P&F Industries Inc (PFIN) 2022 Q4 法說會逐字稿

Please stand by. Good day, everyone, and welcome to P&F Industries 2022 earnings call. Today's call is being recorded. And now at this time, I'd like to turn the call over to Richard Goodman, General Counsel. Please go ahead.

Thank you, operator. Good morning, and welcome to P&F Industries 2022 year-end 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 that 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. These risks -- these risk factors and uncertainties are described in today's press release under forward-looking statements, as well as in our most recent SEC filings which you can find on the company's website, including for 2021 annual report on Form 10-K, our quarterly reports -- Form 10-Q, and other reports that we filed. 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.

I would also like to remind all participants on this call that as we have been doing for the past several conference calls, with respect to the question-and-answer portion of today's conference call, the link for the questions from any particular stockholder or other caller, together with management's responses are limited to 20 minutes. Additionally, please be aware that during the question-and-answer session, management will only answer questions directly related to the company's 2022 results of operations and financial condition, which such information disclosed in a press release published earlier today. We must insist that you adhere to this procedure. Management will not be entertaining any questions that go beyond the scope of this call.

And with that, I would now like to 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 to discuss P&F's results for the 12-month period ended December 31, 2022. I hope all of you are doing well as this country and the world continues to face the ongoing economic pressures and geopolitical crises in Ukraine. We pray for peace in lent to that conflict and a soft landing for the economy.

I would like to direct your attention to the company's press release that was released earlier today, which includes the company's December 31, 2022 balance sheet, statement of operations, statement of cash flows, and a discussion related to the company's results for the year ended December 31, 2022, and how these results compare to 2021. Further, I wish to highlight a number of key factors that impacted our 2022 results.

The Jackson Gear business acquisition completed during the first quarter was one. Number two was a weaker customer mix and an increase of obsolete and slow-moving inventory charges at Hy-Tech, which negatively impacted our gross margin at Hy-Tech. Economic uncertainty, which we believe is causing and is likely to continue to cause a reduction in consumer spending going forward. And lastly, persistent supply chain delays amid -- and as well as volatile pricing.

Finally, in order to make better use of everyone's time yet be mindful of the purpose of this conference call, I would like to remind you all the following. First, as become our standard practice, we will move directly to a question-and-answer session and not restate was already in our morning's press release. Secondly, please be aware that we will only be answering questions directly related to the company's full-year '22 results of operations and financial condition. We must insist that you adhere to these procedures Rich Goodman stated earlier. And finally, please be mindful of 20-minute time of it as previously noted by Rich Goodman as well.

And with that, we would be happy to answer any questions that you may all have. Operator, I hand the call back to you.

(Operator Instructions) Andrew Shapiro, Lawndale Capital Management.

So first off, it would have been with all the things that flowed through this fiscal year, of all the fourth quarters that you had -- and I have sat through, but really helpful that you guys broken out the fourth quarter. Don't you do that for the Board at your quarterly board meeting?

No, we don't do that, Andrew. If we did, we would be happy to present that out as well. It's not required by the SEC for any company in any (multiple speakers) whatsoever. And it requires a lot of work on our part and we have a least -- and we appreciate your comment and we note it, but we just haven't found that we've been able to do it. I apologize.

And internally don't analyze like how the quarter was versus the prior quarter -- internally?

Joe, do you want to continue as I answer the rest of it?

Andrew, I'm looking at all the numbers every day, all the time. So obviously, Richard and I have a feel for the business as do the subsidiary financial people. It just -- as we've said, it's an additional burden. Not that many companies do it. We have a lean staff and we just -- really just don't have the time to do it.

Okay. Well, I mean, I'll move on, but a different view that not many companies do it. Most do breakout the fourth quarter. I know it's not required.

Large companies, certainly. But companies of our size, I would say no.

There are so many companies your size that are public. So that's --

Right, Andrew. Next question, please, Andrew. Please.

Yeah. So with the price increase -- let's talk about Florida Pneumatic first with the price increases you implemented in the middle of '22. Do you feel you've been able to maintain market share or did you have to give up some customers? Because I do note that in the automotive and retail space -- fourth quarter, which I was able to back out. The fourth quarter revenue numbers were down from prior year and I'm wondering what you might attribute that to if it isn't to lost market share or anything was going on with these price increases.

It's not a lost market share for the most part. And it's really -- it's just pricing and economy and all that good stuff. It's nothing really more than that -- unless Joe wants to add more to that. But I will say that the first quarter, we've noticed an increase in that business.

Yeah, Richard is right --

In each one

The automotive.

Okay.

Yeah, as I was saying that it's difficult to entertain changes in market share because there are so many players and we really just don't have that access to that data. It's a little hard to tease out because as we were making the price increases, we were seeing retail sentiment -- consumer sentiment also fall off. So it's really hard to split out what might be a falloff in share versus the general economic situation changing.

Well, I would think you are the OEM provider. You're making the private label brand for Home Depot. And that would seem to be the kind of the promotional or cost leader for Home Depot in tighter times. The progression often is towards the private label products rather than the premium price on the brands. What do you feel is going on that retail line item, which had a sizable drop off year over year?

There's a number of things going on. Depot has chosen -- this probably goes back a couple of years. But they're -- and I don't know when the last time you were in a Home Depot was. But there was a time when our tools were fairly prominently displayed in what they call the tool corral or tool crib. For the most part, Depot has moved those tools out of the tool crib in a separate aisle. So if you're looking for tools, you're going to go and you're not going to find ours where all the other tools are, especially the battery-operated ones. So I think that's had a negative effect on things. And that's Home Depot's decision, and we're not part of that.

And in general, battery-operated tools are certainly an issue on the very low end. And in the long run, they're certainly growing faster than pneumatic tool. So that's also a factor. And as I said, we saw a change in retail sentiment even in Amazon, on the automotive side. So a number of factors -- couldn't really point my finger at any one in particular. And then certainly the price increase. There's certainly some elasticity there, which can't be ignored.

So do you feel here we are near the end of the first quarter. And I know you don't get a lot of visibility other than what you know you're shipping, et cetera. But do you feel that the trend is still a headwind and could be for the rest of the year?

I don't think we would have that clearance. We wouldn't have that vision. Nobody does in the world, especially in these times in the economy. But what we can tell you is that the first quarter have rebounded somewhat, which is --

One other comment. Spray guns, which are not an insignificant portion of the Depot line -- probably for the front of the falloff. As we've seen, those were being heavily used during COVID as we've discussed. And that probably -- that time has passed for that major bump in demand. So that's probably some of it as well.

Okay. And on the automotive side, is that -- I think, Richard, you intimated that things have picked up again back there. There's not anything -- any particular, secular trend or headwind going on there. Is that correct?

Yeah, that's correct. I mean, I would say, Andrew, that it's definitely gotten better. I don't think this is good -- and I know it's not as good as it was a year ago, but it's definitely, definitely better than it was.

Sure. Now, last quarter's call, you guys discussed some Florida Pneumatic now moving to aerospace. How Florida Pneumatic's revenue and margin mix was favorably impacted by rebalancing the aerospace product line, and that was both in commercial and defense. And that made up or kind of filled some of the hole that was created when the Boeing business, especially with the 737 MAX grounding and the 787 production issues, that the production rates and the demand and use for your tools slowed greatly. And there was this hole, and you had this new business in aerospace that was filling it up.

And on the last call, you had said that Boeing it only recovered to about 50% of their pre-pandemic or pre-grounding kind of consumption rate. So I presume with Boeing's commercial production rate nowhere near former levels, your business with them similarly has not fully recovered. But has it migrated up yet from the approximately 50% level you cited, which was almost six months ago given this was fiscal year end and there's longer timeline for your reporting.

It's basically been about the same. It goes sporadically and -- but I would say, we're generally maybe slightly up over that, but not dramatically. But we've experienced a lot of other business in defense and aerospace to counteract that.

Right. So then when Boeing's already publicized that their production rate in '24 is going to step up pretty sizably. There are opening another production line for the 737 MAX. And hiring 10,000 -- most of which are production workers. Again, 2024 -- presumably all those people are going to need tools are you -- do you feel you're well positioned that when they have this increased demand, P&F's going to get your Jiffy line and other lines are going to get their fair share?

I do. Joe, how do you feel?

Okay. We have a significant market share in the installation tools segment of the aerospace market worldwide. And we absolutely are going to get our piece of that. And as we've said -- maybe at a prior call, I can't remember, ramping up production line does provide in addition to just the monthly rate going up. It's applying that line at startup gives you also a little bit of a line fill as well. We don't know when that is. '24 is what they're talking about. But right now, they're at the same level of production they were six months ago -- nine months ago.

Okay. And as for the commercial and defense aerospace business, it's been nicely filling up in this ongoing Boeing hole. Can you name a few platforms and programs and types in each of the commercial and/or defense area that are contributing to your aerospace rebound so far, so that investors and prospective investors can kind of look over the horizon and get a feel for other factors that might influence the company's revenue demands?

Are you asking us to list our customers? Is that would you asking us?

I'm asking if there -- if you can name a few platforms or program types. For example, Boeing Apache line, which they just got a big new contract up. Things like that.

Joe, can you add to that?

Our tools are used to assemble Apache helicopters, if that's your question. But to get a little more granular, all military aerospace production, we are involved in. We've got installation tools, drilling tools. We're selling four control tools. I mean, those are kind of the big three areas in production of planes, helicopters, all that stuff. We're in the middle of all that, especially North America.

But with respect to Europe, we're now starting to really make some inroads there with Airbus and their Tier 1 suppliers and other military folks over there throughout the European continent. So if you want to take a look at aerospace production in Europe, that might be a hint. Just military production in general in North America, we're involved in all that stuff. We're everywhere.

And so you're now into Airbus?

Yes. We are in the Airbus.

Very real. Yeah, we're in there. Not in a way that we would really [exist], but yes.

But you weren't before the pandemic, and it was -- it's a great opportunity that we all want. Everyone was talking about that.

Yeah, for this company to join.

We're very excited about what our Head of European operations has been able to do. He covers a lot of ground. And yeah, we're very excited about what's going on there right now.

Are your tools used in drone manufacturing as well?

I don't know the answer to that. I don't currently know.

Neither do I.

Excellent. On the Hy-Tech side, can you -- you mentioned that part of the margin hit, which also was low margins -- a big drop-off in gross margins in this quarter, which makes me feel like this quarter was where there's some kind of charge or reserve hit or something that occurred. Can you help quantify about how many dollars and/or margin points resulted from what is arguably a non-recurring write-off of obsolete products or slow-moving inventory?

Joe, I'll let you answer that.

What happened towards the end of the year is we had several substantially -- substantial customers get out of a couple of lines of business just sort of coincidentally. And some of the usual wind down of everything is we're trying to move from one market to another market as we're spending a lot of time reallocating resources and looking at emphasizing different markets. There was a several hundred thousand dollars charge related to the inventory that was slow-moving and we felt that that was necessary to get that in line with its true value.

Can you be a little more granular when you say several hundred thousand -- with $400,000, $300,000, $200,000?

No, I cannot. That's all I'm going to say. It was substantial.

Yeah. I mean, if someone wanted to understand the actual ongoing recurring margin for the company, for the division, for the quarter, knowing the amount of write off that's non-recurring help someone come up with what is the ongoing run rate that's occurring --

But Andrew, it's hard to say -- I mean, I can identify every single tool or part that we placed a reserve on. But I can't tell you exactly what's non-recurring. We adjust reserves every month. So I don't know -- to give you a number would be making up a number. All I can tell you that it was several hundred thousand more than typical.

And Andrew, it may give you comfort to know that we are -- our margins have been very nicely improved this year because we've been well with weather --

Well yeah, I mean they are very nice. They were very improved for the first through third quarters. And then all of a sudden, (multiple speaker) digits.

Yeah, I'm talking about '23.

And '23 are back to where they are going be.

Yeah, it was -- I'm not denying that it was a -- I'll call it a one-time event, but I can't. There's no number for the one-time event, if you're following me. We adjust reserves every month. But I can -- we're not looking at anything like that in the foreseeable future. And I think we'll show Q1 have a nice rebound in margins.

Okay. And the shipments to the major OEM customer you've referred to in last -- in prior calls continued or increased its level of activity into the new year?

Yes.

Yes.

Okay. And you said you weren't there yet as of Q3, but beyond this major customer, has the OEM engineered solutions segment encountered enough additional success if there are any particular areas, industries, or products now worthy of a callout and the elaboration?

I mean the only thing I would call out, Andrew, is we're making a significant push through several customers in the rental market for industrial tools. And we're having quite a bit of success. Now I can't tell you exactly where those rental tools are going because it goes into general distribution. But that is happening and we're pretty happy about it.

Okay. And it looks like the ATP weakness that you had in the earlier part of the year, that has subsided and now it's stabilized and maybe even bouncing.

When you say weak (technical difficulty). This is ATP -- Q3, there was weakness in certain industrial markets and customers at ATP. And it had -- was facing some headwinds, but it just looks like things have sequentially gone up and I don't know if that's continued into Q1 or not.

And the other thing I'll tell you, Andrew, is ATP is becoming an increasingly less important part of Hy-Tech. It's up and down kind of a thing, but it's not having a major impact. And as a reminder --

(Operator Instructions)

Yeah. Well, I'm glad you're on the stopwatch. The Gear products, PTG. The last call, you thought that the opportunity for Jackson Gear and its synergies was still in transition. That will be tangible progress this quarter in Q1 with most of the benefits in place for I think it was the entirety of Q2. Is that still what's on the plate or do I have that wrong?

Get it, Joe.

Yeah. No, you don't have it wrong. We're excited about how Q1 is panning out, and we've got some exciting things we're working on further for the rest of the year. So yeah, I think we're pretty confident. Q1 year over year is going to be a very nice improvement and we expect to go from there. So no, you're not wrong.

Okay. All right. And I saw that one point, you got the big bunch of the ERC money in January, not in the fourth quarter -- you've got some cash in the fourth quarter. But that's a big slug of cash. What's the plan on that? Is it going to be initially immediate paydown on the higher interest debt now or is it -- what are the plans?

Joe -- I mean, I think we have to pay down our debt.

Excuse me. Andrew, it's a lockbox. So when it comes in the door, the bank takes their money and pay down the debtors. I don't really have much of a choice.

Okay. Well, it's fine. It's high interest so to get that paid down, it's not so bad anyway. And then --

Our debt is going down as well.

Good. And the CapEx plans for the coming year that you've given some guidance on, but you're still kind of at elevated levels. Has the money -- the other CapEx that was spent this last quarter you gave us guidance on, was that just a partial payment for equipment that is still to be delivered or did that equipment get put in place and you're getting more equipment and automating even further?

Yeah, most of the equipment has been delivered. We're getting some more the next 30, 60 days. And the status in deliveries was about 30 days away from running well and productively in our plans.

Yes, I would just add to that. I don't know that we would anticipate the real benefits from the new equipment initial Q3. They'll be coming online in Q2 and certainly, we'll see some benefit. But not what I see -- in terms of the way of significant contribution to results is still Q3.

Some of that in Jiffy where your increased aerospace business is going to start hitting some capacity utilization finally.

Correct.

Great. All right. I think I'm out of time. Thank you.

Thanks, Andrew. Thank you for your interest and concern.

(Operator Instructions) It appears there are no further questions at this time. I'll turn the call back over to our presenters for any additional or closing comments.

Okay. Thank you all for being on the call today and we look forward to hearing, speaking to you all on our Q1 call in 60 days. Thank you so much for your time today.

And that does conclude today's call. Thank you all for your participation. You may now disconnect.