P&F Industries Inc (PFIN) 2017 Q2 法說會逐字稿

Good day, everyone, and welcome to the P&F Industries Q2 2017 Earnings Call. Today's conference is being recorded. Now for opening remarks, I will turn the conference over to Mr. Richard Goodman. Please go ahead, sir.

Thank you, Operator. Good morning, and welcome to P&F Industries Second Quarter 2017 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 discussed on today's call by our management, including those related to the company's future performance and outlook, 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, exposure to fluctuations in energy prices; debt and debt service requirements; borrowing and compliance with covenants under our credit facility; disruption in the global capital and credit markets; the strength of the retail economy in The United States and abroad; supply chain patterns; market acceptance of products; competition; price reductions; interest rates; litigation and insurance; retention of key personnel; acquisition of businesses; regulatory environments; the threat of terrorism and related political instability and economic uncertainty; and information technology systems failures and attacks; and as other risks and uncertainties described in the reports and statements filed by the company with the Securities & Exchange Commission, including among others, as described in our most recent annual report on Form 10-K, our quarterly reports on Form 10-Q and our other filings. These risks could cause the Company's actual results for future periods to differ materially from those expressed in any forward-looking statements made by or on behalf of the Company. Forward-looking statements speak only as of the date on which they are made, and the Company undertakes no obligation to update publicly or revise any forward-looking statements, whether as a result of new information, future developments or otherwise.

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

Good morning, Rich, and good morning, everybody. Thank you all for joining us this morning on our call. I will begin today's call with a brief summary of the company's results from continuing operations for the 3 and 6-months periods ended June 30, 2017 and how this data compares to the same periods of last year. However, I direct you to our 2 releases earlier today for more information. These releases this morning present the P&F's balance sheet, statement of operations, per share data, along with most of our management's discussion and analysis, as well as our intention to begin a stock buyback program and our latest quarterly dividend continuing.

I also wish to remind you that the purpose of this call this morning is to discuss and review the company's results for the 3 and 6-month periods ended June 30, 2017 only. In order to avoid unproductive distractions from the focus of this call, we you must insist that you confine your questions to these topics only. Thank you for your cooperation. I will then ask Joe Molino to briefly review key cash flow information and provide an update on key events affecting the Company, after which we will move to our usual Q&A session.

The company's consolidated revenue for the 3 and 6-month periods ended June 30, 2017 was $15,359,000 and $28,575,000, respectively compared to $15,637,000 and $30,136,000 for the same periods in 2016. Florida Pneumatic second quarter 2017 revenue was $12,132,000 compared to $12,738,000 during the second quarter of 2016. Declines in its retail and automotive revenue was partially offset by the additional revenue from Jiffy. As I'm sure you know by now, in April we completed this transaction in which we acquired the Jiffy Air Tool business and building located in Carson City, Nevada. Jiffy is a leader in the manufacture and sale of air tools sold to the aerospace sector.

Florida Pneumatic revenue for the 6-month period ended June 30, 2017 was $22,641,000 compared to $23,568,000 for the same 6-month period last year. The primary cause for this decline was a significant reduction in Sears business, which was our conscious decision, partially offset by the Jiffy revenue. Lastly, during the second quarter we encountered a slowdown on orders from a large automotive company who we believe is customarily, currently, attempting to adjust its inventory levels. However, to keep this well in perspective, I want to mention that AIRCAT's recent month revenue, 12-month revenue, excuse me, reflects an increase of 21% compared to our first 12 months since acquisition.

Hy-Tech's revenue for the 3 months ended June 30, 2017 was $3,227,000 compared to $2,899,000 during the same period a year ago. I am pleased to report our ongoing efforts to locate and develop new niche markets is gaining momentum, accounting for approximately 10% of the current quarter's ATP revenue. For the 6 months ended June 30, 2017, Hy-Tech's revenue was $5,934,000 compared to $6,568,000 last year. Again, it should be noted that while slightly lower than last year, this year's revenue is providing a higher gross margin. Also, I'm pleased to report that we are again receiving orders from a major customer that placed little to no orders during the previous 9-month period. And lastly, as of yesterday, Hy-Tech has open orders relating to its new marketing initiatives of approximately $712,000.

Hy-Tech's total open orders have increased more than 65% over the open order level at June 30, 2016. The company's consolidated gross margin for the 3 and 6-month periods ended June 30, 2017 were 35.3% and 36.4%, respectively compared to 33.9% and 34.9% for the same periods in 2016. Key factors contributing to the improved quarter-over-quarter gross margin are greater overhead absorption at Hy-Tech, better product mix in Hy-Tech's second quarter 2017 sales compared to that in 2016, and lastly, in the second quarter of 2016, we adjusted the fair value of a portion of Hy-Tech's inventory which did not reoccur this year. Changes in Florida Pneumatic gross margin change was due mostly to product mix.

Our selling and general and administrative expenses for the 3 and 6-month periods ended June 30, 2017 were $5,366,000 and $10,413,000 respectively, compared to $5,154,000 and $10,173,000 for the same 3 and 6-month periods last year.

Significant items of note include $450,000 of SG&A expenses incurred by Jiffy during the quarter. Other components that changed in our SG&A this quarter compared to the same period last year include what I refer to as nonoperational one-time Jiffy expenses such as an increase of $172,000 in professional fees and other related expenses incurred as a result of the acquisition of Jiffy, $33,000 of lower compensation costs, a reduction in variable expenses of $208,000, lower corporate related expenses of $40,000, and a decrease in amortization and depreciation of $69,000. The 6-month change was due to similar line item changes and the inclusion of the $450,000 SG&A incurred at Jiffy.

Our interest expense during the second quarter of 2017 and 2016 was $64,000 and $36,000, respectively. This increase was driven by the acquisition of Jiffy in April of this past year which was funded through borrowings from our revolver. When comparing the 6-month periods ended June 30, 2017 and 2016, our total interest expense declined to $74,000 from $138,000 in 2016 which included $108,000 in amortization of debt issue costs.

Taking all of the above data into consideration, for the second quarter of 2017, we are reporting pretax income of $16,000 from continuing operations compared to pretax loss from continuing operations of $8,178,000 for the same period a year ago. The loss recorded in the second quarter of last year was primarily due to impairment charges recorded against Hy-Tech's intangible assets. For the 6-month period ended June 30, 2017, we are reporting a loss before taxes from continuing operations of $68,000 compared to a loss before taxes from continuing operations of $8,069,000 last year.

On an after-tax basis, for the 3 and 6-month periods ended June 30, 2017, we are reporting net income from continuing operations of $16,000 and net loss of $44,000 compared to net losses of $5,370,000 and $5,304,000 for the same periods in 2016.

Lastly, in May of 2017 we paid a $0.05 per common share quarterly dividend, and yesterday our Board of Directors, among other things, approved a $0.05 per common share dividend which will be paid August 25th to shareholders of record at the close of business on August 21. The stock buyback plan discussion will I'm certain come up in conversation in the Q&A.

At this time, Joe Molino will discuss our cash flows. Joe?

Thank you, Richard. Capital expenditures during the first 6-months of 2017 were $358,000 compared to $756,000 during the same period in 2016. Significant noncash items affecting our cash flows during the first 6 months of 2017 were depreciation and amortization of $650,000; amortization of other intangible assets of $439,000; amortization of debt issue costs of $25,000; and restricted stock-based compensation of $22,000. Additionally, there was a noncash credit attributable to deferred income taxes of $24,000.

Other significant components which impacted cash provided by operating activities of continuing operations during the first 6 months were $568,000. Those were driven by increases of $1,059,000 in accounts receivable, decreases of $1,399,000 in inventories, and $231,000 in prepaid expenses and other current assets. There were also decreases of $1,056,000 in total accounts payable and accrued expenses payable.

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

Thank you, Joe. In closing, I would like to just thank all of our employees and management for continuing to do such an outstanding job as all of us continue to believe in our companies, products and our customers. That's the end of our report for today and now we'll be happy to answer any questions anybody may have. Operator?

(Operator Instructions) And we’ll take our first question from Andrew Shapiro, Lawndale Capital Management.

First off, thank you very much for considering our thoughts before and adopting and putting in place some kind of buyback plan, so I actually have no questions on that at this time. But regarding Jiffy, after owning Jiffy for a few months now, what type of consolidation or cost synergies and revenue expansion synergies do you now expect to see from the acquisition?

On the cost side, initially it's business as usual, producing product out in Carson City. In the longer run, I think after we get some comfort level with the customer base, we will consider potentially sourcing some components that were perhaps made by outside firms, having them made at Hy-Tech. We have not gotten too far down that road yet. We're really kind of focused on the sales and marketing integration and addressing customer demands at the moment. On the sales side, we have begun to integrate the salesforce which now reports to Florida directly. And in addition to that we have shifted some resources of Florida Pneumatic to handling Jiffy products. So that integration is I'd say primarily complete, but the Florida guys are still getting up to speed on the full Jiffy product line. And by the same token, the legacy Jiffy salespeople are also getting familiar with some of the new products that will be coming online with the Jiffy brand from some of the Florida Pneumatic sources.

Having gone out to Carson City and visited the operations and all, thank you for that. It seems like that there is some revenue expansion opportunities. Are you already seeing doors opened either for the legacy P&F for Florida product side? And similarly, with the Jiffy customers?

Yes. We've had some preliminary conversations with customers regarding our thoughts regarding additions to the line and those have been favorably received. So those are in process. It will take a little while to do some of the engineering because some of them had to be redesigned. We are attempting where we can to integrate the muffling technology in some of these tools and that is in process and we're excited about that. That is absolutely going to happen and will be in the product line. So yes, we've created some opportunities and we've got more boots on the ground now. So whatever the salesforce was with just Jiffy alone, we've now thrown some Florida Pneumatic sales resources at it as well and we have deeper penetration into the country than Jiffy has ever had. So I expect that that will pay some dividends. It's only been 3 or 4 months, so a little early, but clearly customers are being called on more frequently, newer customers are being called on that hadn't been called on before, so we're pretty excited about those opportunities.

Are there any more actions you feel the Company needs to take to expand the aerospace business or is this sufficient and it's now about growing the current business?

Well, I think actions would be additional products that are in the design stage. And I think we just need to get a better understanding of that market. As you know, Florida Pneumatic had a couple of SKUs that were being sold in aerospace and so while we had an understanding of the market, it was somewhat limited in that we were really going after the high-volume parts and certainly did not have access to nearly the number of customers and distributors in the aerospace business that Jiffy did. So we're learning a little bit from talking to the customers out there, but we're going to go at it in a lot of ways. Geography, domestically and internationally, and lots of new products that are in, I'll call, in creation and in design and development. I don't know what else there is to focus on, but we're certainly not looking at another aerospace acquisition or anything like that at the moment, but if one comes along, we'd be happy to take a look at it.

That's what I was getting at was whether you felt there was a need for another aerospace acquisition at this time.

I wouldn't call it, sorry to interrupt. I wouldn't call it a need, but I think now that we're in the market, we’re maybe more open to that than we might have been before. And perhaps there could be a niche aerospace business out there that if we didn't own Jiffy might have been too small to talk about. But now that we've got that platform, just taking on a product line might make a lot more sense now than it might have without the Jiffy brand and presence. So certainly that's a greater opportunity than it would have been without the acquisition.

And I will add just one quick thing, that Jiffy is out of the gate very, very well for whatever that means.

It was very impressive operations. Segueing on that is, can you update us on the status and focus of your acquisition process? Is it on hold for a quarter or 2 in terms of we're absorbing and ramping back Hy-Tech and we're focusing on Jiffy, etc.? Or are there, it's as active of an effort as it was before you acquired Jiffy? And are you seeing particular areas that are desirable from a synergy standpoint now?

It's still a very focused effort on our part. The Jiffy assimilation into Florida Pneumatic is already 4 months old, but we are fully looking and searching for tool opportunities, either niche products or niche companies or other facilities if they are at all related in our tool business. It continues and it's in the forefront of all of our minds at all times.

I would say given the fact that Jiffy, while it was a nice size, wasn't so large that it precludes us financially from continuing to look, and two, it's not a full-blown integration of operations. So it's a lot less of a project so to speak than if we had to close down a plant and do all that. So yes, I agree with Richard, we're still out there and continue to look and talk to people and we have not slowed down.

Okay. Last question before I back out, you called out a bunch of additional SG&A related to the Jiffy acquisition. So am I correct to consider those costs to be nonrecurring and that SG&A ought to be meaningfully lower in the current quarter?

Well, with respect to the Jiffy operational expenses themselves, which are something like $450,000, everything else we talked about was onetime and would not repeat in Q3.

I guess, I should have clarified, meaningfully lower sequentially. Of course, it will be higher than last year because of what you acquired.

Yes.

I'll back out. I do have other questions on Hy-Tech.

There's nobody else in the queue, Andrew, so you can continue.

All right, I'll give you an opportunity to interrupt me again after my Hy-Tech questions. Your development efforts to open up new industries, industrial maintenance, food production, transportation markets and channels for Hy-Tech have reached the level that you're now calling it out in release and that's great. Are there many customers or a few distributors to which these new products are currently being sold?

They are very customer specific and highly engineered solutions. So it's not really something that goes through distribution. So what we're really doing is calling on the end users. Now in some cases there may be a distributor that got us in there, but we're really dealing directly with the customer, trying to solve a very specific problem with a very specific solution that's surrounding our expertise in the pneumatics and hydraulics and gearing. And not to say that we couldn't drive some more generic or distribution capable revenue out of some of these things, but it's really very customer-specific products.

Okay. And is it customer specific in all of those kind of market areas, industrial maintenance, food production and transportation? Or it's right now in only a few of those markets?

I'm not quite sure I'm understanding the questions, Andrew. Could you maybe ask it again?

Well, it sounds like it's a few customers and you're doing some nice high engineering, call it high mix work. And you had described over the last few quarters that you were doing development efforts in multiple industry markets. Industrial maintenance, food production and transportation were the 3 that got called out. Is the success that you've had right now for example solely in transportation or solely in food production? Or is it across the board?

Oh no, it's in all 3 of those. I wouldn't have called those out if we weren't already successful in initial forays into those markets. And the goal would be, there are other customers with similar profiles now that were in there, we can move onto without having to really completely reinvent the wheel now that we kind of have at least one solution for one account. So no, it's all 3 and others to come.

Okay. And like Jiffy was in aerospace, are there small, fragmented competitors in these niches that might prove good acquisitions for Hy-Tech? Or are the competitors the big players who would one day view P&F as that niche acquisition to acquire?

Well, I don't know about the second part of your statement, but what we're seeing are a fair number of smaller competitors, and I'm not even sure I would call them competitors. They are businesses, parts of businesses that are somewhat related to what we do, or might be something we could do but don't do in any major way. So we're looking for folks that have something that's unique and preferably patentable. But they might not even be a whole company, or if they are a company, they're small. So there's a lot of those out there. Not a lot, but enough to have conversations with and I wouldn't even necessarily call them direct competitors. So those are the sorts of things we're looking for, for Hy-Tech. It's a little more of a – it’s a little more different situation than Florida Pneumatic. We're really looking to build things and take advantage of our internal capabilities and adding them to what might be an incomplete business or a smaller, not fully developed business.

And Richard called out in the script you had I think over $700,000 of open orders and I think he said in the new industry markets. Am I correct that it wasn't just total Hy-Tech open orders, it was…

No, it's just new, based on this new initiative, what I called our engineering solutions program. The guys have a better name for it than that, but I just can't think of the name of it off the top of my head.

Now on the last call, you said that back in April you moved back to overtime for pretty much the entire group of operators in Hy-Tech which was a very good sign that supported the improved operating results reported today. So it sounds like the rate of orders has continued if this is the open orders. Are you in a multiple shift or overtime situation in Hy-Tech still?

Yes, we see that continuing. For the first time in a while, we're out there looking for operators and other administrative people to help in some of these new areas. So yes, we expect this to continue.

And this is all prior to your oil and gas side of the business fully recovering to past levels, is that correct?

Yes. As we've said in previous calls, we're not waiting around for that to return. If it returns, that's great, we'll sell the products that are sitting on the shelves or make them if we need to. But yes, this is really unrelated to that.

And we have not really seen a resurgence in that area still. With a slight upward lift of oil, it's not really moved the needle at all yet.

Well, rig count has grown a bit. It's not back at old levels, but it is off its trough and eventually presumably the tools that they use will need replacing, yes?

Well, again, the rig count, as I think we've mentioned, kind of, no pun intended, drilling down a little bit into that a little bit further, it's really the offshore rig count that drives more of our business. And there was a lot of idle equipment there and those rig numbers to my knowledge have not moved as much as the land rigs have moved.

I understand, it's certainly shale and tide oil.

Yes, and that's less -- that's not really our market.

On Florida, is there anyone in the queue? Because I'll move onto Florida with my questions.

Operator, if you could let us know if there someone in the queue, we can't seem to see it right now.

There is no one in the queue at this time. But I would remind everyone, it is star one.

Florida Pneumatic, regarding AIRCAT, on the last call you spoke of a suite of tools targeted towards bodywork. It had just launched, so you didn't really have much feedback on them yet but thought you would in the next couple of quarters. Can you give us an update on that progress and what the feedback has been?

A couple of comments. Relatively slow start out of the gate there, and I remind you that that market is maybe a third, I think I'm right on that, a third or a fourth of the size of the repair work, or the maintenance work, excuse me. So it would be less noticeable anyway. But we're still optimistic about that in the longer run and hopefully can report some more meaningful results in the next couple of quarters.

Okay. And the AIRCAT distributor who reduced its purchases to pare back its inventory, that hurt, that was down for the June quarter, has it begun this quarter towards returning to historic order rates yet or it's not yet back there?

We haven't seen anything yet.

We do not see it and do not expect to see it for --

Until at least the fourth quarter.

Yes, so sometime in the fourth quarter.

Wow. What causes a distributor like that to get that far over inventoried for basically a 2-quarter hiatus?

It's not abnormal. We see it with many customers. We've seen it with retail customers, we've seen it with many people.

We saw it with that large industrial customer for Hy-Tech last year. They overestimate and get out in front of themselves and then turn it all back. We used to see it with Sears every couple of years.

I certainly understand the fluctuations, but the fluctuations could be 6 months or longer in terms of overordering rates?

That one customer we have with Asco is 9 months. And it just started again.

It's made a bit of a mess of the trend. The trend line is still up there, but unfortunately it was so dramatically up in this large distributor, frankly our largest distributor, last year and then they turned off the spigot. So it makes it look as if there's a downdraft in AIRCAT. But really, if you were to look at the longer term trend, it's more of a steady growth. Unfortunately, last year it overgrew so to speak and now they've had to retrench. But we still feel the long term trend is up.

Can you discuss the decline in universal tool division in the UK and what you attribute that to? Is it currency? Is it product line?

It's almost exclusively a currency issue. I believe in pounds we're ahead, in fact I know we're ahead of last year's sales level in pounds.

Okay, so on a constant currency or local currency base you're growing. Do you treat any of the additional Europe, even AIRCAT sales, to be, is it all considered part of the universal tool division in your reporting here?

I'm sorry, is AIRCAT…

When you sell into central Europe or if you were selling AIRCAT into Europe, that's all still considered universal tool division when you're reporting out to us, right?

Yes.

You were said to be developing AIRCAT and other tools and distribution opportunities for Europe and thought that Q2 would be the earliest for which it might start to become meaningful. Can you give us an update on those efforts and timing when the inroads might prove to, you're calling out, are you in the same countries still or you're still trying to get into them?

We are in there. We have a very tiny toehold in Austria and Germany with a distributor. This is a bit of a greenfield effort. While they have some experience in the area, they have not traditionally sold pneumatic tools into the automotive sector. So it's a slow start but they have started. I'm hopeful we'll have something meaningful to sell, but it's slow going but at least we're off to a beginning. We have a distributor.

On the Sears wind down, your release said you expected zero dollars Sears inventory September 30, you hope for zero-dollar receivable at December 31. Having told Sears you're not renewing, have you seen them bring in another supplier yet?

Well, we don't know this for sure, but we believe they're working with the factories that we worked with over there and have simply just transitioned to that direct relationship. Although I can't say for certain if that's the case, we think that's what's happened.

The molds and the tools and all that stuff, are they owned by Sears, those factories, or you guys?

They're owned by the factories.

And are you still manufacturing or importing product for them? And up to what date would that activity continue to and then you're working down inventory only?

Our agreement ends at September 30 I believe and at that time we will not, we will only be shipping them the balance of the excess inventory that they've committed to take from us.

Maybe Andrew, you were asking a different question. Were you asking about whether we're continuing to source?

Yes, are you still manufacturing or importing products?

That has been terminated. We are now working down inventory.

Okay, that's all you're doing. Great. On the last call, you said that your Sears exposure was in the 7 figures with contracts scheduled to run out in September. What's that exposure down to now at June 30?

It's close to the same. Down a little bit, but not significantly.

It's still kind of business as usual. We've got a whole quarter to go here and we would kind of, we would run typically, it's not unusual for us to have at least a quarter's worth of inventory. So you wouldn't really see much at June 30.

Gentlemen, we do have another question in the queue.

All right, when Andrew is finished.

I can back out. It's all right, I'll come back.

[Henry Dubreaux], Private Investor.

You mentioned that you had some executive recruitment expenses for Hy-Tech. Could you just briefly mention what type of changes were necessary at Hy-Tech?

Replaced the president of the company.

At the beginning of the year.

The president of the company?

Yes, that's it.

Just one person? It was one position?

Yes.

What is the Jiffy backlog at the end of June and compared a year before?

It's a 7-figure number. I couldn't tell you off the top of my head what it is, but it is -- we don't really, keep in mind that we didn't own the company a year ago, so I can't really speak to their numbers. I can speak to the fact that the backlog has grown since we've owned them a fair amount. And it's a 7-figure number.

You mentioned that there were professional fees related to the Jiffy acquisition. Besides legal and accounting, anything else make up that number?

Some bank fees, some I guess accounting would be our outside accounting as well. Several accounting fees and then fees related to valuation work which would be also in the professional fee area.

We'll go back to Andrew Shapiro.

So back on Florida Pneumatic, what's your current experience and visibility with respect to Home Depot and Home Depot Canada?

Our experience is pretty much business as usual. It has been fairly flat this year, maybe up a little bit if you exclude we had a rollout last year that was fairly substantial for both Home Depot Canada and possibly one or 2 other products. So I think sales out the door in our product area slightly up, but for the year I think flat or maybe even a little down on the revenue side. But business as usual.

Having been a long-time investor here and seen somewhat Home Depot before, then they left and they're back, throughout Sears, these 2 big retailers often run big promotions and I'm assuming if I recall it's sometimes for the holiday season. We're here in August. Would the visibility and the plans for new product introduction or promotion for the holiday season already be known by August? Or when does that seasonally kick in?

We know the promotions generally by the beginning of the year each year.

And just to answer your question about seasonality, Sears was a much more seasonal customer than Home Depot and obviously as we're winding that down there is no seasonality there. We're not involved in the yearend stock fill. Home Depot's approach is a little different. They tend to order more steadily throughout the year and take the holiday units out of their regular inventory. They just stock enough that that ends up not being really an issue. So as far as Home Depot is concerned, it's pretty much the same revenue almost every month.

And then if would be less fluctuation on P&F margins then as well, correct?

That is correct, yes.

You had the nice promotion at Sears and the revenues jumped, but the margins compressed. The gross margins I should say. Okay. Frankly that's all I've really got this quarter.

(Operator Instructions) And no other questions at this time.

Okay, thank you. Thank you, everybody for your time today. We look forward to speaking to you in a few months again for our third quarter. Have a good holiday, everybody. Thank you.

Ladies and gentlemen, thank you for your participation. This does conclude today's conference. You may now disconnect.