P&F Industries Inc (PFIN) 2008 Q1 法說會逐字稿

Greetings and welcome to the P&F Industries first-quarter 2008 earnings conference call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Richard Goodman, General Counsel for P&F Industries. Thank you, you may begin.

Thank you, operator. Good morning and welcome to the P&F Industries' first-quarter 2008 earnings conference call. With us today from management are Richard Horowitz, Chairman, President and Chief Executive Officer, and Joseph Molino, Chief Operating Officer and Chief Financial Officer.

Before we get started I'd like to remind you that any forward-looking statements contained herein, including those related to the Company's future performance and those contained in the comments of management, are based upon the Company's historical performance and current plans, estimates and expectations which are subject to various risks and uncertainties including, but not limited to, economic conditions, the impact of competition, product demand and pricing and those described in the reports and statements filed by the Company with the Securities and Exchange Commission including, among others, as described in the Company's quarterly report for the three-month period ended March 31, 2008 and its annual report on Form 10-K for the year ended December 31, 2007.

These risks could cause the Company's actual results for the 2008 fiscal year and beyond to differ materially from those expressed in any forward-looking statement made by or on behalf of the Company. Forward-looking statements speak only as of the date on which they are made and the Company undertakes no obligation to update publicly or revise any forward-looking statements whether as a result of new information, future developments or otherwise. With that I would now like to turn the call over to Richard Horowitz. Good morning, Richard.

Good morning, Rich, and thank you so much and good morning to everybody else on the call. Thank you all for joining us this morning for our first-quarter 2008 conference call. I would like to start off with a brief review of our financial results for the first quarter 2008. We are reporting revenue from continuing operations of $24,325,000 for the first quarter, down slightly from $24,959,000 reported for the same period in 2007.

However, our earnings from continuing operations for the first quarter increased to $350,000 from $147,000 for the first quarter of 2007. Additionally, diluted earnings per share from continuing operations for the three-month period ended March 31, 2008 rose to $0.10 per share as compared $0.04 per share for the comparable period in 2007.

Earnings from continuing operations increased primarily as a result of reduced operating expenses and slightly higher gross margins. Additionally, the Company had the benefit of reporting three months of operations for Hy-Tech compared to only one and one half months during the first quarter of last year.

Results from discontinued operations of $12,000 net of tax for the first quarter of 2008 reflect an increase of $33,000 over the same period a year ago which reported a net loss of $21,000. As a result of all this the Company is reporting net earnings of $362,000 for the three-month period ended March 31, compared to $126,000 reported for the three-month period ended March 31, 2007 and overall our net diluted earnings per share for the three-month period ended March 31, 2008 and 2007 were $0.10 and $0.03 respectively.

Before I take you through a more detailed look at the operations I'd like to review what each of our business units does as I do generally on the calls since there are new people on these calls. Our Continental Tool group consists of our Hy-Tech and Florida Pneumatic wholly-owned subsidiaries. Hy-Tech manufactures and distributes pneumatic tools and parts for industrial applications; Hy-Tech also manufactures approximately 60 types of industrial pneumatic tools, most of which are sold at prices ranging from $300 to $7,000 under the names ATP, Thaxton, THOR and Eureka, as well as under the trade names or trademarks of other private-label customers.

This line of products includes grinders, drills, saws, impact wrenches and pavement breakers. Hy-Tech's products are sold at distributors and private-label customers through in-house sales personnel and manufacturer's representatives. Users of Hy-Tech tools include refineries, chemical plants, power generation facilities, the construction industry, oil and mining companies and heavy industry as well. Hy-Tech's products are sold off the shelf and are also produced to customers' specifications.

Florida Pneumatic is primarily engaged in importing and manufacturing of approximately 75 types of pneumatic hand tools primarily for the industrial, retail and automotive markets. Florida Pneumatic also markets through its Berkeley tool division a line of pipe cutting and threading tools, wrenches and replacement electrical components through a widely used brand of pipe cutting and threading machines.

In addition, through its Franklin manufacturing division Florida Pneumatic imports a line of door and window hardware. Florida Pneumatic's products are sold to distributors and private-label customers through in-house sales personnel as well as manufacturer's representatives.

Countrywide Hardware is comprised of Nationwide Industries, Woodmark International and Pacific Stair products. Countrywide 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.

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

Having done that, now I'll just review the quarterly performance of each of our business units. Our Continental Tool segment appears to be stabilizing. The acquisition of Hy-Tech consummated in February of last year continues to make a positive impact at P&F providing an additional $2.2 million of revenue when compared to the same period in 2007. However, revenue reported by Florida Pneumatic for the three months ended March 31, 2008 of $8,907,000 reflects a decrease of approximately $527,000.

Primary factors contributing to this decrease include -- a net reduction in retail revenue of $365,000, a portion of which was due to the wind down of the Home Depot business, and our Franklin hardware division witnessed a decrease in revenue of approximately $281,000, primarily the result of the loss of the Home Depot business which for Franklin commenced in mid 2007.

It should be noted however that we believe the loss of Home Depot business should not materially affect our overall operating margins. Additionally the above declines in product line revenues were offset by increases reported at our Berkeley division of $74,000 and industrial products line of $85,000.

The Company's Countrywide Hardware segment continues to struggle due to the ongoing downturn in a number of new homes currently being constructed in our markets. Revenue reported for this segment was $11,039,000 for the first quarter of 2008 compared to $13,346,000 for the three-month period ended March 31, 2007. Woodmark continues to be our one subsidiary that is hardest hit by the housing market collapse. Woodmark's revenue for the first quarter of 2008 of $6,438,000 was down from $8,516,000 reported during the first quarter of 2007. Within Woodmark revenue from its stair parts line is down nearly $1,937,000 while its kitchen and bath productline is down $140,000.

While no one knows for certain exactly when this downward trend in the housing market will eventually level off, and hopefully increase as well, we will continue to take whatever course of action is necessary at Woodmark to secure its place as one of the leaders in providing quality stair parts, accessories and service to the marketplace.

Revenue during the first quarter at Nationwide was $4,130,000 compared to $3,891,000 for the three-month period last year. Fencing hardware revenue increased $538,000 primarily a result of launching several new fencing hardware products, while Nationwide's OEM and patio productlines decreased $222,000 and $74,000, respectively.

Finally, revenue at Pacific Stair products located in Southern California has been and continues to be severely affected by the housing market in the southwestern region of the United States. When comparing the three months ended March 31, 2008 to 2007 Pacific Stair's revenues decreased nearly 50% to $471,000 from $939,000 for the same period last year.

As mentioned earlier and last quarter, we are continually evaluating the business conditions in this region and will continue to reduce our overhead where possible. Until such time as the housing market in this region turns around operating results at Pacific Stair will continue to struggle.

Additionally, we are beginning to see pricing pressures on commodity prices which are beginning to force up the cost of most of our shaped metal products, such as our gate hardware and iron balusters, increasing the likelihood of margin compression going forward. Gross margins on a consolidated basis increased slightly to 31.5% for the three months ended March 31, compared to 31% for the same period last year. Specifically gross margins in the tool segment increased to 33.2% from 32%.

Gross profit for this segment increased $698,000. When comparing the three-month period ended March 31, 2008 versus 2007 gross margins at Florida Pneumatic increased 0.7 percentage points primarily as a result of the reduction in fees paid to an overseas trading partner. However, when taken in conjunction with a decrease in revenue, Florida Pneumatic's gross profit declined approximately $100,000.

As previously noted, the acquisition in February 2007 of Hy-Tech favorably impacted the tool segment's gross profit as we included Hy-Tech for the full three-month period ended March 31, compared to approximately one and one half months during the same period last year. Hy-Tech's gross profit for the three-month period ended March 31, 2008 was $1,708,000 compared to $909,000 reported last year. However, Hy-Tech's gross margins declined 3% when comparing the three-month period ended March 31, 2008 compared to last year, primarily the result of increased raw material and labor costs.

Gross profit for the hardware segment continues to be adversely affected by the downturn in home construction, decreasing $774,000 to $3,261,000 for the three-month period ended March 31, 2008 from $4,035,000 reported for the three-month period last year. Gross margin percentage for the hardware segment decreased 0.7% during the same periods.

Specifically gross margins for our stair parts business at Woodmark increased 0.8% while our kitchen and bath productline decreased 0.5%. The gross margin percentage decrease was mitigated primarily due to a favorable product mix as a greater percentage of stair part shipments were generated from its warehouse which generally provide higher margins compared to direct shipments from overseas.

As discussed earlier, while Nationwide was able to increase revenue this quarter compared to the same three-month period last year, it's gross margin slipped 1.5% to 35.4% for the three months ended March 31, 2008, primarily the result of price reductions caused by competitive pressures. Additionally, we absorbed cost increases from Asian suppliers which we were not able to pass through to our customers.

Our gross margin at Pacific Stair was severely impacted decreasing to a deficit of 12% reported for the three-month period ended March 31, 2008 from 12% for the three-month period in March 31, 2007, essentially due to the inability to reduce fixed overhead costs as sales levels decreased.

During the three-month period ended March 31, 2008 our SG&A decreased $343,000 or 5% when compared to the three-month period ended March 31, 2007. While SG&A expenses this quarter reflected three months of Hy-Tech operating expenses compared to approximately one and one half months during the same three-month period in 2007, we were able to reduce SG&A as a percentage of revenue to 26.8% for the three-month period ended March 31, 2008 compared to 27.5% for the three-month period ended March 31, 2007.

Excluding the impact of Hy-Tech where SG&A increased approximately $181,000 due to a full three months in the first quarter of 2008, our remaining SG&A decreased $525,000. A large portion of the reduction in our SG&A expenses were savings aggregating approximately $240,000 in freight out warranty costs and advertising, primarily the result of the wind down of our business with Home Depot.

During the three-month period ended March 31, 2008 we received $165,000 in reimbursement of legal fees and other costs related to the settlement of formerly outstanding litigation. Additionally, certain intangible assets led to our acquisition of Nationwide were fully amortized during 2007 resulting in a reduction of amortization expense of $133,000 when compared to the three months ended March 31, 2008 and 2007.

As a result of the impairment of certain intangible assets during the fourth quarter of 2007 our amortization for the three-month period ended March 31, 2008 was approximately $24,000 lower than the amount recorded during the same three-month period in the prior year.

Although P&F's overall results of operations continue to feel the pressure of the downward trend of new housing starts, particularly the Southeast region of the United States, our results for the first quarter of 2008 result in a full quarter of Hy-Tech's results in our ongoing effort to control or reduce costs wherever possible.

Going forward clearly the key drivers for us will be the timing of the housing recovery and the extent to which expected increased costs can be passed along to our customers. That being said, P&F remains committed to its marketing efforts and hopefully can mitigate some of the impact of this difficult economic environment. At this time I'd like to return the call over to Joe Molino.

Thank you, Richard. I wanted to add some additional clarification to the results in the press release. Overall we're pleased with the results at Continental Tool as not only is each operating unit doing well, but the combined activities are also encouraging.

Florida Pneumatic is having another good year at Sears and we continue to be excited about the opportunities that we have with them to present additional products. As previously mentioned, the Home Depot air tool business is winding down, but the activity is greater than anticipated adding some additional sales. In addition, we do not expect to be left with any material level of inventory of tools.

New product development also continues at a brisk pace with additional introductions to the industrial channel slated for later this year as well as adding additional pages in several major catalogs of these tools. We continue to be pleased with Hy-Tech as it has met all of our expectations. Revenue and profits have been steady and we are in the process of introducing a major new line of industrial tools to compete directly with a large competitor whose market position we feel is vulnerable.

Finally, sales of industrial products made exclusively by Hy-Tech for resale through Florida Pneumatic are growing each quarter and we are pleased with their acceptance in the marketplace and our ability to execute this new sales program.

The situation with Countrywide Hardware is more mixed. Nationwide had an excellent first quarter, we were happy with the results overall and especially pleased with the reception at the major annual fencing show to our new products.

In addition, we appear to have created some additional opportunities for sales in the western U.S. which has been difficult for us to this point. This is as a result of a great deal of field market research to develop a productline specific to the western requirements. Our concern with respect to Nationwide is, as noted, the increasing pressure on basic metal prices. As metal is the primary driver of the costs if not all -- excuse me. As metal is the primary driver of most if not all of Nationwide's product cost, this pressure is felt immediately.

In addition, most Nationwide products are sourced in China where there's been a steady strengthening of the Chinese Yuan in relation to the U.S. dollar for about a year. And although we pay in dollars, the local currency received by the vendors for presenting dollars to their bank has obviously been declining putting pressure on vendors to raise prices to their U.S. customers. Given all of the above we expect 2008 to be very difficult for Nationwide.

At Woodmark the economics are still working against us for now. Housing starts for the country are now below 1 million units on an annualized basis. We have not seen these levels since 1982 or 1983. By every indication however we are not losing share to competitors and in most cases we seem to be gaining share at the expense of weakened or distracted competition.

As is the case with Nationwide, we are experiencing cost increases on imported products, primarily on iron balusters. We have passed these along where we can, but as you can imagine in this environment, getting these increases to stick has been difficult. We continue to manage working capital with aggressive targets for inventory reductions for the year.

Unfortunately given the market 2008 will be a very challenging year for Woodmark as well. Even the most optimistic forecasts don't have the downturn over until toward the end of 2008. We are functioning under the assumption that the turnaround will be in 2009.

The location suffering the most currently is Pacific Stair Products, our Southern California mill and warehouse. With starts down over 50% in the western U.S. over the prior year it has been impossible to cover the overhead of our mill and warehouse. Although there has been some recent significant new account activity, it will be some time before this unit turns a profit.

With respect to Countrywide, in general we have been experiencing greater customer receivable issues than normal which is a reflection of the market situation. In some cases this takes the form of slower payments and in some cases we're seeing smaller accounts just simply go out of business. We are obviously, in these times, monitoring this situation closely.

Other items affecting cash flow overall for P&F for the quarter were depreciation and amortization which were $430,000 and $230,000, respectively, for the quarter. Capital expenditures for the quarter were approximately $190,000. In addition, net interest expense decreased $94,000 or 14.4% from $652,000 incurred during the three-month period ended March 31, 2007 to $558,000 for the quarter ended March 31, 2008, primarily the result of lower interest rates during 2008 compared to the first quarter of 2007.

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

Thank you, Joe. And that's the end of our report today. And of course, as always, we'd be very happy to answer any questions any of you may have at this time.

(OPERATOR INSTRUCTIONS). Andrew Shapiro, Lawndale Capital.

Good morning. I have a few questions; I'll back out and then I have more. In the past you had the gross margins of consolidated and Countrywide in your press release. They've been pulled out. Is there any particular reason and can you again just summarize the gross margins of those units because as you read the script they went right by me too quickly?

The consolidated -- the gross margin for Countrywide, just give me a second, I'll pull those. On a consolidated basis gross margins increased to 31.5% for the three-month period compared to 31% for the same period in the prior year.

I got that.

The tool segment went from 32% a 33.2% and the hardware segment margins were up -- see if I -- we broke that out (inaudible).

I know the script had margins for the three pieces, you just went so quickly.

Sure, I can give you the three pieces. Gross margin for hardware decreased by 0.7% for the -- comparing the March period of this year to the March period in the prior year. Gross margins for stair parts increased by 0.8% with kitchen and bath decreasing by 0.5%. Gross margins at Nationwide slipped 1.5% to 35.4%. And gross margin at Pacific Stair went from 12% margin to negative 12% margin, so that's a difference of 24 points.

And at Pacific Stair, that was primarily a function of the business levels gone to a point where it's mostly unabsorbed overhead?

Exactly. There's not really much of a change in the pricing out there, it's just simply lack of volume and we can't cover the overhead anymore.

It's more a function of the overhead than it is input cost?

Yes, input costs are really no different. The material cost has not changed, the labor costs are similar it just gets less and less efficient given the volumes going through.

So given the revenue volume and the negative 12 gross margin what's the gross -- I guess gross loss rather than gross profit from Pacific Stair? What's it costing?

Yes, 12% of 471 before SG&A of course.

Okay. And The Nationwide drop is -- that's mostly cost input issues?

Yes.

So if you're gaining some share or holding steady and you have this kind of a margin squeeze from your costs, do you feel your competition has the same. Is there a price movement that's just lagging that will be able to be passed on or what's the competitive view there?

To the extent we're competing with other importers they're exactly in the same boat we are. If you're talking about Nationwide the product is primarily coming from China. Also some product from Taiwan, but we're also seeing the Taiwanese currency going against us a little bit from a year ago.

U.S. competitors are not seeing the currency squeeze, but everybody is seeing the squeeze on metals prices. Commodities in general are up from a year ago, but to the extent that they're not importing they may have a little bit more flexibility. As far as how long it takes these prices to work through the system, obviously it depends on inventory levels for each competitor; for us it takes a couple of months. But I suspect everybody is in a similar situation.

And on the tools side, you gave the aggregate tool margins rising. I'm trying to get a feel for what is a function of sales mix and what is a function of the individual divisional impacts. Could you tell us what Florida Pneumatic and Hy-Tech's gross margin year-over-year have migrated to?

Sure. I believe we said what it was, but let me --.

Again, yes, that was just part of the script and -- sometimes so quickly versus when it's in the past been put in your press release.

Okay. On tools, gross margins in total, as I said, went up to 33.2 from 32. Florida Pneumatic's margins increased by 0.7 points, and Hy-Tech's margins -- I can't find it -- oh, Hy-Tech's margins declined by 3%, but I caution you with regard to that Hy-Tech change because we are comparing a one-and-a-half month period to a three-month period. And to be honest, the cutoff midmonth is a pretty fair estimate. So I don't think I would draw too many conclusions from that decline at Hy-Tech.

Because that is a function of arbitrary overhead costs?

Yes, exactly. I think as we see a full second quarter, that will start to -- the impact of that somewhat arbitrary cutoff will start to go away and I would suspect that that 3% change is going to be smaller.

But down nonetheless, and is it a function of input cost?

Well, the second quarter hasn't really happened yet. But that number will get smaller. I'm not saying it can't actually go positive, but it is input costs.

Then in the Florida Pneumatic, is the increase the result of a decline in the Home Depot low-margin business or a function of other factors?

Well, I would say it's a change in mix, both with respect to Sears and Home Depot, and also just a greater mix of non-retail business. We have got more industrial products out there. They sell at higher margins, much higher margins. So to the extent we can keep growing those revenues, we can actually see the overall margin continue to creep up.

So that is industrial products within Florida Pneumatic?

Yes, exactly.

Have you determined -- you said on the last call you were still doing the budgeting process and thus had no guidance for the 2008 calendar year. I know you don't give quarterly guidance. Have you determined whether you will provide the 2008 guidance and when that will be?

I thought we had covered that, Andrew, on our last call, but we are no longer giving guidance in these times.

Even annual guidance?

Even annual guidance.

Even in the division that is less housing related?

Well, we are not going to break down segments. We are going to report as a company.

All right. Well, can give us some either guidance or help with your SG&A? Last year in the June quarter, there was a sizable amount of SG&A. You have made some cuts and you're down already at 6.5 this quarter. But last year, I can't recall what if any onetime items were in it. But if spreadsheets are correct, it looks like you had a $7.6 million SG&A in the June quarter of last year.

So I'm trying to get a feel if we have some seasonality, some sequential upturn we are going to expect, or we should see something around the same $6.5 million level.

Well, if you're talking about absolute dollars of SG&A, without having it in front of me, I would suspect that Q2 would be pretty high because it is our big selling season on Nationwide and also to some extent Woodmark. In addition, if memory serves, we had a fair number of legal costs last year in the second quarter, which I guess you can call those onetime. But I think it was just larger than normal, given what we were working on.

In fact, that return of some legal fees that we spoke of, a good deal of that was actually spent in the second quarter of last year. So from an absolute perspective, I think you're going to have some seasonality to that, but in addition, I think last year we did have some larger than normal expenses, especially on the legal side.

And Andrew, just as a clarification, the legal fees that we recovered this year that I referred to and Joe referred to it, had nothing to do with the real estate lawsuit that we are in the midst of. It was a separate product liability matter that we got money back from, we recovered.

Okay. So this doesn't relate to the Embassy real estate ongoing escrow recovery?

No and there's nothing new to report there, we're just waiting for a trial date and we're going to be moving forward on that.

Okay. You were in pretrial last time and has the times passed for the mediation settlement talks if any?

There have not been any mediation settlement talks and, as I've said to you before and I've said to all of our people on the call, we feel and our lawyers feel, 100% confident that we are in the right and so we are prepared to go to court and we are not really looking to settle. It's either a zero or full settlement.

That amount would be what again?

$650,000.

And would it be $650,000 plus legal?

No.

No, they don't do that in (multiple speakers).

And again, it would be in disc ops, it would not be in continuing operations.

It's still cash, but based on your debt level.

That's correct.

Without a question.

And the amount of reimbursed legal expenses this quarter that reduced SG&A to the 6.5 level?

165,000.

165, thank you. I have more questions, please come back to us. I'll back out in the queue to let others ask if someone is here.

You got it.

Thank you.

(OPERATOR INSTRUCTIONS). Andrew Shapiro, Lawndale Capital.

Okay, I'll go through most of the rest of mine if you wouldn't mind since no one (multiple speakers).

Not at all.

You might as well just finish.

All right. So this quarter versus last quarter there's a large pay down of long-term debt that occurred and a large increase of short-term debt that kicked in. Can you describe both, if they're interrelated or not interrelated and what's going on?

They're both related and not related. In the first quarter -- let me back up. Whenever we make an acquisition we have 12 months -- the first 12 months of the seven-year deal which is what we typically do we are permitted to pay interest only. And unless we have a lot of excess cash flow that's what we do. At the 12-month anniversary, whatever debt is outstanding on the acquisition locks in and payments are then scheduled out for the next six years.

We had an opportunity to draw down on the revolver to pay down some of the long-term debt related to the Hy-Tech acquisition. We did it for a couple of reasons. It helped with covenants going forward, the interest rate is slightly better on the revolver than the long-term debt and that was about $5 million if memory serves.

And then second, we will tend to build up borrowings through the first six months of the year, that's just our seasonal business. And if you take a look back over the past few years or even back 10 years you'll see that the revolver goes up Q1 and usually Q2 and then starts to come back down towards the second half of the year.

And so your revolver is somewhat formula based or tied to things. What's your availability under the revolver as of the quarter end after you drew down $5 million extra to pay down the long-term debt?

The total availability per the agreement is $18 million currently. And so obviously to the extent we're drawing whatever is there, $15 million, $15.5 million, we've got $2.5 million left.

Okay. And is it during the quarter ended June that it goes up further or this is a quarter -- since I noticed your inventories dropped and your receivables went up, is this a quarter where there is a net paydown by the end of June?

It will go up during this quarter. It's hard to say where it will be at the end of June. I think it could be just about back where it is. But it does not peak at March, it peaks in May usually, but again it's very dependent on receivables and when product is received, but it usually peaks somewhere in the middle of the second quarter.

Right. Now I saw your inventories drop sequentially, your receivables went up sequentially, is that standard timing or is some of this quantifiable amount related to Home Depot and how much more in the Home Depot inventory would there be coming out and sold through and not replenished?

A couple of things going on. I would say, yes, some of it is drawing down some Home Depot inventory. Some of it is our hardware customers going out a little farther and also Sears is now starting to take a little bit more advantage of their 90-day terms where I think throughout most of last year they probably functioned in the 60-day level. Although I'm not sure at what point during the year they informed us they would be going to 90 days, Q4 I think -- they are really starting to take full advantage of that now.

So in Home Depot what kind of size inventory do you have left to move through and what's the timings of winding the rest of Home Depot down?

A few hundred thousand dollars, it should be gone by the end of the second quarter.

Okay. And Sears has had its own overall store problems, not necessarily in Craftsman tools, but they did unveil a new strategy that is a signing or appointing brand managers to their brands, Kenmore, but in particular for us here at P&F Craftsman. At this stage now has this impacted or what are the future prospects, optimism, negativism that has resulted in what you're hearing from them on this?

It's business as usual for us. We're still dealing with the same people we've been dealing with. I think it's generally positive that they've got a brand manager. But right now we're just going along with the plan for the year and continue to work with them on new product introductions.

And are they putting your Craftsman tools into more stores, meaning in more stores in their universe which includes Kmart and eventually it sounds as if, if they're going to have a brand manager, they may go outside of the Sears/Kmart universe?

They're obviously already in all the Sears stores and Sear's hardware stores and we have rolled out some product to Kmart last year. But we don't have any information about them moving the Sears Craftsman brand outside that universe.

No, that's still early, but I didn't know if you were fully into the Kmart chain yet either.

I don't think we're fully into the Kmart chain, but even if we were that increase would be relatively immaterial.

Okay, okay. In Hy-Tech so far it sounds as if you're not seeing anything of an economic slowdown into this stage of your ownership. And can you explain a little bit your expectations or its end used customers a bit to understand if an economic slowdown would impact them or it is somewhat countercyclical?

We've been doing very well at Hy-Tech, but our management there have pretty regularly been waiting for the shoe to drop. It hasn't happened yet, but they keep discussing it with us in great detail, not that we can put our hand on it. But we are expecting to have an impact at our business there, but we have not seen it as of yet.

Okay.

If we were to talk about the markets they're in, obviously petrochemical is doing relatively well with oil prices where they are. They also have a fair amount of business in power generation which I think just generally is probably a pretty steady business. I don't know that that really goes up and down with economics. They're concerned about some areas, but we're not seeing any falloff in business.

(inaudible) step back there in the Florida Pneumatic, Home Depot -- with the wind down of Home Depot have the overhead cuts that could be made or have been made tied to your Home Depot sales? Those already are embedded in your lower SG&A? Or are there more cuts to come?

The cuts were made, but a lot of the severance and all those things were still in there. So the impact of it would be -- I guess would be in the second quarter.

In the second quarter we're going to see some expense in one time expense related to severance tied to the employees that were working on the Home Depot product.

So then Q3 ended September would then have a lower ongoing level then?

Yes.

And you mentioned new products out of Hy-Tech to compete with a larger competitor. Can you say who the competitors of Hy-Tech generally are?

I can't say with regard to that specific product, but they compete with all of the major manufacturers of heavy industrial tools whether they be Ingersoll Rand, Cooper Industries, Atlas Copco, Chicago Pneumatic and a few others -- [Stanley].

And the timing of the new products you mentioned that you want to roll out, what's the timing of that?

It will be throughout the year.

Okay. As the sales mix to Hy-Tech, it seems like -- first off, am I correct in the assumption that the sales mix of revenues from Hy-Tech versus your other Florida Pneumatic that Hy-Tech is growing at a faster rate given that it's less cyclical and your Home Depot business is scaling down? Is that, first off, a correct assessment or not?

Yes, it's a little hard to compare. Honestly I think our industrial tool group at Florida is growing faster than Hy-Tech which is 100% industrial, but that's because we're going to some places we hadn't been before at Florida Pneumatic. Hy-Tech's growth is slow but steady. And yes, Sears and Depot tend to throw off any trend you might identify at Florida Pneumatic because they're so large and so volatile.

And then the relative margins at the Hy-Tech side, obviously since it's all industrial, are much higher, right?

Yes.

That's what I was trying to get a handle on. If Hy-Tech's overall sales as a mix of Continental Tool's was rising at a faster pace then Continental Tool's margins as a segment ought to be migrating upward.

I think that's a reasonable assumption.

Okay. On Woodmark you mentioned input cost increases, competition, etc. Is our pricing -- is pricing holding inside of the Woodmark competitive spectrum and it's just lower levels of business? Or are people who are on the ropes discounting everything to try and make the sale?

I'd say it's a combination of the too. We are cutting prices where necessary to get business, but being very selective about it if we can be.

Are you seeing competition fold and close and capacity leave the industry?

Well, we've seen some competition folding or having great difficulties, but it hasn't been -- to my knowledge there hasn't been anything really substantial in picking up other (multiple speakers).

What you have to remember is capacity isn't here, capacity is in Asia and that capacity is not folding. So even if we were to lose a competitor here I'm not sure that really changes the capacity situation necessarily. But all the major competitors are still around, even though some are having trouble. I think a few regional people have probably gone under, but I don't think the impact to us has been that great.

Right. And then in the past you've had good revenue uplift when you've introduced new products at Woodmark. And I wasn't sure when you talked about new products in the hardware side if that was Nationwide, Pacific Stair or Woodmark. Do you have a line of new products coming out of Woodmark and what's the timing for all that?

Nationwide was all we really spoke to about new products. Woodmark does not have any major new slate of new products coming in the next couple of quarters -- not to say that we're not working on anything, but we were speaking about Nationwide.

Okay. And what goodwill and intangible amounts remain associated with the three hardware assets after the year-end goodwill and impairment write-downs?

It will be on the balance sheet, those numbers --.

There's goodwill but I'm not sure what of that remains with respect to Woodmark, Pacific Stair or Nationwide.

I don't have the breakdown, I can just tell you simply that total goodwill is $4.6 million and that's all in the hardware group. And total intangibles is $10.9 million and, again, that's all in the hardware group.

So there's still goodwill and intangibles related to hardware, but can you say, because you know Pacific Stair has moved to negative, if anything relates to Pacific Stairs any more?

On the goodwill side, no; intangibles could be some.

But no more goodwill on Pacific Stair?

There's no more goodwill left on PSP, no. I stand corrected, there is $900,000 in goodwill on Hy-Tech, sorry about that.

So some of it is Hy-Tech?

A little bit.

And then would it be Nationwide or Woodmark that would be the bulk of the goodwill, or you don't --?

It would be Woodmark followed by Nationwide would be the bulk of the goodwill remaining. And yes, as I said, it's Woodmark, Nationwide and a little bit of Hy-Tech.

And I guess this is a comment and a question for Richard. In light of the SG&A cost cuts that have to be made and people tightening their belts here at the Company, etc., and the large drop in the Company's book value and profits, and you own a third of the Company or a little less than a third of the Company, can you -- I just received the proxy and it's a little disturbing to see in the proxy such a sizable increase in base salary.

Can you -- that's ordinary income, and to the extent earnings drop down to the bottom line or, not that we're in a position for a dividend, but if there's incremental cash here that's buyback or any other activities, can you comment about your thoughts about requesting, expecting additional increases in your salary levels for a company this size that has had such recently -- it's been more than a year here of declined value either from acquisition, goodwill written off or low profit levels?

Andrew, first of all, we're no different than most other businesses today that are suffering from the economy. And I don't know what your point is of the question other than the lingering comment that you generally make, but I'll just say that if you look at last year's proxy and compare it to the year before you would have seen no increase. So I took an increase in my base salary for the first time in two years I believe and I didn't take an increase again this year. So I don't know what else you want me to answer with you on that. What else specifically would you like me to mention to you?

Well, more of a discourse than a comment on it. You take in the salary as ordinary income and you have a large equity ownership here. So it seems kind of -- there may be other ways of the skinning the cat that are more tax efficient and would also work better for the Company's cash flows and earnings per share.

Well, it's a personal question for my personal requirements about tax efficient or not tax efficient options, cash. But also I believe last year we had a stockholder vote on the 144, if that's the right number -- 162m which made my salary much more tax efficient because it's now deductible, am I right? Anything above the $1 million. So we made it more tax efficient for the Company. Am I right about that?

Yes, that vote made large salary payments deductible to the Company where previously the Company had to eat and not get tax write-offs from high payments. It doesn't necessarily address the high payments itself, but yes, it made that more tax efficient.

Yes. So we made that more tax efficient and, I mean, it's an ongoing dilemma -- I don't know how to (multiple speakers).

I guess (multiple speakers) your salary is higher than most of my portfolio companies that have market caps much higher than P&F's. And so the salary is a little disproportionate to the market cap. And a year ago we went through the value added of the acquisitions that you've made and you made the assertion that they were all great and unfortunately we have had macroeconomic factors that have caused a good chunk of the purchase prices of these acquired assets to be written off and written down.

Let me just throw in a couple of points myself. First of all, we believe that the markdown of those assets is temporary, as I've talked about, we're in the bottom of a 20-year trough. Second, every year we have a compensation consultant that's hired independently by the compensation committee of the Board (inaudible) and comment on Richard's compensation and mine. And that gentleman and his firm are keenly aware of the competitive compensation levels out there. So Richard just doesn't make up what he wants to receive in compensation. We've got outside people that are independent of us determining that they're reasonable levels.

If your companies that you're buying it's disproportionate that's one thing. If you look at the companies in this area where the local newspapers put out a yearly report on exactly that subject you'll find me smack in the middle, if not even on the lower end of the middle, since you're talking about me. And as Joe says, we have an independent consultant and he's totally independent and the comp committee deals with him and the comp committee also deals with a compensation attorney as well and they all opine to it.

I'm sure they've dotted their i's and crossed their t's.

That's what it's about, it's about that, it's about (inaudible) whatever you're looking is what you're looking at and obviously it's a little different than what we're looking at. And I guess this has been something that's bothered you for the longest time and I'm sorry about that, Andrew. I don't know what to say other than we do it properly and we do it correctly and I don't think my level of compensation is --

I'm sure the Board would never have a problem if you chose to take a reduction in what's called your guaranteed minimum and made it more performance-based. And in years when things don't know so well for the Company, macroeconomic or otherwise, then some of the SG&A cost reductions could come because it's more performance-based rather than such a high base salary that the proxy says you'll receive a minimum of 975 and will not have decreases, only increases. It's just troublesome language and it, again, is not the best alignment one could have on a company this small.

Again, that's your opinion and I'm sorry we don't agree.

Right. Well if I have any savings grace or any comfort on it I know that a third of this is coming out of your own pocket and going back into your pocket as ordinary income anyway.

No matter what you think it's not about me, Andrew (multiple speakers).

(multiple speakers) well, you're the one that's receiving the check (multiple speakers).

(multiple speakers) You know what, Andrew, I think the time has come for you to stop it because it's enough. We understand what you're saying, you're a stockholder, I'm a stockholder as well. I have more of an interest in this than you do, and I do have more of an interest in the Company and the public nature of it and the stockholders than you give me credit for. And at some point you cross the line and I take exception to what you're saying and this is that line.

Well, (multiple speakers)

You said your points, I hear it, I hear you and you hear me.

You're being a little testy unnecessarily and (multiple speakers).

I don't think so, I don't think so at all. And you're entitled to your opinion and I'm entitled to mine.

Very well. Okay. I have no further questions.

Thank you, ladies and gentlemen. I'll turn the conference back over to management for closing comments.

Thank you all for joining us on our Q1 conference call today. We look forward to discussing with you our Q2 results in the middle of the summer sometime. Thank you all for joining us and spending the time.

This concludes today's teleconference. All parties may disconnect now. Thank you.