P&F Industries Inc (PFIN) 2006 Q3 法說會逐字稿

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

As a reminder, this conference is being recorded Thursday, November 9, 2006.

I would now like to turn the conference over to Mr. [Chris Witty]. Please go ahead, sir.

Thank you, Operator. Good morning, and welcome to the P&F Industries' third quarter earnings conference call. With us today from management are Richard Horowitz, Chairman, President, and CEO, and Joseph Molino, CFO.

Before we get started, I'd like to remind you that any forward-looking statements made during the 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. They are subject to various risks and uncertainties, including, but not limited to, the impact of the competition, product demand, and pricing. These risks could cause the Company's actual results for the fiscal year and beyond to differ materially from those expressed in any forward-looking statements made by or on behalf of the Company.

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

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

Good morning, Chris, and thank you so much. And good morning, everybody. Thank you all for joining us on our third quarter 2006 conference call.

Let me start with a brief overview of our financial results for the quarter.

Revenues increased to 32.3 million compared with 29.8 million in the third quarter of 2005. Earnings from continuing operations increased by 23.2% to 1.5 million from 1.2 million last year. And diluted earnings per share from continuing operations were $0.40 versus $0.31 in the prior-year period. Including our discontinued operations, which, of course, are [Green Manufacturing and Embassy Industries], net earnings for the quarter were 1.4 million, or $0.39 per diluted share, compared with 1.5 million, or $0.39 per diluted share, for the third quarter of last year.

Consulting earnings from continuing operations benefited from higher revenues and containment of margin deterioration. We continue to generate increased revenues at Countrywide, increasing 9.2% this quarter, through our Woodmark Division business, and from incremental revenues from Pacific Stair, which we acquired January 3 of this past year. An 8% increase of Florida Pneumatic also favorably impacted our overall revenue results.

SG&A expenses grew at a lesser rate than the consolidated revenue growth for the quarter, with increases coming from planned higher sales and marketing expenses that are intended to generate additional revenue in the coming periods and from higher freight costs, reflecting the rise in the price of oil.

Before I take you to a more detailed look at the operations of our two business units, let me just briefly tell you what each of our units does for the first-time callers.

Florida Pneumatic is primarily engaged in importing and manufacturing of approximately 50 types of pneumatic hand tools, and our country hardware -- Countrywide Hardware group 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, Woodmark International, and, of course, Pacific Stair, that we acquired this year.

Pacific Stair is also 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 Southwestern United States.

Now, for the quarterly performances.

At Countrywide, revenues for the third quarter increased to 17.3 million from 15.8 million last year, a 9% -- a 9.2% increase, as stated earlier. Woodmark contributed 11.3 million in revenue, increasing 5% over the third quarter of 2005. And Pacific Stair contributed 1.5 million in revenue. Nationwide's revenue of $4.5 million was a decrease of approximately $610,000, or 11.9%, from last year's third quarter, primarily attributable to a decline in sales of fencing products due to market weakness, as well as a decrease of approximately $178,000 in revenues from patio products that resulted from the discontinuation of the production and sale of screen doors.

Gross profit margin at Countrywide decreased from 33.8% to 32%. The decrease in the gross profit percentage was due primarily to the impact from significant revenue increases in the lower-margin direct container business at Woodmark, as well as from competitive pricing pressure on stair products in certain markets. Some cost increases from Asian suppliers due to increases in the cost of metals that were not fully offset by general selling price increases, and the inclusion of Pacific Stair, which operates at a lower margin than the rest of our group, also contributed to this margin erosion.

The gross margin percentage decrease was partially offset by a favorable product mix and a shift by Nationwide to high-quality, lower-cost suppliers for some products, which has been ongoing.

We have taken further steps to address Countrywide's margin erosion with redesigned products that we believe should generate improved margins in the next several quarters.

Countrywide's Woodmark unit experienced a significant growth in revenues in its kitchen and bath division revenues as sales to a large customer have rebounded to 2004 levels after experiencing a decline last year. In addition, we have strengthened relationships with other kitchen and bath customers, principally in the mobile home and remodeling markets. Furthermore, Countrywide's West Coast operations have been enhanced by the acquisition of Pacific Stair, and we are encouraged by the organic growth in revenues on the West Coast as a result of our warehouse operation put in place last year, which we have now combined with Pacific Stair.

And, lastly, revenues from the sale of staircase components decreased in the third quarter by approximately $271,000, or 3.1%, due primarily to softness in the new construction market.

Revenues at Florida Pneumatic increased 8% from 13.9 million in the third quarter of 2005 to 15 million in the third quarter of 2006 due to approximately $2 million of additional retail revenues from new products shipped to a significant customer.

Offsetting this increase was approximately $509,000 less in retail promotions in the period, as well as an overall decrease in net retail base sales of approximately $331,000.

Base sales decreased from one significant customer as a result of decreased purchasing activity of approximately $973,000 as part of a program of theirs to reduce their overall inventory levels, and this decrease was partially offset by an increase in base sales to another significant customer of approximately $642,000, due primarily to the stocking of newly redesigned products that are expected to be reset in that customer's store displays on or about the beginning of next year in January.

Gross profit margins of Florida Pneumatic increased from 27.8 -- to -- excuse me, to 27.8% from 26.8%, due primarily to a lower proportionate amount of retail promotional sales in the current period versus the prior-year period, which historically have lower average margins, as well as the strength of the U.S. dollar in relation to the Japanese yen and the Taiwanese dollar compared to prior-year periods. Gross profit margin increases were also impacted by a more favorable product mix.

At Florida Pneumatic, we are also focusing 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 that we've discussed previously to a substantially redesigned offering with an enhanced look and performance, having made initial shipments in the third quarter, and we are planning further shipments in the fourth quarter of this year.

We also plan to increase our investment in the industrial sector through product development and various other channel initiatives. We see this as critical to our future success in this channel, typically -- which typically provides higher margins and, we believe, greater growth opportunities for Florida Pneumatic.

I'd now like to turn the call over to Joe Molino, who will review some of the key financial metrics for the quarter, as well as the year-to-date highlights. Joe?

Thanks, Richard. I'd like to give some additional perspective for the first nine months.

As Richard said, revenues for the nine months were up 7.1%.

Hardware revenues were up 16.8%, from 46.2 million to 54 million. The revenues from hardware increased at Woodmark, decreased at Nationwide, and include revenues from the recently acquired Pacific Stair Products.

Revenues from kitchen and bath products sold into the mobile home and remodeling markets have increased 29% from the prior year as we have both strengthened our relationship with one significant customer and had another significant customer return to ordering levels from a robust 2004.

Nationwide revenues decreased almost 4% as OEM and patio sales decreased. Unfortunately, this was not offset by fencing product sales as our growth here has flattened out, primarily due to general market conditions.

Pacific Stair contributed just under 4.9 million to consolidated revenues for the quarter.

Gross margin in the hardware segment for the first nine months decreased from 34% to 31.7%. The decrease is due primarily to some cost increases from Asian suppliers due to increases in the cost of metal, 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.

Revenues at Florida Pneumatic were down 5.4% to 34.1 million from 36 million for the nine months ended September 30. The decrease was primarily due to approximately 2.7 million less in retail promotions in the period, as well as a decrease in base sales of approximately 1.2 million.

Base sales decreased as a result of decreased purchasing activity of approximately 2 million from a significant customer as a part of a program to reduce overall inventory levels. This was partially offset by an approximately 800,000 increase in base sales from another significant customer. In addition, Florida Pneumatic enjoyed approximately 2.6 million in incremental revenues from new products in the retail channel.

Gross margins at Florida Pneumatic also increased from 28.3% to 30.1% year to date. This increase was due primarily to a lower proportionate amount of retail promotional sales in the current period, which historically have lower average margins, versus the prior-year period and the strength of the U.S. dollar in relation to the Japanese yen and the Taiwan dollar compared to the prior period.

Consolidated SG&A expense increased 9.9% for the nine months to 19.8 million from 18 million for the year-earlier period.

SG&A expenses grew at a significantly faster rate than the consolidated revenue increased for the nine months ended September 30, 2006. This expense growth was driven by several factors, including share-based compensation expense, certain corporate nonrecurring professional and tax fees, the nonrecurring 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 revenue in the coming periods. Overall, SG&A was 22.5% of revenue for the nine months, up from 21.9%.

Interest expense for the nine months increased 5.3% to approximately 1.5 million from 1,432,000 as a result of a number of factors.

Higher interest rates outweighed the impact of lower average borrowings in the Company's -- on the Company's revolving credit facility, resulting in approximately $60,000 increase in interest expense.

In addition, interest expense and trade financing in Florida Pneumatic increased by approximately 31,000 as a result of higher average borrowings and higher interest rates.

Interest on borrowings under the term loan facility decreased by approximately 59,000 as lower average borrowings during the period due to repayments were offset by higher average interest rates.

And, finally, interest expense in Woodmark -- on Woodmark's acquisition-related notes increased by approximately 30,000 due to higher average rates.

Other items affecting cash flow were depreciation and amortization of intangibles, which were 680,000 and 898,000, respectively, for the nine months. For the quarter, those amounts were 227,000 and 299,000, respectively.

Finally, capital expenditures were 1,257,000 for the nine months and 349,000 for the quarter.

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

Thank you, Joe.

Before I open the call up to any questions, I'd like to remind everyone that we modified our guidance policy this year to only provide full-year estimates, and based on our current outlook for our business for the remainder of this year, we are modifying our previously issued 2006 guidance slightly downward. We continue to anticipate results from continuing operations for the year ending December 31, 2006 to be lower than last year.

We now expect earnings from continuing operations for the year to decrease between 15 and 20% from last year, primarily due to a reduction in our previously anticipated revenue growth rate, resulting from a softer-than-anticipated market for fencing products and the unanticipated continuation of an inventory reduction program from a significant retail tool customer.

We anticipate revenues to increase between 4 and 6%. We anticipate sales at Countrywide to increase between 12 and 17%, primarily, of course, to the inclusion of Pacific Stair this year and, of course, continued growth at Woodmark.

And we anticipate sales of Florida Pneumatic to decrease between 5 and 8% as increases in our industrial and catalog business are expected to be more than offset by decreases in our retail sector.

We now anticipate gross margins to range from 30 to 32%, as I discussed the reasons earlier. Selling and general and administrative expenses are expected to range from 22 to 24% as a percentage of sales. Interest expense is expected to approximate $2 million.

That is the end of our report today, and now we'd be happy to answer any questions any of you may have.

[OPERATOR INSTRUCTIONS]

Your first question comes from Andrew Shapiro with Lawndale Capital Management.

Good morning, guys. I have a bunch of questions for both Florida Pneumatic, Countrywide, and then some consolidated. I'll ask these Florida Pneumatic questions, back out, then anyone else [inaudible] their questions in and -- but please come back to us, okay?

On Florida Pneumatic, I'm just trying to clarify in the press release, are you referring to two or three customers in your discussion of Florida Pneumatic as you move around, or is it just the prime two that we know of, Sears and The Home Depot?

That's -- that's the customers.

Okay.

That's our retail -- that's our retail customer base, essentially.

Okay. So to then clarify from last quarter's conference call and where we are, was the 2 million in revenues from new product, which you spoke of last quarter's call that you were starting to ship to Home Depot first, is the $2 million in new product referring to the significant customer of Home Depot?

No, no, no. The --

Was it to Sears for Q1?

You're a little confused, and it is a confusing thing. I apologize, Andrew. It was a new product that we sold to one of those two retail customers. It was a new product, not a tool product so much, a totally new product that we sold, and it had nothing to do with anything else.

Okay, so this is brand new. It's the original stocking of the product?

Yes, that would be correct.

And then this is what, to Sears or--?

Yes, it's Sears.

It's Sears, and it's a promotional thing. It's not necessarily an ongoing -- maybe ongoing, but I'm not sure.

We have indications that they have an interest in potentially making it a stocking item for 2007, although I don't believe that's confirmed yet.

Right. And if it were, it wouldn't be 2 million a quarter?

No.

Well, no, it would not be 2 million a quarter. On the other hand, we would have more typical margins. It would not have promotional margins.

Okay, so this was a low-margin product, lower than normal?

It was lower because it was a promotion.

Right, so lower than normal, it's a brand new product, it's Sears, and it may get uptake in '07 and become normal margin and normal-based business?

Yes.

That's correct.

All right. Okay, then if that's the case, then trying to understand the increase in the base sales, which was inventory, adjustments here, which was 973,000, last year was pretty bad in Q3 due to -- at that time, it was Sears starting a substantial inventory adjustment, but that has been reported by you in the recent quarters to be behind you, and there was mention of Home Depot having some inventory reductions to get their inventories in line. Can you clarify that this 973 is Home Depot or Sears?

It's Home Depot.

Okay, so at least it's all consistent. All right. Do you feel that this de-stocking activity at Home Depot is now behind them? Given that you're in the middle of the fourth quarter, is Home Depot's purchasing back to, we'll call it, normalized levels?

Andrew, I think it's wise of us to not get into other people's businesses. We've made those wild, inaccurate projections in the past with Sears, and we just don't have the information and the ability. What we'd go by would be a buyer's comment, and it's really -- it's just not accurate.

Even halfway into Q4?

I'm sorry?

Even halfway into Q4, you can't tell yet whether or not they're --

No, right now -- right now, nothing -- we're still not performing up to our expectations at Home Depot, and that's not to say that tomorrow or next week, the faucet could open, but it doesn't -- we don't know. We just don't know. We're at their mercy, of course. They're a customer -- they're the customer.

Yes, no, understand that.

And so to give you any ideas would just be conjecture on our part. It would be unfair.

Okay. And then the reference in the Florida Pneumatic paragraph here that talks about 642,000 of new base sales of newly redesigned products that are expected to be reset, that's the start of the Sears?

Well, that's primarily --

Sears, yes.

Okay. All right. Very good. Does some of the Craftsman stuff that you provide into Sears, are those items that sell well for Christmas, or they're not really a Christmas item?

You know what? If they promote it, it becomes a Christmas item. If they don't promote it, it's not a Christmas item. But it does sell pretty well this time of year.

Yes, we don't generally see a Christmas surge. Keep in mind, we've got to get product to them well ahead of Christmas, so we would have already shipped to them at this point for anything they were hoping to sell during the Christmas season. But --

But for sell-through?

It -- as we've said in prior years, where they've decided to put the promotional money is where you see the spike in revenue, and it could be at any other -- any point store in the year.

Right. But Pneumatic isn't like getting the hubby a new tool set?

Yes, no, I would agree. That's not a -- that's not a Christmas present product, in my opinion.

Now, you had mentioned in the last quarter that some of the newly redesigned product is first going to Home Depot. You obviously now described how some of the newly redesigned products going into Sears; it's too early to tell how it's worked at Sears. But with the quarter behind you now, is there some visibility as [to] the uptake on the new product that had been placed at Home Depot already?

You know, unfortunately, with the reduction in their inventory levels, it's almost impossible to know how successful that has been. We just -- we've seen sales fall. But we know it's not because the product's been changed; it's because of the inventory situation. But since those two things are going on simultaneously, it's pretty hard to know what impact we've had with the new look.

Can't tell you, okay. You had mentioned in the past that there had been some disappointing promotional activity and shelf positioning, etcetera, at The Home Depot side and that -- we have seen in the regular marketplace that there have been changes taking place at Home Depot. Have you noticed yet in terms of promotional activity, shelf positioning, just other observations from the channel whether or not the changes have taken place at Home Depot and they are for the better, or you can't tell yet?

We have -- how do I describe it? We've touched -- they've had to retouch all our product in the stores to put the new sets in.

Yes.

So, obviously, regardless, that cleans things up. But I don't think -- we don't believe that the layouts are where they could be, and we've had discussions with Home Depot about a more formal reset with a much different display and how it looks on the shelf. They're talking to us about that, but we don't really have a commitment from them on that yet.

Okay. What do you feel are margins levels that you can achieve in this business? There's been pressure here over time, and barring, I guess, all of the unpredictability of promotional activity, is there a range of what normalized margin levels could be achieved here?

In the retail business?

Yes.

I really don't -- I think that's a constant battle.

Okay.

Yes, Andy, I don't see how we could significantly improve margins on the tools. I think what we're -- our goal is to continue to reduce cost to maintain margins because, as you know, with these larger customers, they tend to ask for a cheaper price every year, and if we don't give it to them, somebody else will. So our goal is really to focus on maintaining our margin. I think it would be great if we could increase margin, but I just don't see that as reasonable.

So then it's got to be a migration of your sales mix to the other areas if --

Yes.

-- [inaudible] being less dominant?

That's really our strategy.

That's our strategy overall because there's clearly dominant -- downward pressure on margins in every area, but in the retail, more specifically, you're --

Right. So what [inaudible] are you having to developing your commercial/industrial product versus, let's say, acquiring it, or do you intend to acquire here as a means of stepping into it?

We are having modest, slow growth. Would we like it to be more? Yes. But it's a very, very tough market to crack into, especially when you're dealing against some very, very big giants in that business.

But will we like -- let me just add to that. What we like about it is margins are steady. They've been steady for years.

Business is more predictable.

Right, business is more predictable. It's less promotionally oriented. And we are -- we have been successful in picking up some very strong rep organizations in the last few months and two additional direct salespeople. I don't imagine it will be until '07 till we start to really see any benefit from that. And then just, lastly, we certainly are on the lookout for acquisitions that would fit in that category.

Would the acquisitions be in the products -- we'll call it the product developments in the creation of product, or would it be in the distribution channels, primarily?

It would be -- it would be -- and I don't know what to ask you. I don't understand the question. It's really -- we're looking to expand, if we can, into the industrial sector of the world, of the tool.

But do you already have the products to offer them, or would you want to and need to expand and acquire product lines, or --

We have -- we have several --

-- [inaudible] get a distribution channel?

We have several products that go into that channel. Having said that, we do not have a complete line, and we are -- yes, we are expanding that. We've introduced some new products, and we will continue to do so.

Under what brands would they be known as?

Universal Tool --

Or Florida Pneumatic.

-- or Florida Pneumatic.

Okay. And are there opportunities to gain access to these markets, perhaps via your Woodmark and Florida Pneumatic avenue?

A very -- a very small opportunity in one or two specific tools, but generally, no.

I would say no.

Okay. Last question on Florida Pneumatic; it carries over to everything else, though, as well. You look at a bunch of deals. You've paid down your debt nicely. You get a little bit more debt pay-down if you can close the sale of the real estate, which is a later question. But do you see much competition coming from private equity where you're looking for acquisitions? And are you finding the multiples generally high, or are they -- [come] down within range?

I'll chime in first. I -- we have not seen -- there are always multiples that are -- that just don't make any sense, but I would say the market right now is no different than it has been over the last few years. I have not been seeing prices that are any more expensive, so to speak, vis-à-vis, where we were a couple years ago.

And aggressively on the -- I know you'll look and you'll take something if something comes to you, but are you aggressively on the prowl right now, or where is the managerial focus?

Yes, we're aggressive. We're looking hard.

Absolutely.

All right. I'll back out of the queue. Hopefully, there are some other questions, but you should know I have some questions on hardware and consolidated, so please come back to me.

All right.

Your next question comes from [Ken Tong] with Steel Partners.

Hi, guys. Good morning.

Good morning.

Good morning.

You mentioned basically maintaining margins through cost cutting and so forth, and in the release, it says you're trying to source from your suppliers some other low-cost regions. Just wondering if you can give us a breakdown of where are you guys in that. I mean you probably do have some U.S. locations and probably Mexico, but I mean have you guys done a full study of where you guys can source from low cost and then give an estimate of how much cost savings that could be?

Well, I'll try to answer the question. There are a couple of questions in there.

Right.

If you were to take -- let's start with '07, I think, because in '06, things are kind of in flux. We've shifted -- we're in the middle of shifting production among a couple of countries.

But beginning in '07, if you're just looking at Florida Pneumatic -- these are approximations -- approximately 15% of the line is made in the U.S. in Florida in our facility. Approximately another 10 to 15% would be coming out of Japan. And then, let's say, the rest is split fairly evenly between Taiwan and China. Where that percentage will be in a few years, I don't know. We have some benefit to making the product ourselves in the U.S. It keeps us in the business. It keeps us very sharp in terms of understanding these tools. And there are some benefits to having the product ready to go right here on our shores. There is some other product that just can't be made anywhere other than Japan. That's just the gold standard on certain SKUs, and it's just going to be made there, and we get the right price for it.

The shift between Taiwan and China, ultimately, we could move more production to China. At this point, we're happy with the mix among those countries. If we do shift to China, there may be some opportunity for further savings. But what we are seeing as time goes by is production costs on the eastern coast of China are starting to approach the costs in Taiwan, and it's just -- this is what's gone on historically over the last few decades. As you move production and those wage rates start to rise, you lose a little bit of your advantage.

So our goal, as I said, is to maintain our margins. We've got a ways to go in working with the current suppliers, and we've got some real commitments on the part of our newer partners to work with us on the engineering side, so we have a real organic opportunity to decrease costs, not just simply by shifting to a different factory. I hope that answers your question.

Yes. What about in general with the other divisions? You know, how much is in the U.S.?

Very little of the other -- of the hardware side of the business is U.S. made.

So even with the 15% in the U.S. for Florida Pneumatic, I mean is there anything that you guys have done, you know, like a Six Sigma or lean manufacturing type of initiatives?

Yes, we have a lean manufacturing initiative at Florida Pneumatic that we've -- we're probably five or six years into. We have reduced costs on our U.S. manufactured products -- and this is again an estimate -- probably by a good 20%, and we're pretty happy about that.

[Inaudible].

Excuse me?

I'm sorry. So it was continuing that you guys are --

Oh, yes, absolutely.

Okay.

Lean manufacturing is ongoing, and we constantly look for tools that we can actually make here as opposed to making overseas, and I will say that I believe that we enjoy the highest margins on the tools we make in the U.S. for the ones that we make here.

Okay. And the other piece in the press release says the growth in Countrywide is roughly 12 to 17% but primarily due to Pacific Stairs. Is there any other organic growth? I mean that just sounds like it's just all Pacific Stair.

No, it's not all Pacific Stair. We're having a nice growth on the West Coast, as we predicted we would have by setting up a warehouse out there. And we have a very good growth in kitchen and bath products U.S.-wide. And then, lastly, very nice growth in the South -- the Southeastern U.S. on the stair business. And we see future opportunity if we can come up with a way of getting the product there in the Midwest and possibly the Northwest on the hardware side. So there is more opportunity for organic growth; it's simply not through acquisition.

Okay. Thank you.

[OPERATOR INSTRUCTIONS]

Your next question comes from Andrew Shapiro with Lawndale Capital Management.

Okay, some questions here on the hardware side. First off, in general, is this business -- are you finding it to be more predictable business versus Florida Pneumatic, while Florida Pneumatic is primarily retail tools?

Well, I guess, yes, because of the promotions with the retail, but it's not very predictable either. I mean there are certainly plenty of surprises as we go along in that business as well.

The month-to-month variability is less. That is -- that I would -- I would say.

Yes.

Is it the nature of the business, or is it just because of the lack of customer concentration?

I think it's both. There is not a high customer concentration, and there's no promotional activity.

Okay.

Those two things go on at Florida Pneumatic, obviously.

Now, can you characterize the overall marketplace for you at the moment? You know, obviously, the reports from homebuilding are pretty bleak, yet you have projected organic growth for the year at Woodmark and Countrywide. Is it just because of -- geographic expansion is outweighing the decline in historical markets, or is it a factor -- or what additional factors is it in addition to geographic expansion?

Well, plus, also, you have the Pacific Stair acquisition in there, as well.

[Inaudible].

So I would say the answer to that question is yes, with the addition of Pacific Stair, as well.

The two places where we've grown the most on -- in Woodmark -- well, there are really three areas. Kitchen and bath has come on strong because the number-one customer has rebounded dramatically from '05. And in addition, we've got -- the number-two guy, we came up with a new program with them at the end of '05, and we're really having some big benefits in '06. That's in kitchen and bath.

Yes, I don't mean to deject, but the kitchen and bath division, our people are doing very well at concentrating the -- getting the customers to give new orders and getting new customers and promotions. They're doing a good job in that area.

And then there are three areas where we're doing quite well in stair products, three regions of the country, and actually, it's three different reasons.

Out in the West Coast, simply by showing up with a warehouse, we've been able to grow revenue very nicely out there.

Two, we're being very successful in our Southeast region, where we've got [Stair House], which is our operation in Atlanta with our -- what we call our "milk run" program, where we've got a couple of trucks that drive within three or 400 miles of Atlanta in every direction. It's been extremely effective in picking up sales from customers that love that daily delivery.

And then, thirdly, in the Mid-Atlantic region, we just have an excellent salesperson out on the road who has done a tremendous job for us in growing business in that region.

So we still have some hope that we can weather the storm here on housing downturns. I mean we are working against a pretty good headwind. There's no doubt about it. But we've been pretty successful this year even with that.

Right. So you're -- these are basically market share gains --

They absolutely are.

Yes.

There's no doubt about it.

Okay. And is it possible to -- when you feel that some of these things anniversary? And, of course, if the homebuilding decline stabilizes in that time then weathered the storm, and of course, if homebuilding drops through that timeframe, then you have some year-over-year issues.

Well, I mean --

When do these things anniversary?

I'm not sure what you mean by anniversary. We still see some growth opportunity in the South, the Southeast. I don't know what you mean by anniversary --

[Inaudible] ongoing and so it's not as if these were one-timers now.

Yes, there's no one-time event where I'm going to say I'm not having the one-time event again next year. Now, that doesn't mean it doesn't get harder and harder to steal share, but I don't know that there's a single event that I can point to and say, well, when that anniversary hits, you're going to see a degradation. But I will say this. We're still facing a lot of margin pressure at Woodmark, and there are plenty of people out there that are getting into the market offering lower prices. That has gone -- still gone on. Even though we're picking up share, we're giving away a few points --

Okay.

-- to get it.

Now, you mentioned about some new products that you were introducing via Woodmark to try to address that competitive environment. How are those products getting uptake? Is it working?

The initial reviews are positive, but it's way too early to tell, and it's very -- even more premature to know how much of an impact it's going to be. We're hopeful. It looks good on paper. But we don't really know till next year.

Okay. Now, if you'd clarify, the mobile home and kitchen ramp that you described in the press release paragraph and all that, is that just one customer, or that is also for this quarter the benefit of the second customer you referred to?

Both customers.

So the one -- the kind of the new customer that was referred to in prior quarters is continuing to ramp up?

I'm sorry; what was that?

You guys referred to someone in the prior quarter's release. I don't know if it was last quarter or the quarter before that it was implied when someone [like you said] a brand new customer that's become significant for mobile home and kitchen.

It was a -- it's not a new customer. It was a customer -- I don't know what we were referring to exactly, but it was a customer that was there before but has had tremendous growth for us this year and it's continuing.

And, Andy, let me just clarify mobile home and kitchen. Our kitchen and bath product is sold into mobile homes and regular residential construction. Those aren't really different markets.

Okay.

But we have a very large customer that is quite concentrated in mobile homes.

Now, are they selling and building more mobile homes? Is this part of a Katrina effect, or it's something broader for them?

It's both --

Both.

It's definitely Katrina. It's also the fact that they had a huge inventory reduction program in '05 that hurt us. So it's both.

Okay. And is there any feeling or feedback as to how much more Katrina work they have to do because there was a lot of housing that was knocked out?

We don't get that information, but that business is doing okay. That's all we know.

Okay. Company-wide, how good do you feel you've been at bringing out new products to market in terms of quickly enough and ahead of commoditization, both inside of the Florida Pneumatic and in the hardware segments?

I would --

[Inaudible] do better, or is it -- your turnaround in bringing in new product is something that's a competitive advantage?

Well, I'd say up until recently, we -- I wouldn't give us very high marks, frankly, for new product development, but I would say in the last 12 months, we've made a real focus, we've put resources into that, and we're changing that quite effectively on both sides, on tools and hardware.

Now, you mentioned in prior calls a manufacturing transition that you were doing, and some questions earlier here in the call talked a little bit about it. But you also talked historically about it being done -- nearly done by year-end. What is kind of the status of that? I know it's always an ongoing thing, but there was some more like call it major transitioning you were doing. And what one-time expenses do you think you've incurred in this process this year towards that?

I don't know of any material one-time expenses other than some tooling, which we again capitalized and spread out over a number of years, and it wasn't so significant that that would really show up.

We are definitely on plan. We are meeting all of our timelines there, and I'll restate that by year-end, that will all be in place.

And your MIS transitions, you know, absorbing Pacific Stair and Woodmark and all that, have you gotten -- I don't know if it's four systems down to three or two?

We have not reduced the number of systems, although with the acquisition of Pacific Stair, we didn't add a system; we were able to get them on to one of our current systems. [Stair House] is -- was on the same system with the parent in Dallas. It's just gotten a little tighter than it was, and that process is continuing in its -- I don't have to tell you that's a major project across the board for us to look at, and whether we need to be in one system or five or four or what have you --

Right.

-- it's not -- it's important, but it's not something we've pushed a lot.

Okay. Can you talk about this direct container business that's been growing so much and who the customers are here?

The customers are our larger customers in Woodmark. Those are really the only ones that take direct containers.

And the growth there is continuing and expected to expand, or it's just that those two [inaudible] that's how it will go?

I think that it's the latter. I don't know that there's any organic reason that that full container direct business would grow for -- otherwise.

Okay. In reviewing your financial statements, the balance sheet shows a pretty hefty growth from last quarter of more than normal in the payables side as a source of cash during the quarter. Is there any particular thing going on in your working capital, also receivables obviously, on the top, but that seemed more normalized than your payable strategy?

Andy, I'm not sure you mean for the quarter; I think you mean for the nine months.

Well, I -- what I'm looking at is if I have the numbers right, last quarter, your payables were at about 4.5 million, and this quarter, they're listed in the press release at 9.3 million. Now, that might include other accounts in the press release versus the 10-Q.

Yes, without it in front of me, I don't know if those numbers are completely comparable, but I will say this. Q3 is typically the cap, the max, on payables, receivables, and inventory. In addition to that, there could just be some timing. In fact, I know there's some timing on some payments.

Okay. And then -- yes, receivables obviously went way up.

I mean the more general answer for the nine months is that we did get some vendor financing at Florida Pneumatic, which is now permanent, and I mentioned on the call that we're paying interest on that, but it's extremely favorable.

Great. And then, yes, debt is way down from last year but does not yet include a debt pay-down for the sale of the real estate that that was once known as the [Embassy] real estate over on Long Island. Can you update us on the status of that disposition and the legal issues therein?

Also, refresh me the amount that is mortgage debt on there and what kind of I guess I'll call it monthly payments you have to pay on that mortgage now that you're not renting out that facility presently.

The sale of the building is ongoing. We have a lot of interest but no real offers that are good enough at this point. The mortgage is about 1.3 million, and that's down to 1.3 million, and the payments are accordingly, and whatever they are monthly --

15,000, approximately.

-- $15,000, whatever it is, of course, it's a cost. We have a pending lawsuit with the people who were buying the building. They had given us, obviously, a security deposit.

Yes, 640,000, right?

Right. And that's being adjudicated through the judicial system, and we are aggressively pursuing that, and we intend to win that case. We're told that we should win. So it will take as long as it takes to go through the judicial process.

So [inaudible] I just want to make sure I have my numbers correct here on this. It was previously under contract for around 6.4 million, 6.3 million, or whatever, and it only has now 1.3 million of mortgage on it, right? So about $5 million when and if it was sold at around that price would be available for debt pay-down?

But minus the tax.

Minus the taxes that are due.

Right -- oh, that's right. It's on the books for basically nothing. And what would be the tax rate you'd apply on that then?

Well, without my tax person here, I'm going to just say use 40% as a very rough number. I can't give you a better answer than that. But I don't know of a reason we're getting a big tax break on that.

Okay, and it is on the books for nothing?

It's [inaudible] on the books.

About 5 or 600,000, I believe, Andy.

Okay, so there's like a pretax gain of around 5 point something million?

Yes.

Well, that's assuming that we sold it at the price that we sold it at last time.

[Inaudible].

Yes.

I can tell you we will not because the market is certainly softer, not only here but everywhere.

Yes, that's why I said 5 point X.

And, Andy, do not lose sight of the fact we had a full-service broker on this transaction, and we'll have a substantial number of legal fees and remediation fees worked into that sale, so right now, [you're overstating them].

Again -- again, maybe I'm not putting a sufficient cushion in here, but if you said the cost basis here is around 500,000 and I'm saying a gain of 5 point X million, that's a $1 million reduction off of the 6.4 you were under contract for?

No.

No, no, no. You're missing something.

You're missing something.

That's why I wanted to ask. What am I missing here?

Well, first of all, the building -- we were selling it for 6.3, I believe it was, roughly.

Yes.

And we have 1.3 mortgage, so that would be not 5.

But the mortgage doesn't take into effect when it comes to the gain.

That's correct. [Inaudible].

It's not part of the gain.

Then you have a broker's commission and you have taxes and you have the remediation costs of fixing up the building, which was a couple of hundred thousand dollars for environmental. So it's in the 4-plus area, not the 5-plus area.

Yes, and my recollection -- I'm sure we put this in a release or a K at some point -- we were at 4.9 or 5 million on what we thought the gain was going to be, and that --

That's the original price.

-- and after, we sold it for 6.4.

Okay, so it's 4X, so 4 point X million would be a gain. You have about $5 million or so that would be debt pay-down when you put this thing under contract.

Well, you've got to -- again, I think you're skipping taxes again.

Okay, correct.

Yes, 40% of that gain is going to get -- go right to Uncle Sam.

That's true. Okay.

So I think --

You have right now a deposit that's in dispute. If you win the legal case minus the legal fees --

Right.

-- that deposit presently is not on the balance sheet anywhere as cash or anything else, presently --

That's correct.

-- and it's also not on the income statement, right?

That's correct.

That's correct.

Okay.

Andrew, I think it would be -- I'm a pretty involved real estate guy in this area, and I think it would be very optimistic on our part to think that we're going end up at the end of the day between the sale and whatever we end up getting from that lawsuit as whole as we were before. I would think it would be fair to say we will not be as whole as we were. Having said that, we will have a very good return, a very good cash pay-down, or whatever [inaudible].

Right. Now, it's costing you $180,000 a year of negative cash flow until you do sell it.

Right.

And is the marketplace on that 110 corridor in Long Island, is that one that is -- it's not like a Florida real estate market, or is it having such a precipitous drop?

It's not having a precipitous drop, but having said that, it's -- you've got to find somebody who's interested. It's a slower sell for sure, and it certainly is a drop. There's no question that the market is not what it was when we closed on this deal originally, which was nine months ago.

Right.

So I'd be guessing -- I'd be guessing at least a 10% drop in the market, at least.

Is your legal claim because they failed to close and breached their contract solely limited to the deposits and liquidated damages, or are you able to make greater claims because of the loss value?

That's -- real estate law is the deposit. That's real estate law.

Okay. So have -- it sounds from your answers to these questions that you, from the seller's point of view, have also adjusted your expectations that might enable a sale to occur here pretty soon?

Right.

I should say enable you to get into contract for a sale pretty soon?

I would --

We're not looking to sell it for a bulk market, if that's what you're getting at.

Yes.

We're willing to accept the market price for the building.

And our goal --

And you've got people looking through it? You've got lookers?

Every week, every week.

Lots of interest [inaudible] but no real important offers, real serious offers yet. But our goal is to try, between the sale and whatever we can get out of the lawsuit, to get as close as we can to the original number, and that's our goal.

Okay. Now, with the substantial amount of net-of-tax cash and the substantial amount of net-of-tax -- you're going to have some additional debt pay-down, your debt-to-equity ratios are going to be near the very low end of where you've been over many years as you lever up, do an acquisition, you pay it down, and you've done a very good job in doing that.

With the sale of this real estate, again, you've got to get it under contract and collect, but there's still a decent amount of cash that's coming in, and your debt-to-equity ratios being down there, the Company has not been all that aggressive in successfully buying back its stock despite a buyback program that's in place. Would you anticipate the proceeds of this cash again to be maybe allocated to -- more aggressively acquire or possibly even tender for your shares?

Andrew, I couldn't possibly tell you in good conscience that that would be what our plan is. I think what we have to wait and see is when we sell the building --

Yes.

But when we get the cash, what the price of the -- I mean there are 100 variables --

Okay.

-- at that time, but that would certainly be one of the considerations.

[Inaudible], of course, with the stock had been down so low and now Sears is -- I would say Sears has stabilized. It sounds as if you'll have eventually visibility on the stabilization on your Home Depot that would provide an analysis that while you look for acquisitions for a certain rate of return, your stock at very low price levels provides a rate of return that might be comparable or in excess of what an acquisition could provide you.

I hope you didn't get -- glean from our conversation today that we find Sears and Home Depot's business to be predictable because we don't. We do not. We do not, and we have not, and we do not, and I don't expect it to get any more predictable as time goes on, to be frank with you.

No.

But I mean, look, we're always looking at the best ways of using our cash, be it paying down debt, being buying stock, being making an acquisition, whatever it is. We're not -- we're certainly going to be responsible and do what we have to do to use the cash in the most proficient way, and if it means buying back stock, we'll do that. If it means paying down debt, we'll do that. If it means making an acquisition, hopefully, we'll do that, and given the choice, I sure hope it would be an acquisition.

Yes.

I mean that would be our first goal if we can get there to use any cash that we have or any credit line that we have.

Right. Now, you gave 2006 total year guidance after we've now completed nine months, which, in effect, is giving quarterly guidance, which you guys didn't want to be doing. When I reverse-engineer these things, it seems to predict for Q4 quite a substantial decline year over year, and I'm trying to get a handle on if you're going to go into this quarterly guidance method by giving the year-end guidance after the nine months rather than, let's say, '07.

No, we're not morphing into quarterly guidance. You won't be getting Q1 guidance when we do our --

Right.

-- year-end call.

It's just that at this particular time -- it just happens to be now -- we saw that we should give better guidance for the year-end numbers, so it just happened to be this quarter.

Right. Well, what you did is it looks like you narrowed the range, as well, but reverse-engineering nine months out basically gives quarterly guidance that needs to be --

It will be a lower quarter than last year's fourth quarter, yes, that's correct.

Yes.

That would be correct.

Yes, we have seen some [cushion] in there.

Yes, I don't think it's dramatic, but it will be lower.

Yes, okay. Now, at this stage in the fourth quarter -- I'm not asking how Q1 '07 looks, but how does the fiscal year 2007 look to be developing? Since you're only about 15 -- you're only about eight weeks away to the beginning of '07.

We are in the budget process right now with our subs, and we really don't have -- I couldn't really answer that with very good comfort and reliability to you, either. We have some good things that are on the horizon, and we have some things that are not so good on the horizon. And until we get a budget and see what our people tell us and then we go through them and discuss it with them, I don't know if we could say anything dramatic. I mean we're not going to have a dramatic increase next year. I think with the economy and everything, housing starts, all those things, staring at us, I would hope we could get close to somewhere around '06 numbers. That would be a good thing. But, I -- again, we couldn't tell you.

Okay. Well, thank you very much.

Okay. Anything else you've got?

No, I'm out of the queue. I'm done.

Okay. Okay.

[OPERATOR INSTRUCTIONS]

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

Okay, thank you all for being on our call today. We appreciate your time and your patience and support, and we look forward to speaking to you with our year-end numbers in March. Thank you. Goodbye.

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