P&F Industries Inc (PFIN) 2006 Q2 法說會逐字稿

Welcome to the P&F Industries' second quarter 2006 conference call. At this time, all participants are in a listen-only mode. Following management's prepared remarks, we will hold a Q&A session. (OPERATOR INSTRUCTIONS).

As a reminder this conference is being recorded today, August 10th, 2006. I would now like to turn the conference over to Jody Berfanine. Please go ahead, Ma'am.

Thank you, Operator, and good morning and welcome to P&F Industries' second quarter 2006 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 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 and 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 may 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 statement whether as a result of new information, further development or otherwise.

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

Good morning, Jody, and thank you so much and thank you, everybody, for joining us today on our conference call for our second quarter 2006 results.

I will start with a brief overview of our financial results for this quarter - this past quarter. Revenues were $28.9 million compared to $28.1 million in the second quarter of last year. Earnings from continuing operations declined by 11.1% to $1.3 million from $1.4 million last year. And diluted earnings per share from continuing operations were $0.34 versus 37% in the prior year period.

Including our discontinued operations which, of course, are Green Manufacturing and Embassy Industries, net earnings for the quarter were $1.3 million or $0.35 per diluted share compared with $1.5 million or $0.38 per diluted share for the second quarter of last year. Although our quarter's earnings were down year-to-year for the quarter I'm pleased to report that this period was our second best second quarter in the Company's history, following last year's record second quarter.

We continue to generate increased revenues at Countrywide through our Woodmark business unit; and we also benefited from the incremental revenues from Pacific Stair which we acquired on January 3rd of this year. A 20% revenue decline of Florida Pneumatic (technical difficulty) temperate these revenue results.

In addition SG&A expenses grew at a faster rate than consolidated revenue for the quarter due to several factors, including certain nonrecurring professional and legal fees, planned increases in sales and marketing expenses to drive future revenue growth, increased freight cost - reflecting the obviously high price of oil - and non-cash stock-based compensation expense.

These higher SG&A expenses - combined with a decrease in sales of Florida Pneumatic - caused consolidated earnings from continuing operations to fall slightly below that of last year.

Before I take you through a more detailed look at the operations of each of our business units, I would like to just tell you briefly what each of our business units do as I do at every call.

Florida Pneumatic is primarily engaged in importing and manufacturing of approximately 50 types of pneumatic hand tools and our Countrywide Harbor division imports and manufacturers' hardware products for items such as doors, windows, and fence/staircase components, kitchen and bath, hardware and accessories as well as other general hardware products.

Of course, Countrywide is comprised of Nationwide Industries' Woodmark International and Pacific Stair which as I mentioned earlier we just acquired this past January. Pacific Stair is the manufacture of Premium Stairwell Products and a distributor of staircase components for Woodmark to the building industry primarily in Southern California and the Southwestern United States.

Now I will review the quarterly performance for each of our units.

At Countrywide Hardware, revenues for the second quarter increased 19.3% to $19.3 million from $16.2 million last year. Woodmark contributed $11.8 million in revenue, increasing 19.2% from the second quarter of 2005, and Pacific Stair contributed $1.7 million in revenue. Consistent with the first quarter revenues from the sale of Staircase Components benefited from greater customer penetration. And kitchen and bath products sold into the mobile home and remodeling markets rose as we strengthened relationships with certain of our customers.

Partially offsetting these gains were [Nationwide] revenues which decreased by approximately $466,000 or 7.5%, primarily attributable to a decline in sales of fencing products and patio products.

Our gross profit margin at Countrywide decreased from 34 -- excuse me, from 35.9% to 33.2%, reflecting primarily cost increases from our Asian suppliers, tied to the rising cost of certain metals and the inclusion of a lower gross margin dropped Pacific Stair revenues.

In addition, margins were also impacted by significant revenue increases in the lower margins direct container business of Woodmark, which also experienced some competitive pricing pressure on spare parts in certain regions. The gross profit margin percentage decline was partially offset by margin improvement at Nationwide, which benefited from a more favorable product mix and a shift of higher quality/lower cost suppliers for some products.

We have taken further steps to address Countrywide's margin erosion with redesigned products that should generate improved margins for a major portion of the product line in the next several quarters. Countrywide's Woodmark unit continues to expense revenue growth in stair parts, and its kitchen and bath division performance has improved, reflecting strengthened relationships with certain customers in the mobile home and remodeling markets.

We remain encouraged about the long-term growth opportunities at Pacific Stair through its strategic alliance with Woodmark, which gives us a combined product offering that is now the most complete in the Southwestern U.S. and Southern California.

Although fencing sales nationwide were down this quarter, they are up 4.6% on a year-to-year basis over the prior year, primarily reflecting increased demand for new and existing customers.

Revenues in Florida Pneumatic decreased 20% from 11,960,000 in the second quarter of 2005 -- 2005, excuse me to 9,565,000 in the second quarter of 2006 due to approximately $1,000,893 less in retail promotions in this period, as well as a decrease in base sales of approximately $782,000.

Base sales declined due to approximately $722,000 in lower purchasing from a significant customer - as part of a program to reduce its overall inventory levels - and to a $60,000 drop in base sales from another significant customer. Partially offsetting these decreases were incremental revenues from new products in the retail channel of approximately $295,000, and increases in [Berkley's] revenues of approximately $199,000 due to better market penetration.

As Florida Pneumatic gross profit margin increased to 31.4% from 27.8% - due primarily to a lower proportion of the amount of retail promotional sales in this current period which, historically, have lower average margins versus the prior year and the strength of the U.S. dollar in relation to the Japanese yen and the Taiwanese dollar.

Gross profit margin increases were also impacted by a more favorable product mix. At Florida Pneumatic we remain focused on improving gross margins by sourcing products from other low-cost, high-quality suppliers to offset pricing pressures in our retail business. We are on schedule for the replacement of a significant portion of our retail product line through the introduction of a substantially redesigned offering, with an enhanced look and performance, in the third and fourth quarters of this year.

We also plan to increase our focus in the higher margin industrial sector through product development and other channel initiatives. We believe that penetrating the industrial sector, which offers greater growth opportunities, is critical to our future success.

I'd like now to turn the call over to Joe who will review some other key financial matters.

Thank you Richard. Since Richard focused on the quarterly information I would like to give some perspective for the first half.

Revenues for the first six months ended June 30, 2006 increased 6.2% to 55.7 million from 52.5 million for the first six months of 2005. Net income from continuing operations for the six months ended June 30, 2006 was $2,155,695 or $0.56 per share on a diluted basis, as compared to net income of $2,555,366 or $0.66 per share on a diluted basis for the six months ended June 30, 2005.

Revenues at Countrywide were up 20.7% for the first six months of 2006, improving to 36.7 million from 30.4 million for the prior year.

Sales of Woodmark Staircase components continued to increase, benefiting from better customer penetration. These sales were up 14.5% or 2.9 million. Woodmark's kitchen and bath products - targeted at mobile homes and remodeling markets - were strong, increasing 23% or 900 million from 2005 levels. This reversed the trend from 2005 and was accomplished through stronger relationships with current customers and to a lesser extent penetration of a plumbing wholesale channel.

Nationwide sales were up slightly, driven by a $279,000 increase in fencing products, which were offset by a decline of $135,000 in OEM sales. Fencing sales growth has slowed due to a reduction in housing starts throughout the country.

The gross margin at Countrywide decreased from 34.2% to 31.6% in the first six months of 2006, as compared to 2005.

The decrease in the Countrywide margins was due primarily to some cost increases from Asian suppliers due to increases in the cost of metals, competitive pricing pressures on certain stair products and the [occlusion] of Pacific Stair which operates at a lower margin than the rest of the group.

Revenues at Florida Pneumatic decreased 13.8% to 19 million for the six months ended June 2005 from 22.1 million for the prior year. Excuse me -- June 2006. There were approximately 2.8 million less in promotional sales in the period, as well as approximately 500,000 in decrease-based business sales due primarily to an inventory reduction program at one large customer.

In addition, sales decreased to Florida Pneumatic's Franklin division by $213,000 due primarily to decreased shipments to a few customers related to weak in-store sales and supply related issues.

Gross margins increased from 29.3% to 31.9% year-to-date at Florida Pneumatic due primarily to a lower proportion of amount of retail sales in the current period which historically have lower average margins; and also the strength of the U.S. dollar in relation to both the Japanese yen and Taiwan dollar.

Consolidated SG&A expense increased 1.5 million or 13.1% for the six months to 13 million from 11.5 million for the year earlier period. SG&A grew at a faster rate than consolidated revenue increases due to certain non-recurring professional tax fees to non-recurring costs of the move of the Company's headquarters, increased freight costs and planned increases in sales and marketing expenses that are intended to generate additional revenue in coming periods.

SG&A as a percentage of revenue increased from 22.0% to 23.4%. Interest expense for the six months increased 12.5% to a little over 1 million from approximately $900,000 in the prior period. This was due primarily to higher average interest rates. Other items affecting cash flow were depreciation and amortization which were 453,000 and 599,000, respectively, for the six months. For the quarter these amounts were $226,000 and $300,000 respectively.

Finally capital expenditures were 908,000 for the six months versus 407,000 for the quarter. I would like to now turn the call back over to Richard. Richard?

Thank you, Joe. Before I open the call to any questions any of you may have I'd like to remind you that we've modified our guidance policy to only provide full year estimates going forward. And based on our current outlook for our business in 2006, we are modifying that guidance and now expect net earnings from continuing operations to be weaker than 2005 primarily due to the margin degradation at Countrywide's Woodmark division and, to a lesser extent, the non-recurrent corporate expenses noted in the first quarter and higher interest expense resulting from an increase in interest rates. Interest borrowing rates.

We believe that the incremental results of operations from the recently acquired Pacific Stair acquisition should partially offset these factors. Our revenue guidance will stay unchanged. However we anticipate our earnings to grow --

I'm sorry. Our revenue guidance is unchanged. We anticipate revenues to increase between 5 and 10% to approximately 113 to $119 million, with revenues at Countrywide expected to grow between 15% and 20%, reflecting continued growth at Woodmark principally in the stair business and inclusion of Pacific Stair products. Revenues at Florida Pneumatic are expected to decrease by 5 to 10% as our retail business continues to contract, partially offset by gains in our industrial and catalog businesses.

We continue to anticipate gross margins to range in the 31 to 33% range which reflects continued margin erosion at Woodmark due to competitive pricing pressures. Selling, general, and administrative expenses are expected to range from 22 to 24% of revenues; and interest expense is expected to approximate $2.1 million. As a result of all of the above we anticipate net earnings from continuing operations to decline between 9 and 15% from 2005.

That is the end of our report today and we will be more than happy to answer any questions anybody may have at this time. Operator.

(OPERATOR INSTRUCTIONS) Andrew Shapiro with Lawndale Capital Management.

Good morning. Several questions. I will ask a few and then back out of the queue and let anyone else who is waiting ask and hopefully there will be someone.

The first and main question for me - since it results in the impact of the sizable gain in cash proceeds to pay down your debt and reduce ongoing interest expense etc. - is your sale of the old Embassy land and factory of Long Island. Can you speak think about the sale, the status, the information that was disclosed in the 8-K? That resulted in the -- we will call it the sale contract dispute and where things are. If they are dead with the former buyer or they're being renegotiated and what is happening with prospective other buyers?

I think that what we said in the 8-K is pretty self-explanatory and, really, at this point I don't know what else we can add to that that our council or anything would let us do about it, regarding our case. But it's just simple that -- just simply stated in the end of July we received a letter from the people who were buying the building from their lawyers and they are just (indiscernible) terminate that contract that we had entered into.

And we agreed to sell the building for 6,400,000 and that little change and there was an environmental issue which is subject to open discussion at this point. We are not quite certain even if they have a leg to stand on. But at this point it's fair to say that they're not buying the building; and we are remarketing the building.

And having said that it's a good asset and we will sell the building. More than that I don't know what I can add. If you have something specific to ask if I can answer it, I will be happy to answer it for you.

I will actually try to ask specific questions that hopefully you will be able to answer. So that particular contract they think that conditions to close didn't occur; you think the conditions to close did occur. So can you confirm I guess at this point, the deposit they put on the parcel is the Company has maintained or holds? You have the deposit. Right?

Yes we have the deposit and that is -- that will be, I guess, part of the lawsuit.

And until the lawsuit or the dispute is resolved, that deposit is not considered income yet for the Company?

Not in any way, shape, or form. Of course we have it and it will be -- no doubt we intend to keep it and no doubt it will result in a lawsuit.

How much is it?

Roughly 650,000, I believe.

So it is a sizable amount. Is it currently on the Company's balance sheet as an asset and a liability or nowhere?

Nowhere at all.

I believe, technically, it is probably in escrow but -- and in any event that would be a third quarter event. So it is nowhere in the June statements.

Right. But it's 600,000. So if -- as this thing resolves and the cash is kept, that is -- would the accounting treatments technically be a reduction further of the cost basis which is minimal? Or would it be considered an income item?

That's a good question. I honestly don't know (MULTIPLE SPEAKERS)

600,000. I thought it was worth asking.

I mean, at the end of the day it ends up in income at the -- ultimately. Whether that means through a reduction in the base or just a straight other income item, I don't know. I think it somewhat depends on how it goes, if there is litigation.

So then we have the issue of the resale of the facility, mitigating damages, yada yada. Having a second buyer come on in so currently it's renegotiated and do you already have interested parties looking at it?

We have. We are actively selling the building and there is nothing -- we just started in the last week or so and to my knowledge there is nothing substantive yet.

People are looking at the building.

But obviously people are looking at the building. It is actively back on the market and I will say it is a good asset and we will sell it. There is no issue with that at all.

All right. So then let's talk about the environmental issue that caused them some concern and what the status is of that in terms of your belief. According to your 8-K was something about -- possibly anything on the parcel was a result of a neighbor and remediation may be the responsibility of the neighbor.

Can you talk a little bit more about what may or may not be on the parcel or the property itself? And what is happening to resolve that issue?

The environmental issue, there was -- I will segregate it by saying there were two environmental issues.

One was what I would term the mundane rote type of environmental issue that we he remedied to everybody's satisfaction and we got what they call a new action. No further action required. Letter from the local ordinance, the local agencies here. So there was no issue with that.

And there was a question of a petroleum spill, which did not necessarily come from our property, that we are further investigating but seems to be -- but does not seem to be at this early stage something that was our -- is our responsibility. But I can't tell you any more than that. Because I don't know. I am not being secretive. (MULTIPLE SPEAKERS) seem to think that it is very much under control.

I do not think there are any issues going forward with selling our building environmentally.

So causation of the petroleum issue is being investigated. Is there an estimate on the cost of remediation, regardless of who has to pay for it?

I'm not even saying there's a problem any longer. I said, there's no answer on that but it's nothing substantial.

Just to be a little more clear that petroleum problem was in a far corner of the property, upgradient from the main facility. So to our knowledge we never stored anything in that area; it's on the opposite side of the building from where we had our own fuel tanks, caps. So we are pretty confident it has nothing to do with us.

Right. But I'm more interested in the issue of, okay, well how much does something like this cost to remediate because in terms of my downside at P&F - even if we were responsible, the remediation comes off the purchase price and gives me better handle on what I think you guys were under contract to sell for around 6.5?

We were under contract to sell for 6,403,000 and Andrew, again, I can't tell you anymore. You can ask 50 questions if you want. We can only tell you what we know. Nothing more -- I have told you everything there is to tell you. There is nothing more to say. There -- we do not, we do not have any clue how big a remediation cost factor would be if there was even to be one at this point.

And I can't even tell you that there is a cost associated with the because I'm not even certain at this late date if there is an issue anymore. As I said to you, at this point I think that we have covered all environmental issues and everything has been expensed already. I do not expect anything to be of any consequence going forward.

Having said that, anything can happen but at this stage there is no further knowledge that we have to indicate anything more looming.

The only thing I would add is, I certainly think before our next call we will know what the story is on the environmental issue. I don't think this is going to take months and months to sort out what's there and to what extent it is.

Okay. Because if I was buying the parcel, I don't necessarily care who pays to fix, it, I just want to know and then I'm going to set my price and that's it and then I will buy the parcel. that's it.

Right. (MULTIPLE SPEAKERS)

Having said that, the environmental issues that were outlined in the contract of sale were addressed and remedied already.

Yes. I understand. I understand it's just this history or issue in the far quarter of some petroleum in the soil thing.

And again. We are not even sure that there is even an issue with that at this time. And I will tell you and the bottom line is, we have a very good asset there. We will sell it. There is no issue with selling it. We do not have a super front side or a problem in anything, in any nature of that consequence.

Right. Now, Joe, you gave the depreciation and amortization for both the quarter and the six months. But when you read through on the CapEx side, unfortunately, I think you gave a six months versus a one quarter and I don't know which is prior year of this year. Could you just (MULTIPLE SPEAKERS)

I wasn't giving any prior year data. To be clear the capital expenditures for the six months were 908,000; capital expenditures for the quarter were 407,000. That is all '06 data.

The remaining CapEx expected expenditures obviously absent this -- any environmental remediation is what for the year?

Close to $600,000 and a good chunk of that, there's a little more than normal? We are doing a build-out of our Nationwide facilities.

And which way are --?

In Tampa.

Tap but is it more office space or --?

It's primarily going to add office space. Yes.

Let's talk a little bit about Florida Pneumatic and then I will back out of the queue and ask questions on the hardware side.

Florida Pneumatic, when you talked about these things last quarter you had talked about how the rollout of the new products will be coming here in the third quarter and in the fourth quarter. How is the new product rollout going so far this quarter and do you expect to have all the new products deployed by the end of this year?

We are on schedule. No. Not everything will be deployed by 12/31 and that was never the plan. Some of that will spill over into first quarter of next year.

The process has begun and we are on schedule.

You had mentioned on the last call that the new products will be rolling out to your customers, particular your two big customers - Sears and Home Depot - you had implied that Home Depot would be the first to roll out. Are the products that have been rolled out to date, here we are in the middle of August been solely now to Home Depot or has there been uptake at Sears as well of the new products?

I don't have in store data for Home Depot. I do know that the product is -- if it is not on the shelf there already it certainly will be there shortly before the end of the quarter. I don't believe we have shipped anything to Sears yet.

Okay. Now last quarter, Home Depot is down just a bit but they were down mostly in your view due to inventory destocking for reasons other than the forthcoming new product rollout. The quarter you reported today looks like they were further tinkering with inventory. Was Home Depot the $60,000 clients or the $722,000 clients? And was that in anything in anticipation of the new product rollout?

Home Depot was the bigger number.

They were. Okay. Do you feel that some of that reduced purchasing was in the quarter ended June the result of anticipating the new products? Or a reduction of the inventory levels overall like the Sears thing was?

Yes it's the latter.

Oh, really?

We don't think that it relates to new -- getting set for the new product. In fact, in some ways we had to move the older product out to get ready for the new product. So the bulk of that is just their inventory reduction.

Then with Sears being down only 60,000 or so and from a base sales point of view, is that kind of a reduction where you were declining from them in the first quarter? And thus do you feel we'll call it the inventory lowering levels are behind you and Sears is at a normalized level now?

Yes. I would say that, yes, they are normalized.

The relationship with Home Depot has been a long-term one but not as long as the Sears one has been. This reduced inventory levels focus from Home Depot, do you have any feel for this being anything that is a reduced SKU or reduced exposure or should I say, relationship with P&F or it's across the board? Multiple vendors? You know, a policy gig just like the Sears thing was?

I don't -- I can't speak for other vendors but Home Depot. They have not reduced our SKUs. In fact we are discussing with them going in the other direction about increasing SKUs. So we don't believe it has anything to do with that.

Thus you also don't feel there's any ammunition of your relationship with them just like there wasn't with Sears?

No. No, I do not. I think the inventory issue is No. 1. I mean, I will say and I believe I've said on a previous call or two that we have some concern about the displays and how the product is kept on the shelf and we think that may be hurting in-store sales. The good thing about the regeneration or the reinvigoration of the line is just about every display will get touched and spruced up in the next few months. And our experience is that that's generally -- if nothing else happens that actually generates a little extra in revenue even if you didn't change any product.

Your product supply to Home Depot is sold under the Husky name or a different name?

Husky.

The sizable destocking or down here was for the quarter ended June. You're in the middle of this quarter. Has Home Depot returned to normal purchasing from you yet?

Well we are in -- it's a little hard to say because we are in the middle of transitioning the product lines so I am not sure what normal purchasing even means. But we are meeting our expectations on what we expected them -- sorry to be redundant -- but expectations on inventory levels there.

You did a good job with the margins in Pneumatic, given the large sales decline. Of course, a lot of that large sales decline was year-over-year reduction from promotional lower margin sales. Are the new products that are going to be moved through here first in Home Depot and then at the Sears are they subject to as part of a promotional program where you'll see lower margins than your base margins? Or -- and if they're not, and they are just going to be base margins sales of these new products targeting similar margins than you've had for base are even higher margins with lower costs (inaudible)?

I would say generally on both sets of product lines, our costs are improved.

Slightly.

Yes; this isn't an order of magnitude change (MULTIPLE SPEAKERS)

(technical difficulties) slight margin improvement from base sales but on the uptake is it going to be promotional?

No, this is not -- there are promotions later in the year and certainly some of them would be related to new product introductions. But the margins -- we think we are going to hold margins for the rest of the year where they are. So some of the reductions have been given back to the customer.

So I'm not really ready to say what is going to happen to margins in Q4 other than the guidance we have given overall. I think we are generally where we are.

A few more questions here on Pneumatic and I am back out the queue again with hardware questions to follow.

Your automotive business seems to be dictated by new product rollouts. What is the progress and timing of the new product rollouts? You weren't certain whether that was going to be a Q2, Q3 or maybe even early Q4 then.

It's on target and some of that will be Q3.

Now can you go into greater detail on how you plan to increase the industrial business? Is it primarily through acquisitions you are looking at? Is it a change or enhancement of your distribution resources? Is it all within your existing infrastructure?

It is really all the above. As you know, we are looking at acquisitions all the time across the board all of our companies. So if we are looking for acquisitions, that's the type of the thing we're looking for on the tool side but we are working with doing some things in the channel. As you mentioned yourself, the key seems to also be new product introduction.

So we have actually made a little more of a strategic alignment with our partners in Asia and their engineering groups to accelerate product development, reduce product development times and trying to get more product, new product in the pipeline than we have done in a lot of previous years. So it's really across the board.

Introduced new product, is anything somewhat proprietary to P&F?

There will be some items that are proprietary to P&F. Absolutely.

How much better are the margins comparatively speaking that you are targeting are you thinking could come from industrial products versus your current retail side?

I'm not sure -- say that again? I am not sure I follow.

You mentioned in the script how the industrial -- the product lines for the industrial would be targeted for higher margin (MULTIPLE SPEAKERS)

Our industrial business in general is higher margin than retail. So by definition, if we can move those sales, raise those sales vis a vis retail we [will lift] the entire average margin. I think that's what we're trying to get at.

So there's not a -- you normally see 200, 300, 400 basis points higher on the industrial site. There's not a --?

No. It's nothing like that.

Broadly speaking, your Companywide business mix in the last year has shifted meaningfully, partially not in the desired manner because of the inventory reshuffling that took place. Is there a percentage of sales that you would kind of like Florida Pneumatic and the tools business to represent within the mix? And do you think you can get the operating margins back to the low double digits or not?

Is there a percentage of sales.

That you would like tools to represent in the mix?

Of the total Company?

Yes.

I mean I don't know that I can answer that. I mean we like both markets so I guess my answer is, I would like to it be half. That's the easy answer.

Have you considered or are you -- have targeted any exposure in some of the we'll call it more razor blade applications associated with power tools, fasteners, other supplies? Things like that?

We look at those things when they come our way. I don't know that it's a particular focus of our search but there are some benefits as you know. The razor blade approach is a nice one, but there really -- we have a few of those and we've got -- we started in the beginning of the year with a diamond cutting blade program we're very excited about. It's not huge revenue but it is exactly that kind of product.

A last question for Pneumatic and than I back out in the queue. Hopefully there are others to ask questions. Otherwise I do have the hardware questions for you. So please come back to me.

Berkeley had a very sizable revenue jump for a company division or product line of its size. Is this new level a sustainable level, a non-recurring promotion rollout? What is was the story behind that?

Mark Berkeley has a new customer, a new customer that caused -- that we are developing and doing more and more business with -- that generated a lot of that increase.

Was that like initial inventory (MULTIPLE SPEAKERS) level will be reduced or --?

No. It is a customer that we have been doing business with for about two years now that is doing more and more business and we are getting more and more into their system and just doing more business.

It's absolutely sustainable.

Absolutely sustainable and actually growing.

Excellent. Please come back to me. I do have some hardware division questions, a few general corporate questions but I will back out of the queue. I've asked a lot already. Hopefully there's some people that want to ask questions. Thank you.

(OPERATOR INSTRUCTIONS)

Andrew Shapiro with Lawndale Capital Management.

Before you get started, I should say that for the most part generally speaking, you are the one who generally asks the most questions. You're the most inquisitive. It doesn't mean that there aren't many other people on the call but I guess you ask so many comprehensive and exhausting questions that I guess you are answering everybody else's questions which is a good thing and we appreciate your taking the time and the interest in asking us the questions.

We really do; because they're good questions and we are happy to answer them for you.

I hope you're not implying that if I ask fewer questions someone would ask questions because I have had a vacation now and then in these calls and the transcripts seem to be quite thin.

Yes. I'm implying that you have a good understanding of our business and we appreciate your questions.

People just weren't ready. You need to tell people you're going on vacation.

We're giving a complement so take it (MULTIPLE SPEAKERS)

I appreciate that. I have been one of your largest shareholders and the largest independent shareholder of this Company for more than a decade so -- .

We certainly know that and we appreciate that.

Let's talk a little bit about hardware. Can you speak to the Western expansion and whether or not you are break even there at this stage? You referred to here as the strategic alliance between your wholly owned Pacific Stair and your wholly owned Woodmark.

As you know, we start - before we purchased Pacific Stair we had a startup operation going on out there at the end of the summer of '05. And that business has been growing actually pretty nicely. And really the operations have been combined and commingled, even though we still have two -- we have a warehouse and a manufacturing facility within a mile of each other. But we've done a lot of moving product back and forth, management back and forth.

So the lines are getting blurred on whether the warehouse operation by itself would be breakeven at this point. I think the answer is probably yes but, certainly, the combined entity is nicely profitable.

So it sounds like right now with the two things near each other and all that you have access capacity to grow further there?

Absolutely. Absolutely.

And has that been the trend in your experience? Are those two entities growing and filling up that capacity?

We are experiencing growth. Yes.

Are there integration opportunities? SG&A opportunities that you have there? Or is it just going to be mostly leveraging the SG&A through sales growth?

No. I think there are -- the way we set this up - and the timing was a little delicate - we've timed the leases to expire simultaneously between the building we are leasing that was part of Pacific Stair originally and then the building we are leasing that was our own startup operation.

I think we probably got two and a half years to go there. We are not going to see the step function improvement in overhead absorption until that happens. But it will ultimately happen.

Now remind us, is fencing and patio typically weak in the quarter ended June or not?

Not particularly. I mean, I don't that in front of me but patio in general is a weakening division at Nationwide. We are sort of deep into the product lifecycle there and really, outside of the hurricanes driving additional sales, we are in a reasonably difficult competitive spot with patio. And I think as we said on prior calls, in the long run that's not going to be a focus.

One other thing I might mention is a year ago in patio we were still making screen doors - not particularly profitable but it was a decent chunk of the patio revenue. We got out of that business and freed up some space for other items so to the extent patio revenue was down, that is probably the majority of the reason.

Last year kitchen and bath hadn't been doing so well and the last two quarters seems to be doing quite well. Last year you discussed doing some more improvements of the product offering there, refocusing the sales efforts, etc. Did you ever initiate anything and that is what has resulted in the upturn? Or has the business turned on its own?

It's been a little -- it's been a function of both things I would guess, I would say. For the most part a few of our customers have just had better years with us. For the -- that's generally speaking what I would say is causing the better results.

Yes but just to point out one proactive thing we did we've made a real focus in plumbing wholesale. We hired a key salesperson for that late last year, I believe. And we are very excited about the opportunity for our kitchen and bath product to be sold through that channel which is largely untapped for us. We're having very encouraging results so far.

You have been transitioning as new suppliers. How has that worked out? I think as it's been mostly Nationwide and now Woodmark's doing it or maybe it was concurrent but the point is, have there been bumps in the road? There's more transitioning to be done and more opportunities to be had?

I would say for Nationwide the bulk of the transitioning has taken place; and we have achieved a large amount of the year-over-year savings in costs there; and in fact there definitely have been some bumps and although there may be some ways to go in terms of transition, the people we're working with are pretty full right now. And we are probably going to be slowing down some of the what transition is left. We'll probably move at a slower pace.

The Woodmark transition, I wouldn't call it as much of a transition as we had at Nationwide that there is a fair amount of the line we are looking at, transitioning here by year-end, let's say. At least we'll have targeted and have come to an agreement with somebody by year end but that will take some time to fully implement.

Now Woodmark, let's talk a little bit about the margin pressures. In addition to changing manufacturing you're looking to roll out new products at Woodmark to offset margin pressure. Has the new product been rolled out or is it still in the pipe?

It has been rolled out. The start has been slow. In this market, which is a fairly -- one that has a lot to do with aesthetics it takes some time to get a new look out there and accepted. And it could take a season or two, really, for that to fully get accepted out there but we are still preliminarily we are excited about what we see and everything is positive. But it could take some time.

Now the new product offerings and things like that for Woodmark, are they viewable like on the Internet for investors and/or prospective customers and all that? How does one get to see these new products not just for Woodmark but also like your tool offerings and such?

That's a good question. I don't -- Woodmark has a website. I am not 100% certain the new look is on that website, honestly. I don't have an answer for that. But if it isn't it certainly will be soon, later, I would say before the end of the year.

What about Florida Pneumatic's new offering?

Their website I don't think is -- it's fairly limited in terms of what they're going to show but all you have to do is go into a Home Depot or a Sears around year end and you'll see it.

Are you in Home Depot in all the regions as well as Sears all the regions?

Every single store; both companies.

Excellent. You also mentioned your experience in margin pressures in Woodmark from smaller customers being attacked by your competitors. Have you reversed or halted any of that particularly focused trend?

Just to make clear what that issue is what we have found is that as we move past the 500 mile mark or so from our warehouses, we get some pretty tough competition from people that are smaller than us generally. We are certainly at a disadvantage on freight and probably the bigger problem is we don't have a daily delivery option. We dominate where we can do that so it goes to say that there's obviously the long-term solution would be to have some sort of outpost in strategic locations. And it's certainly something we are looking at but in the meantime we are going to have to defend what's either a better line, a broader line or a cheaper line; and better back office service, not -- the smaller guys can't offer everything.

So they can be very competitive on the more popular items but they certainly can't provide the breadth of products that we can. So that is toward the angle we take until we can be there physically, which in some places just may not make sense. But that's the plan.

In Woodmark, you referred to the press release or the script here something you called the lower margin direct container viz. What is that?

Woodmark has a program with certain of its larger customers where product ships directly from our factories in China to them. It doesn't -- we don't touch it. In full container loads. We obviously don't get as much money for those products but again we don't have to provide very much infrastructure to make that happen. We can only do it with larger customers who are willing to buy large quantities of product.

There's no inspect then for the product really. Is there?

We inspect it before it leaves China.

You have (MULTIPLE SPEAKERS)

We have got a fairly sizable organization over there that's exclusive to us to do that with inspectors and quality people. So it's -- we've never really had a lot of problems with quality in that program.

Remind us of your exposure to the housing in the South versus the West and a mixture of new build oriented products versus -- we will call it the remodel recurring oriented products?

We're very exposed in the South and maybe less than the West but only because we have got a smaller operation out there. And at this point in time, it's a smaller percentage of our revenue. But we are highly exposed in the South and, clearly, the housing slowdown is affecting us.

It is?

Absolutely.

And that slowdown that is affecting you was visible and is part and parcel of the second quarter results?

It's definitely in the mix. I think it is probably a little more of an impact on Nationwide in the second quarter than Woodmark. But it is both.

You mentioned in the release and in the script SG&A cost - that include nonrecurring SG&A costs. Because you gave it a mention, I'm wondering what if you could quantify and describe the factors that are behind the nonrecurring SG&A costs?

I think we talked about those in Q1 and I think we added it up to be about $0.25 million in nonrecurring.

That's in Q1 only?

There was a little bit in Q2 but the bulk of the nonrecurring is Q1 unless I'm mistaken.

Okay. I thought the script implied you had similar -- not similar quantity but it was given an equal kind of mention.

No. I -- in my comments where I was speaking about the first six months, obviously, that is inclusive of Q1. There were some one-time legal fees in Q2 but the bulk of the nonrecurring was a Q1 event.

Now you are certainly out there looking for good businesses to buy, low multiples and generate a return on the Company's capital. And Company has a good deal of good businesses here that you are very familiar with and you own and operate today. In light of all the news and everything now out on the table, there's not any material inside information that's not been disclosed out here, your debt and equity ratios are down. Your stock price is down substantially down - 12.8% for the year. And that's after a sizable decline last year. Where do you stand in the buyback? What have you bought back this quarter if anything? And are you comfortable with the debt to equity ratios here of the Company that buyback is a viable and the realistic use of Company cash at current depressed values of the stock?

I'm not sure what order this came in but we didn't like anything back in the second quarter. The buyback is still viable and where we think we have an opportunity, we will look at that. It depends on a number of factors at the moment. What time it is in the quarter, do we feel we are in possession of any material nonpublic information? And we have assigned some fairly tight windows for buybacks as well just so you know.

We in general will not -- do not make purchases if we are within a couple of weeks of quarter end and up until the press release. (MULTIPLE SPEAKERS)

You can overcome that particular hurdle or burden of that issue by instituting - pursuant to the SEC rules 10B5 10B18, a buyback plan that is determined and you put in pricing and parameters and volume, etc., ahead of time before you get to the window. You should inquire a company legal counsel about that the adoption of such a plan it is the inverse of the managerial insiders adopting an insider selling plan, where insiders are allowed to sell, pursuant to a schedule.

We are very well aware of the regs on that.

Okay. Because those regs do apply in the inverse for company buybacks as well as it might help you narrow your windows and take advantage because obviously the recent opportunity in the Company stock of highly accretive acquisition and retirement of shares you could have done occurred during your window. And had you had a plan like that in place, you could have at least participated in and retired with a decent amount of volume and a decent amount of shares available that could have been retired.

So it's unfortunate that your windows of closure were so broad. IR efforts. Company's revenue stream because of your acquisitions, your refocus, etc., are bit higher than the were a few years ago when you did some efforts of meeting with the investment community above and beyond, of course, these quarterly conference calls which we appreciate in your making the transcripts and stuff available.

Do you have any plans where the companies will collect investor profile and your exposure -- the story, getting the story out to those beyond who attend this conference call you have planned or lined up?

We have talked about it often and we will be doing something towards the end of the third quarter or perhaps the early fourth quarter. But the problem still remains the same. We have a limited float on the stock and, sometimes, getting people interested in our Company with a limited float poses problems for them. That problem does not go away, no matter how much we talk about the business.

Well Berkshire Hathaway has a very limited float and they don't seem to have a problem of getting a much higher multiple than we have here.

Berkshire Hathaway trades how many shares a day?

In terms of the float there's --

It's not in terms of their float. How many shares do they trade a day?

Richard, at the right price, Richard, at the right price all of your shares float and at a little less than a right price all but your shares float.

Okay. All I'm saying (MULTIPLE SPEAKERS)

At the right price my shares float.

We're not Berkshire Hathaway.

All I'm saying to you is it is absolutely something that we intend to do, we want to do but having said that, that is the issue (MULTIPLE SPEAKERS)

That is the issue we should worry about. If you get some buying interest in here and people understand the business, what you're doing and your growth and things like that they will be buyers and when there are buyers there'll be sellers here.

When we go back out there, we will see if the tune has changed. But Richard speaks from plenty of experience (MULTIPLE SPEAKERS)

I appreciate that. We just have to find prospective investors who aren't as lazy because that's just -- .

Send them are way. We're happy to talk to them.

All right. Well thank you, I have no more questions.

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

I would like to thank you all for joining us on this call today and we look forward to hearing, to speaking with you again when our third quarter results are presented, which will be some time in early November. Thank you again for your patience and your time today.

Ladies and gentlemen, that concludes your conference call for today.