P&F Industries, Inc. (NASDAQ:PFIN) Q2 2023 Earnings Call Transcript

P&F Industries, Inc. (NASDAQ:PFIN) Q2 2023 Earnings Call Transcript August 10, 2023

Operator: Hello, and welcome to the P&F Industries Q2 Earnings Call. My name is George. I’ll be a coordinator for today’s event. Please note, that this conference is being recorded. [Operator Instructions] I’d like to hand the call over to your host today, Mr. Richard Goodman, to begin today’s conference. Please go ahead, sir.

Richard Goodman: Thank you, operator. Good morning, and welcome to P&F Industries second 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, 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 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 our 2022 annual report on Form 10-K and our quarterly reports on Form 10-Q. 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 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 second quarter 2023 results of operations and financial condition as disclosed in a press release published earlier today. We must insist that you would 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.

Richard Horowitz: Good morning, Rich. Thank you and good morning, everybody. Thank you all for joining us this morning to discuss P&F’s results for the three month and six 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. 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 the discussion related to the company’s results for the three-month and six-month periods ended June 30 of this year and how these results compared 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. 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, and I apologize for being repetitive to Rich Goodman. First, as has 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 second quarter of this year results in operations and financial condition.

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 or other callers with pertinent questions with multiple questions, please complete your portion of the Q&A within a 20-minute time line, and then we will move on to the next questionnaire. And with that, we would be happy to answer pertinent questions that you all may have. Operator, you can open up the lines. Thank you.

Q&A Session

Operator: Thank you, Mr. Horowitz. Ladies and [Operator Instructions] Our first question today is coming from Andrew Shapiro, calling from Lawndale Capital Management. Please go ahead.

Andrew Shapiro: Hi, good morning. Can you hear me?

A – Richard Horowitz: Yeah.

A – Joseph Molino: Good morning, Andrew.

Andrew Shapiro: Okay. So first regarding Florida Pneumatic, if I could. Boeing’s large 787 Dreamliner inventory now has begun delivering production is expected to begin ramping in the coming months. Are you seeing an uptick in the demand for 787 tools? And then of course, I got a follow-up on the 737

A – Richard Horowitz: Joe, you can answer that question.

A – Joseph Molino: Yes. We were 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. So — but yes, it’s a positive development, no doubt. And as I said, we’re on that program. So…

Andrew Shapiro: Right. And then the 737 MAX, their production is now predicted by Boeing to really ramp up and they’re going to tool up a new line up 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 the year.

A – Richard Horowitz: Yes. We really don’t have a tracking to know how far ahead of time they order the tools or if they order ahead of time at all. And secondly, their numbers are — we see the same number as you do, and we don’t know anything more than you do in that regard. However, when we were — when they claimed they were doing 22 planes a month, which goes back maybe six months, I guess, or something along those lines. They were — according to our people who are in throwing 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 take away whatever that is.

Andrew Shapiro: 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 were you at around 50% or so before. Is it the same, or you ticked up a little bit

A – Richard Horowitz: I’d say we’re probably 60% or so of pre-pandemic levels. I wouldn’t say, pandemic its free crash, really, the crash was really more the issue for them, not the pandemic.

Andrew Shapiro: 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 three months. 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 third quarter we’re in. So, what’s the status of that as well?

Richard Horowitz: 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 are taking orders for that tool worldwide, and it’s shipping. 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, where the second tool is in test, sometimes their internal tests, sometimes we send a few to some customers for — to work. So that’s still in process, but I think that’s 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, the beginning of ’24 for the second — the second version.

Joseph Molino: And Andrew, I’ll just — I’ll take — just one other thing I’ll just add, a comment on your comment. The — 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, and we don’t generally talk about things like this on these calls, but we’re very, very optimistic about…

Andrew Shapiro: Yes. No, you generally don’t. So I’m pleased to hear that you’re even excited. So that’s good especially with Boeing having got another, we’ll call it, 40% air pocket to get back up to, and we know they will down the road.

Richard Horowitz: And I’ll just give you one other color, you 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, where they’re slightly smaller percentage of our overall Aerospace business, I believe, pretty sure.

Andrew Shapiro: That would make sense simply because their business level is down 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 whole with other aerospace customers. So when Boeing returns, your aerospace division presumes — your aerospace subsegment presumably will be setting records for the company. Home Depot going on in Florida Pneumatic, your release mentions that retail customer is Home Depot, reduce the number of SKUs of their — the Husky line, pneumatic tool line now manufacture for them. What happens to the inventory you had or still have of these no longer stock units? Will your inventory levels come down further and cash be received?

Joseph Molino: Okay. Inventory has come down, I don’t have in front of me, call it $3 million, mostly related to the Home Depot. There are a couple of things going on. I think it’s something like six SKUs were dropped approximately since last year, 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

Andrew Shapiro: But when they just continue SKUs and you were stocking units what happens they are obligated and they’ll take those out and then those SKUs are discontinued?

Joseph Molino: Yeah. They take all the old merchandise.

Richard Horowitz: Yeah, we run that out. We don’t get stuck with anything.

Joseph Molino: We don’t get stuck.

Richard Horowitz: It’s a well-orchestrated conversation and discussions with us. We get it all out the door.

Joseph Molino: And, Andrew, as you know, you’ve been here long enough to know we’ve gone through this two or three times with them with new lines and new products, maybe even 4 times over the years. So it’s, we never had any inventory left.

Andrew Shapiro: Yeah. Moving on to Hy-Tech. What have the shipments to the major OEM customer you have referred to on prior calls. They continued and are 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?

Richard Horowitz: The large OEM customer places fairly large blankets that go out many months, could be six or seven months worth of product or more. So deliveries can be spiky. We work them in to our production plan and get them out the door in an 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. The good news is we’re in great shape with them. We’re excited about the future with them. We’re working on some things and we’re hopeful that we can do better even going forward on top of the levels we currently even have.

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

Andrew Shapiro: Last quarter you discussed how you were making inroads through a customer in the rental market for industrial tools and we’re working on tweaking some products to better serve this 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?

Richard Horowitz: 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.

Andrew Shapiro: Okay. In the OEM engineered solution segment, or sub-segment, are there any other particular areas, industries, products that have grown worthy of any call-out and elaboration?

Richard Horowitz: No, not at this time.

Andrew Shapiro: 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 its growth and were there any other types of customers worthy of a call out as to momentum?

Richard Horowitz: Yeah. 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. It’s doing very well. That customer is doing very well with us.

Richard Horowitz: And as is our backlog in that — I wouldn’t call Jackson, we call it the PCG, PTG business, our backlog is very, very healthy there as well.

Andrew Shapiro: Right. Now 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 six months? How do you define backlog when it comes to aerospace? And how do you define backlog as it comes to PTG?

Richard Horowitz: It’s both. It’s both. I’ll let Joe elaborate. But we monitor bookings on a daily basis. But Joe, you can maybe…

Joseph Molino: Backlog is an order that hasn’t shipped yet. I mean, I’m not — not quite sure how to define in any other way.

Richard Horowitz: Okay. It’s open order.

Joseph Molino: Yes.

Andrew Shapiro: And — and so it’s kind of gets quantified. Any chance that you guys might consider providing those kind of backlog numbers and present in future quarters?

Richard Horowitz: 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 three months of backlog. And then for me to parse out, what’s going on across eight 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 investors. I think it’s — we’re better off explaining the overall business. Because as I said, if you take our largest customer, we could get an eight month order from them, work it down over four, five months, ship it all in 30 days, wait for the next order, and then I’ll get a question about why backlog dropped by $2 million 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.

Andrew Shapiro: Okay. To what extent has prior under absorption of manufacturing overhead costs that you’ve been referring to in prior press release 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?

Joseph Molino: Yes. As we’ve said in prior calls, we’ve — over the last six months, seven months, we brought in actually three to four 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 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 machines until even the fourth quarter. And I would estimate that, I’m just taking a number of four machines, probably 20% of the benefit in this year. But most of — next year, we’ll see almost full benefit for the whole year. 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 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.

Richard Horowitz: Yeah. It’s going to be very significantly and very, very profitable and very good for efficiency-wise and all that. And as Joe said, it will be phasing in over the fourth quarter and next year, we’re expecting very good things.

Joseph Molino: And having said that, we’re not having any issue getting product out the door in general.

Andrew Shapiro: You’re just manually loading things instead of the robots doing it.

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

Andrew Shapiro: Okay. Now, when you talk about this, is this — I asked, the question within PTG, but you’re talking about automation equipment that is at PTG or Hy-Tech across the board or also shifting in Florida …

Joseph Molino: Yes. Jiffy no, Florida Pneumatic doesn’t manufacture domestically, really. It’s Jiffy. It’s Jiffy, in both our facilities in Hy-Tech.

Andrew Shapiro: Okay. It’s all three areas where things are go little behind schedule, but the machines are in, …

Joseph Molino: Yeah.

Andrew Shapiro: …but you’re just getting things tweaked.

Joseph Molino: Yeah.

Richard Horowitz: We spent roughly $2.5 million in CapEx this year, on these machines and very, very exciting and promising for us.

Andrew Shapiro: And your prospects…

Richard Horowitz: [indiscernible]

Andrew Shapiro: Yeah. And your prospective CapEx spend from this point going for the rest of the year is what kind of level and for what other equipment?

Richard Horowitz: Modest, I think I don’t have it in front of me, but I think the full year is something like $2.9 million or $2.8 million to $3 million. So maybe there’s — well, we’re already in August. So I’d say, in the — in terms of our reporting, there’s probably $1 million left to go, but we probably already spent a good chunk of that already. By the end of the third quarter, it will be money will be spent for the …

Andrew Shapiro: So it’s about $1 million left as of the end of June — the June quarter.

Richard Horowitz: Yes. Right.

Andrew Shapiro: Okay. All right. And …

Richard Horowitz: Andrew its three minutes left.

Andrew Shapiro: Thank you.

Richard Horowitz: Okay.

Andrew Shapiro: Is yours and the Board’s view to focus P&F more towards making new acquisitions or to permanently lower the company’s average debt levels or 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, in the Board?

Richard Horowitz: Yeah. The Board and I — myself are very, very focused on acquisitions. There are — 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 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 immense. But certainly, I would say, within the next nine months of the year, I would expect that we will have at least one acquisition. I would hope.

Andrew Shapiro: And is this on the …

Richard Horowitz: Go ahead.

Andrew Shapiro: Yeah. Your debt level is very low now.

Richard Horowitz: Very low. And we have a big runway but — aligned with the bank.

Andrew Shapiro: Right. Right now, these acquisitions in the focus of PTG. other areas of Hy-Tech or inside of the Florida Pneumatic indoor aerospace operations?

Richard Horowitz: Well, I can’t be specific about it, but I can tell you it could be affecting all of our companies in a good way.

Andrew Shapiro: Okay.

Richard Horowitz: It’s kind of the way I would describe it. 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 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

Richard Goodman: Andrew, any one last question before you — if you mind.

Andrew Shapiro: Yes. And the one last question is it’s nice that you’re thinking about the acquisitions, your focused, and your discussion on it is our debt levels 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 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 to 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.

Richard Horowitz: We — as we’ve said this many times, as we talk about this at each Board meeting, we certainly intend to do that and to be seen. But it’s not — it doesn’t go on lost years, what you’re saying. So thank you for that.

Andrew Shapiro: Okay. All right. Thank you.

Richard Horowitz: All right. Thank you, Andrew.

Richard Goodman: Well, thank you, Andrew Shapiro. [Operator Instructions] We’ll now go to Timothy Stabosz, who is a Private Investor. Please go ahead, Timothy.

Unidentified Analyst: Good morning, gentlemen. Thank you for taking my call.

Richard Horowitz: Good morning, Tim.

Unidentified Analyst: 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 $1.9 million decline, probably a Joe question, but whichever. In the retail segment, can you give some sense of what part of that one-third, two-third is due to the lack of the pipeline fill that you saw in the year ago quarter versus the choice of certain customers, Home Depot, I don’t know, to reduce SKUs?

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

Joseph Molino: So I would say, there was — Q2 of 2022 was pretty big quarter. We had a rollout. We refreshed the line. As you know, we refresh the line every four or five years. So we refreshed the line. It was a running change — so we certainly had a bump up. I mean it was a seven-figure number, for sure. I don’t know exactly, but it was seven figures. So yes, I think there’s definitely some of that in there. But it’s lost a little bit there’s three things that happen. There’s the rollout. We dropped six 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. 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 seven-figure rollout.

Unidentified Analyst: 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. 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 of.

A – Joseph Molino: 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.

A – Richard Horowitz: Yes. Well, just — Tim, just to add 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 three months or maybe more, their levels have been very predictable. Their orders have been very predictable. And whatever their business is, it’s ongoing at this point, and it’s stable. Say it that way.

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

A – Richard Horowitz: Thank you, Tim.

Operator: Thank you, sir. [Operator Instructions] 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.

Richard Horowitz: Okay. Thank you all for your time today. We wish you a good rest of summer. And we will look forward to speaking to you with our third quarter numbers closer to the end of the year in November. Thank you all for your time today.

Operator: Ladies and gentlemen, that will conclude today’s presentation. Thank you for your attendance. You may disconnect.