P&F Industries Inc (PFIN) 2006 Q1 法說會逐字稿

Welcome to the P&F Industries First Quarter 2006 Conference Call. (Operator Instructions.) As a reminder, this conference is being recorded May 11, 2006. I would now like to turn the conference over to Ms. Jody [Berfanine]. Please go ahead, ma'am.

Thank you, Operator. Good morning, and welcome to P&F Industries First 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 2006 fiscal year are based upon the Company's historical performance on current plans, estimates, and expectations. We 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 2006 fiscal year and beyond to differ materially from those expressed in any forward looking statements made by or on behalf of the Company.

Forward looking statements speak only as of the date on which they are made. And the Company undertakes no obligation to update publicly or revise any forward looking statements, whether as a result of new information, further developments, or otherwise.

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

Thank you so much, Jody. And good morning, everybody, and thank you for joining us today for our first quarter 2006 conference call. During the first quarter of this year, overall revenues increased 10.4% to $26.8 million, compared to $24.3 million in the first quarter of 2005. Earnings from continuing operations declined by 21.6% to $872,000 from $1.1 million last year. And diluted earnings per share from continuing operations were $0.23 versus $0.29 in the prior period--prior year period.

Including our discontinued operations, which are, of course, Green Manufacturing and Embassy Industries, net earnings for the quarter were $874,000, or $0.23 per diluted share, compared with $963,000, or $0.25 per diluted share, for the first quarter of last year.

We continued to generate increased revenues at Countrywide through both our Woodmark and Nationwide business units, as well as incremental revenues from Pacific Stair Products, which we just acquired on January 3 of this year.

A 6.4% revenue decline of Florida Pneumatic temporarily overrode revenue results. In addition, SG&A expenses grew at a faster rate than consolidated revenue for this quarter, but we do not expect this trend to continue.

The unusual expense growth was driven by several factors, including, but not limited to, certain non-recurring professional and tax fees, the cost of moving P&F's headquarters in February, certain other corporate expenses that are not typically concentrated in the first quarter that are spread more, and increases in sales and marketing expenses within our few divisions, which are expected to result in additional revenue in the coming periods.

These added SG&A expenses combined with the decrease in sales of Florida Pneumatic, caused our consolidated earnings from continuing operations to fall below that of last year. Nevertheless, you should note that we remain confident that our net earnings projection for the entire 2006 fiscal year, which calls for a 10 to 20% increase in net earnings over 2005, consistent with the guidance we have provided on latest quarter's call.

Before I take you through a more detailed look of the operations of each of our business units, I'd like to review for the first-time listeners our--what our Company does. First of all, our Florida Pneumatic subsidiary is primarily engaged in the importing and manufacturing of approximately 50 types of pneumatic hand tools.

Our Countrywide Hardware division imports and manufacturers 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 now comprised of Nationwide Industries, Woodmark, and Pacific Stair Products, which we acquired this past January.

Pacific Stair is a manufacturer of premium stair rail products and a distributor of staircase components for Woodmark to the building industry, primarily in Southern California and the Southwest United States.

Now let me go over the quarterly performance for each of our business units. At Countrywide hardware, revenues for the first quarter increased 22.3% to $17.4 million from $14.2 million. Woodmark's revenues increased $986,000, or 9.9%. Revenues from the sale of staircase components rose once again, benefiting from greater customer penetration. In addition, revenues from our kitchen and bath products sold into the mobile home and remodeling markets have increased, reversing their 2005 downward trend.

Pacific Stair contributed $1,666,000 to first quarter revenue, while Nationwide's revenues increased by approximately $523,000, or 12.4%, primarily attributable to a rise of approximately $566,000 in sales of fencing products, up 26%, primarily reflecting increased demand from new and existing customers.

Gross margin in our Countrywide subsidiary decreased from 32.2% to 29.8%. The decrease in gross margin was due primarily to some cost increases from Asian suppliers, tied to the rising cost of metals, competitive pricing pressures on certain stair products, and the inclusion of Pacific Stair, which operates at a lower gross margin than the rest of the group.

The gross margin was partially offset by a favorable product mix and a shift by Nationwide to higher quality, lower cost suppliers for some of our products. We have taken steps to address the margin erosion in both redesigned products and the planned transition to alternative high quality suppliers at our Woodmark subsidiary as well--the division as well. Excuse me. However, we expect that it will take several quarters to realize fully the improved margin gains from these efforts.

We enhanced Countrywide's West Coast operations during the quarter through the acquisition of certain assets at Pacific Stair, which I mentioned earlier. We are excited about the growth opportunities available at Pacific Stair through its strategic alliance with Woodmark, and our combined product offering is among the broadest available in the areas where we operate.

Revenues of Florida Pneumatic decreased 6.4% from 10.1 million in the first quarter of 2005 to 9.4 million in the first quarter of 2006, due to approximately 310,000 less in retail promotions in the period, as well as a decrease in base sales of approximately $360,000. Days sales declined due to approximately 692,000 in lower purchasing from a significant retail customer, as part of a program to reduce their overall inventory levels, partially offset by a $332,000 increase in base sales from another important retail customer.

Decreases in revenues of approximately $173,000 in Franklin were due primarily to decreased shipments to a few customers related to weak in-store sales and supply related issues. Slightly offsetting these declines were increases in automotive revenues of approximately $66,000 and a rise in Berkley revenues of approximately $102,000 for the quarter.

Gross profit margin at Florida Pneumatic increased to 32.4% from 31.1%, reflecting the impact of lower margins related to greater retail promotion sales, promotional sales in the prior year period, as well as the strength of the U.S. dollar in relation to the Japanese yen in the current quarter, partially offset by weakness in the U.S. dollar versus the Taiwanese dollar. Gross profit margin increases were also impacted by a more favorable product mix.

At Florida Pneumatic we are also focusing our efforts on improving gross margins by sourcing our products there as well from other low-cost high quality suppliers to offset pricing pressure in our retail business. In addition, we expect a favorable impact from the revenues generated from new products introduced during 2005 and other products slated for release this year. By year-end, we expect to have substantially redesigned a significant portion of our retail product line for enhanced look and performance.

I'd like to now turn the phone call over to Joe Molino, who will give you further insightful comments.

Thank you, Richard. I wanted to add some clarification to the financial results discussed in the press release and also in the attached table. The discontinued operations for the quarter includes residual operations for the Embassy building and activities related to various post-closing commitments with respect to Green Manufacturing. With regard to the comparative balance sheet, the book value of the Embassy building is included in the assets held for sale line and the bulk of the liabilities of discontinued operations is the mortgage related to the Embassy building.

The comparative balance sheet also shows a large increase in accounts payable. This is the result of negotiating 90-day terms with our significant Asian trading partner at Florida Pneumatic. We pay an interest rate on that that is below our regular borrowing rate. So that's very favorable to the Company.

Florida Pneumatic did have a disappointing quarter, however, but we are excited about our product--our major product development initiatives that should have an impact later in the year. We plan to roll-out a major new product look to a significant retail customer in the third quarter. This will be followed by a different, but equally bold new look for our other large retail account later in the year and into 2007. We are hopeful that the new look and better features will approve end-user demand.

In addition, we've made significant investments in marketing to the retail channel with the goal of ultimately improving revenues in the upcoming quarters. We believe that our--we believe that the new focus on innovation at Florida Pneumatic will better position the tool business, especially vis a vis our powerful large accounts.

We continue to be pleased with the Countrywide group, both Nationwide and Woodmark. The fencing product line at Nationwide continues to flourish. In addition, the patio business is still benefiting from the rebuilding from the hurricanes of last year. At Woodmark, although we continue to have a strong market presence, we're beginning to see some margin erosion as we defend against competitors attacking our smaller accounts.

We will soon be introducing a major new line of balusters - those are the vertical rods that attach the stair railings to the steps. We believe that this will help us not only better defend our accounts, but also stabilize margins. On the more positive side, the Atlanta operation continues to expand its reach geographically with improving margins. Our business model of providing frequent local deliveries from a regional warehouse is helping us gain share in this market.

We also remain excited about our expanded California operation with the addition of Pacific Stair products. Our recent survey of our current accounts indicates that we have great potential there with our new extensive product line and growing mill capacity.

SG&A for the quarter grew as a percentage of revenue from 22.3% to 23.5%. In absolute dollars, this is an overage of approximately $300,000. As mentioned, we have identified at least this much in expenditures that will either not repeat or occurred in a different quarter of 2005 hurting the first quarter comparison. Approximately [indiscernible] were expected.

Interest expense increased for the quarter from $415,000 to $492,000, due primarily to higher average borrowings under the revolver, which was used for the acquisition of PSP or Pacific Stair. In addition, although there were lower average borrowings on all debt related to the Woodmark acquisition, there has been a significant increase in interest rates since this time last year.

Other items affecting cash flow were depreciating and amortization, which were $227,000 and $299,000, respectively. In addition, capital expenditures for the quarter were approximately $500,000.

With that, I'd like to now turn the call over--back to Richard. Richard?

Thanks, Joe. Before I open the call up to any questions, I'd like to remind everyone that we modified our guidance policy last quarter to only provide full year estimates. And based on the current outlook for our business in 2006, we are reaffirming - and I want to underscore that we are reaffirming - our 2006 guidance, which calls for revenues to increase between 5% and 10%, gross margins to range between 31 and 33%, reflecting the benefits of revenue gains, planned product cost reductions and operational efficiencies, slightly offset by margin erosion from higher product costs and competitive pricing pressures, and net earnings from continuing operations to increase between 10 and 20% over 2005.

We remain confident about the future and we look forward to improved results during the remainder of 2006.

That's the end of my report for today. And I'll be happy to answer any questions anybody may have.

(Operator Instructions.) Your first question comes from Andrew Shapiro with Lawndale Capital Management.

Hi. I have several questions. I'll ask many, but then step out of the queue to let others ask some, then please come back to us.

Did you buy any stock back during the quarter, about how many shares, and what prices?

Andy, we purchased around $23,000--23,000 shares of stock during the first quarter. I do not recall the average pricing, but it was spread out over a number of transactions, so it would be safe to say it would be at approximately the average prices that the shares were during that period of time.

Okay. With respect to I guess it is Countrywide, particularly, maybe it was Woodmark where you cite the margin reduction coming from increased costs, metals, et cetera. Are competitors facing these same cost increases, or are your competitors sourcing elsewhere? And if they are facing these same cost increases, what are the opportunities and chances for a price increase pass-through?

Of course, all of our competitors are experiencing the same material increases we are and we get price increases, Andy, where we can, and we do. But the timing of them are not always--our cost increases don't always go up to the same rate that we can get price increases from our customers, which is not a new story.

Right. No, that would be an industry-wide--.

--Right--.

--Margin compression.

Right.

It's just that I cite from your press release and your discussion a bit of shifting from one supplier to another and I didn't know to what extent that is due to your competitors having different suppliers and not facing similar cost pressures.

No. Really what that is, Andy, for the most part is, of course, that's trying to get better pricing and all of that to increase our margins. But also, when we focus on what our customers need and what our products, features, and materials offer, sometimes the customer doesn't need everything that we're building. And we're building sometimes, excuse the expression, a Cadillac when we only need--when you only need a Chevy.

Okay.

So we modify that in that regard.

And--.

--Joe, did you--is basically that what you feel, Joe?

Yes. I would agree with that. The only thing that I would add is what's true Richard--everything that Richard said is true about the costs. We are, however, and I did note getting some strong competition on the smaller customers, especially the customers that are farther and farther away from our main basis of operations, namely Georgia, Dallas, and California. As those--as our travel time to get to those accounts is greater and they're not so large, there are regional competitors that can do a fair job of competing with us and they are getting a little stronger than they have been and they're getting a little more aggressive on price than they have been. So we've needed to match prices in some instances. So that has also impact to margin--impacted the margin.

And was the move to the suppliers a move from the Cadillac to the Chevy or from the Chevy to the Cadillac?

I mean, I think it was a lateral move in terms of the quality of the product at the very lease. And actually, I think probably some improvement. It's just that that facility, or facilities, have a lower cost structure than the ones we are with.

Okay. In the Countrywide and Woodmark there has been growth, as you've cited. I'm trying to--is there a way to break out what amount or what kind of half, quarter, or small portion of the share of the growth is a result of your geographic expansion to the West coast? And then, what would you say is--we'll call it more organic growth from your existing geographic territories?

Well, let me address that, Andy. The Nationwide growth that was discussed in the press release was almost entirely organic growth from current customers in some geography. I don't think there is very much California business in there. I think we are growing out there, but the bulk of that is coming from current accounts and expanding geography outside of California, although ultimately we expect the California growth to have an impact there.

Woodmark's growth, again, I don't know that--I think it's a little too soon with the Pacific Stair operation, to really--to see a great deal of additional growth there on West Coast from Woodmark. So their number is really related to their current operation. And I'd say a lot of it has to do with our growth in the--what I'll call the Georgia or Southern area that we can service out of Atlanta. And then, the difference is really the addition of Pacific Stair on its own. Hopefully, that--I'm not sure that answers your question, but--.

--It goes part of the way to do that. What other product lines have you not put out yet into the West Coast that you might be able to put out there [inaudible]?

We basically have pretty much everything out there at this point between our Nationwide and Woodmark companies.

Okay. And is there any synergies any opportunities to do your Florida Pneumatic products out West via the--we'll call it the facilities you put up out there, or--?

We do sell out West in our Florida Pneumatic already. It's a--and if the time comes that some customers want us to be stocking product out there, we can certainly look into that. But that's not the real basis of our move out there.

Okay. And with respect to Florida Pneumatic, you had a very major--one of your two major customers had done inventory reductions third quarter and some fourth quarter that greatly impacted Florida Pneumatic. And you've given indications that they might have depleted their cutbacks and stabilized. And you have a second major customer. The first quarter impact, I just wanted to get a handle. Is the rebound or the increase in the first quarter - the large customer - Sears or Home Depot?

Sears is essentially flat for the first quarter and Home Depot is down.

Okay. They were the ones down. And then, there is one that's described as up year-over-year.

Well, I would say it's flat, modestly up.

Okay, okay.

It's essentially flat.

So do we--do you think the tide has turned on the Sears side now and the visibility going here into the second quarter as Sears is--obviously going into third quarter, year-over-year comparisons are going to be quite easy.

Yes. Again, we can only operate our business. We can't operate others businesses. And we can only reflect to you what we are being told. And we've been told things right along which really have not--really so come true. But they tell us that they are about to start ordering and in a more aggressive and better pattern. But again, until we see it, we don't really believe it.

And then, your interaction on the Home Depot side in terms of feedback. Okay, they've cut down their inventory levels. Are you getting indications or observations that their inventory cut back -because they weren't subject to a big merger that was disruptive, et cetera - that their inventory reduction program was as stark and deep as the Sears program? Or is there visibility as to their return to a more normalized level?

Theirs is a different issue. And, Joe, you can expand on it if you want. But their issue is a combination of lower inventory levels as well as fixing up their displays in their pangrams and a lot of stuff which we're in the process of doing, which should be introduced somewhere early in the second half.

Yes. I would second what Richard said there. I think that our indications--we get data on in-store sales from both those accounts. And we feel fairly confident that the inventory reductions are related to warehouse inventory that's being held and worked down. But having said that, I do agree with Richard about the displays which we're truly trying to upgrade and there is going to be something done about that with our new product launch later in the year. So that should address that issue.

Is Home Depot or Sears to be the first to roll out your new redesign products?

Home Depot.

Home Depot. It's Home Depot.

Home Depot will be the first to roll it out?

Yes. And--just to make it clear, they're not both getting--we came up with a program for each company and each company had a different set of needs and requirements. It's just that we happened to be doing them both in the same year. But those two--we weren't driving that as though--we weren't driving that and then saying, well, here, Sears, this is your look, and Home Depot, this is your look. It's not really like that. We worked with each customer and developed a new look and they're coming out of different factories and it's not really the same product. It's one's designed for one and one's designed for the other. But having said that, we're very happy with the way they both look, both sets of products.

Is part of the inventory reductions at these customers, at Sears and Home Depot, related to the fact that a new look and new SKUs are going to be rolled out?

No, I don't believe that is the case at all.

Okay. Will there be somewhat non-recurring levels of purchasing because of the new look and new SKUs?

We're still looking through that. We're still working through the transition ordering and inventory levels. I don't really have a good answer for you on that. I mean, at this point, we're assuming it will be a relatively smooth transition with no impact up or down in purchases.

Okay. And last quarter we did talk about this where the--as a result of the reduced purchases at Pneumatic in particular, and in other areas, the inventory levels had not been brought down on your end as much as you might have liked them to have been, thus reducing your net borrowings, et cetera. Is that more of a time delayed thing? And do you have visibility and expectations for additional debt pay down above and beyond the Embassy sale, which the debt has now been moved off I guess to discontinued ops there?

Yes. The debt is now in discontinued operations. The--we do anticipate other debt pay downs for the rest of the year, primarily just from positive cash flow from operations. I remind you that Q1 is typically our worst cash flow quarter and that it's generally better in the last three. And it's really Q4 where we get the greatest amount of cash flow if you look at the quarterlies.

But having said that, we think that with the change to some alternative suppliers--in fact, we know with the change to some alternative suppliers at Florida Pneumatic, we're going to have a tighter window between ordering and receipt of product. And it goes without saying that that should help on the inventory levels. The lead times are going to come down.

Okay. I'm going to back out of the queue. Hopefully, there are some other questions. But I do have some more, so please come back to me.

You got it.

Your next question comes from Sam Rabotsky with Sam Rabotsky Management.

Hi. It's SER Asset Management. I didn't want Andy to feel alone. But he does a wonderful job asking a lot of questions. Let me--the--your 10 to 20% improvement for the year, does that consider any kind of real estate sales, any kind of--and do you expect to have those in this current year?

It does not include the real estate sales and--am I right, Joe? Is that correct?

Yes, that's correct.

Right. And we do expect that to be within the next 60 days or so.

And as far as the--even though you're not commenting relative to a quarter-to-quarter basis, are you--do you expect the earnings to be sequentially another--do you expect any backend loaded as far as improvement in earnings, or do you expect them to be even? Or you're not able to talk about that?

Well, generally speaking, our second and third quarter are our better quarters. But in this year, it may be a little different with the product introductions at the retail customers. There may be more of an impact from others in a more delayed fashion this year. I'm not--it remains to be seen.

Okay. And I try to understand what you said relative to the first quarter. Were there--the expenses that incurred that brought your income down compared to the previous year. What was that specifically? Were there extraordinary items or--that doesn't expect to be repeated?

Yes, there were--we can--Joe, you can go through them. But there were--most of them--many of them were nonrecurring.

Yes. Just to highlight a couple of them, I believe we said that we moved our corporate headquarters during the first quarter. And while we capitalized building improvements, as you can imagine, there were a tremendous number of costs involved in that move. In addition, there were some unanticipated fees from our prior auditors on the transition from the old accounting firm to the new accounting firm, which were unfortunately not anticipated. We did have a tax audit for a prior period that had an adjustment that was certainly not expected. And then, in general, we had some typical accounting fees that in prior years tended to fall in the second quarter, this year fell in the first quarter, which, of course, we'll pick up the benefit of that going forward. And then, finally, we did have some increased marketing and sales expenses at Florida Pneumatic in the retail area to try to generate some additional revenue. Of course, that revenue is not here yet. So that will also show a little bit of a disconnect between that expense and the top line.

So what is the total of all of these numbers?

I mean, it's in the hundreds of thousands of dollars.

Hundreds of thousands.

Yes.

So $200,000, $300,000?

Yes. I said--as I think I said in my comments, if you took a $300,000 adjustment to SG&A, you'd get the percentage right in line. And between all of those items, we're certainly closing in on that number.

Okay. Now, I guess, so at this point you have made the acquisition and you sold the business, and you're basically integrating everything. Are you still looking at other acquisitions or is it your--basically your mindset to run what you have and--before you sort of look at anything else?

We are always looking at other acquisitions.

Okay. Well--.

--That's continuing and we're--and in a very serious manner. That's just part of our mission.

Then are you--.

--To grow the Company.

And I guess based on the price of the stock, you would either use a combination of cash and stock or whatever.

We generally buy for cash.

Okay.

We generally do not buy for stock.

Okay. Well, good luck.

Thank you.

Thank you, Sam.

Thanks for being on the call.

(Operator Instructions.) Your next question comes from Andrew Shapiro with Lawndale Capital Management.

Well, it's nice to finally have some company in the Q&A.

You mean we're not company, Andrew?

Well, it's just--we're having always a Q&A party here.

Yes, okay.

[Inaudible] people at the party.

Right, I understand.

But I'm going to do some fill-in questions, if you don't mind, now.

Please, please.

If no one else is here. Okay. Back on the Florida Pneumatic, you mentioned some initiatives in the industrial side. What specifically are you looking at doing there, and when and how much investment will be required to do it then?

Go ahead, Richard.

Yes. I was going to say, it's just adding products. And investment is nothing abnormal. It's what we would normally do when we add all the products. Nothing significant that would be noteworthy.

Standard [marketing] [inaudible]--?

--Yes--.

--[Inaudible] headcount?

Yes, I would say. And we're just trying to broaden our range of industrial product so that we can just get more of that business, which is more important business for us. I don't know if--Joe, if you can add anything on to that.

Yes. The only thing I would add is that in terms of looking at acquisitions, I'd say we're definitely focused more on looking at industrial kinds of products and tools in the tool group than retail. If we--we certainly have. Having said--I wouldn't say that we're looking at acquisitions any more at Florida Pneumatic than we are anywhere else, but to the extent we are there, we're focusing on industrial tools.

Could you expand a little bit on that since, as you know, when we come across small companies that might be a fit for you we turn--we introduce those ideas to you. What do you mean by industrial and companies you might be looking for?

Companies that sell to industry, to [factories]--.

--[Inaudible] in the hydraulic cylinders, right?

No, no, no, no. We're talking about in the tool--in the tool arena.

Right. This would only be tool products.

This would only be tool--we're only looking at--when we talk about industrial, we're only talking about in the tool area.

So could you just cite an example of an industrial tool--?

--Chicago Pneumatic is an industrial tool as well as a retail tool. Sioux - S-I-O-U-X - is an industrial product company.

I mean, Andy, there's lot of--.

--Millions of them--.

--Lots of industrial air tools used on assembly lines all over the country. Versions--similar versions to what we have, but not exactly. And we would also look at tools that are sold--other tools that are sold into garage shops and used by mechanics that aren't even necessarily air tools.

Would you be looking for other brand names or just the tool companies that you'd put into your brand?

It could be either one.

Okay. Can you speak to the automotive side of pneumatic - what new products you might have there. This historically has been--and you've talked about how this is much more of a new product [indiscernible] [in the channel] for you and you had a little bump in it this quarter.

Joe, maybe you'd want to answer that one better.

Yes. We do have a couple of new products slated for automotive this year. I frankly don't remember if it's slated for second quarter or third, but it's imminent and we're excited about it. And we think that we're going to get a little bump from that. We did cite that without that we tend to--sales tend to fall off a little bit. So we are addressing that and we plan in the future to not let a year go by without some sort of introduction in that area.

But Andrew, I might mention to you that the automotive is a very commodity-driven business. And generally speaking, though we're in it--because we're in it, we don't look to go further in that arena.

Low margin.

Yes.

We're trying to be very selective about what we sell.

We have enough low margin business. We don't need more.

Franklin--what went on at Franklin during the quarter? Is it other ongoing or related integration costs or what's kind of slowing things down?

No, it wasn't integration--it wasn't integration costs. It's just--it's a very--that is a commodity product and it's an extremely tough product to sell and it's a personal sale. And it's just some of our customers with the transition to the new--we're--I guess--well, I guess I could say that it is a little bit of integration because we changed a few policies, we're a little stricter with accounts receivable. And--.

--So that might cost you a sale here and there.

Yes. It may cost us a sale here and there because we want to make that we're getting paid for our products.

Yes, I mean, we're trying--.

--That's one thing, so--.

--It's not really a sale if you don't collect.

Right, exactly.

We're trying to clean up the customer base a little bit. And in some cases we're having to make some hard decisions about a few accounts that we've had that may not be the best accounts to have in the long run. So--.

--How I would best categorize it, Andy, is that we are becoming much more professional with--it was more of a hand-to-mouth Mom and Pop type of a business and it always worked very well for us. But now, we're doing it more analytically and more professionally, not to minimize what we've done before. But we're just doing it in a more systematic fashion.

Okay. It appeared it was--now back into the hardware in Nationwide. It appears that without [expensing], Nationwide was actually down and the rest of the business was slightly down. So what do you attribute that to?

We--.

--Andy, that's--.

--I don't think that's correct-.

--Not correct.

I don't think that's correct.

That's absolutely not correct. Both Woodmark was up and Nationwide was up. And, of course, PSP was all incremental, so that is not correct.

I guess it just said fencing was up a certain amount. And then, overall, something was up a little less than that.

Yes. I know what you're referring to. I know what you're referring to. It may just be a play with numbers. But, no, essentially Nationwide is up every which way to Sunday and Woodmark is doing just as well.

Yes. We were very close to our expectations overall in the hardware group for the quarter.

Right.

To what do you attribute the positive reversal in the kitchen and bath remodeling markets? Because I don't recall you having implemented any particular initiatives there to speak of.

Two of our major customers had big inventory reduction programs last year and now this year they're ordering more--currently. And also, we made an inroad with another customer, which only started I would say the second half of last year. On a--we were doing business with them, but we stepped it up to a new level the second half of last year, which is continuing into this year.

Okay. Are the gross margins at Pacific Stairs structurally lower or can they be brought up to Countrywide level?

They are structurally lower for the most part. I mean, we're going to be looking at trying to fix that a little bit here and there, but they are niche products and competitive by nature in that particular marketplace.

I would just add to that, if you think about it, Pacific Stair is functioning really almost like a distribution center for Woodmark, much like Stair House is in Georgia. And if we were to break out Stair House separate from Woodmark, you would see very similar margins. It's just what we have to do to be able to service the local market, but we still think it's a strategic--good strategic play for us.

How much--so how much lower are Pacific Stair gross margins from the Countrywide? 400 basis points? More?

I'd be--it's at least--it's certainly double-digits. I don't have that in front of me, but it's certainly double-digits.

Wow. Percentage points?

yes.

Wow. Okay.

But again, you're forgetting that part--with Stair House, the sale is coming through Woodmark as well, so that margin is split between two locations. So the total margin on the product from the time--for P&F would be greater than what you're just seeing at Stair House, if that makes sense.

Yes. Okay. Can you remind us again - the gain from the real estate will come during the current second quarter?

It's scheduled to be in the second quarter, if environmental issues that are being finalized and addressed at this point and a few other municipality approvals come through. Again, that's a little out of our control. But we do expect it to be before the end of the second quarter, as of now.

Okay. And is it looking as if there would be a purchase price adjustment of size?

No, no. Not of size.

All right.

I mean, we have to--we had to do some remediation work there to make it a good clean title for the buyer. But it pales in comparison to the overall purchase price.

Are you seeing any slowing regionally in your new home sales-oriented businesses yet?

I would say that's a fair statement. Yes.

And yet, you're still comfortable with the guidance you have provided?

So far. Yes. All of our customers are giving us thumbs up. Plus we're making more penetration with other customers, which picks up--hopefully, picks up some of that slack.

Yes, I would just add to that. Home starts in Q1 were 2.3 or 2.5% up from the prior year. That number was like 8 or 9% in Q1 of '05. So that's going to have an impact, but we are gaining new accounts as well, so that's working to help improve things.

Right.

Right. Your geographic expansion--.

--Absolutely--.

--[Inaudible] the decline in the [inaudible]. And lastly, can you confirm the proceeds of the real estate sale that will go to debt pay down? Obviously, the mortgage is going to get paid off. But again, could you generally quantify the additional proceeds that are coming in above and beyond the debt--mortgage debt that will go towards debt pay down?

Well, Andy, we did state in an earlier release that the gain was approximately $5 million. So you can do the math and take out the mortgage, and then, you can count on the rest going to pay down debt.

Okay. So that--when you take that into--.

--Obviously, we have to pay some taxes.

Yes. When you take that all into account after tax proceeds, it seems like your debt pay down will put you down to debt-to-equity levels that are probably the lowest this company has seen in quite some time. Does that alter or change your focus on the acquisition front, on the buy-back front, and other alternative fronts at all? One aspect is, obviously, cash that's paid out in a dividend isn't able to be used for acquisitions, but it's still tax efficient cash payouts rather than through other ordinary income - salary events. So as your debt pay down levels come down, do you recognize or do you agree to the idea that the levels themselves would be down near somewhat historic lows and does it impact your strategic planning at all?

They may be at historic lows, but it will not impact our strategic thinking. Our strategic thinking is to grow the company either way. So we're looking to grow that business and we'll just pay down debt. And it will just give us that much more availability to buy another company at the right price.

So [inaudible] for example, strategically you would be looking to make a larger acquisition than a Pacific Stair?

Without question.

Because of--.

--Yes, without question. However, having said that, we've never--even without the debt-to-equity ratio being lower, we haven't really let that factor into our thinking. If our banks have the appetite to do--to let us borrow the money, and if it's a good acquisition for us. We haven't done small acquisitions because we're looking for small acquisitions. We've done small acquisitions when they come our way. And we've done slightly bigger ones when they've come our way and they make sense for the company as well.

Right. But as your availability to make the bigger ones come about, the bigger acquisitions tend to be let's say less synergistic and possibly more incremental in terms of the product line or divisions. Like Green was a big acquisition years ago--.

--Yes--.

--When P&F was smaller. And Pacific Stair was a very nice small tuck-in acquisition that made a lot of sense and it was done when your leverage ratios were much--were on the high end. So with your leverage ratios down on the lower end and your ability and inclination to make maybe bigger acquisitions, does--is that leading--is that a broadening to the idea that you make look into a third divisional area, or it would still be just a focus on a larger acquisition, but still synergistic and tuck-in-like?

Yes. Our sense is that we're looking to stay in the tool and hardware arena, not go into a third area again. We painstakingly got out of that philosophy for us. And we want to stay more focused on where we are. So we're looking to grow in the tool arena or the hardware arena. Having said that, it doesn't have to be what we would call a direct hit for product line, but it would have to be a direct hit for marketing or some other aspect of it.

So you'd try to pick up some other company possibly that its customers were in the Home Depot/Sears market rather than risking things by going to someone who is a supplier to Lowe's?

Well, I mean, since you're mentioning that, we're not--we wouldn't be really looking to go further into the big box business. That's the business we're in. We're not looking to expand in that business.

Right.

To be honest. So--but we would look at products that we sell to that business that we could go out to industry with.

Okay. All right. That's a great and helpful insight. Thanks a lot. No more questions.

Okay.

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

Okay. Thank you all so much for being on our call today. And we look forward to speaking to you with our Q2 results in the next several months. Thank you all. Have a nice day.

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