Q1 2007 P&F Industries Earnings Conference Call - Final.

Original Source: FD (FAIR DISCLOSURE) WIRE

OPERATOR: Welcome to the P&F Industries' First Quarter Earnings Conference Call.

At this time, all participants are in a listen-only mode. Following management's prepared remarks, we'll hold a Q&A session. To ask a question, please press star, followed by one on your touchtone phone. If anyone has difficulty hearing the conference, please press star zero for operator assistance.

As a reminder, this conference is being recorded today, May 14, 2007.

I'd now like to turn the conference over to Mr. [Chris Witte]. Please go ahead, sir.

CHRIS WITTE, P&F INDUSTRIES: Thank you, Operator.

Good morning, and welcome to P&F Industries' First Quarter Earnings Conference Call. With us today from management are Richard Horowitz, Chairman, President, and CEO, and Joseph Molino, CFO.

Before we get started, I'd like to remind you that any forward-looking statements made during this call, including those related to the Company's performance for the 2007 fiscal year, are based upon the Company's historical performance and current plans, estimates, and expectations. They are subject to various risks and uncertainties, including but not limited to the impact of competition, product demand, and pricing. These risks could cause the Company's actual results for the fiscal year and beyond to differ materially from those expressed in any forward-looking statements made by or on behalf of the Company. Forward-looking statements speak only as of the date on which they are made, and the Company undertakes no obligation to update publicly or revise any forward-looking statement, whether s a result of new information, further developments, or otherwise.

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

RICHARD HOROWITZ, CHAIRMAN, PRESIDENT, AND CEO, P&F INDUSTRIES: Good morning, and thank you so much, everybody, for joining us today for our 2007 First Quarter Conference Call.

I will start with a brief overview of our financial results for the quarter.

In our first quarter 2007, overall revenues decreased to $25 million from $26.8 million, compared to the first quarter of 2006.

Earnings from continuing operations were $147,000, as compared to $872,000 in the first quarter of last year, and diluted earnings per share from continuing operations were $0.04 per share versus $0.23 per share in the prior period. Earnings from continuing operations declined primarily as a result of legal revenues and lower gross margins in the first quarter of 2007 for the hardware business, partially offset by the results of operations for the newly acquired Hy-Tech Machine Incorporated.

The loss from continued operations -- discontinued operations, excuse me, net of tax benefit for the first quarter of 2007 was approximately $21,000 as compared to earnings of $2,000 for the same period last year.

And net earnings for the first quarter of 2007 were $126,000, or $0.03 per diluted share, as compared to $874,000, or $0.23 per diluted share, for the same period in 2006.

Needless to say, we were extremely disappointed by our performance this past quarter.

With respect to Countrywide Hardware's business, we began to face challenges in the fourth quarter of 2006 as a result of the continuing softness in the national new home construction market, as well as with certain competitive pressures on a regional basis and material cost increases of metals. And to further [exacerbate] the situation, the housing market has worsened considerably in the first quarter of this year and was particularly severe in several of our key markets, most notably in the South and the West. As a result of all this, we are continuing to take steps to maintain our customer base, as well as to reduce our operating costs to minimize margin erosion going forward.

Florida Pneumatic's business, although essentially flat this quarter versus the comparable period last year, is performing as expected and has stabilized somewhat after the volatile 2006 fiscal year, and fortunately, we have been successful in introducing new products to this channel and anticipate benefit from these product sales throughout the coming year.

In February 2007, we acquired Hy-Tech Machine, a subsidiary of the newly formed Continental Tool Group, which has helped to counteract the volatile retail tool sector due to its emphasis on the more stable industrial channel. Although Hy-Tech's results are only included since its February 12 acquisition, they have helped reduce further gross profit erosion in our tool sector.

On another note, with the anticipate sale of Embassy's building in the later part of the second quarter of this year, we would expect to receive additional cash of approximately $4.4 million net of related costs and the satisfaction of an existing mortgage, which will result in a gain of approximately $5 million. The after-tax proceeds of approximately $2.7 million will be used to pay down debt.

Before I take you to a more detailed look at the operations, I'd like to review just briefly what each of our companies does.

Our tool segment now comprises Florida Pneumatic and Hy-Tech Machine. Florida Pneumatic is primarily engaged in importing and manufacturing of approximately 50 types of pneumatic hand tools, and Hy-Tech, which was acquired, of course, on February 12 of this year, is engaged in the manufacture and distribution of pneumatic tools and parts primarily for industrial applications.

The combined product lines offer a unique solution to certain parts of the industrial tool channel that were previously not available to either Hy-Tech or Florida Pneumatic.

Our Countrywide Hardware Group imports and manufactures hardware products, such as doors, windows and fences, staircase components, kitchen and bath hardware, and accessories, as well as all other general hardware products. Countrywide, of course, is comprised of Nationwide Industries, Woodmark International, and our recently acquired Pacific Stair.

Now, for the quarterly performance of each of our units.

Our Countrywide Hardware revenues for the first quarter of this year decreased by $4 million, or 23.2%, to $13.3 million from 17.4 million in the first quarter of last year due to softness in the new construction -- new home construction market as a principal driver for this sector.

Woodmark's revenues decreased by $2.5 million, primarily due to a decrease in revenues from staircase components of approximately $1.7 million.

In addition, revenues from our kitchen and bath products sold into the mobile home and remodeling markets decreased approximately $779,000, or 32.9%.

During the period of sales, the two significant customers, one of which serves the manufactured housing market, have been adversely affected by market conditions.

Nationwide's revenues decreased 851,000, or 17.9%, primarily attributable to a decrease in fencing product revenues of approximately 194,000, attributed to overall weakness in the market and competition, a decrease in OEM revenues of 194,000 from market weakness, and the timing of certain customer orders and a decrease in patio revenues of approximately $463,000, due primarily to market weakness and an uneventful hurricane season last year.

Pacific Stair's revenues decreased by $727,000, or 43%, primarily attributable to significant softness in the new home construction market in the Southern California region.

Gross profit margin at Countrywide increased from 29.8% in the first quarter of 2006 to 30.2% in the first quarter of this year. This increase was primarily driven by a favorable product mix in our kitchen and bath division due to a selling price increase and the effect of lower sales to a significant but lower-margin customer.

These gross margin percentage increases were partially offset by selling price reductions at Nationwide due to competitive pressures and market softness, as well as some cost increases from Asian suppliers that were not fully offset by overall selling price increases; also, the adverse impact from fixed overhead expenses resulting from lower production and revenue decreases at Pacific Stair; and, lastly, due to competitive pricing pressures on stair products in several markets served by Woodmark.

For the three months ended March 31, 2007, revenues at Florida Pneumatic were essentially flat at 9.4 million compared to the first quarter of 2006. Retail revenues increased by approximately $253,000 due primarily to new products shipped of approximately $954,000, an increase in base sales to a significant customer of approximately $203,000 and an increase in certain promotional revenues of approximately $224,000, partially offset by a decrease in base sales of approximately $1.1 million from one significant customer.

Other revenue increases of approximately $70,000 in our Franklin division were partially offset by decreases in revenues of approximately $140,000 in our catalog business, decreases of approximately $82,000 in our [Berkley] division, decreases of approximately 97,000 OEM products, and decreases of approximately 62,000 in our automotive business. Revenues from the newly acquired Hy-Tech were approximately $2.2 million since its acquisition on February 12 of this year.

Gross profit margin for the tool business decreased from 32.4% in the prior-year period to 32% in the first quarter of this year. The decrease in the gross profit margin percentage from this segment was due primarily to a decrease in gross profit margin in Florida Pneumatic as a result of certain price reductions to a significant retail customer and material cost increases of various metals purchased by the Franklin division. This margin decrease was partially offset by certain price increases implemented in the industrial and automotive businesses.

In addition, this segment's gross profit margin was favorably impacted …