P&F Industries Inc (PFIN) 2005 Q4 法說會逐字稿

Welcome to the P&F Industries fourth quarter conference. [OPERATOR INSTRUCTIONS] As a reminder this conference is being recorded March 28, 2006. I would now like to turn the conference over to Ms. Jody Burfening. Please go ahead, ma'am.

Thank you, operator. Good morning and welcome to P&F Industries fourth quarter 2005 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 would like to remind you that any forward-looking statements contained herein including those related to the Company's future performance and those contained in the comments of management are based upon the Company's historical performance and current plans, estimates, and expectations which are subject to various risks and uncertainties including but not limited to the impact of competition, product demand and pricing and those described in the reports and statements filed by the Company with the Securities and Exchange Commission including among others those described in the Company's annual report on Form 10-K.

These risks could cause the Company's actual results for the 2006 fiscal year and beyond to differ materially from those expressed in any forward-looking statement 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, future developments or otherwise. With that I would now like to turn the call over to Richard. Good morning, Richard.

Thank you so much, Jody and good morning and good morning to everybody and thank you all for joining us this morning on our 2005 year end conference call. In the fourth quarter of 2005 overall revenues decreased 5% to $25.8 million from $27.2 million in the fourth quarter of 2004. Earnings from continuing operations were flat at $1.1 million and diluted earnings per share from continuing operations were $0.28 versus $0.30 for the same period last year simply due to the inclusion of more shares outstanding at year end versus last year.

The inclusion of Green Manufacturing and Embassy's net earnings for the fourth quarter increased 74% to $2.6 million or $0.68 per diluted share compared to $1.5 million or $0.39 per diluted share for the fourth quarter of last year. But more importantly for the full year last year P&F reported its most profitable year on record with consolidated revenues increasing by approximately 23% to $108 million from $88 million in 2004. And as well earnings from continuing operations grew by approximately 24% to $4.8 million or $1.25 per diluted share from 3.9 million or $1.07 per diluted share in the same period last year. And, of course, we attribute much of our growth during 2005 to the addition of Woodmark which contributed an additional $20 million to P&F revenues for the first full year of our ownership of that company. Overall we are quite pleased with our fourth quarter and full year performances.

During 2005 we successfully completed our plan to streamline our business and to focus on our two core segments, tools and hardware. We redeployed resources from the divestiture of the Green and Embassy operations to acquire complementary product lines and improve our capital structure dramatically. During the fourth quarter we completed the sale of certain assets of Embassy for $8.4 million then just after the close of 2005 we completed the acquisition of Pacific Stair Products, a profitable privately-held manufacturer of premium stair rail products and a distributor of staircase components primarily in Southern California and the southwestern region of the United States and, of course, this is a complement to our Woodmark International business unit.

During 2005 we paid down $9.8 million in long-term debt. And as a result we ended 2005 with an interest bearing debt to total capital ratio of 35.8%, much lower than the ratio as of December 31, 2004, which was 47.6%.

Finally we are in contract to sell Embassy's building in the second quarter of this year for approximately $6.4 million and as a result of this transaction we expect to pay down even more debt and report a gain on the sale of the building of approximately $5 million. Since we began to divest these two operations in late 2004 that were not performing in accordance with our strategic goals here at P&F we have received nearly $18.6 million in cash. We expect to receive an additional $8.7 million related to these divestitures primarily in 2006. Before I take you through a more detailed look at the operations of each of our business units I would like to review what each one does.

Florida Pneumatic, of course is primarily engaged in importing and manufacturing of approximately 50 types of pneumatic hand tools and 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 and, of course, Countrywide is comprised of Nationwide Industries and Woodmark International. Embassy Industries which we formerly owned manufactured and sold baseboard heating products as well as radiant heating products and gas-fired boilers primarily to the northern tier of the United States and, of course, as I imagine most of you must know and as I mentioned earlier during the fourth quarter this year we sold substantially all of its non real estate assets to Mestek, Inc. of Westfield, Massachusetts.

And lastly Green manufacturing was engaged primarily in the manufacture, development and sale of custom design welded hydraulic cylinders used in heavy industrial and mobile equipment. In December, 2004, we disposed of the assets associated with this cylinder business and in 2005, February of 2005, we disposed of the access product line which was a part of Green which included access equipment for the petrochemical industry. And lastly, in July of last year we disposed of the last business unit at Green which was the post hole digging equipment line thereby completing the final stage of the disposition of all of Green assets.

Now I'll review with you the quarterly performance in each of our business units. At Florida Pneumatic which accounted for 48% of our consolidated revenues, our revenues decreased by 15% to $12.4 million compared to $14.6 million in the prior year's quarter due to approximately $2.2 million less in retail promotions. Gross profit margins however increased to 30.5% from 29% last year as a result of a more favorable product mix and higher margins due to the decrease in promotional sales and continuing efforts to reduce our costs and improve our productivity. These efforts include sourcing our products to lower cost, high quality suppliers, to offset pricing pressures in our retail business. In addition we introduced new products in 2005 and have others slated under -- that are under development and are slated for release during 2006 along with a redesign of our major product line.

New products will be introduced in retail, industrial and automotive channels throughout the year. In addition, the next-generation products being introduced at retail later in the year and into early 2007, will offer increased torque and/or less weight as well as a much new bolder look.

Countrywide Hardware accounted for 52% of consolidated revenues for the quarter. Revenues for the fourth quarter of 2005 increased by 6.3% to 13.4 million from 12.6 million for the prior period, primarily reflecting a 6.8% increase at Woodmark and a 3.7% increase at Nationwide. Gross profit margins at Countrywide increased from 31.5% to 33.3% primarily on favorable product mix and higher margin fencing revenues and a shift by Nationwide to other high quality, lower cost suppliers for some products.

During the quarter stair part sales continued to increase benefiting from continued market penetration and strong new housing starts offset by some weakness in demand for kitchen and bath products sold into home remodeling and mobile home markets. At Nationwide revenue grew on the strength of an increase in OEM sales from the addition of new customers and a further penetration of the markets for fencing products. These increases were offset by a reduction in patio product revenue due to the elimination of the screen door product offering in the third quarter. We are very optimistic about continued success and profitability at our Countrywide subsidiary, especially now that the combination of Pacific Stairs products and customer base and Woodmark International's product offerings creates the only full-line one stop source of stair products offered on the West Coast.

As I mentioned earlier we intend to focus our efforts on further investment on our tool and hardware businesses. These segments of course, possess the best prospects for continued growth and overall profitability for P&F. Before I give you our guidance for 2006 I would like to turn the phone call over to Joe Molino who will review our financial performance for the full year 2005. Joe?

Thank you, Richard. As Richard discussed specifics for the quarter and the significant consolidated amounts I will focus on the year-to-date trends at the subsidiary level and other details. For the year gross profit margins in Florida Pneumatic decreased from 29.9% to 28.8% due primarily to the weakness of the U.S. dollar in relation to the Taiwan dollar and a less favorable product mix offset by cost reductions and productivity improvements.

For the 12 months ended December 31, 2005, revenues at Countrywide Hardware increased 64.7% to 59.6 million from 36.2 million due primarily to the Woodmark acquisition which recorded full year revenues of 40.5 million in fiscal 2005 versus 19.7 million in revenues for the second half of 2004. Additionally Nationwide's revenue increased 16% or 2.6 million as a result of increases in both fencing product sales and OEM product sales. Gross margin at Countrywide remained consistent at 33.9% as some cost increases from Asian suppliers due to increases in the cost of metals were offset by a favorable product mix and a shift by Nationwide to lower cost suppliers for some products.

I neglected to mention the change in revenues at Florida Pneumatic, excuse me. For the 12 months ended December 31, 2005, revenues at Florida Pneumatic decreased 6.7% to 48.4 million from 51.9 million for the prior period. The decrease was due primarily to $1.7 million reduction in retail promotional sales as well as a decrease in days sales of 2.4 million. This was offset partially by 1.4 million in sales related to newly developed products. The reduction in retail base sales was due to an inventory reduction program at a large retail customer as well as a large decrease in automotive revenues due primarily to the lack of new inventory stocking accounts that were obtained in 2004. In addition there were no significant new product introductions in this channel which we have found is a key driver of overall sales.

Now getting back to the consolidated numbers. Consolidated SG&A expense for the 12 months ended December 31, 2005, increased 22.2% from 19.9 million to 24.3 million due primarily to the revenue increase discussed as well as due to increased personnel related expenses from additional headcount and the West Coast expansion at Countrywide to support growth. In addition this increase was also driven by increased freight costs due to fuel surcharges and sales territory expansion and increases related to professional fees principally for certain non-recurring M&A activities and corporate compliance and reporting requirements. This was all partially offset by a reduction in certain warranty expenses. As a percentage of revenues SG&A decreased slightly from 22.6% to 22.5%.

Interest expense for the 12 months ended December 31, 2005, increased from 1,149,000, to 1,896,000, due to the Woodmark acquisition as well as due to an overall increase in interest rates throughout the year. This was partially offset by significant debt repayments. Other items affecting cash flow were depreciation and amortization which were 813,000, and 1,105,000 for the 12 months respectively. For the quarter these amounts were 210,000, and $276,000 respectively. Finally, twelve-month CapEx was 600,000. For the quarter it was 196,000. I would like to remind everyone that the figures I just gave reflect only the continuing operations and obviously exclude Embassy and Green. With that I would like to turn the call back over to Richard. Richard?

Thank you, Joe. I would like to present our outlook for tools and hardware business in 2006, but before I do that I would just like to mention that after careful consideration by the management team and board at P&F, and taking into account the limited predictability of our quarterly results, we have elected to change our guidance policy going forward. We will provide you with our expectations for the full year only with the same level of line detail as always.

We anticipate results from continuing operations for the full year ended December 31, 2006, to be stronger than 2005's fiscal year primarily to revenue growth at Countrywide, Woodmark and Nationwide businesses along with the addition of Pacific Stair Products. Consolidated revenues for the year are expected to increase between 5 and 10% to approximately $113 million, to $119 million respectively. Revenues at Florida Pneumatic are expected to remain relatively flat as increases in our industrial and catalog business are expected to be offset by decreases in our retail business. We anticipate sales at Countrywide to increase between 15 and 20% due primarily to the inclusion of Pacific Stair Products, continued growth at Woodmark, principally in its stair parts business and continued growth at Nationwide's OEM and fencing businesses.

We expect gross margin for the year to range between 31 and 33% reflecting the benefits of revenue gains, planned product cost reductions and operational efficiencies offset by margin erosion from higher product costs and competitive pricing pressures. Selling, general, and administrative expenses are expected to range from 22% to 24% as a percentage of sales. Interest expense is expected to approximate $1.9 million, nearly flat with 2005 as a decrease in average borrowing is offset by the increase in the average borrowing rate. As a result we anticipate net earnings from continuing operations to increase between 10 and 20% in fiscal 2006 over 2005.

In conclusion we have achieved success with our strategy to convert underperforming assets into cash and concentrate our resources on our tool and hardware businesses. And we have strengthened our balance sheet and cash flow which provide us with further opportunities to expand our operations in the coming years. As a result we are optimistic about our prospects to perform well and grow in 2006.

That's the end of our report today and now we would be happy to answer any questions anybody may have.

[OPERATOR INSTRUCTIONS] First question, Andrew Shapiro, with Lawndale Capital Management.

Good morning. I have several questions. Hopefully we can back out of the queue and if anyone else wants to ask something we can get back in. Can you help us understand a few things, in particular the last two quarters obviously Florida Pneumatic has suffered on a year-over-year basis through the reduced purchases from one of its largest customers, through that customer's inventory reduction programs. On the last call you gave some indication that they had sold out of several product SKUs and were back in the market to be purchasing. Some time has since passed and can you give us somewhat of an update of what you are seeing, where things stand and are we back here -- with only a week left in the first quarter, was your first quarter at a normal purchasing pattern for this customer?

Good morning, Andrew. Our customer has -- we cannot get into their business. We do not know. We only can relate to you what we are told and we were told that last quarter, the end of last year that they were bottoming out and in fact they have shown more life of late in the first quarter of this year than they had in the past. Having said that, there are still -- they are still having their own internal issues in ordering and tracking products and all that. And though it has been more robust, I don't think I would categorize it as up to our expectations yet, quite yet. Joe, do you have anything you want to add to that?

The only thing I would add is that this customer was purchased a year or so ago, a year and a half ago and--.

You all can say it's Sears, it's pretty common knowledge.

We know that there's been a lot of internal turmoil there and they seem to have changed philosophy in how they run their business or how they had run their business for many years and we probably don't have quite as much consistency of what data and what's coming out of there and what they tell us they are going to do. It sounds like there's just a lot going on there and it's probably giving us -- it's shortening our window for the future to understand what they are hoping to do but I would agree with Richard that they seem to have bottomed out on their inventory situation and to that extent that's over. There's no doubt about that.

The last quarter's call you had provided us the insight that felt their sell through of product, your product that was on their shelves, their sell through was up on a year-over-year basis frankly in the high double digits. And that's part of the reason why they were selling out of certain SKUs. Where again we are near the end of the first quarter. And our last call with you folks, a discussion on all of this was frankly, end of November, mid-November. So many months here have passed. Are they selling your products through? Are they reordering from you? Where do they stand? Obviously they are purchasing more than they did the last third and fourth quarters but are they purchasing more from you or as much as from you as they did in the first quarter of last year?

Andrew, again, I'm telling you I just answered the question, I think. We do not, we cannot, we can only report to you what is reported to us by them. They are in turmoil. But they are ordering and I don't honestly recall if they are ordering more than the first quarter of last year because the first quarter of last year these problems had not surfaced quite yet. I think the better question to perhaps that we would be focusing on would be how our first quarter of this year is laying out compared to the fourth quarter and the third quarter of '05. And I would say that we are having better activity in the first quarter of '06 than we had in the second half of '05.

Well, I hope so, they didn't buy any product from you in Q3.

Well, they certainly bought product from us. They didn't buy as much as we had expected or anticipated. They certainly bought product from us. It's an ongoing relationship and we have an ongoing business with them. Of course they bought product from us. It wasn't up to our predictions and our budgeted projections, that's all. I don't know what else I can tell you about it. There's no more that we can tell you. We can only tell what we are being told.

I guess this is a question now that gets to either your internal revenue visibility -- your internal revenue and internal controls issues. We are in the last week of March.

Andrew, I just answered the question. I said the first quarter of this year is more robust than the last two quarters of last year. What else do you want to know about that? What else am I not answering? I'm sorry, I'm--.

The first quarter of this year how it compares to the first quarter of last year?

I just told you that we are down because the first quarter of last year they hadn't started this inventory reduction program until the second half of last year.

I'm sorry, you hadn't said that before but now that you said that you are down from first quarter of last year. That is fine. That's all I was asking.

No, Andrew, I want you to understand it's important to know that the problems with the customer did not start until approximately the end of the first half. So business was as usual for the first half and then their own internal structure changed mid year and that's when everything affected us so dramatically.

I understand. We are trying to understand if Sears is back on track or how far they need to go to become back on track.

Andy, let me say this. Through February -- I don't have March's information and even if I did I'm not sure that I would be prepared to talk about numbers that haven't even been vetted out yet, but through February they are ahead of last year.

There we go.

And that's all I'm going to say. And Richard I think said that.

Okay. If you say. Let's move on. Okay. Last quarter you talked about significant redesign efforts going on in many of your Florida Pneumatic product lines.

Yes.

Are you in a position to discussing these new designs and some of the new products in greater detail and if not when would you be?

We are still in the midst of redesigning it and not in a preliminary stage. We are very advanced and down the road with tweaking the engineering parts and all that stuff and I would say we are looking at an introduction later in the year. So I would think that if I were to guess in our September call we probably would be able to give you a much better feel of it. But it's going to be a bold look. And it's going to have less weight and more torque. So that's our goals and that's where we are and we are very encouraged that we are moving in that direction.

I would just add that it's the biggest redesign we've done in sort of one shot.

Is this across all we will call it segments like automotive aftermarket and home and all the other things or--?

No, it's more retail oriented. It's more to the retailer customers.

(multiple speakers) Craftsman and then your private label?

Yes.

Having said that there are also continuing design efforts going on in the other channels. It's just that this is such a large effort with relation to the scope of the line that we felt we needed to mention it.

Again, it's more retail oriented not that it wouldn't have overflow into our other line at some other point.

Okay. Let's talk a little bit about Woodmark and Nationwide. To what extent have you begun to see the impact of any slowing new home construction and what are your plans to I guess deal with that?

I would say we have not seen a lot of impact from slowing construction. I would point out a couple of things. There has been a lot of talk about the housing bubble. A lot of that surrounds the pricing not as much the building rate. We are however seeing more pressure on us from competitors which has nothing to do with the rate of housing starts. But we do anticipate when starts slow down, which they have begun to, that ultimately we will see a degradation in the top line. Having said that we've got, I want to point out a couple of things.

First of all both Woodmark and Nationwide and Pacific Stair, maybe Pacific to a little lesser extent, have highly variable cost structures due to the fact that for the most part Nationwide and Woodmark are a pick and ship operation with some very minor modifications that are done here, not the huge investment in infrastructure that you would see at Florida Pneumatic which has a substantial manufacturing operation. And even Pacific Stair is really a manufacturer as well. We are protected from a downturn by having highly variable costs.

In addition to that Nationwide -- it's really three product lines. We have the fencing product line which isn't tied direct to housing starts. A lot of people put up fences well after they've bought a home and put poles up well after they've bought a home so I don't think there's going to be as high a correlation on the fencing side that you might see on the stair side although ultimately I guess there is a correlation.

On the patio product side that's very unrelated to housing starts. And in fact the nasty weather in the south, the hurricanes and whatnot actually is a boon to the patio business as people end up replacing all of their [pool] enclosures and fencing around their [pools] it seems like almost every year with these winds that blow through.

And then the OEM business at Nationwide is a hodge-podge of things. A lot of it's related to building home starts but it really is a little broader than that. At Woodmark the housing starts definitely are correlated with the stair building, the stair parts. There's no question about that. That's roughly we will call that two-thirds of the business, maybe a little more, 70% of the business. And then the rest is the kitchen and bath hardware. Again, not directly driven by housing starts. That's not our market. We are not selling to new home construction. It's primarily an MRO based business and also there's a lot of remodeling.

Interestingly the one aspect of that business that's related to home building is related to mobile home building which actually is doing reasonably well. There's a lot of demand for that due to again the hurricanes. And then Pacific Stair it's a little too early to tell but I would say in general that is certainly driven by housing starts. So that would be my long winded response to your question.

To understand your capital allocation things and this is like a sale of a business why did you choose to discontinue the patio screen door business?

It was marginally profitable. There was a major competitor of ours that had the lion's share of the business right in the Florida area. We actually are much better off selling components of those screen doors to people that were once competitors than selling the entire screen door. The screen doors took up a lot of space in the plant and that space is much better allocated to higher margin, higher turn products.

So would that be an asset sale, it wasn't a big business?

It wasn't a big business. We just got bought out of our inventory or just sold out of the inventory and have refocused that on selling components of those doors which are at a much higher margin.

Your West Coast expansion, to what extent has Pacific Stairs been integrated at this stage and what remains to be done?

Well, as you, I think we mentioned in an earlier call we had a management team already in place for the West Coast operation that we opened up last summer. They have been integrated into Pacific Stair. The president of Pacific Stair is staying on for some period of time. So we feel we have a lot of, plenty of management at the moment. We are in the process of upgrading the MIS systems, which is actually a fairly significant task. They did not have a particularly high level MIS system so that's being done primarily driven by our accounting folks and MIS folks out of Texas. So that's not complete yet. We certainly don't have all the systems and reports and all those things we are accustomed to getting on a regular basis but we should have that all squared away by early in the second quarter.

And the West Coast distribution expansion effort in total how is that going and do you expect that to be profitable in '06 as you had hoped for?

Yes, it will be and now that certainly that that business has been combined with Pacific Stair, there was never anything wrong with the gross margins we were getting. We just had a lot of overhead to carry but now it's not an issue.

Are there some tuck in acquisitions to go into that West Coast effort still in the works?

I mean we are always looking for so-called tuck in acquisitions and we continue to be open to those sorts of things but I don't really have anything to report at this point.

In terms of your capital allocation, can you verify in the balance sheet for 12/31, the financial statements in your press release that the cash outlays related to acquiring Pacific Stair -- that was done after year end? And can you give us a handle on how much was paid for that business? Was that--?

It was about 5.5 million, Andrew, in fact I thought it would have been in the 8-K we filed for that but I could be wrong.

But that was cash, that would be a reduction of -- either borrowings or cash off the balance sheet, the 12/31, that we just got today.

Yes, correct.

All right.

That was plugged on the 2nd of January.

And are you -- can you give us a handle on shares that you bought back and shares outstanding?

Just give me a second I'll see if I have that. We certainly were active in Q1 in buying stock back. If memory serves, about 20 to 25,000 shares were purchased back in the first quarter.

Excellent. Guidance, could you give us some guidance as to your CapEx expectations for '06 to go along with your '06 guidance you provided?

It's around $1 million.

It's around $1 million.

(multiple speakers) A little more.

And then in addition to that we had some build out for the corporate offices as well.

I'm sure you realize Andrew P&F has moved out of 300 Smith Street where Embassy was as we sold the building, so we moved into our office space and we redid the place there as well.

Right. And that occurred this fiscal year, so first quarter of CapEx will be a little higher than--?

For sure, for sure.

But in, so it's 1 million plus whatever.

It will be somewhere between 1 million and 1.5 million.

Let me break it down by a couple -- yes, probably closer to 1.5 million. The other thing that make it seem a little large is that we are undergoing a pretty major expansion at the Nationwide Tampa headquarters.

Office.

An office expansion. So that, those two items, the P&F and the Nationwide would be on top of what we would see typically for Woodmark and Nationwide annually.

As you move through the year will your guidance, have you thought about your guidance policy -- will your guidance be providing us updates of where you think you will be through the end of '06 and providing still year end '06 guidance, Q3 and Q4, or is it going to be rolling four quarters?

No, it will not be rolling four quarters. We will update you on the previous guidance to the extent that it's any different but it will still be shooting for year end. We will not be looking into '07.

When you say 22 to 24% of sales because it's a fixed cost in nature here for the SG&A percentage is it correct to assume that your 22% of sales matches up against your high-end revenue growth numbers and your 24% of sales is matching up against your low end revenue growth (multiple speakers)

Yes, I mean, more or less, yes, and it's not completely fixed.

I had one or two other questions and I will back out of the queue. Can you guys please come back to us?

You got it.

Thank you.

[OPERATOR INSTRUCTIONS] We have a follow-up question from Andrew Shapiro.

Okay. Well, we are alone again. The SG&A numbers for this recently reported quarter, look to be around 6.3 million and the prior quarter they were around 7.2 million. And then 6.9, and 6.1. So last quarter seems to be what was pretty high and then it's dropped down. And then you have given some guidance as to your SG&A for the coming year? Can you remind us was there one time items that were in the third quarter that caused it to be as high as it was and are we -- and just trying to get a handle of being comfortable with the fixed cost or the SG&A numbers here for the coming year?

Yes, Andy, without going into a lot of details we are fairly active in the M&A front and sometimes we spend some money and nothing happens. That's all I can say.

And the other thing is to understand the balance sheet. The balance sheet for today that you reported shows prior year balance sheet which removes the Embassy assets out of inventories and puts that down into the assets of discontinued ops. So what one can see is a, still a decent size year-over-year increase in inventories, right? 26.2 versus the 23.4?

Yes.

What I want to get a handle on is do you feel that your inventory levels -- because you got caught blindsided by Sears Q3, talk of even beginning of Q4, your inventory levels at year end, reflect the level of inventories that you would have wanted to be at in your expected kind of levels or is it, about how much were you running higher than normal?

Let me address that, a couple of things going on. I think in general inventories are probably a little higher than we would like at primarily Woodmark. But secondarily at Woodmark which clouds the picture even more, one of our major suppliers, maybe even our largest supplier, built a new factory and transitioned the shut down of the old factory with the bringing the new factory on line. In addition all that happened around the Chinese new year which we felt was going to further, create some further risk. So we built up some inventory at year end to make sure we can get through this transition through Q1 without any hiccups to the customer base. I'm happy to say that the transition went fine. The new plan is on line and they are now building product out of the new facility. So to put a dollar figure on that I can't say but certainly a seven figure number that maneuver.

Here we are near the and of March and you have got your February numbers. Have you worked your inventories down here in Q1 to the levels that you would like them to be at?

They are not where we want them to be yet, but they are coming down.

So there will be some extra cash generation than you might normally or seasonally generate?

That's true.

With your guidance for Florida Pneumatic for '06 to be basically flat, is the issue of anticipated declines from other retailers as Sears comes back up or is it further just Sears projected flatness while the other retailers do their thing or are you purposely walking away from less margin more competitive retail business?

We are not walking away from any business. I think for the year we feel pretty good about Sears. It's really the non-Sears retail that we are not as optimistic about. And that's really the driver there of retail sales falling off.

Now that's a little bit -- I won't say inconsistent but a little surprising if you're rolling out some really nice redesigns for the retail side. And feel Sears is going to be generally at a higher run rate because they were so far off the path in Q3 and Q4, why would you -- is there issues with like Home Depot or the catalog side, is there any particular areas you are trying to address here with that?

Our retail business is essentially Sears and Home Depot. So obviously if we are not talking about Sears, Home Depot is really what is left and, yes, we have some concern there about the top line and we think there are a number of issues going on inside of Home Depot not the least of which -- we feel that the in store merchandising isn't what it was a few years ago and we have limited opportunity to do much with that. That's Home Depot's purview. But we do see some degradation in unit sales from some of the older items or items that aren't displayed as well as they could be displayed. So that's what we are talking about generally.

Do you feel that's a loss of market share to other tool players or just a--?

Well, not at Home Depot, no, I don't think it's a loss. But if somebody goes into a Home Depot and of the ten items on display the one they want isn't on display, that item is probably not going to get sold and they will go down the street, maybe they will go to Sears even, but if it's not out it's not as likely to be sold. That's what the data tells us.

All right. How about in the catalog side, is there an expectation that catalog is flat or also somewhat weak.

I'm assuming -- you don't mean Sears catalog you mean our industrial catalog.

No, your industrial catalog.

No, we feel pretty good about that for the year. We don't think that's going to be weak.

Very good. That's all I have.

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

Are we certain that there are no other questions from anybody?

Yes, sir.

Okay. Well, then I would like to thank you all for joining us today on our phone call and we look forward to speaking to you with our first quarter results in the -- around the end of May or so. Thank you for your time and we look forward to reporting good results in the future.

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