, I would say, third quarter of next year.

Having said that, it's very possible the building may -- we may not be able to be successful in selling the building. We can't speculate anything about that.

But we're actively marketing the building.

Okay. And the gain on the sale of Embassy?

Well, that hasn't been finally calculated yet. That won't be done until we release our fourth quarter numbers. We did not specifically state what that is, but you can actually get a pretty good sense of it by backing into it by comparing the projected results for continuing operations for Q4 with the all-end results, as I like to say. There's a little bit of adjusted in there for the result of Green. But that'll give you a sense. It's just that that number is being finalized, and we'd prefer not to state what we think it's going to be. There are a number of other factors, not the least of which is some expenses related to termination of employees, and the fact that there's a pension withdrawal liability here. We had a union facility, and that plan was terminated. So there are still a few numbers up in the air regarding that actual gain.

Having said all of that, there will be a gain, which is a very good thing. And it will be a gain. That's all we can say. We're happy about that.

Just want to congratulate you. It's a great transaction for shareholders to be able to realize that amount of value, not just in the business but in the real estate, and put the proceeds into businesses that can build value for shareholders at an even faster rate.

Thank you. We appreciate you recognizing that.

Tell other people.

All right. Nice job. Thanks.

[OPERATOR INSTRUCTIONS] Andrew Shapiro, Lawndale Capital Management.

Hi. This is Daniel. I was phoning in on behalf of Andy. I wanted to get more clarity on the SG&A guidance if possible. You've got it, you say, point kind of number of 25 percent of sales, and I know that our sales mixes can be a little different now that we don't have the other divisions in there. So, is it fair to say in absolute terms it's going to be down year-over-year, but 25 percent -- 25 percent it will then therefore be a higher percent?

It's 25 percent of the projected sales. And those sales would not include any sales of Embassy or Green. It's simply 25 percent of the projected sales of Countrywide and Florida Pneumatic.

Up to 25 percent.

Right.

Okay. Up to 25 percent. So, is -- ?

I believe the guidance is 21 to 25 percent.

Well, from 21 to 25. Right.

It will be approximately -- .

So is the SG&A where the variability comes in, and you're down 40 to down 60? Because when I run your numbers through and I just used the point of 25 percent, I get to the down 60 percent in earnings.

No. I mean, the variability is driven by a number of things. I don't think, frankly, I'm not sure the SG&A is the big wild card. I think it's sales in the tool business in Q4, and where those are going to fall out.

Right, okay. And what about the tax rate, and then on the tax rate that you use?

I don't think the tax rate is an issue for Q4. I don't anticipate that number being vastly different than what we've seen year to date.

Okay. And then on the interest rate guidance, does that take into account any of the paydown of debt of Embassy -- or from the Embassy sale, or are you just being conservative?

No. No. The interest rate guidance certainly takes into account the timing of the cash receipt from the sale of Embassy, as well as the fact that, if you've been following us for any number of years, you'll know that regardless of any M&A work, we received the bulk of the year's cash flow in the fourth quarter. And that certainly incorporates that, along with some interest rate projections, trying to figure out what the Fed is going to be up to here in the last part of the year.

Right. Could you just talk a little bit about the West Coast expansion? You mentioned that, and I'm trying to figure out if that means in your SG&A expenses going up.

Certainly it's in there. There are a number of factors. I think there's 3 big adjustments -- well, 3 things going on in Q3 that are hurting the year-over-year comparison. One is West Coast expenses. We're now in full bloom on trying to build that operation. We're at the worst point, if that's the right word to use, between what we're spending in cash and what we're receiving in new business. We are adding customers, but as with any operation that's a startup, and this is what it is, we're going to have negative cash flow, and negative income for some number of months. But it is actually on plan and we're expecting '06 for that to be a positive. That figure could be -- that negative is several hundred thousand dollars in the quarter. In addition, last year's fourth quarter had the benefit of a receipt from a number of vendors to us as reimbursements for some marketing expenses, warranty expenses, that we had outlaid earlier in the year. We were not certain that we were going to receive those, but we were able to negotiate some concessions. And those reduced expense to the tune of, again, several hundred thousand dollars in Q4 alone. And then lastly, the fall-off in revenue at Florida Pneumatic, as expected, will certainly have an impact on the Q4 profit. So 2 out of those 3 events are what I'd like to think as nonrecurring. They aren't really anything that's going to affect us in '06.

Right.

So I think everybody should keep that in the mind.

So you're looking for basically a couple hundred thousand again in the fourth quarter incorporated from West Coast?

Yes, certainly.

Okay. And how far along are you now on the West Coast expansion? I mean, you had 2 employees there last quarter. Where are you at now?

We have 3 now. And that's probably where -- we certainly can function with that at the moment. We are currently leveraging off of the overhead in Dallas and Tampa.

Right.

And we will be doing that for some time. I mean, the 3 employees doesn't necessarily reflect the full-time equivalents, if you will, that are working on that business right now.

Okay. Okay. And are you putting through a higher percentage of your product range through the West Coast now? Have you expanded what the offerings are there?

Yes, basically at this point, the West Coast has the full product line of Woodmark, and probably 50 percent of the product line of Nationwide. And I don't know that it will be that product line percentage for Nationwide will go a whole lot higher than that. There are some products that just don't -- just won't work out there. But it could go a little higher. But it will never be 100 percent for Nationwide product line.

Okay. Now, the hurricanes have been back again in Florida in a big way this year, I guess. And it was a benefit last year for you -- or this year, sorry. Am I right in saying that it didn't really help you last month -- last year in the fourth quarter, but it kind of started to come on in the first quarter?

That is true. There was some delay. I think by the time people got insurance checks, it was the end of the year. And nobody bothers with fixing their patio doors and lanais in December. But it did help Q1 and actually has had some benefit generally throughout the the year. So, I don't think it's unreasonable to expect some of that again in the south Florida area.

Right.

And maybe to a lesser extent in the Gulf Coast, but that's not really a big market for our product.

Now, with the sale of Embassy, if I'm not mistaken, you're now very Southeast and kind of southern states oriented. What might you benefit somewhat from Katrina rebuilding and all that, or is that a bit of a cliche?

Well, I mean, to the extent there's additional rebuilding, Nationwide, that has some benefit for us. Woodmark, just to remind you, sells nationwide. Nationwide, the subsidiary, has sales -- yes, they're primarily focused in the East and Southeast. But there are some sales in the Gulf region. We're not really counting on any impact from Katrina. With the possible exception of, we do have some significant customers in kitchen and bath products who sell into the mobile home market. And our understanding is, a great number of mobile homes were destroyed, and we're working with some national players in distribution there. So potentially, there's some upside there at some point, when those people get their insurance money.

Okay. I'm going to back up, but maybe we'll come back and ask more question on kitchen and bath

Okay.

[OPERATOR INSTRUCTIONS] At this time, there are no further questions. Please proceed with your presentation or any closing remarks.

Okay. I'd like to thank you all for participating in today's call. I look forward to speaking to you with our next quarter, as we discuss our fourth quarter results and first quarter '06 outlook. I just want to make mention of 1 more thing. That this Company and the management in this Company and the Board take a long-term view of this Company. And the market is looking at it, obviously, in a very short-term view. And we are a much better focused and financially strong Company than we were a year or 2 ago. And I just want you to know that management is committed to continuing that work in that way. So thank you all for being on the call today, and we'll speak to you some other time.

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