P&F Industries, Inc. (PFIN) CEO Richard Horowitz on Q2 2022 Results - Earnings Call Transcript

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P&F Industries, Inc. (NASDAQ:PFIN) Q2 2022 Earnings Conference Call August 11, 2022 11:00 AM ET

Company Participants

Richard Goodman - General Counsel

Richard Horowitz - Chairman, President & Chief Executive Officer

Joseph Molino - Chief Operating Officer & Chief Financial Officer

Conference Call Participants

Andrew Shapiro - Lawndale Capital Management

Operator

Good day and welcome to the Q2 2022 Earnings Call. Today's conference is being recorded.

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

Richard Goodman

Thank you, operator. Good morning and welcome to P&F Industries second 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, 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 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 2021 Annual Report on Form 10-K. 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 earnings conference call that with respect to the question-and-answer portion of this call, is the company's policy that 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 results of operations and financial condition relating to the second 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 with that, I would now like to turn the call over to Richard Horowitz. Good morning Richard.

Richard Horowitz

Good morning, Rich, and thank you all for joining us today to discuss P&F results for the three months ended June 30th. I hope all of you are doing well, as the country and the world are continuing to try to edge up on these horrific ill effects of the global pandemic, while navigating through difficult domestic and global economic headwinds as well.

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 balance sheet, statement of operations cash, flow and discussions related to the company's results for the three and six-month periods ended June 30, 2022, and how these results compared to the same periods in 2021. Further, I wish to highlight a few key factors that impacted our second quarter results.

The Jackson Gear business, which was acquired earlier in the first quarter, has significantly improved our PT revenues, the shipment to our largest retail customer -- of retail customers destocking rollout, the decline in total gross margin driven by, among other factors, rising cost of raw materials, labor and outside processing, massively high ocean freight costs and customer and product mix and lastly, the persistent ill effects of the pandemic.

Finally, in order to make better use of everyone's time, you have to be mindful of the purpose of this call. I'd like to remind all of you of the following. First, as we have done for several conference calls, it has become our standard practice. We will move directly to a question-and-answer session and not restate what’s already in this morning's press release.

Secondly, please be aware that we’ll only be answering questions directly related to the company's results of operations and financial condition relating to the second quarter of this year. We must insist that you would hear to this procedure, management will not entertain any questions that go beyond the scope of this call.

And lastly, please be mindful of the 20-minute time limit that Richard Goodman previously noted, which we plan to enforce, as always. To the extent shareholders or other callers with pertinent questions or multiple questions, please complete your portion of the Q&A within the 20-minute limit and then we will move on to the next questioner. And with that, we would be happy to answer pertinent questions that you may have now.

Please -- operator, please, open up the question-and-answer line.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] And we'll take our first caller from Timothy Stabus [ph], he's a Private Investor.

Unidentified Analyst

Good morning.

Richard Horowitz

Good morning.

Joseph Molino

Good morning.

Unidentified Analyst

Congratulations on the revenue growth material. Can you give some 60,000, 50,000-foot commentary on whether the ability to recover the 400 basis points or whatever it is, gross margin shortfall? I'm looking at a company that -- and I know some of the Home Depot perhaps has lower margin, but a company -- finally looking at a company here that potentially would be at material profitability and if you can pull the levers here to restore your gross margin, what's your -- broadly speaking what's your level of optimism that, has been a long time but that we can move that needle and get the company back to material profitability, historically, we've earned $1 plus in earnings per share. I'm not asking for specific guidance but a high-level qualitative sense of your optimism or -- yes, optimism.

Richard Horowitz

I will let Joe answer that for the most part, but I'll just start it by saying, Tim I wish any of us had a crystal ball to be able to talk about the economy. If we weren't facing the procession that everyone keeps talking about every day in every publication depends what you read. I try not to read them anymore, because there are so negative all the time, but if that -- we didn't have that, we could give you a very more concrete answer, but there's so much unpredictability and the price increases are just so enormous and so erratic from our vendors and the materials and stuff like that.

I mean in the range, you can get a 40% increase in product -- in a raw material and two weeks later, I get another 15%. It's just so crazy. How do you possibly combat that? But Joe, maybe you can add more color to that, but just in general, if you're looking for a high-level review, I don't think any one of us could give it to you, because we don't know what's really going on in the world. We can only act on what we see today. So Joe, you may want to add on to that.

Joseph Molino

Thanks Richard. I think Richard's general comments are all true. I would say that, it's a relatively short list of customers for us to really focus on to move those margins and I remind you in the quarter, we did have that one large retail customer that shipped. That's our lowest margin customer on the Florida Pneumatic side, so obviously that one order won't repeat. So the average will come up just mathematically.

On the Hy-Tech side and the Florida side, we had fairly rapid input increases throughout the quarter. We were catching up with concurrent price increases. I think we were, frankly, a step behind because that's the way it is sometimes when you've got a committed price and then your input goes up and sometimes you get caught in a little bit of a squeeze. I think just mathematically, we'll be catching up there just by the virtue of time passing.

Having said that, we've got specific initiatives to address some of the input increases in costs. I won't go into specifically what we're going to do, but to answer your question Tim is, yes, I'm pretty optimistic we can make a very big dent in that drop in margin. Some of it was mix, but some of it was also just still playing a little bit of catch-up on these rapidly changing input our costs.

Unidentified Analyst

Thank you. Specific to our view -- our business that relates to the oil and gas market and that's exactly clear. I'm not as much as a student of the company as another large shareholder on this call, but do we view ourselves as the business related to that industry as being decent now or where it needs to be and growing or how would you characterize where we see our customer base and are you satisfied with where that is now and where it's going, what it's -- the potential is actually for further improvement in sales and profit?

Richard Horowitz

Yes. Tim, you had dropped out of the picture of P&F for a while, so perhaps you haven't done some of these phone calls, but the oil and gas part of our high-tech business is dramatically different than it used to be. We're nowhere near as -- we don't have -- nowhere near as much business in that area. We've changed the scope of -- the focus of our business in that, and by doing so it's become a less important factor in the business. And it's really -- we see sporadic orders and we definitely get orders but it's not that we don't get orders, but it's nowhere near as important as it once was in a different kind of a mix to our products and our customers. Joe, do you want to expand on that at all, or is that basically why is so?

Joseph Molino

Yes, just to break it down a little bit. There was a time Tim, when I'd say oil and gas might have generated 30% to 40% of the revenue for Hy-Tech sales. Now with the transformation of the company in Hy-Tech, I struggle to say that it's even 10%.

Unidentified Analyst

Okay.

Joseph Molino

Yes, at most. And for Florida, it was never a significant piece, maybe it's 5% of sales there at best. It's just not really much of a factor. Obviously, to the extent, there's robustness there, we still have those customers and they do well, but it's probably not going to move the needle as much as it might have five or six years ago.

Unidentified Analyst

Okay, fair. Probably something that only another -- large shareholder would care about them. I would imagine. I'm going to get back in queue. I don't know what the policy is, but I would hope if something else comes up you might come back to me. Thank you.

Joseph Molino

Thank you.

Operator

Thank you. [Operator Instructions] And we'll take our next question from Henry [indiscernible], Private Investor.

Unidentified Analyst

Good morning gentlemen.

Richard Horowitz

Good morning.

Unidentified Analyst

Could you tell me if there was any -- what was the provision for doubtful accounts in the current quarter compared to a year ago?

Richard Horowitz

Joe?

Joseph Molino

That is not a number we publish that I'm aware of, but we probably have it somewhere in our Q files. If you'll give us a few minutes we can probably dig that up. I mean I would say in general maybe what you're getting at is how healthy our receivables, I would say that we've seen minimal losses related to the pandemic and people not paying. I don't want to say it's zero, but it's not very material. But someone's going to dig that number for you and we can get we can compare this June to the prior June if that's a number you want to know. We'll give you June to December.

Unidentified Analyst

Any of the significant over 90-day receivables are those handled in-house, or are they out with collection agencies?

Joseph Molino

I'm sorry Rich. Go ahead.

Richard Horowitz

I was generally in -- house, but go ahead.

Joseph Molino

Yes, I can't say that we've never put them out to collections, but it's usually only something that's very minor and I did get the numbers for you. So, at December 31st, the provision was call it $267,000 and at the end of June $300,000, but mind you AR dramatically grew between those periods from 7.8% to 10.7%. So, I don't think that's an unusual. ARR is very healthy.

Unidentified Analyst

Okay. One last question relating to the compensation of the salesforce? Is it a salary a fixed amount per person or is it salary plus and earned commission?

Richard Horowitz

It depends on the job description and the company that the person is in. We couldn't -- I couldn't tell you that there's one specific thing, we have some people on salary -- full salary, we have some people on commission, and we have some people on commission and salary. So, it's a mixed bag.

Unidentified Analyst

Okay. I'm going to back out. thank you.

Richard Horowitz

Welcome.

Operator

Thank you. [Operator Instructions] It appears we have no questions at this time. My apologies. We do have a follow-up from Timothy Stabosz [ph]. One moment.

Unidentified Analyst

I'm not sure what's going on with Shapiro. I thought he had questions of his own. So, that's strange. I'll got a follow-up here. I appreciate the announcement of the dividend by the way. Thank you for it gentlemen.

I presume that that also getting back to my first original question is a statement a broader commentary on your confidence level of the business to be in a healthy enough state that we're not going to be burning through capital to pay the dividend in the next several quarters. You don't need to respond to that.

What was my follow-up on that? Well, I guess the other question would be and I'll ask this in a friendly way as possible because I know it sometimes is wrong, but the buyback and we got the dividend which is great. What -- has the Board added to change or can you comment Richard on the Board's attitude towards the buyback of the stock at $5.50 or where it is right now?

Richard Horowitz

Sure. We talk about it as I've told Andrew and anybody else asked the question. We talked about it at every Board meeting and if we have telephonic Board meetings in between the formal Board meets we talk about it then as well.

And it's all a function of what our cash commitments are what our projections are for the future, what our priorities are and we felt at this time right now we felt that we want to return to the stockholders start to try to return to the stockholders thing. So, that's why we went to dividend.

But if things improve continue to improve, we would absolutely want to buy back stock at that time, but right now, we don't have any comment about it because we really can't say it. We talked about it all the time and that's all really. Sorry about that.

Unidentified Analyst

Yes. So, You paid the dividend -- as I'm reading the press release, otherwise, we've had some demand on capital and we are actually I guess borrowing some money now. I guess it goes without saying for declaring a dividend that Joe, you're very comfortable that to grow the business or otherwise here is to fund growth or fund working capital needs that with the asset base I guess that's what you said in the press release that you sleep perfectly well at night, right?

Joseph Molino

Well, maybe I don't sleep perfectly well, but it's nothing to do with P&F. Yeah, I'm very comfortable with our financial position. Our cash flow in the quarter, my expectation, so obviously, if I was uncomfortable with the $160,000 or so I would have let the Board know, but yes to answer your question.

Richard Horowitz

Let me remind you and anybody else on this call, we called a special dividend for a reason because of the uncertainty in the world, we're going to look next quarter, our Board is going to look next quarter and we'll do that for the foreseeable future and it will depend on the company's operations and the financial condition and other relative factors. So it's a special dividend and every quarter we will analyze it that. Our hope and plan is that we will continue, but we can make that commitment at this time.

Unidentified Participant

Okay. Joe, the accounting, just briefly, is the accounting difference for a special dividend versus a regular dividend in terms of the entry or whatever?

Joseph Molino

No. Not to my knowledge, it's been a long time since the CPA exam, but I would say, no there's no difference.

Unidentified Participant

Sure, it was taken from existing capital versus retained earnings or something like that but I guess you may have negative return on...

Joseph Molino

No. There's no difference. It's just what we're -- there's no difference financially.

Unidentified Participant

Okay. And then finally -- my final question is, is there a way that you could give us again at a qualitative level, a sense of because of Boeing Air Max, what four went opportunities that could come -- I mean no one really has a way of knowing as a shareholder. And frankly giving you guys the credit you may deserve for what you have been doing or achieving here, the eight balls you've been behind. Is there a way that you could qualitatively, Joe and Richard to give us a sense of I guess not numbers, but the potential of that return or that getting back to normal? Is there some way we could get a sense?

Richard Horowitz

I think we answered that question earlier. I'm not being dismissive, but I mean, we just we don't -- nobody in the world has that answer right now. I don't think you're not getting from GM forward predictions for the future, so I can promise you we can't do it either. Nobody knows. It's a very big question mark as to where...

Unidentified Participant

Could you look into your crystal ball actually though. Just kidding. Okay. That's all for me.

Richard Horowitz

I wish I could. Okay. Thank you.

Unidentified Participant

Mr. Shapiro at text me said he's trying to get in, so I'm not sure hopefully he's gotten him, but he wasn't being acknowledged somehow even though was trying to ask so just as an FYI. Thank you very much.

Richard Horowitz

Okay. Thank you.

Joseph Molino

You're welcome.

Operator

Thank you. Next, we'll move on to Andrew Shapiro with Lawndale Capital Management.

Andrew Shapiro

Hi. Thank you for allowing me in to ask some questions here. Following up on a few things that Tim raised and just trying to get a little bit more color on some of the stuff. I just want to make sure, you guys are aware under the legislation that the President is going to sign this week. That an Excise tax is going to begin in position on buybacks, but it won't kick in until January 1st. So that might be a consideration for the Board in the event it might want to get a buyback in before then and then continue on with the dividend policy et cetera. So just an FYI.

Richard Horowitz

I promise you we will send news with you too. I promise you we understand.

Andrew Shapiro

Okay. Great. And on the last call -- you said on the last call that it was only about 60% to 70% of the customers where you were able to conduct on-site visits with current or prospective customers for both iTEC PTG as well as existing North American aerospace like Boeing and its suppliers as well as prospective overseas aerospace customers like Airbus. Did that improve in Q2 and even further here halfway through the current Q3? Are you able to get into pretty much all the customers you want to get into to start conversations?

Richard Horowitz

Yeah. I can't give you a percentage, but my general sense and my feeling is and Joe can cooperate if it's correct, we're basically having no issues any longer with getting into customers. We've been to Airbus, but of course Airbus is like moving the 10-tonne gorilla, so it's going to take -- to get there, but it's pretty much we're able to get around. Joe, is there anything else you want to add on that?

Joseph Molino

There's no. I don't anticipate whatever restrictions are in place are going to have any material effect on our ability to grow the business.

Andrew Shapiro

Okay. Because that was a big issue for PTG in particular because it's such an engineered product that you needed to get in there on site?

Joseph Molino

It absolutely was and that seems to have subsided.

Andrew Shapiro

Awesome. Okay. Where is the under-absorption of what you call other manufacturing overhead costs occurring? Is it Jiffy Air Tool and/or High-tech?

Joseph Molino

It's primarily High-tech.

Andrew Shapiro

Okay. And with the sizable gains in the OEM engineered solutions in high tech,are there any particular areas industries or products worthy of any callout or elaboration at all?

Richard Horowitz

Go ahead Joe.

Joseph Molino

I would say it's primarily heavy-duty tools and mechanisms industrial. The industrial area.

Andrew Shapiro

And any particular industry sector or anything that stands out?

Joseph Molino

We're working with a wide range of industries.

Andrew Shapiro

Okay. On the March quarter call, you thought that the opportunity for Jackson Gears and its synergies was still in transition, but there would be tangible progress in Q2 but with the bulk of the benefits kicking in for Q3. Can you provide a status update? Do you feel this progression of timing is still on schedule?

Richard Horowitz

Joe can give you more specifics again as well but I would say it's probably more third quarter and fourth quarter that we will be – where we would expect to be but Joe you can chime in.

Joseph Molino

Yes. As I was saying a little bit earlier or we were saying a little bit earlier, we really got caught up in some input squeeze for lack of a better word in Q2 material cost increases some labor issues and also it's a fairly complex supply chain for high-tech and while we do a lot we're very vertically integrated, we don't do everything and there are a number of outside processes required for us to get the tools complete and our suppliers have struggled to meet our time lines and hit our target pricing, so that definitely slowed us down.

I don't know that there was anything that could have been done about that. We are expanding our base of suppliers. In fact in some cases even considering bringing something back in-house, so to Richard's point I'd say we're probably a quarter behind where I'd like to be. We have made progress but we're probably a quarter behind, where I thought we might have been if you would asked me that question five or six months ago.

Andrew Shapiro

So – and then on Aerospace, your press release said this and I think it was probably just written before this week's news but Boeing's large 787 Dreamliner inventory has just been cleared to begin delivery this week in American Airlines took its first delivery yesterday. Production is expected to begin to ramp up in the coming months last quarters. Do you have tools that are approved and are being used in the production of 787 or the 787 subassemblies?

Richard Horowitz

Go ahead Joe.

Joseph Molino

Yes we absolutely do. It is not a major part of our sales. It is there and honestly I'm not 100% sure that full production of the 787 actually halted. I know that they weren't approved.

Richard Horowitz

They cut it down to 5. I mean it was...

Joseph Molino

Yes. I'm not even sure what full production is. Maybe it's not 50% it's probably 10% but in any event yes we sell in – we build that, we help build that aircraft with our tools but it's not a big piece of the pie. The 737 MAX that's the product. That's the one that would have a significant impact should that come back online to the way it was.

Andrew Shapiro

Right. And are you beginning to see more order activity on your 737 tools?

Richard Horowitz

A little bit but not really. I mean it's a little bit but not enough to make a difference.

Joseph Molino

Go ahead Andrew.

Andrew Shapiro

I think it probably needs the inventory all the airplanes sitting in the desert to be brought down as well as of course the Chinese to recertify.

Joseph Molino

Yes. So while we don't have a crystal ball, I would point out three things that are publicly available, that you don't need to hear from us that can help you get a sense of where that's headed. One you just alluded to was the Chinese approval. Second would be getting the inventory cleared out and the third is when they're related, going from the 30 a month they're building now to the mid-50s, which is where they were before the crashes and before the pandemic. So you guys read, what we read, when we read it, we don't have any advanced note really frankly no more advanced notice than the public does on when those things are going to happen but when you read about changes in any of those three items then you'll know as much as we do about what happens next.

Andrew Shapiro

Right. On the prior call, there was approximately $3 million or $1 a share a little less in various tax refunds coming to the company over the course of this year and next and about I think it was $1.35 million. Please correct me if I'm wrong, was a 2020 tax year refund for your NOL carryback, and around a little less than $2 million was for the employee retention credit you thought, wouldn't come in until 2023. What's the current visibility on the timing and receipt of those two cash payments?

Joseph Molino

We did receive the first refund the $1.3 million. I can't tell you exactly, what month that happened, but it was sometime since the end of Q1 and the $2,028,000 which is a refund for 2021, which was driven by the credit it's in various pieces. We received a small portion related to one jurisdiction, but the vast majority is we're still waiting for. 2023 is still our assumption.

Andrew Shapiro

Okay. And breaking that down, the amount that was already received for the 2020 while you couldn't recall what month it was, is it in Q2's numbers and balance sheet, or is it something that's...

Joseph Molino

Yes it's in Q2.

Andrew Shapiro

Okay. So that's the important part, okay. And the vast amount that remains, that you're not expecting until 2023 is approximately, how much?

Joseph Molino

Still approximately $2 million a little less. $1.9 million something.

Andrew Shapiro

Okay. We'll call it $1.9 million to be conservative. All right. Regarding potential acquisitions on the prior calls, you said you were particularly interested in opportunities that might become available to further expand the company's gear business. Can you update us on, if you are seeing opportunities to pursue that as of yet?

Joseph Molino

Richard, do you want me to answer?

Richard Horowitz

Yes, go ahead.

Joseph Molino

Yes. Opportunities abound they're everywhere, but I'll speak for the team saying, right now we're focused on integrating Jackson and this is just my opinion, until I'm comfortable that we're fully integrated I think we're going to sit on the sidelines and I don't think we're going to miss anything. Our survey of the landscape there is, there will be deals for us when we're ready. It's a target-rich environment, once we get to that point.

Andrew Shapiro

Great. Then regarding your mention on competing with newer battery-powered and cordless products. Can you provide us an update and some more color, on your development of or incorporation of others advanced technologies into your tool platforms, to compete and perhaps color on the prospective time range in, which these technologies would be integrated and part of products introduced by P&F?

Richard Horowitz

Go ahead, Joe.

Joseph Molino

I don't know that, I want to tip our hand frankly, because some of these are fairly competitive markets and I don't really know who is listening, but we continue to evolve our analysis of those things and everything is still on the table, but when we have something to announce we will. But for strategic reasons, I frankly don't want to say more than that.

Andrew Shapiro

Okay. Usually when you guys have had new products that you've introduced and all, that hasn't been made via investor press releases generally, had to dig it out and find it on the web in various corners of the web from the trade press, might you provide that to investors?

Joseph Molino

Yes. I think, should we make what I consider a significant splash in battery-operated tools, I'm pretty certain we're going to make a big deal about it, but we don't really want to say, what we're up to at the moment.

Andrew Shapiro

No, that's completely understandable. Thank you. That's all, I have for you. This quarter you answered a bunch of the rest in the call. Although, if you have the share count number, that we can't see until the 10-Q, because you don't actually put it in your press release. That would be helpful.

Joseph Molino

Yes. 3,194,699 shares.

Andrew Shapiro

699. Awesome. And if there's any consideration you might give to a little bit more time gap between your press release and the timing of the conference call that might be somewhat of an aid because it's just a very short turnaround time to doing the analysis or incorporation, especially since you don't provide the breakouts that we find in the 10-Q until afterwards because you don't do this 10-Q concurrently. I don't know if you could do the 10-Q concurrently. That would be helpful or provide a little more time between the start of the conference call and the timing of your press release but, just an investor suggestion.

Richard Horowitz

Okay. Thank you. We'll talk about that for sure.

Andrew Shapiro

All right. Thanks guys.

Richard Horowitz

Okay. Stay well.

Operator

[Operator Instructions] And it appears we have no further questions. I'd like to turn the conference back over to the company for any additional or closing remarks.

Richard Horowitz

Thank you all for your time today and we look forward to our next phone call with Q3's results in the next coming months. So stay healthy and well everybody and thank you for your time. Good day.

Operator

That will conclude today's teleconference. We do appreciate your participation. You may now disconnect.

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