P&F Industries Q2 2023 Earnings Call Transcript

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August 10, 2023

There are 5 speakers on the call.

Operator

Debt Industries Q2 Earnings Call. My name is George. I will be your coordinator for today's event. Please note that this conference is being recorded and after the call, your lines will be in listen only mode. However, you will have the opportunity to ask questions towards the end of the presentation.

Operator

I'd like to hand the call over to your host today, Mr. Richard Goodman to begin today's conference. Mr. Krishnan. Please go ahead, sir.

Speaker 1

Thank you, operator. Good morning, and welcome to P&F Industries' 2nd quarter 2023 conference call. With us today from management are Richard Horowitz, Chairman, President and CEO and Joseph Molino, Chief Operating Officer and Chief Financial Officer. Before we get started, I wish 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 and could cause the company's actual results for future periods to differ materially from those expressed in any forward looking statement is made by or on behalf of the company. These risks 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 our 2022 Annual Report on Form 10 ks and our quarterly reports on Form 10 Q.

Speaker 1

Forward looking statements speak only as of the date on which they are made and the company undertakes no obligation to update publicly will 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 With respect to the question and answer portion of today's conference call, the length of 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 Q2 2023 results of operations and financial condition as disclosed in the 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.

Speaker 1

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

Speaker 2

Good morning, Rich. Thank you, and good morning, everybody. Thank you all for joining us this morning to discuss P&S results for the 3 6 month periods ending June 30, 2023. I hope all of you are doing well as our country and the world continues to face ongoing economic pressures as well as the ongoing crisis in Ukraine and general global unrest. We pray for a rapid and peaceful end to all these conflicts.

Speaker 2

I would like to direct your attention to the company's press release that was released earlier today, which includes the company's June 30, 2023 balance sheet, statement of operation, statements of cash flows and a discussion related to the company's results of the 3 6 month periods ended June 30 this year and how these results compare to the same periods in 2022. I wish to highlight a few key factors in our release. Our consolidated revenue declined 9.2%. However, and more importantly, Our gross margin of Florida Pneumatic and Hy Tech improved 3.9% and 8.1% respectively. Of the quarter.

Speaker 2

Total operating expenses declined 2% and rising interest rates were of course the primary cause for the increase in interest expense. Finally, in order to make use of everyone's time and yet be mindful of the purpose of this conference call, I would like to remind you all the following. I apologize for being repetitive to Rich Goodman. First, as I've become our standard practice, 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 directly related to the company's Q2 of this year, results of operations and financial condition.

Speaker 2

We must assist you adhere to this procedure. Finally, please be mindful of the 20 minute time limit as previously noted, which we plan to enforce. To the extent shareholders of other callers with pertinent questions with multiple questions, please complete your portion of the Q and A within the 20 minute time limit, then we will move on to the next questionnaire. And with that, we will be happy to answer pertinent questions that you all may have. Operator, you can open up the lines.

Speaker 2

Thank you. Recorded.

Operator

Thank you, Mr. Horowitz. Function is not activated. Our first question today is coming from Andrew Shapiro calling from Lawandale Capital Management. Please go ahead.

Speaker 3

Hi, good morning. Can you hear me?

Speaker 2

Good morning, Andrew.

Speaker 3

Yes. Okay. So first regarding Florida Pneumatic, if I could. Boeing's large 787 Dreamliner inventory now has 787 tools and then I of course I got a follow-up on the 737.

Speaker 2

Joe, you can answer that question.

Speaker 4

Yes. We We're on that program. It is a fraction of the 737 program. But obviously any uptick in production is helpful. But as you know, we're not Selling tools per plane, so an uptick in production doesn't mean we get an order next week.

Speaker 4

So, but yes, It's a positive development, no doubt. And as I said, we're on that program. So

Speaker 3

Right. And then the 737 MAX, their production And they're going to tool up a new lineup in Everett. How far in advance do they typically order and make demands for that since that ramp up is going to be next year for the new production line and the hiring that they're doing. And I believe they said they want to be up to 38 planes a month by the end of this year.

Speaker 2

Yes. We really don't have a tracking to know how far ahead of time they order the tools or if they order it ahead of time at all. And secondly, their numbers are we see the same numbers you do and we don't know anything more than you do in that regard. Recorded. However, when we were when they claimed they were doing 22 planes a month, which goes back maybe 6 months, I guess, something along those lines.

Speaker 2

They were according to us, our people who were employing the factory pretty much every day, it was nowhere close to that number. So I don't know what's the true number or what it is, but certainly I think the takeaway is it will be much better going forward for the next couple of years. That's the big takeaway, whatever that is.

Speaker 3

And your level of kind of business With them right now is about kind of what percent compared to pre pandemic and frankly compared to when they slowed the production line down when the 737 MAX got initially grounded, which was actually before the pandemic. We were at around 50% or so before. Is it the same or you ticked up a little bit?

Speaker 4

I'd say we're Probably 60% or so of pre pandemic

Speaker 2

levels. I wouldn't even say

Speaker 4

pandemic, it's the crash truly the crash was really

Speaker 3

more the issue

Speaker 4

for them not the pandemic.

Speaker 2

Yes.

Speaker 3

Right. Okay. So that's a decent amount of upswing, but your Aerospace division seems to be subdivision of Florida Pneumatic seems to be doing pretty well. On the last call, you discussed a new suite of cordless installation tools for aerospace from Jiffy that you were working on, one of which You said on the last call, you were taking orders in Europe, including from Airbus, and you and the customers were very excited about this. It's been another 3 months.

Speaker 3

Did those tools get delivered? And how did the initial tests work out? And when do you expect follow on orders of that initial tool? And you also said you have a second or more tools in this line that would be ready for testing in the field, I think in the present Q3 we're in. So what's the status of that as well?

Speaker 4

Okay. So we are shipping we're taking orders and shipping the first tool. It's ramping up. It's No one particular customer. We're taking orders for that tool worldwide and it's shipping.

Speaker 4

And Just to be clear, we're past the testing phase. These are shipments for to go right to the lines to produce jets. The testing phase is over for that tool. Great. The second tool is in test.

Speaker 4

Sometimes they're internal test. Sometimes we send a few to some customers for to work. So that's still in process. But I think that's is probably not really going to be shipping. We're not going to be taking production orders probably until closer to the end of the year and the beginning of before for the second version.

Speaker 2

And Andrew, I'll just I'll take just one other thing I'll just add, comment on your comment. Our Aerospace business is doing extremely well, extremely well. Very good backlog, very good prospects. Quoting is very high. It's really a very we're very, very optimistic.

Speaker 2

And we don't generally talk about things like this on these calls, but we're very, very optimistic about Yes.

Speaker 3

No, you generally don't. So I'm Pleased to hear that you're even excited. So that's good. Yes. Especially with Boeing having got another, we'll call it, 40 percent air pocket to get back up to and we know they will down the road.

Speaker 2

And I'll just give you one other piece of color that can move on. I don't want to waste your time with this, but our percentage of business with Boeing is down even though their business is up, If you understand what I'm saying. We're there are slightly smaller percentage of our overall Aerospace business, I believe, pretty sure.

Speaker 3

Well, that would make sense simply because their business level is down is with you and you hadn't you were trying to get into Airbus before the pandemic and now you've gotten into them. So that just makes a lot of sense that You've filled the hole with other aerospace customers. So when Boeing returns, your aerospace division presumes your aerospace sub segment presumably will be setting records for the company. Home Depot going on in Florida Pneumatic. Your release mentions that retail customer it's Home Depot reduced the number of SKUs of their the Husky line, a pneumatic tool line you manufacture for them.

Speaker 3

What happens to the inventory you had or still have of these no longer stock units. And will your inventory levels come down further and cash be received?

Speaker 4

Okay. Inventory has come down. I don't have in front of me call it $3,000,000 mostly related to The Home Depot. There are a couple of things going on. I think it's something like 6 SKUs were dropped approximately since last year.

Speaker 4

But more importantly, we were stocking up pretty heavily throughout all of last year and into the beginning of this year because of the delays we were experiencing in getting product here from Asia. Those delays have come down and we've been able to get away with keeping less safety stock. And I think we're pretty comfortable with where the stocking levels are now and that cash is pretty much in the door at this point.

Speaker 3

But when they discontinue SKUs and you are stocking units, what happens? They are obligated and they'll take those out and then those No, those SKUs are discontinued.

Speaker 2

Yes. They take all the old merchandise.

Speaker 4

Yes. We run that out. We don't have any. We don't have any. It's a well orchestrated conversation and discussions with us.

Speaker 4

And we get it all out the door.

Speaker 2

And Andrew as you know, as you've been here long to know, we've gone through this 2 or 3 times with extend with new lines and new products, maybe even 4 times over the years. So it's a we never had any old inventory.

Speaker 3

Yes. Moving on to Hy Tech, what have the shipments to the major OEM customer you have referred to on prior calls? As they continued and increased their level of activity in this current quarter, it looks like it did okay. Can you also comment on their business with you in the present quarter?

Speaker 4

The large OEM customer places fairly large blankets that go out many months could have been 6 or 7 months worth of product or more. So Deliveries can be spiky. We work them into our production plan and get them out the door in an in organized fashion. So I don't know that I would glean too much from any particular month's shipments to that customer. We kind of take a look at it over the quarter or even quarters at a time.

Speaker 4

The good news is We're in great shape with them. We're excited about the future with them. We're working on 2 things and we're hopeful that we can do better even going forward on top of the levels we currently even have.

Speaker 2

And our levels right now are very healthy with that customer, very healthy.

Speaker 3

Last quarter, you discussed how you were making inroads to a customer in the rental market for industrial tools and we're working on tweaking some products to better serve customer and market. Can you expand a little on your progress this past quarter and prospects for the rest of the year with these products and this customer?

Speaker 4

That continues. There really isn't much of an update there. It's a longer term program and we expect to be working on this for the next few quarters. There's not really much of an update.

Speaker 3

Okay. In the OEM Engineered Solutions segment our sub segment. Are there any other particular areas, industries, products that have grown worthy of any callout and elaboration?

Speaker 4

No, not at this time.

Speaker 3

Okay. On the last call, you mentioned Jackson Gear had a lot going on in the international mining arena. Did that sub segment continue with of growth. And were there any other types of customers worthy of a call out as to momentum?

Speaker 4

Yes. We're still doing very well with international mining. And again, just to remind everyone, it's not mining for coal necessarily. It's mining for just about everything you can mine. So and it's spread across a number of international locations.

Speaker 4

It's doing very well. That customer is doing very well with us.

Operator

Okay.

Speaker 2

And as is our backlog in that business. I wouldn't call it the Jackson. We call it the PTG business. Our backlog is very, very healthy there as well.

Speaker 3

Right. Now you You mentioned backlog on aerospace and backlog with PTG. What do you define kind of as backlog? These are POs that you have. These are orders with expected deliveries within the next 12 months, the next 6 months.

Speaker 3

How do you define backlog when it comes to aerospace? And how do you define backlog as it comes to PTG? It's both. It's both. I'll let Joe elaborate.

Speaker 3

But we monitor bookings on a

Speaker 2

daily basis. But Joe you can maybe

Speaker 4

Backlog is an order that hasn't shipped yet. I don't know how I mean I'm not quite sure how to define it any and

Speaker 3

so it's kind of it's quantified. Any chance that you guys might Consider providing those kind of backlog numbers in present and future quarters?

Speaker 4

We are reluctant to do that. That number moves around a lot. I think we're better off explaining The general outlook for the businesses, I'm just not comfortable trying to explain what's happening in the backlog, because Backlog is very different in terms of each business unit. Some have a few weeks of backlog, some have a few days of backlog, some have of 3 months of backlog and then for me to parse out what's going on across 8 different product lines and they're each of them in their different backlog Normal relationships would be frankly, I don't think very helpful to expert. I think it's we're better off explaining the overall business.

Speaker 4

Because as I said, if you take our largest customer, we could get an 8 month order from them, And then I'll get a question about why backlog dropped by $2,000,000 when there's absolutely no issue going on with that customer just waiting we're working with them on the next order. So I don't think it's going to be very helpful to investors and that's one of the reasons we've never disclosed it.

Speaker 3

Okay. To what extent has prior under absorption of manufacturing overhead costs that you've been referred to in prior Press release has been addressed in Q2. And what are the remaining issues, if any, to be resolved? And can you expand on the steps and timing to address these issues?

Speaker 4

As we've said in prior calls, we've over the last 6 months, 7 months, we've brought in actually 3 to 4 fairly expensive pieces of equipment that will help automate things. We are frankly a little behind schedule on where I'd like to be with those the machines being up and running. They're all up and running, but we're well behind where I'd like to be in terms of their benefit to the operations overall. And I don't really think we're going to see much benefit for those of machines until even the Q4. And I would estimate that I'm just thinking a number of 4 machines probably 20% of the benefit in this year, But most of next year we'll see almost full benefit for the whole year.

Speaker 4

So lots going on. We were excited about the run times that we're seeing, but there's a lot of tweaking, there's a lot of coding, there's a lot of additional tooling that has to go in place. It's is just a slow process and we're taking our time. We were hopeful that we'd be a little farther along than we are and it just is what it is. But we still are highly confident in the ability of those new tools to drop some money to the bottom line.

Speaker 2

Yes. It's going to be very significantly and very profitable and very good for us efficiency wise and all that. And as Joe said, it will be phasing in over the Q4 and next year. We're expecting very good things to do.

Speaker 4

And having said that, we're not having any issue getting product out the door in general.

Speaker 3

You're just manually loading things instead of the robots doing it.

Speaker 4

Well, yes, I mean, we were achieving these levels of shipments just about a year ago, but these are going to help a lot.

Speaker 3

Now when you talk about this, is this I asked the question within the PTG, but you're talking about automation equipment that is it PTG or Hy Tech across the Board or also

Speaker 2

It's Jiffy no, Florida O'Matic doesn't manufacture domestically really. It's Jiffy. It should be in both our facilities at Hy Tech.

Speaker 3

Okay. So it's all three areas where things are a little behind schedule, But the machines are in, but you're just getting things tweaked.

Speaker 2

Yes. We spent roughly $2,500,000 in CapEx this year on these machines and very, very exciting and promising for us.

Speaker 3

And your prospects Do you have any idea? Yes. And your prospective CapEx spend from this point going for the rest of the year is what kind of level and for what of equipment.

Speaker 4

Modest, I think I don't have it in front of me, but I think the full year is something like $2,900,000 or $2,800,000 to of $3,000,000 So maybe there's well, we're already in August. So I'd say in the queue in terms of our reporting, There's probably $1,000,000 left to go, but we probably already spent a good chunk of that already. By the end of the Q3, it will be money will be spent for the

Speaker 3

So it's about $1,000,000 left as of the end of the June

Speaker 4

quarter? Yes. Right.

Speaker 3

Okay. All right. And Thank you. Is it yours and the Board's view to focus P and F more towards making new acquisitions or to permanently lower the company's average debt levels for expanding the return of capital to shareholders with highly selective buybacks or increased dividends as the company appears to have returned to sustained profitability and even higher cash flow generation. What's your thoughts here, Richard and the Boards?

Speaker 2

Yes. The Board and myself are very, is very focused on acquisitions. There are a few that I know of that are potential that will be good for us in the same exact fields that we're in, which would add to our business. So if If they make sense for us to move in and we can make the deals with the people, the other companies, we fully intend to do that. It's nothing imminent, But certainly, I would say within the next 9 months to a year, I would expect that we will have at least one acquisition, And is this on the

Speaker 3

yes, your debt levels Very low now.

Speaker 2

Very low and we have a big runway of a line with the bank.

Speaker 3

Right. And these acquisitions in the focus of TTG, other areas of high-tech or inside of the Florida Pneumatic Indoor Aerospace Operations.

Speaker 2

I can't be specific about it, but I can tell you it could be affecting all of our companies in a good way. Okay. This is kind of the way I would describe it.

Speaker 4

We're looking at acquisitions. We always are. This isn't any new information, but I think you rightly point out debt levels are getting to the point and sustainability of of the company's earnings call. Profits and cash flow are getting to the point that we certainly will be in a position to pull the trigger on something at some point next year assuming we're comfortable with how we're doing with our factories.

Speaker 2

Consideration. Angie, I have one last question before your if you don't mind.

Speaker 3

Yes. And the one last question is, it's Nice that you're thinking about the acquisitions, your focus and your discussion on it is if debt levels are low, we can use debt to do it. The one thing that we can't really do is use shares to do it in light of the fact that our shares are so deeply undervalued relative to book value and even tangible book value, which is north of $10 a share. In light of these operating and sustainable progress you made, is there any thought of perhaps doing some non deal roadshows, talking to the investment community a little more outside of these quarterly calls raise the visibility of the company, its cash flows and its prospects, so that Your acquisition opportunities could be done with the lowest cost of capital, which might at some point Perhaps not necessarily be high interest debt?

Speaker 2

We as you know, we've said this many times, but as we talk about this in each Board meeting. We certainly intend to do that and to be seen, but it's not it doesn't go on lost ears what you're saying. So thank you for that.

Speaker 3

To come. Okay. All right. Thank you.

Speaker 2

All right. Thank you, Andrew.

Operator

We'll thank you for your interest in Shapiro. I will now go to Timothy Stavros, who is a Private Investor. Please go ahead, Timothy.

Speaker 4

Good morning, gentlemen. Thank you for taking my call. Good morning, Tim. Richard, it's exciting to see you optimistic, enthused and even, dare I say, chipper. I have one question in mind only and that is I'll never drill down like Andrew, but I'm going to drill down in Florida Pneumatic, on the $1,900,000 decline, probably a Joe question, but whichever, in the Retail segment, Can you give some sense of what part of that 1 third, 2 thirds is due to the lack of the pipeline fill that you we saw in the year ago quarter versus the choice of certain customers of Home Depot, I don't know, to reduce SKUs.

Speaker 2

Yes. I don't know if you're asking this question. I'll let Joe fill it in. But it's essentially of the SKU drop and of course the economy, which is slowing down. But Joe, you can add to it.

Speaker 4

So I would say there was a Q2 of 2022 was a pretty big quarter. We had a rollout. We refreshed the line that as you know, we refreshed the line every 4 or 5 years. So we refreshed the line. It was a running change.

Speaker 4

So we certainly had a bump up. I mean it was a 7 figure number for sure. I I don't know exactly, but it was 7 figures. So yes, I think there's definitely some of that in there. But it's lost a little bit.

Speaker 4

There's 3 things that happened. There's the rollout. We dropped 6 SKUs. And then in addition to that, Prices were raised and I think frankly there were probably a few less units sold. Our margins got better, but a few less units sold.

Speaker 4

So it's a little hard to parse Which one of those things exactly drove the total change? They're all in there, but not to be lost. There was a 7 figure rollout. Okay. Well, it sounds like that the bulk of it or a majority of it then is just the lumpiness of the rollout and not a permanently lower level of sales due to reduced stocking keeping units.

Speaker 4

So that's real also. That's true. That's material. But it sounds like it may that The lumpiness factor may be the not the outsized amount, but maybe a majority, Yes. I mean the level of revenue for the quarter that we have in retail is a pretty sustainable number going forward without trying to get into projections, but we're we think that's a reasonable figure.

Speaker 2

Yes. Well, I'll just Tim, I'll just And to what Joe said, in the end of last year Home Depot sales were going down a lot. They were tightening inventory and all that kind of stuff. And now as Joe is saying, in the last 3 months or maybe more, their levels have been very predictable. Their orders have been very predictable.

Speaker 2

And whatever their business is, it's ongoing at this point and it's stable. Say it that way.

Speaker 4

Okay. Okay. Okay. I know this may shock you, but I don't have anything more. So thank you and have a good day.

Operator

We do not appear to have any further questions coming in. Mr. Horowitz, I'd like to turn the call back over to you for any additional or closing remarks. Thank you.

Speaker 2

Okay. Thank you all for your time today. We wish you a good rest of the summer and we will look forward to speak to you with our Q3 numbers closer to the end of the year in November. Thank you all for your time today.

Operator

Concludes. Ladies and gentlemen, that will conclude today's presentation. Thank you for your attendance. You may disconnect.

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Earnings Conference Call
P&F Industries Q2 2023
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