P&F Industries, Inc. (NASDAQ:PFIN) Q4 2022 Earnings Call Transcript

P&F Industries, Inc. (NASDAQ:PFIN) Q4 2022 Earnings Call Transcript March 28, 2023

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

Richard Goodman : Thank you, operator. Good morning and welcome to P&F Industries’ 2022 year-end conference call. With us today from management, are Richard Horowitz, Chairman, President and Chief Executive Officer; and Joseph Molino, Chief Operating Officer and Chief Financial Officer. Before we get started, I’d like to remind you that any forward-looking statements discussed on today’s call by our management, including those related to the company’s future performance and outlook, are based upon the company’s historical performance, current plans, estimates and expectations, which are subject to various risks and uncertainties that could cause the company’s actual results for future periods to differ materially from those expressed in any forward-looking statements made by or on behalf of the company.

These 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 2021 Annual Report on Form 10-K, our quarterly reports Form 10-Q and other reports that we file. Forward-looking statements speak only as of the date on which they are made, and the company undertakes no obligation to update publicly or revise any forward-looking statements, whether as a result of new information, future developments or otherwise. I would also like to remind all participants on this call, that as we have been doing for the past several conference calls, with respect to the question-and-answer portion of today’s conference call, the 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 2022 results of operations and financial condition, which such information 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. And with that, I would now like to turn the call over to Richard Horowitz. Good morning, Richard.

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Richard Horowitz : Good morning, Rich, and good morning, everybody. Thank you all for joining us this morning to discuss P&F’s results for the 12-month period ended December 31, 2022. I hope all of you are doing well, as this country and the world continues to face the ongoing economic pressures and geopolitical crisis in Ukraine. We pray for a peaceful end to that conflict and a soft landing for the economy. I would like to direct your attention to the company’s press release that was released earlier today, which includes the company’s December 31, ’22 balance sheet, statement of operations, statement of cash flows and a discussion related to the company’s results for the year ended December 31, 2022 and how these results compared to 2021.

Further, I wish to highlight a number of key factors that impacted our 2022 results. The Jackson Gear business acquisition completed during the first quarter was one. Number two was the weaker customer mix, and an increase of obsolete and slow moving inventory charges at Hy-Tech, which negatively impacted our gross margin at Hy-Tech. Economic uncertainty, which we believe is causing and is likely to continue to cause a reduction in consumer spending going forward. And lastly, persistent supply chains delays amid and as well dollar depressed pricing. Finally, in order to make better use of everyone’s time, yet be mindful of the purpose of this conference call, I would like to remind you all the following. First, as has become a standard practice, we will move directly to question-and-answer session and not restate what is already in our morning’s press release.

Secondly, please be aware that we will only be answering questions directly related to the company’s full year ’22 results of operations and financial condition. We must insist that you adhere to this procedure as Rich Goodman stated earlier. And finally, please be mindful the 20-minute time limit as previously noted by Rich Goodman as well. And with that, we will be happy to answer pertinent questions that you may all have. Operator, I hand the call back to you.

Operator: Thank you. We’ll first hear from Andrew Shapiro of Lawndale Capital Management.

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

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Q&A Session

Richard Horowitz : Yeah, we hear you fine. Thanks.

Andrew Shapiro : Great. Thank you. So first off, you would have been — with all the things that flowed through this fiscal year, of all the fourth quarters that you’ve had, and I’ve sat through have been really helpful had you guys broken out the fourth quarter. Don’t you do that for the Board, at your quarterly Board meeting?

Richard Horowitz : No, we don’t do that, Andrew. If we did, we would be happy to present it out as well. It’s not required by the SEC for any company whatsoever. And it requires a lot of work on our part. And we have a lean, excuse me, a lean staff. And we appreciate your comments. And we note it but we just haven’t found — been able to do it. I apologize.

Andrew Shapiro : And internally you don’t analyze, like how the quarter was versus the prior quarter, internally?

Richard Horowitz : Joe, you want to want to continue to answer this.

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

Andrew Shapiro : Okay, well. I’ll move on. But I differ on the view that not many companies do it. Most do breakout the fourth quarter. I know it’s not required.

Joseph Molino : Large companies certainly, but companies of our size, I would say no.

Andrew Shapiro : There aren’t so many companies your size that are public. So that’s —

Richard Horowitz : Right. And your next question, Andrew please?

Andrew Shapiro : Yeah. So with the pricing — let’s talk about Florida Pneumatic first, with the price increases you implemented in the middle of ’22, do you feel you have been able to maintain market share? Or did you have to give up some customers, because I do note that in the automotive and retail space fourth quarter, which I was able to back out, the fourth quarter revenue numbers were down from prior year. And I’m wondering what you might attribute that to? If it isn’t a lost market share, or anything going on those price increases?

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

Joseph Molino : Yeah, Richard is right

Andrew Shapiro : Which one?

Richard Horowitz : The Automotive. The Automotive.

Andrew Shapiro : Yeah. Okay, got it.

Richard Horowitz : Go ahead, Joe.

Joseph Molino : Yeah, I was saying that it’s difficult to ascertain changes in market share, because there’s so many players. And we really just don’t have that access to that data. It’s a little hard to tease out because as we were making the price increases, what — we were seeing retail sentiment consumer sentiment also fall off. So it’s really hard to split out what might be a fall off in share versus just the general economic situation or anything .

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

Joseph Molino : Well certainly, there’s a number of things going on. Depot has chosen, this probably did goes back a couple of years. But they’re — and I don’t know when the last time you were in a Home Depot was. But there was a time when our tools were fairly prominently displayed in what they call the Tool Corral or Tool Crib. For the most part Depot has moved those tools out of the Tool Crib in a separate aisle. So if you’re looking for tools, you’re going to go and you’re not going to find ours, where all the other tools are, especially the battery operated one. So I think that had a negative effect on things. And that’s Home Depot’s decision. And we’re not part of that. And in general, battery operated tools are certainly an issue on the very low end.

And in the long run, they’re certainly growing faster than then pneumatic tools. So that’s also a factor. And as I said, we saw a change in retail sentiment even in Amazon, on the automotive side. So a number of factors; couldn’t really point my finger at anyone in particular, and certainly the price increase, there’s certainly some elasticity there, which can’t be ignored.

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

Richard Horowitz : I don’t think we would have that clearance. We wouldn’t have that clearance. We wouldn’t have that vision. Nobody knows in the world, especially in these times of the economy. But all we can tell you is that the first quarter have rebounded somewhat, which is —

Joseph Molino : One other one other — I’m sorry, Richard. Go ahead. One other comments, spray guns, which are not an insignificant portion of the Depot line, probably bore the brunt of the fall off. As we’ve seen those were being heavily used during COVID, as we’ve discussed. And that time has passed for that major bump in demand. So that’s probably some of it as well.

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

Richard Horowitz : Yeah, that’s correct. I mean, I would say, Andrew, that it’s definitely gotten better. I don’t think it’s as good as — I know, it’s not as good as it was a year ago. But it’s definitely better than it was.

Andrew Shapiro : Sure. Now last quarter’s call you guys discussed Florida Pneumatic now moving to aerospace. Florida Pneumatic’s revenue and margin mix was favorably impacted by rebounds in the aerospace product line. And that was both in commercial and defense. And that made up, kind of filled some of the hole that was created when the Boeing business, especially with the 737 MAX grounding, and the 787 production issues, that the production rates and the demand and use for your tools slowed slow greatly, and there was this hole. And you had this new business in aerospace that was filling up. And on the last call, you had said that Boeing had only recovered to about 50% of their pre-pandemic or pre-grounding, kind of consumption rate.

So I presume with Boeing’s commercial production rate nowhere near former levels, your business with them similarly is not fully recovered, but hasn’t migrated up yet from the approximately 50% level you said, which was almost six months ago, given this was fiscal year end, and there’s a longer time lag for your reporting?

Richard Horowitz : It’s basically been about the same. It goes sporadically and — but I would say generally, maybe slightly up over that, but not dramatically. But we’ve experienced a lot of other business, in defence and aerospace to counteract that.

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

Richard Horowitz : I do. Joe, how do you feel?

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

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

Richard Horowitz : Are you asking us to list our customers, is that what you’re asking us?

Andrew Shapiro : I’m asking if they’re — if you can name a few platforms or program types? For example, Boeing’s Apache line which they just got a big new contract on, things like that?

Richard Horowitz : Joe, can you answer that?

Joseph Molino : Our tools are used to assemble Apache helicopters if that’s your question. But to get a little more granular, all military, aerospace production, we are involved in. We’ve got installation tools, drilling tools, we’re selling four control tools. I mean, those are kind of the big three areas in production of planes, helicopters, all that stuff. We’re in the middle of all that, especially in North America. But with respect to Europe, we’re now starting to really make some inroads there with Airbus, and their Tier 1 suppliers, and other military folks over there throughout the European continent. So if you want to take a look at aerospace production in Europe that might be a hint. Just military production in general, in North America, we’re involved in all that stuff. We’re everywhere.

Andrew Shapiro : And so you’re now into Airbus?

Joseph Molino : Yes, we are into Airbus.

Richard Horowitz : Yeah, we’re in there, but not in a way that you would really mean? But yes.

Andrew Shapiro : Well, you weren’t before the pandemic, and it was — it’s a great opportunity that we all want. And everyone’s talking about this company.

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

Andrew Shapiro : Are your tools used in drone manufacturing as well?

Joseph Molino : I don’t know the answer to that. I don’t cover it.

Richard Horowitz : Nor do I.

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

Richard Horowitz : Joe, I’ll let you — I’ll let you answer that.

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

Andrew Shapiro : Can you be a little more granular when you say several hundred thousand?

Joseph Molino : No, I cannot.

Andrew Shapiro : Four, three, two?

Joseph Molino : That’s all I’m going to say. It was substantial

Andrew Shapiro : Okay. Yeah, I bet if someone wanted to understand the actual ongoing recurring margin for the company, for the division for the quarter, knowing the amount of write-off that’s non-recurring, helps someone come up with what is the ongoing run-rate.

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

Richard Horowitz : And Andrew, I’ll just add, it may give you comfort to know that our margins have been very nicely improved this year. Because even weather —

Andrew Shapiro : Well, yes. I mean, they are very nice. They were very improved for the first two third quarters, and then all of a sudden single digits.

Richard Horowitz : Yeah, I’m talking about ’23.

Andrew Shapiro : Oh, ’23 or back as to where they’re going to be.

Joseph Molino : Yeah, it was, — I’m not denying that it was a — I’ll call it a onetime event. But I can’t, there’s no number for the onetime event if you’re following me. We would just reserves every month. But I can — we’re not looking at anything like that, in the foreseeable future. And I think will show Q1 have a nice rebound in margins.

Andrew Shapiro : Okay. And shipments to the major OEM customer you’ve referred to in last and prior calls continue to increase its level of activity into the New Year?

Joseph Molino : Yes.

Richard Horowitz : Yes.

Andrew Shapiro : Okay. And you said you weren’t there yet as of Q3. But beyond this major customer, has the OEM Engineered Solution segment encountered enough additional success that there any particular areas, industries or products now worthy about call out and the elaboration?

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

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

Joseph Molino : What you say weakness, it’s not, could you be more specific?

Andrew Shapiro : Well. This is ATP, Q3 There was weakness in certain industrial markets and customers at ATP. And it had — was facing some headwinds, but it just looks like things have sequentially gone up. And I don’t know if that’s continued into Q1 or not.

Richard Horowitz : The only thing I’ll tell you, Andrew, is ATP is becoming an increasingly less important product of Hy-Tech. So it’s about — it’s up and down and kind of a thing, but it’s not having a major impact. Just a reminder, two minutes left, so please just be mindful of it.

Andrew Shapiro : Yeah, well, I’m glad you’re on the stopwatch there. Gear products, PTG. Okay. The last call, you thought that the opportunity for Jackson Gears and its synergies was still in transition? They’d be tangible progress this quarter in Q1 with most of the benefits in place. For I think it was the entirety of Q2. Is that still what’s on the plate, or do I have that wrong?

Richard Horowitz : Go ahead Joe.

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

Andrew Shapiro : Okay. All right. And I saw that one point, you got the big bunch of the ERC money in January, not in the fourth quarter. You got some cash in the fourth quarter, but that’s a big slug of cash. What’s the plan on that? Is it going to be initially an immediate pay down on the higher interest debt now and — or is it — what are the plans?

Richard Horowitz : Joe?

Joseph Molino : Richard it’s, excuse me — Andrew, it’s a lockbox. So when it comes in the door, the bank takes their money and pay down the debt. I don’t really have much of a choice. Okay.

Andrew Shapiro : Well, that’s fine. It’s high interest, so to get that paid down is not so bad anyway.

Richard Horowitz : And then is going. Our debt is going down as well.

Andrew Shapiro : Good, and the CapEx plans for the coming year that you’ve given to guidance on, but you’re still kind of at elevated levels, as the money – the other CapEx that was spent this last quarter that you gave us guidance on. Was that just a partial payment for equipment that is still to be delivered? Or did that equipment get put in place, and you’re getting more equipment and automating even further?

Richard Horowitz : Yeah, most of the equipment has been delivered. We’re getting some more on the next 30-60 days. And the stuff that’s been delivered was about 30 days away from running well and productively at our plant.

Joseph Molino : Yeah, I would just add to that, I don’t know that we would anticipate the real benefits from the new equipment until Q3. They’ll be coming online in Q2. And certainly, we’ll see some benefit but not what I see in terms of the significant contribution to results until Q3.

Andrew Shapiro : Some of that’s in Jiffy, where your increased aerospace business is going to start hitting some capacity utilization finally?

Joseph Molino : Correct.

Andrew Shapiro : Great.

Joseph Molino : All right.

Andrew Shapiro : I think I’m out of time. Thank you.

Richard Horowitz : Thanks, Andrew. Thank you for your interest and concern.

Operator: It appears there are no further questions at this time. I’ll turn the call back over to our presenters for any additional closing comments.

Richard Horowitz : Okay, thank you all for being on the call today. And we look forward to speaking to you on our Q1 call in about 60 days. Thank you so much for your time today.

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