P&F Industries Inc (PFIN) 2022 Q1 法說會逐字稿

Good day, and welcome to the P&F Industries, Inc. First Quarter of 2022 Earnings Call. Today's conference is being recorded. (Operator Instructions)

At this time, I would like to turn the conference over to Mr. Richard Goodman, the company's General Counsel. Please go ahead, sir.

Thank you, operator. Good morning and welcome to P&F Industries' First Quarter 2022 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 based upon the company's historical performance and current plans, estimates, and expectations, which are subject to various risks and uncertainties and could cause the company's actual results for future periods to differ materially from those expressed in any forward-looking statement made by or on behalf of the company.

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 that you can find in the company's website, including our 2021 annual report in Form 10-K. Forward-looking statements speak only as the data in which they're made. The company undertakes no obligations to update publicly or revise any forward-looking statements whether as a result of new information, feature developments, or otherwise.

I would also like to remind all participants on this call that as we announced in our April 25 press release, as part of our efforts to streamline the conference call process, the company has revised its procedures relating to the questions and answer portion of the earnings conference call by limiting the length of the questions from any particular stockholder or other caller together with management's responses 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 results of operations and financial conditions relating to the first quarter of 2022. We must insist that you adhere to this procedure. Management will not be entertaining any questions that go beyond the scope of this call.

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

Good morning, Rich. Thank you so much, and good morning, everybody. Thank you all for joining us this morning to discuss P&F's results for the 3-month period ended March 31, 2022. I hope all of you are doing well as a country and the world, we're trying to exit the ill effects of this global pandemic that seems to continue and keep going. Our thoughts and prayers go out to those who have lost loved ones due to this COVID disease. Further thoughts and prayers go out to the victims of the current crisis in Ukraine, may soon come to a peaceful resolution.

During the first quarter of this year 2022, P&F continued to encounter the ill effects of the COVID-19 global pandemic. The areas most affected were the ongoing difficulties of our salesforce encountered in their effort to gain on-site product presentations, which in particular hampered the growth of our PTG or gears business to some degree. The supply chain disruption which we all see about every day in the news, which caused and continues to cause major delays in receipt of much-needed inventories. And additionally, the excessive costs we continue to incur. Most notably, ocean freight costs which remain at historic highs are adversely affecting our gross margins.

I would like to direct your attention to the company's press release that we released earlier today, which includes the company's March 31, 2022, balance sheet, statement of operations, statements of cash flows, and discussion related to the company's results for the 3 month period ending March 31, 2022, and how these results compare to the same period in 2021.

In order to make better use of everyone's time, we have to be mindful of the purpose of this conference call. I would like to remind all of you of the following. First, as we have done for several previous conference calls and has become standard practice at this time, we will move directly to a question and answer session and not restate what is already in this morning's press release. Secondly, please be aware that we will only be answering questions relating directly to the company's results of operations and financial condition relating to the first quarter of 2022.

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 finally, please be mindful of the time limit as previously noted which we plan to enforce. To the extent shareholders or other callers with pertinent questions have multiple questions, please complete your portion of this Q&A session within a 20-minute time limit, and then we will move on to the next questioner.

And with that, we will be happy to answer any pertinent questions that you may have at this time. Operator?

(Operator Instructions) We'll go ahead and take our first question from Andrew Shapiro with Lawndale Capital Management.

I hope this won't count against the timer here. Can you repeat what the rules are here on the 20 minutes? Do you want me to just ask question after question or back out into the queue, please?

You just keep going on your questions, Andrew, and then 20 minutes later.

Okay. All right. Can you expand on the discussion on the price increases your press release you instituted at the beginning of April? Were they across both high-tech and Florida Pneumatic product lines and how have they impacted your orders and sales?

Yes. I thought that in our press release I've already said it clearly, but I'll repeat it anyway for you. The cost increases are like what you see in here every day in the news. Prices of gas, prices of ocean freight, which are roughly 5x.

No, I didn't ask about cost increases, Richard, I asked about price increases. Were they across both high-tech and Florida Pneumatic and have they impacted your orders and sales?

I apologize. Yes, we've had price increases throughout our company. Is that what you're asking?

Were they across both high-tech and Florida Pneumatic and how have they impacted your orders and sales? Are your customers rebelling? Are you keeping a similar pace? You had otherwise said things were growing, has it stopped your growth in unit sales?

I have not noticed anything negative in that regard. Joe, you can chime in. I haven't noticed a thing. I think people realize that it's a way the world's right now. Joe, you can answer that.

Yes. Every customer saw this coming. They're seeing the same price increases from every competitor. So, at some point, could prices get to the point where it just stamps down demand, period, for the whole industry? Sure, but I don't think this round of price increases had that kind of effect.

Okay. And it's not having an effect on market share that you see?

Not that we can see.

Not that we can see. Okay. And I think your preliminary comments discussed that you are still not getting into and having on-site visits as much as you'd like. Has the instances of on-site visiting and getting in on the PTG side, as well as your North American aerospace like Boeing and suppliers, as well as Airbus, has any of that opened up at all, or is it the same as it was last quarter?

Yes. Things have relaxed a bit. It varies from company to company, of course. Each company has its own set of parameters that work for them, but in general, if I were to give an estimate, I would say maybe 60% to 70% of the customers are taking business now. Airbus and Boeing do that on a very limited basis, but they still do. But we are seeing it loosen up a little bit, not like we wanted it but better. Joe, anything else you want to say?

No, I would agree. Just we've never really had much trouble getting into Boeing. The issue has been more about the critical people at Boeing that make decisions regarding new products haven't always been available because they haven't been in the office. So we can get in but the people we want to see aren't always there, so it slows you down a bit.

Okay. And as the doors are opening for visits, is that following and flowing through with your expectations that quarters have been and are following?

Again, it depends on the customer. The bigger customers like the Airbus which are going to be new customers, it's a much, much slower process.

Sure.

As I know you know, it's not like selling a toothbrush. It’s engineered products and stuff like that. So all of them are a little-- I would say the more engineered the product is, the more of a leg there is. Joe, you want to add to that?

Yes, that's agreed. I would say that we have seen more activity on the PTG side because of the fact that while it is an engineered sale, it's a little bit simpler of a process and we are seeing the flow of opportunities grow there as we get out in the field. So we're pretty optimistic about that.

Okay. And with respect to PTG and the gears, is a decline in orders from a large PTG customer that partially offset the gains from your acquisition of Jackson Gear something that you see as temporary or more long-lasting?

Joe, you can answer that.

Yes, it's temporary. We had technical issues with a product or a product line. We've resolved those so we expect those orders to resume. And yes, it did impact. Obviously, it brought down the total number. We would have seen a greater impact with the acquisition if not for that.

Sure. Awesome. Regarding Florida Pneumatic, what's the present status of the large late 2021 Home Depot order you built your inventory for in Florida Pneumatic in Q4 that couldn't get shipped out in the March quarter? Did they get shipped out yet during the present quarter or what is its expected timing?

Yes, it's all shipped at this point. It’s all been shipped. It's shipped in the last 2 or 3 weeks. In 4.

Awesome. And regarding the transition of your products and Home Depot to your new Husky tools that I guess just got shipped, over how many quarters or years will the discontinued products being sold by Home Depot? And is this the time horizon around the same duration you would expect your new line of tools to be made for and sold to Home Depot?

The short answer to that question is yes, but Joe, you can give more details.

Joseph Molino Yes, I would say this, first of all, it wasn't a complete reset with every tool being brand new. I think, don't quote me, there was some refreshing of some similar tools. There was a discontinuation of a couple of tools and just upgrades to some older tools. It was a bit of everything. And this happens every 4 or 5 years. Sometimes you can have parts of lines that change out sooner or later, but every 4 or 5 years.

And again, in this case, some of them weren't even brand new tools. So it's just a way you take a step back, you reset the displays, you talk to the brand people there and discuss changes that you might want to make. So these things happen throughout the relationship from time to time. And there's no set period when it happens, but it does seem to ever happen every 4 or 5 years.

Okay. As of the March call in addition to the large Home Depot order we just discussed, you said the inventory you built up to increase safety stocks was not yet where you felt fully stocked. It would still take a few months, and it's now been a few months. Do you feel the company is now at desirable levels and have the out stock problems been addressed?

Again, that's a individual product sometimes issue and other things. We're not totally out of the woods, but from what we're being told, we're very, very close to being out of the woods. Joe, you can add on to that.

Joseph Molino Yes. Going forward, I don't anticipate any meaningful impact on sales as a result of being short on products.

Right. Okay. And would you expect, I guess, over time the inventory levels would be coming down and cash would be generated, or that is going to take a greater visibility and improvement in the supply chain?

No, [it was just something is] accurate, Andrew. We are forecasting that the inventories will be coming down pretty dramatically in the short term.

Okay. Can you expand on the change in the distribution channel strategy at Florida Pneumatic that you're employing in the automotive subsector and referred to in the press release, and is it temporary, and the change in this strategy is temporary and what's more long-lasting impacts in both revenues and well as margins?

I'll let Joe answer that but the short answer, again, is it's not a short-term thing. It's how they're moving forward, but Joe, you can go ahead.

Yes. So up until sometime last year, we would sell products to Amazon. They would take ownership of the product, title of the product, and fulfill orders. Sometime last year, we started working with a third party selling them the product who in turn worked with Amazon to fulfill orders. The product is still fulfilled by Amazon, but there's an intermediary, there are certain things that this intermediary provides to us in our partnership that are positive to us. So it's just a different way of doing it, it doesn't really affect the consumer in really any way. It's just a little easier to manage the situation with a third party.

And I need to answer this question Andrew, but the reason we shipped to Home Depot in the second quarter was because, actually, they wanted it, and we knew that right from the start. They didn't want to take a chance and not check the material and get off on the wrong foot with everything going on with the shipping roles. So that's why we ended up taking it a little bit earlier.

Okay. You talk about a decent growth in the OEM high-tech area. Can you discuss new products and your experience in the OEM area that you've introduced where you see the increased shipments to 2 large customers? Is that something transitory or more long-lasting?

You're talking about the gears business or on our OEM business? I'm sorry.

OEM.

Go ahead, Joe.

Well, there's nothing new. We've expanded our relationship with our largest customer there, but it's not a new customer in the market, isn't even particularly new for us.

Right. We're just doing more business in other products that they have and we can accommodate them. As the relationship grows, they have more confidence in our quality and our delivery schedule so they give us more business, different things.

Okay.

Which is not insignificant.

Right. On the prior call, there was approximately $3 million comprised of 2 big tax refunds about $1 a share that is coming to the company over the course of the next year and a half or so. What's the current visibility on the timing in receipt of those 2 cash payments?

Okay. Again, I'll let Joe give you the specifics of it, but there's nothing changing in terms of the timing of it, except that we did get the government refund for the entire year. We got that about 4 or 5 weeks ago. Joe, was it 1.3 million, I believe?

Let's call it 1.350, and it was for the 2020 return.

Right. And that's received.

Right. That's the NOL refund essentially, Yes.

Yes.

And so that's out of the $3 million and then the rest is the primarily employee retention credit, which you're not going to see until 20 23. Sorry, Richard.

Go ahead, Joe.

That credit was part of the 2021 return, so it's not just that number. Obviously, there's the rest of our results that affect that figure. But yes, we are expecting a refund sometime next year.

Okay. Well, then I don't necessarily have to ask about it next quarter. I'll put it off the bat that...

If we get it, we'll tell you.

Okay. Capital allocation-wise, is the view to focus more towards making new acquisitions to permanently lower the company's average debt levels or returning capital to shareholders with the reinstatement of dividend rate and/or selected stock buybacks?

It's all on the same plateau. As we discuss, we look at that every time we have a board meeting or board discussions and we balance our company needs in terms of cash, buyback, dividends. If there's a company that we're looking to buy, if it's going to be accretive and help us marketing-wise and to the bottom line, we would consider that as well. I don't know if they're mutually exclusive, but as I've said in the last call and I'll say it again now, we view that very regularly.

I say this respectfully. We don't need to be reminded because we know exactly what is needed and what is required and what we want to do. To answer your question, when we feel that it's a comfort to do it. We don't want to put ourselves in a position that we have the dividend and then we have to discontinue it again. We don't want that to happen. If and when the time comes that we do the dividend, you can be less assured that our plan is to continue unless God was making unforeseen things to develop like happened with the pandemic.

Okay. I want to move on because I know I only have about 10 more minutes, maybe a little less. I've been watching the timer so closely. On previous calls you said you were still very actively looking at tool businesses aerospace, automotive, industrial. Can you update us on the focus of the acquisition process? Is it that broad-based or have you narrowed in on areas that you're looking at and do you have the bandwidth right now to even do that as you are integrating Jackson?

We like the gear. I think we said this in the customaries also. We like the gear space. We're a definitely big player in that space now. Our business has with this acquisition essentially doubled and it's not a business of gigantic companies. So we're a real factor in that business now and we have a very wide range with our latest 2 acquisitions. So I think given a choice that is an area that we feel very comfortable expanding. Having said that, if something comes up that relates to our other businesses, tools, et cetera et cetera, we'll certainly look at them as well.

Okay. In the aerospace side, you had a while ago you had Jiffy and pneumatics acquisitions and you had the opportunity. You had a full suite of P&F tools including new ones that could serve aerospace but Florida Pneumatic Jiffy high-tech pneumatics, all of these various things, and you're ready to present them once you are able to get into the facilities. And as you described, get into the right purchasing people for the long engineering process.

Do you maintain that high level of confidence that these tools that you have developed but in a sense of had to be deferred at getting into them? That they are still somewhat state of the art and you have an attractive opportunity that they're likely to glom onto in their long engineering cycle. That there's something advanced or enhanced about your tools versus someone else's?

I think we're fine. I think we're fine in that area, Joe, do you agree?

Yes, not only are we fine, we have never really completely stopped working with the technical people at Boeing and Airbus on things. So yes we're very state-of-the-art because we're talking to them right now about things so I'm not worried about us falling behind.

Right. Okay.

You just got to be able to get into them.

Yes.

All right. Well, I'd like to perhaps reserve the extra 2 minutes for our next quarter's call, I'm done.

Unfortunately that's not our plan. But if there any other questions you want to ask, Andrew, please do. We have 2 minutes left. Happy to answer them for you.

I'd love to yield my 2 minutes to someone else in the queue since they've been so patient waiting.

Okay. Okay. All right, thank you, and stay well and stay safe.

(Operator Instructions) We'll go ahead and take our next question from [Timothy Staples].

I have 4.5% of the company roughly. Yes, Richard, you said that we look at capital allocation all the time. Obviously, looking at this earnings report, we've got a decline in earnings, the company hasn't made money in years. You've had a strategy in place, we had a good robust discussion about that the last conference call in the context of Boeing Air Max and the volatility to say the least in the crude oil market. But I think when the subject of capital allocation comes up, I think that you should be as contrite as possible because we haven't made money for years here.

And I think that [Bears] is asking you and not Joe to reassert if you can, reassert the imperatives and the compelling nature of the company you're building because shareholders have been suffering with no profits for years here. And I've been excited at times, okay, they got a strategy, but it hasn't come through. And so when we look at you guys continuing as you are and hoping for $1 [plus] earnings per share whatever it is, I would hope for, versus the notion that you could possibly sell this company for upwards of 3x the current stock price.

So as capital allocation goes, the shareholders deserve, the outside shareholders deserve to know that the board is robustly looking and considering those things, and not just the fact that the CEO needs to make $1.5 million a year here. I'm not trying to be nasty. But these shareholders and I as a 4.5% owner, I'm asking you right now for reassurance, that how these strategies are as compelling, in your own words, what makes them so compelling that you're going to make money for me and all of us because we've been waiting a long time and I hope you can appreciate that. And I know you can appreciate that. So I'd like to get your response.

Yes, [Tim], in all due respect, I believe…

And that's an earning question. So don't go there.

Let me answer the question. At least if I'm not correct, I would be surprised. Joe, you can tell me if I'm wrong, but I think before the pandemic the company was making profits every year and that's 2 years ago. Am I right, Joe?

Let's just go back in time a little bit. The company was profitable in 2018. 2019 was a transition year we made a lot of money in 2019, but we had a big sales in assets there. We're down to 2 companies. We've got a tool company in Florida Pneumatic and we've got High-Tech. While Florida Pneumatic was doing quite well, we were engineering a complete turnaround of the High-Tech business beginning in 2019. For those of you that remember there was a time when most of the High-Tech businesses was large, heavy-duty impact wrenches sold into oil and gas, industrial areas. That business has gone mostly to Chinese tools. That was our business.

So as we had brought in a new president back in 1718, we tried and have successfully engineered a turnaround of that business, but the profits that we had which were quite large in terms of margin are not as robust in the new business we're in, they're nice, they're healthy. But we're not finished with that turnaround and on a consolidated basis, it's going to take a little longer to get there. So I don't think there's anything wrong with the strategy and then of course I don't have to remind everybody about the elephant in the room that they don't make 737 Maxes at the pace they were making them.

That was a huge customer for us with the highest gross margins in the history of the company. So until that comes back and we have every reason to believe it will that's going to have a huge impact on the bottom line. I don't think there's anything wrong with our strategy. We've changed up our strategy on the internet product. We have a robust industrial product line that I think is poised to take advantage of the infrastructure project. We've got huge opportunities in rolling up gear companies with the High-Tech business. So I don't think there's a darn thing wrong with our strategy, but we're not finished. Okay. So I don't know how else to answer that, but I think you will see those numbers come.

And [Tim], I'll just answer a little further just for you. None of us have crystal balls, we're not Superman. And I only mean that in a respectful way. So we can't assure you of anything and I don't think anybody in the world can assure anybody in the world of what they're going on and craziness, but I say that what Joe was saying is absolutely correct. I think without getting very specific our backlog in both our companies right now is extremely healthy. Extremely healthy. It's as good as I can remember it in several years. When the pandemic hit, most, everybody lost money here and we were no different. Now, before that, we were enrolling and we were doing just fine and we would have continued.

And now during that time, we bought another company now which strategically has been in the press release. Strategically, it's a very good fit for us and we're seeing the dividends already being paid off. And we are very comfortable with that -- we're not comfortable being an unprofitable company, and then it's only because of the pandemic, and things are absolutely turning around. I don't know if that makes you feel any better or any worse. And I think it's a fair question you're asking and I've given you what I think is the right answer.

I think they're fair answers, and I appreciate the color, that good color, that good commentary. I think shareholders deserve at least to know, frankly, do you guys have a goal or a belief in any case, not a projection, that the strategies can earn what any good solid businessman would want to earn which is a double-digit eventually, whenever, a double-digit return on equity for the investments made. Can you reassure the shareholders that the-- not projections, the attorneys don't need to be involved, just that good faith, as an expression of good faith. Yes, as an expression of good faith. I'm sorry? Sorry, go ahead.

In all due respect, we're not looking you in the eye, we're not doing any of that stuff. We're very comfortable with where we are, and we think, if we were not going to be making money, we wouldn't be here, we wouldn't be in the company anymore. Our banks feel confident, we just had a new agreement and I'm sure you've read about it, an extension of our agreement. Everybody feels very comfortable with where we are. Our advisors, our board, our management, we're on the right road, and that's the best I can tell you. I can't promise you…

But the banks are just happy making money off the company and as much as anything as long as they can get their money back, so the most important thing is that the faith and good faith with the shareholders and really the outside shareholder base, but I appreciate the color and thank you for it, and I'll free my time up, maybe Mr. Shapiro has another question to follow up on, I don't know, but another shareholder.

We can go ahead and take our next question from [John Adams with Robert Baird].

This is more of a comment and you can comment on it or just listen and sleep on it. I've followed this company and for a handful of decades, 20 years, been a shareholder for many years, and [Tim's] comments, and I've never spoken to [Tim] in my life or met Tim a couple of weeks ago, I'm paging through some of your financials and I get the piece on the ownership of your company. And I know you guys, Joe and Richard, you guys, wallets are on the table in a large way.

And then I start looking at some of the other board members who have been around since the mid-70s, and most of these folks, I own substantially more than these guys that have received probably over the years, several $100,000, it would be encouraging to see these guys, maybe it's a message to these folks, "Hey, put your money where your mouth is." And then Tim's last comments, if the corporate finance environment is such where this company is truly worth those kinds of multiples, why would we not, if nothing else consider it, and we're, "Hey if the company is worth $15 this year, there's execution risk to go earn a dollar and get it to $15 a share in the market."

So longtime shareholder, patient guy, feel like some of the things that Tim had mentioned holds some merit and just wanted to make those comments.

I'm at a loss as to what the question is. If you want...

Well, the question was, it was more of a comment. It's disappointing to see your board owns so less minus you 2 guys. There's a handful of folks that own de minimis amounts of shares after being on the board since the mid-70s, 2004, 2004, 2012 and there's been plenty of opportunities to buy right now, for example. And my question is, why would the management of this company, whose fiduciary responsibility is to maximize shareholder value, go through a chart on this company, last 20 years, it hasn't done well at all, probably gone down.

If the thing is worth $15, to be more to the point, if the company's worth $15 a share in this environment, why would the board not consider seeing what the company is worth?

Well, of course, you're not privy to any discussions that we have at the board level or even individually. So I guess that's a question. I can't answer that question, but I really don't know what to say about that. We can't tell the board members what to get and spend their money, and by the way, I don't know of anybody who's been on the board since the '70s except for me, that I can think of.

[Kenneth Sheriff]?

Not the 70s.

That's not correct.

Okay. Well, maybe I wrote my notes down. But long-tenured nonetheless, and I understand that.

I think let Joe and I look at it. Our Board members are really very tuned into our business and understand it very, very well. And whatever their personal reasons are for them not buying (inaudible) in the company, that's (inaudible) pocketbook can tell them. It's not (inaudible) look at the value that they give us and each one of them has a value to us.

If I didn't think so, we would replace that person and we have replaced people in the past when that time comes. And more than that when we feel the company's evaluation and their time is right, we would consider anything. So (inaudible) comment on the M&A or that kind of stuff. It's a loaded question. I can't answer.

We'll go ahead and take our next question again from Andrew Shapiro.

Oh, I'm sorry, I already used up my time, but I didn't know if this thing was turned off or not.

Okay.

Okay. We can go ahead and take our next question again from [Timothy Staples].

Actually, I have no further questions. I got into the call late, so I wasn't clear on what the exact rules were. So I am done, gentlemen.

All right. Well, it appears there are no further questions at this time. Mr. Horowitz, I'd like to turn the conference back to you for any additional or closing remarks.

Sure. So I'd like to thank you all for taking the time today to be on the call with us. And we look forward to speaking in on the Q2 numbers when they come out sometime during the summer. But in the meantime, we hope that everybody says stay safe and well. Have a good day everybody.

And this concludes today's call. Thank you all for your participation. You may now disconnect.