P&F Industries Inc (PFIN) 2007 Q2 法說會逐字稿

Welcome to the P&F Industries second quarter 2007 earnings conference call. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded Thursday, August 9, 2007. I would now like to turn the conference over to Ms. Jody Burfening. Please go ahead, ma'am.

Thank you, Operator. Good morning, and welcome to P&F Industries second quarter earnings conference call. With us today from management are Richard Horowitz, Chairman, President, and Chief Executive Officer; and Joseph Molino, Chief Financial Officer.

Before we get started, I'd like to remind you that any forward-looking statements made during this call, including those related to the company's performance for the 2007 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 competition, product demand, and pricing. These risks could cause the company's actual results for the 2007 fiscal year and beyond to differ materially from those expressed in any forward-looking statements made by or on behalf of the company. Forward-looking statements speak only as of the date on which they are made, and the company undertakes no obligation to update publicly or revise any forward-looking statement, whether as a result of new information, further developments, or otherwise.

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

Good morning, Jody, and thank you so much, and good morning to everybody else. Thank you all for joining us this morning on our 2007 second quarter conference call. As always, I'll start with a brief overview of our financial results for the quarter.

In the second quarter of 2007, overall revenues increased to $30.6 million from $28.9 million in the second quarter of 2006.

Earnings from continuing operations decreased to $231,000, as compared to $1.3 million in the second quarter of 2006, and diluted earnings per share from continuing operations were $0.06 per share versus $0.34 per share in the prior-year period.

Earnings from continuing operations declined primarily as a result of weaker hardware revenues, lower gross margins, and certain nonrecurring in the second quarter, partially offset by the results of operations of the tool business, which include the results of Hy-Tech Machine, which was acquired in mid-February of this year.

Earnings from discontinued operations, net of tax expense for the second quarter of 2007, were $3.0 million as compared to $43,000 for the same period last year. Of course, this increase was due primarily to the gain on the sale of Embassy's real estate assets in June of this year.

Net earnings for the second quarter of 2007 increased to $3.3 million, or $0.86 per diluted share, as compared to $1.3 million, or $0.35 per diluted share, for the same period in 2006.

With the exception of a certain nonrecurring expense related to the sale of Embassy's building, reported in earnings from continuing operations, these disappointing results were anticipated.

With respect to Countrywide Hardware's business, we continue to face challenges that began in the fourth quarter of 2006 as a result of the softness in the national new home construction market as well as with certain competitive pressures on a regional basis, coupled with material cost increases in metals. The decline in the housing market has been particularly severe in our key markets in the South and the West.

As a result, we have implemented, and will continue to implement, to maintain our customer base while reducing operating costs to minimize margin erosion going forward. We expect our hardware business to return to more profitable levels once the housing market recovers.

With respect to Continental Tool's business, Florida Pneumatic did not perform as expected this quarter as sales to a significant retail customer declined. Fortunately, we have been successful in introducing new products to another significant customer in the retail channel and anticipate benefit from these product sales throughout the remainder of 2007.

Additionally, in February of this year, we acquired Hy-Tech Machine, which has helped to counteract the volatile retail sector due to its emphasis on the more stable industrial tool channel while helping us to reduce further gross profit erosion in our tool sector.

And finally, as expected, we completed the sale of Embassy's building in June of this year and reported a pretax gain of approximately $5.1 million. After the satisfaction of an existing mortgage and net of related costs, proceeds of approximately $4.7 million were used to pay down debt.

Before I take you to a more detailed look at the operations of each of our business units, I'd like to review what each one of these does.

Our Countrywide Hardware division is comprised of Nationwide Industries, Woodmark International, and Pacific Stair Products. Together, these companies import and manufacture hardware products for items such as doors, windows and fences, staircase components, kitchen and bath hardware and accessories, as well as all other general hardware products.

Our Continental Tool Group, newly formed, now comprises Florida Pneumatic and Hy-Tech. Florida Pneumatic is primarily engaged in importing and manufacturing of approximately 50 types of pneumatic hand tools, while Hy-Tech is engaged in the manufacture and distribution of pneumatic tools and parts for primarily industrial applications. The combined product lines offer unique solutions to certain parts of the industrial tool channel that were not previously available to either company.

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

Our Countrywide Hardware division revenues for the second quarter of 2007 decreased by $4.5 million, or 23.2%, to $14.8 million from $19.3 million in the second quarter of last year due to softness in the new home construction market, which is a principal driver for this sector.

Woodmark's revenues decreased $3.3 million, or 28%, with revenues decreasing from the sale of staircase components by approximately $2.3 million, or 24.7%.

In addition, revenues from our kitchen and bath products division sold into the mobile home and remodeling markets decreased approximately $995,000, or 40.7%, during the period as sales to two significant customers declined dramatically. One of these customers, which serves the manufactured housing market, has been adversely affected by market conditions. The other customer began sourcing products from other vendors.

At Nationwide, revenues decreased $501,000, or 8.7%, primarily attributable to a slight decrease in fencing product revenues of approximately $79,000, attributed to market weakness' a decrease in OEM revenues of $69,000, essentially from market weakness and the timing of certain customer orders; and a decrease in patio revenues of approximately $353,000, due primarily to market weakness, competition, and an industry consolidation.

Pacific Stair's revenues decreased by $660,000, or 39%, reflecting significant softness in the new home construction market in Southern California and Arizona.

As far as gross profit margins at Countrywide, they increased from 33.2% last year to 32.6% in the second quarter of this year. The decrease was due to selling-- price reductions at Nationwide due to competitive pressures and market softness, some cost increases from Asian suppliers that were not offset by selling price increases, and the ability to reduce fixed expenses at Pacific Stair as production levels decreased and revenues decreased.

These gross margin percentage decreases were partially offset by a favorable product mix at Woodmark as a significant portion of revenue decreases were associated with its lower-margin direct container business.

Revenues in the tool segment were $15.8 million for the second quarter, and included $4.3 million of revenues from Hy-Tech and higher Florida Pneumatic revenue of approximately $1.9 million. Retail revenues increased by approximately $2.1 million, primarily due to the new products that I just discussed with you that were shipped of approximately $1.6 million, an increase in base sales to a significant customer of approximately $1.6 million, partially offset by a decrease in base sales of approximately $835,000 from another significant customer and a decrease in certain promotional revenues of approximately $224,000.

Other revenue increases of approximately $54,000 in OEM products were partially offset by decreases in revenue of approximately $37,000 in our industrial and catalog business, decreases of approximately $60,000 in our Berkley division, decreases of approximately $65,000 in our Franklin division, and decreases of approximately $71,000 in our automotive business.

Gross profit percentage declined from 31.4% in the second quarter of last year to 26.9% for the second quarter of this year. The decrease in the gross profit percentage was due primarily to a decrease in gross profit margin at Florida Pneumatic as a result of certain price reductions to a significant retail customer and material cost increases in various metals purchased by the Franklin division. This margin decrease was partially offset by certain price increases implemented in the industrial and automotive businesses.

In addition, this segment's gross profit margin was favorably impacted by the newly acquired Hy-Tech, which operates in the industrial tool business at higher margins than Florida Pneumatic's business. We do remain excited about the future of Hy-Tech in our Continental Tool group as we begin to see the benefits from some synergies in the industrial marketplace as a result of this acquisition.

In addition, we continue to focus our efforts on improving gross margins by re-engineering current products for lower costs and developing new higher-margin products. We anticipate a favorable impact on revenues from the new products introduced during 2006 and other products under development that are slated for release this year.

Consolidated, selling, general, and administrative expenses for the second quarter of 2007 increased 15.8%, from approximately $6.7 million to approximately $7.8 million, with the majority of this increase due to the newly acquired Hy-Tech in the current period of approximately $851,000. SG&A expenses as a percentage of revenues increased from 23.4% to 25.5%.

In addition to Hy-Tech's expenses, SG&A expense growth was attributable to an accrual of approximately $400,000 for nonrecurring compensation related to the sale of Embassy's real estate assets, increased retail market support costs, stock-based compensation from the grant of stock options, and increased net freight costs as the company's absorbing a greater percentage of customer shipping charges.

SG&A expenses were partially offset by approximately $225,000 from the favorable outcome of certain litigation and the implementation of certain cost-reduction measures.

Interest expense for the second quarter of 2007 increased by $309,000, or 59.2%, to approximately $831,000. Interest expense on borrowings under the term loan facility increased by approximately $261,000 due to additional borrowings related to the acquisition of Hy-Tech. Interest expense on borrowings under the company's revolving credit loan facility increased by approximately $19,000 as higher average borrowings were further adversely affected by higher average interest rates.

Before I update you on the guidance for the remainder of the year, I'd like to turn the phone call over to Joe Molino, who will give you some further comments. Joe?

Thank you, Richard. As Richard discussed certain specifics for the quarter, I wanted to focus on the year-to-date results and other details.

Revenues for the first six months of 2007 were $55.6 million, essentially flat, with revenue of $55.7 million for the same period last year.

Net earnings from continuing operations for the six months ended June 30, 2007, were $377,000, or $0.10 per diluted share, compared to $2.2 million, or $0.56 per diluted share, for the six months ended June 30, 2006.

Revenues at Countrywide decreased 23.2% to $28.2 million for the first six months of 2007 from $36.7 million in the prior year.

Revenue declined at each unit in our hardware segment. Sales at Woodmark decreased $5.8 million, or 25.3%. Revenues from the sale of staircase components decreased in the first half of 2007 by approximately $4 million, or 22.1%, due primarily to softness in the new home construction market. Further, revenues in our kitchen and bath products sold into the mobile home and remodeling markets have decreased approximately $1.8 million, or 37.4%.

Sales to one significant customer which serves the manufactured housing market were adversely impacted by market conditions and sales to another significant customer decreased as they began sourcing products from other vendors.

Nationwide's revenues decreased by approximately $1.4 million, or 12.9%, primarily attributable to a decrease of approximately $273,000, or 4.3%, in sales of fencing products due to market weakness and competition; a decrease of approximately $263,000, or 10.6%, in OEM products, essentially from market weakness and the timing of certain customer orders; and a decrease of approximately $817,000, or 47.1%, in sales of patio products, due primarily to market weakness, competition, and industry consolidation.

Pacific Stair's revenues decreased by approximately $1.4 million, or 41.3%, primarily attributable to significant softness in the new home construction market in Southern California and Arizona.

Gross profit margin in the hardware segment at 31.5% for the first six months of 2007 was essentially flat with last year's 31.6%. The slight decrease in gross margin percentage from hardware was due primarily to selling price reductions at Nationwide due to competitive pressures and market softness as well as some cost increases from Asian suppliers that were not offset by selling price increases and the adverse impact from the inability to reduce fixed overhead expenses as production levels decreased, combined with revenue decreases at Pacific Stair.

The gross margin percentage decrease was partially offset by a favorable product mix at Woodmark, as a significant portion of revenue decrease were associated with its lower-margin direct container business.

Revenues from our tool segment increased 44%, from $19 million for the six months ended June 30, 2006, to $27.4 million for the first six months of fiscal 2007. The revenue increase includes revenues from the February 2007 acquisition of Hy-Tech of approximately $6.5 million and higher revenues from Florida Pneumatic of approximately $1.9 million.

Retail revenues increased by approximately $2.4 million due primarily to new products shipped of approximately $2.6 million.

An increase in base sales to a significant customer of approximately $431,000 were partially offset by a decrease in base sales of approximately $632,000 from another significant customer. These revenues were partially offset by decreases in revenue of approximately $129,000 in our industrial and catalog businesses, decreases of approximately $142,000 in our Berkley division, decreases of approximately $134,000 in our automotive business, and decreases of approximately $43,000 in OEM products.

Gross profit margin for the tool segment declined from 31.9% for the six months ended June 30, 2006, to 29.1% for the six months ended June 30, 2007. The decrease in gross profit percentage was due primarily to a decrease in gross profit margin at Florida Pneumatic as a result of certain price reductions to a significant retail customer and material cost increases of various metals purchased by the Franklin division.

This margin decrease was partially offset by certain price increases implemented in the industrial and automotive businesses. In addition, this segment's gross profit margin was favorably impacted by the newly acquired Hy-Tech, which operates in the industrial tool business at higher margins than Florida Pneumatics' business over all.

Consolidated, selling, general, and administrative expenses for the six months ended June 30, 2007, increased $1.6 million, or 12.4%, from approximately $13.1 million to approximately $14.7 million, with the majority of this increase due to the newly acquired Hy-Tech in the current period of approximately $1.3 million. SG&A expenses as a percentage of revenues increased from 23.4% to 26.4%.

In addition to Hy-Tech expenses, SG&A expense growth was attributable to an accrual of approximately $400,000 for nonrecurring compensation related to the sale of Embassy's real estate assets, increased retail market support costs, stock-based compensation from the grant of stock options, and increased net freight costs as the company is absorbing a greater percentage of customer shipping charges.

SG&A expenses were partially offset by approximately $225,000 from the favorable outcome of certain litigation.

Net interest expense for the six months ended June 30, 2007, increased $469,000, or 46.2%, from approximately $1,014,000 to approximately $1,483,000. Interest expense on borrowings under the term loan facility increased by approximately $397,000 due to additional borrowings related to the acquisition of Hy-Tech. Interest expense on borrowings under the company's revolving credit loan facility increased by approximately $50,000 as higher average borrowings were further adversely affected by higher average interest rates.

Other items affecting cash flow for the six months were depreciation and amortization of $729,000 and $711,000. For the three-month period, depreciation was $416,000 and amortization was $343,000.

Finally, capital expenditures for the first six months of fiscal 2007 were approximately $959,000. For the quarter, capital expenditures were approximately $752,000.

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

Thank you, Joe. Before I open the call to any questions, I'd like to update previously issued guidance.

We expect the result of operations for the second half of fiscal 2007 to be better than the first half of 2007. However, we still anticipate earnings from continuing operations for the year ending December 31, 2007, to decrease between 25 to 35% as compared to 2006, as the inclusion of the results of the newly acquired Hy-Tech Machine are not expected to offset the decline in the results of our hardware business due to poor housing starts nationally as well as certain other competitive pressures.

For fiscal 2007, we anticipate consolidated revenues to be flat or decrease up to 5%, primarily due to the anticipated revenue decline in Countrywide, which is expected to be partially offset by the results of the newly acquired Hy-Tech machine business.

As national housing starts continue to be depressed, we expect Woodmark's sales to decrease 15 to 20% and sales at Pacific Stair to decrease 25 to 35%.

Nationwide's revenues are also expected to decrease between 8 and 15%, due primarily to adverse market conditions and new competition in the fencing and patio businesses.

We anticipate sales of Florida Pneumatic to be flat as the increases in our industrial and catalog businesses are expected to be offset by decreases in our retail business.

We anticipate revenues at Hy-Tech machine to be between $13 and $15 million for the balance of the year.

Gross profit margins are anticipated to range from 29 to 31%.

Selling, general, and administrative expenses are anticipated to range from 24 to 26% as a percentage of sales.

And interest expense is expected to approximate $2.9 million, increasing approximately $900,000, or 45%, as a result of servicing the debt related to the acquisition of Hy-Tech Machine.

That concludes our report for today, and I will be happy to answer any questions any of you may have.

(OPERATOR INSTRUCTIONS) Your first question will come from the line of Andrew Shapiro with Lendale Management.

Hi; Lawndale Capital Management. I have a bunch of questions I'll ask of you and then back out into the question queue and let others ask, but please come back to us.

The nonrecurring gains and expenses that you refer to -- I just want to get those clarified, if I could. The 225 litigation gain -- that's the Embassy building dispute? Is that a settlement or an adjudication? Your word on that one.

It's not-- it has nothing to do with the real estate thing; it was a separate claim with an old employee of the company that we bought a business from. And it was just-- we settled it and that was our proceeds.

Okay, so then the litigation dispute over the prior sale--

Still continues.

And what is the status of that?

Actually, I had a conversation just yesterday. We're going through the process. I don't expect anything to be resolved on that before some time early next year with the judicial process going forward. But they're going to go down the road with it and certainly we're going down the road with it because we feel that we are right. So it will be-- to be continued.

And those escrowed moneys currently are not on the balance sheet or in the income statement?

They are not.

Okay. And the amount that's in dispute presently is--?

$650,000, approximately.

Okay. The nonrecurring expenses referred to in the sale of the discontinued real estate -- brokerage commission?

No; that is a reserve for the bonus for the compensation-- for the management bonus on the sale of the building, which was the second part of the sale of Embassy.

Okay, so there was a performance-based bonus hiding, successfully, (inaudible) for the certain pricing.

Right. If you recall, we sold the business and the building separately so they were two separate transaction. So if we sold the business with the building it would have been one, but we didn't and we were-- and that, of course, took about another year for us to dispose of that. So it was two separate transactions, unrelated to current operations, obviously.

Okay. So that's why it went to SG&A rather than out of the sale price, which I didn't understand.

Right.

Okay. On Florida Pneumatic-- and then I'll back out of the queue; I do have questions, though, so come back to us. What retailer was it this quarter that was kind of the problem and the one that increase the sales -- Sears was the increase and Home Depot continues to be the problem, or is it the other way around?

That is correct.

That's correct, Andrew.

Now, in terms of the problem, or the reduction, is it because they already stocked up on your new product or was it a pure base sales type of reduction?

I would say it was a combination of a bunch of things. But it's including a line review so there was confusion from all the buyers, etc., in terms of buying more product, not buying more product, continuing the thing. And of course their own business and their lack of commitment on their part, I guess, in terms of proper displaying of product, etc., etc. All those kind of things came into it.

We've heard from some people who also supply them that they're seeing inventory restocking occurring there. How do you feel about your levels at that retailer? Do they have adequate levels, do you think, of inventory presently? And are you making headway in improving the promotions, the presentation, of their product in this current quarter that we're in now?

Yeah. Andrew, we keep a pretty close eye on their inventory levels. They actually were in some stock-out positions at point during the quarter. I think we resolved that. And we are in the middle of-- they have considered yet a new look for the product, and we're really just finishing putting together the look from last year that we had redone.

But generally, just to reiterate a point from earlier, in our opinion, the degradation in the business is more related to their lack of focus on this product line. It's a very small line for them and doesn't really get a lot of attention. And we are trying to shake them up a little bit to get that attention that it deserves.

Okay. The price reductions to the significant customer -- I'm assuming it's the one who grew, Sears, rather than the one that shrunk?

Yeah, it was Sears. It was not a new thing; it was kind of our new arrangement when we were granted the new program with them at the beginning of the year. That was what it was.

So do you view that as more of one of your annual or quarterly promotional type of issues or is it more of a permanent lowering of ongoing margins on a base price reduction?

It's more of permanent ongoing thing, which we knew, going in, that this is what it was. And the way that we increase that going forward from time to time is through promotions.

Yeah, kind of in return for that reduction on the base business -- which, by the way, we share with the various people in our supply chain -- we were able to get access to some other opportunities, a number of which are going to come to fruition in the second half of the year; and in some other product categories that were not part of our original base suite of products. So, yeah, we're going to have some degradation in the base sales but we're more than making up for it in volume and margin on other products.

So in a sense, you're getting some incremental business, albeit at lower gross margin, but that will help offset your overhead in terms of fixed costs.

Yes. We're not unhappy with the results.

Got it. I have many more questions; I'm backing out of the queue at this time. Come back to us.

Sure.

(OPERATOR INSTRUCTIONS) And your next question will come from the line of Andrew Shapiro with Lawndale Capital Management.

Okay, I'm going to ask a bunch more follow-up here. Your guidance appears to be mostly related to your hardware in terms of your change here, but what you're doing now, are you providing some guidance in the individual segments of hardware? Can you provide the aggregate hardware guidance for the year at all?

Andy, I don't have that in front of me. You can probably-- certainly you can back into that from--

Well, we've tried; that's why I was asking if you had it.

I do not have that handy.

Could you consider for the next time? And if you say--

Yeah, that's not a problem.

And if you say we can back into it, then because of that we're going to call you off line and ask your help on that -- that means anyone else can back into it, too, (inaudible) issue.

In the Pneumatic, where are we in the rollout of the new products? You talked about products slated for '06 and '07 -- have most of those new products you've come out with filtered out to the customers or is there still more benefit to be seen?

The answer to that question is both. We've filtered out many of the products and there are still more to come.

Okay. And is there-- it's all-- like, all kinds of lines or is there a general description of what these products are that you're introducing?

In the Florida Pneumatic area, you're referring to?

Yeah, or if you have--

The Florida Pneumatic area is, of course, introducing the Hy-Tech line of products to their customers. And then we have another line of, you know-- you don't know, but stools and other types of accessories that the mechanic uses in his normal work day that are selling very, very well to the retail shop.

And in addition to that, Andy, we've put together in the last 12 months something like 50 to 75 new tools in the industrial area and not all of those have hit the market yet.

Okay. And then, on the Countrywide side, the new products that might start making headway for, obviously, the loss of your earlier base business?

The Countrywide products are expansions of some of the current product lines and styles in addition to, for the first time, we're going to be replicating several of the main profiles of rail for a major competitor out on the West Coast, and we're hoping that that is going to jump-start some revenue out there.

Okay. A few more Florida Pneumatics here and then (inaudible). Your recent 8-K filing, I noticed you amended your credit agreement that specifically defined eligible accounts receivable to go up to 120 days for Home Depot and Sears?

Yes.

Is this formal-- what was essentially happening in practice or have those two customers further pushed out their terms?

I'd have to-- It's actually-- it's a deal with their practice. There hasn't really been a big degradation but sometimes they slip a little bit and we didn't want to lose our ability to go out to the line. And it's fairly common practice for lenders to do that if the customers are large and healthy.

So you were formalizing something that already was happening.

Yes.

Okay. How transferable is your retail tool production abilities and infrastructure to your commercial tools?

What is that? I don't follow the question.

To what extent can your retail production capacity and infrastructure, which you already had existing, produce things for Hy-Tech if you needed it to?

Well, the vast majority of our retail product is not made in our own factories. (inaudible) the vast majority of-- the greatest majority, if not all, of the industrial tools are made in our factories. So they're really independent of each other.

Okay. And for cost purposes, I would assume you wouldn't want to go the other route and have your retail products done here at the Hy-Tech commercial facility?

It's a little technical, and I may not have it exactly right, but-- Joe, you can jump in here. But tools that kind of go round and round, if that's the best way of saying it, are tools that are not generally made in this country. And tools that go back and forth are generally tools that are made in this country. The technology is much more complex for the-- I guess the word is "reciprocating" tools. And that is not a domestic expertise for anybody. So the majority, the vast, vast majority of reciprocating tools are made overseas while the vast majority-- not the vast majority, but in our particular case, the tools that go up and down, back and forth, are made in this country. So the retail sector is really something that we don't really have much manufacturing ability in this country to do. Does that answer your question?

Yeah, that helps. Now, do you need to either get these bigger in the retail side or is this low-margin single-digit margin kind of business is just-- it's a good business still to be in? It's hard to tell when the return on assets and return on equity is in the-- call it the lower-margin retail business. Is it something that can be overcome with size or it's just always going to be such low returns?

It's not an emphasis that we want to stress going forward. It's-- on a marginal basis, to use accounting terms, I guess, on a marginal basis, it's something that we do and we feel we should continue to do as long as we can, make a reasonable return on a marginal basis. It pays some of the bills. But it's not something that we want to emphasize going forward because that's not really where the bulk of the money can be made below the line or above the line.

But the business itself does require a decent amount of asset allocation and resources.

Yes.

For figuring out your return-- I guess I understand things (inaudible) gross profit.

Marginally, it's still putting enough to the bottom line that it's worth our while after all of our [force] have been considered.

Okay. And how has Hy-Tech integration gone since February and how much more integration is there left to go?

Integration would be overstating that-- I mean, we're really not combining much in the way of operations. What we are doing is sharing some customer information and now Hy-Tech is manufacturing some product for Florida Pneumatic for resale through Florida Pneumatic's channels; not replacing anything that Florida already had. So these are new products to Florida and their sales force now has access to them.

Okay. What luck have you had in the rental channel that you have discussed as an opportunity in the past?

We have on board a decent-sized national rental company so far -- I think the No. 3 firm in that area.

And that's fairly recent?

Yes, the last few months.

Oh, okay. And have your offerings to them been the whole line or is that a plan for expanded offerings so that business to them would be expanding.

We just-- in July, we finished the catalog that includes all the industrial tool offerings coming from both Florida Pneumatic and Hy-Tech under one umbrella. So, yeah, we'll add a few but we've probably got 80% of what we had planned already available.

Okay. And the catalog business has been referred to in the past. Is that a business or is that something separate, and how is that doing?

It's not separate. It's part of Florida Pneumatic and it's doing well. It's not like knocking the cover off the ball but it's a very important part of our business and it continues to do well.

And they're just-- they had a bit of an inventory reduction program that went on this year that hurt us a little bit at our largest catalog.

But what we're excited about is their interest in some of the new tools, not only our tools that Florida Pneumatic has under development the last 12 months but also the Hy-Tech tools. So they go through a program once every 12 months where they redo the catalog and we missed the last window. So even though we have that opportunity, we're really not going to see those sales until '08. But there is a substantial opportunity there.

Don't these catalog companies now update more currently via the Internet?

Not the largest one that we deal with. I mean, there may be some Internet opportunity and I'm not 100 percent familiar with it, but I'm being told that until there's the new reset on the catalog, we are not going to see any significant revenue.

Okay. I have more questions for hardware in general; I'm going to back out again in case someone's--

Andrew, why don't you just stay on the call, if you don't mind, and finish so we don't have any confusion?

Okay; just didn't want to--

No, we appreciate your thoughts and the process. And just continue because you're going for it.

On hardware -- clearly a challenging environment. What cost-cutting initiatives have you implemented or intend to implement? What benefit from those actions are already in the reported numbers and what benefits might be able to be culled out of them in the future?

Joe can give you more specifics about it, but the few things that we've done -- we've unfortunately had to terminate a significant amount of people in our Texas facility. And we are redoing the whole process there in terms of order processing, inventory controls. We're just reviewing every area of the company. We basically started from the ground up, from zero -- a zero-based budgeting process. And we said, "What do we need for this business now?" and we built up instead of reducing down.

And that's what we did and we've had-- I think the reductions have been approaching $1 million or something to that effect on an annualized basis. It's not something we wanted to be doing because we've had many loyal and talented and good people there, but we've had no choice in that regard.

And also, we're streamlined things such as we've negotiated better rates on freight, we consolidated some of our real estate. I mean, we've done-- we've looked at-- the bottom line is we've looked at pretty much everything that we can look at, and we continue to look at. But-- we've frozen on some hirings at Nationwide.

We've done whatever we can because our feeling is that this housing downturn, which is continuing, is going to be here for at least another year. We all read the news, the Toll Brothers news that came out today, and many other companies that are very directly related to housing. So we feel there's no time soon that things are going to improve so we need to be leaner and meaner, I guess is the best way of saying it. And we're doing it in processes, with overhead, with people. Any area that we can save money, and we've looked pretty much at everything and continue to do so.

Is that-- Joe, do you want to add anything to that?

Yeah, the only thing I would add is that the big focus is the Texas operation. The Atlanta operation is actually doing reasonably well on its own, nicely profitable on its own, and doesn't really need to be right-sized. The California operation, unfortunately, since it's so small to begin with, there's just not a lot we can do right now other than ride it out.

We're fortunate in that we have one of the premiere salesmen in that industry that came on board a few months ago. And even in this market, he is certainly making some inroads although, again, at much reduced volumes from what some of these potential customers had in the past. But having said that, we're definitely investing in him and hoping that he can really bring in some business out in California and Arizona.

But we really have no choice other than to ride it out out there; there isn't much we can do given the very basic infrastructure that we need to have in place at the moment.

Nationwide is still a nicely profitable business and we've done some minor cost-cutting, but probably more just cost-avoidance.

And just getting back to Texas for a moment, the $1 million that Richard referred to was a run-rate basis and we probably didn't even hit that run rate until probably June or July. And there is further restructuring that we're looking at that we may be able to drop a little bit more to the bottom line.

So the timing of that -- the benefit of these actions, then -- it sounds like are not in the Q2 numbers.

That is correct and it's also one of the reasons we feel that if the revenue simply holds where it is, Q3 and 4 would be quite a bit better at Woodmark.

And any restructuring charges that would come from these actions?

No, not really. Any severance was relatively insignificant.

Okay. And I'm surprised -- Atlanta had-- I'm surprised it's doing well; it had been challenging in the past. And I've seen-- if I look at your numbers sequentially, from what you reported, I've noted that certainly year over year, for the next quarter in particular, you're facing very bad comparables. But sequentially, this quarter versus Q1, it looked like you even had some upticks. Do you feel the market's bottoming and, while the new level of activity might remain this low, that it's not getting worse?

It's close to bottom; I don't know that we're going to say it's at the very bottom. It's close to bottom. Certainly the drop is slow-- the decrease is slowing significantly. But I'm not 100 percent sure we're at the bottom, over all, in Woodmark.

Right. But am I correct in observing that, sequentially, things in the quarter were better than the March quarter?

Yeah, I think so. I think Q1, we were just seeing no building -- people just trying to get rid of inventory. And Q2, late in Q2, we started to see some people at least building a little closer to the actual demand. That inventory-- some of the inventory worked out of the system. And mind you, we still have some strong selling efforts out there and are bringing in some customers, such as they are.

Right. Now, I saw a large increase in CapEx in this quarter versus last quarter. I think that was all according to your annual plan -- but what was the big purchases in CapEx in this quarter? And the expected payback, or benefit, of these?

We bought a couple of fairly sophisticated horizontal machining centers for Hy-Tech; that was planned all along throughout the acquisition and was in our forecast. And we expect-- and they're up and running and making product. It's just going to add a lot of versatility to the facility and allow for them to have a little more capacity going forward. So the payback is well above our required payback on these sorts of things, which are generally in the 20 to 25% range.

And you mentioned last quarter, I guess Q1, that two large Woodmark customers were converting business. That decline in Q1 from those customers continued here in (inaudible)? It's a tougher issue.

Are you referring to the plumbing side of the business?

It was referred to as two large Woodmark customers; I don't recall any detail, where it was.

Yeah, I have a feeling you're talking about the plumbing customers, and the answer to your question is yes. They continue to do very, very poorly.

Okay. Now, there was one large customer that you mentioned sourcing from anther vendor. Was there a change in price or quality? And what's the chances of recovering that customer in the future?

Which customer?

This is [use].

Oh; I would say that it's up to-- I would say it's not a very good possibility that we could get the customer back. Having said that, there is some transition in their company right now, in that particular customer, and they're actually changing management and I happen to know the new management in the company. So they've told us that they will definitely look at it once they've taken over the business. And once they do, we will certainly give it our best shot. But it may be a while to unravel it and get back to where it was.

Was the reason for the old management shift a price or quality issue or--?

No. It was not a price, it was not a quality issue; it was strictly a way that-- I don't know how to describe it, really--

Well, here's what happened. When we bought-- we bought Woodmark, this customer was under Management A and very happy with us. Several years later, it came under Management B, who had a relationship with a different vendor and wanted their pet vendor to be the main supplier. Now we're understanding possibly this is going to be Management 3 in here, who's not wed to Management B's preferred vendor and may, in fact, even prefer us. But we don't know yet.

Right.

What kind of product do you provide this customer?

Faucets and plumbing.

Plumbing and bath-- kitchen and bath accessories and faucets.

Is it a branded area?

Yes.

Yes, it is. It's called Banner.

Banner?

That's our name for it, Andrew.

Okay. And you've had high customer concentration in the kitchen and bath area. What efforts have you made and what success in diversifying your customer base?

We actually have a major effort going on in working with mid-size plumbing wholesalers. That business is growing quite rapidly, in the 40% range. We've hired a couple of people that are focusing on that area and we're having a lot of success. So that is a big thrust. It's unfortunate that our-- if you actually took a look at that business and took away the top two accounts, it actually has grown every year since we've had it.

But the large customers are so large it just-- their decline--

Yeah, dwarfing that. I mean, that'll start to change as we do year-over-year in '08 but right now it's still going to be a negative comparable.

Have you begun to see any less healthy players in the whole hardware segment -- the various hitches -- fall by the wayside in this area yet, or not?

Yeah, we're seeing some. Some are customers, some are competitors -- all sorts of regional smaller people are having some trouble; that's true. So to some extent that helps us, obviously, because we're financially stable.

Okay. And the Katrina rebuilding effort is spoken of as not even half done. Are you positioned in that area to benefit from any of it or is that observation -- that it's got more to go -- faulty?

Well, we certainly have Louisiana as part of our territory. A lot of those homes are the mobile homes, which unfortunately our one in there was one of those large customers we just talked about, which isn't in very good financial health. So we're there. I mean, we're there to the extent we can be but we haven't seen a particular uptick in business as a result of it.

Okay. Well, is that because there is, in fact, still a lot more rebuilding to go or are we just (inaudible) anticipate in building?

Honestly, I don't know how much more rebuilding there is to go. I mean, I couldn't tell you how many single family homes are yet to be built in the New Orleans area; I don't know the answer to that question.

Would you assume that-- I'm assuming you're being pitched acquisitions. Have the sellers reset their expectation of prices yet or are they still holding on to '05-'06 levels?

I would say levels have not come down.

Yeah, and every acquisition is specific. To be honest, Andrew, we have not-- we don't have a great effort going on in M&A right now. We've got some debt to pay down here and some integration for Hy-Tech and I'm not sure management is comfortable with going after anything of any significance while the housing market is where it is because that's a big part of our cash flow and we'd like to see that improve a little bit before we bit off something else.

Well, having said that, that's not so much-- Andrew, that 's not so much my opinion about it, not to be contradictory. There may be some great values and opportunities as time goes on like this, but right now I think our emphasis is more with trying to focus on our businesses and do as best we can with what we do have. If something comes along, we will certainly look at it.

But our emphasis is more about keeping the banks comfortable, as Joe referred to, as well as working hard and diligently to make sure-- to maximize our businesses in these turbulent times, I guess is the best way of saying it.

Right. I was just thinking of the synergistic acquisitions around -- have their price multiples become more realistic yet or not?

I don't know if I have enough data points to say whether they've really changed a whole lot. I mean, every business is unique. I haven't noticed much of a change.

Okay, great. I'll back out in the queue. Thank you.

Okay.

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

Thank you. Thank you, everybody, for listening to our call. Andrew, you're so thorough, which we're happy that you are. You're so thorough in all your questions. Obviously, you hit on all the subjects other people were interested in, and we appreciate that.

Everybody else, have a good day and we hope to report better numbers going forward. We certainly will do everything we can to do that. Good bye

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