Richard Goodman - General Counsel Richard Horowitz - Chairman, President & CEO Joseph Molino - COO & CFO

Andrew Shapiro - Lawndale Capital Management

Good day, everyone. And welcome to the P&F Industries Q2 2017 Earnings Call. Today's conference is being recorded. Now for opening remarks, I'll turn the conference over to Mr. Richard Goodman. Please go ahead, sir.

Thank you, operator. Good morning and welcome to P&F Industries' second quarter 2017 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 would 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, including but not limited to, exposure of fluctuations in energy prices; debt and debt service requirements; borrowing and compliance with covenants under our credit facility; disruption in the global capital and credit markets; the strength of the retail economy in the United States and abroad; supply chain patterns; market acceptance of products, competition; price reductions; interest rates; litigation and insurance; retention of key personnel; acquisition of businesses; regulatory environment; threat of terrorism and related political instability and economic uncertainty; and information technology systems failures and attacks. And as other risks and uncertainties described in the reports and statements filed by the Company with the Securities and Exchange Commission, including among others, as described in our most recent annual report on Form 10-K, our quarterly reports on Form 10-Q and our other filings. These risks 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. 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. With that, I would now like to now turn the call over to Richard Horowitz. Good morning, Richard.

Good morning Rich and good morning everybody. Thank you all for joining us this morning on our call. I will begin today's call with a brief summary of the company's results from continuing operations for three and six months period ended June 30, 2017 and how this data compares to the same period last year. However, I direct you to our two releases earlier today with information. These releases this morning presented P&F's balance sheet, statement of operations, per share data along with most of our management discussion and analysis as well as our intention to begin a stock buyback program and our latest quarterly dividend continuing. I also wish to remind you that the purpose of this call this morning is to discuss some of the company's results for three and six-month periods ended June 30 2017 only. In order to avoid unproductive distractions from the focus of this call, we must assess that you combine your question. Thank you for your cooperation. I will then ask Joe Molina to briefly review key information and provide an update on key effect events affecting the company after which we will move to our usual Q&A session. The company's consolidated revenue for the three and six month period ended June 30, 2017 was $15,359,000 and $28,575,000 respectfully. Compared to $15,637,000 and $30,136,000 for the same period in 2016. Second quarter 2017 revenue was $12,132,000 million compared to $12,738,000 during the second quarter of 2016. Decline in retail and automotive revenues partially offset by the additional revenues in Jiffy. As I'm sure you know by now in April, we completed the transaction, this transaction which we acquired the Jiffy air tool business and located in Carson, City, Nevada. Jiffy is a leader in the manufacture and sale of air tools sold to the aerospace sector. Florida Pneumatic revenue for the six months period ended June 30, 2017 was $22,641,000 compared to $23,568,000 for the same 6-month period last year. The primary cause for this decline was a significant reduction the Sears business which was our conscious decision partially offset by the Jiffy revenue. Lastly, during the second quarter we encountered a slowdown in orders from a larger automotive company who we believe is customary currently attempting adjust its inventory levels. However, to keep this low on perspective, I want to mention that AIRCAT's recent month revenue -- 12 month revenues gives me reflect an increase of 21% compared to our first 12 months since acquisition. Hy-Tech's revenue for the three months ended June 30, 2017 was $3,227,000 compared to $2,899,000 during the same period a year ago. I am pleased to report our ongoing efforts to locate and develop new niche markets is gaining momentum accounting for approximately 10% of the current quarter's ATP revenue. For the six months ended June 30, 2017 Hy-Tech's revenue was $5,934,000 compared to $6,568,000 last year. Again it should be noted that while slower than last year, this year's revenue is providing a higher gross margin. Also, I am pleased to report that we are again receiving orders from a major customer that place little to no orders during the previous 9-month period. Lastly, as of yesterday Hy-Tech has open orders relating to its new marketing initiatives of approximately $712,000 and Hy-Tech's total open orders have increased more than 65% over the open order level at June 2016. The company's consolidated gross margins are three and six month period ended June 30, 2017 were 35.3% and 36.4% respectively compared to 33.9% or 34.9% for the same periods in 2016. Key factors contributing to the improved quarter-over-quarter gross margin or greater -- absorption in Hy-Tech better product mix in Hy-Tech second quarter 2017 sales compared to that in 2016 and lastly in the second quarter of 2016 we adjusted the fair value of a portion of Hy-Tech's inventory which should not reoccur this year. Changes in Florida Pneumatics gross margin change was due mostly to product mix. Our selling and general administrative expenses for three and six month periods ended June 30, 2017 were $5,366,000 and $10,413,000 respectively compared to $5,154,000 and $10,173,000 for the same three and six months period last year. Significant items of note include $450,000 of SG&A expenses incurred by Jiffy during the quarter other components that change in our SG&A this quarter compared to the same period last year include -- as non-operational one-time Jiffy expenses such as an increase of $172,000 professional fees and other related expenses incurred as a result of the acquisition of Jiffy. $33,000 or lower compensation for us. A reduction in variable expenses of $208,000 lower corporate related expenses of $40,000 and a decrease in amortization and depreciation of $69,000. The six months change was due to similar line item changes and the inclusion of the $450,000 SG&A incurred to Jiffy. Our interest expense given the second quarter of 2017 and 2016 was $64,000 and $36,000 respectively. This increase was driven by the acquisition of Jiffy in April of this past year, which was funded through borrowing from our revolving. When comparing the six month periods ended June 30, 2017 and 2016, our total interest expense declined to $74,000 from $138,000 in 2016 which included $108,000 of amortization and transition growth. Taking all the above data into consideration, for the second quarter of 2017 we reported pre-tax income of $16,000 from continuing operations compared to a pretax loss with continuing operations of $8,178,000 for the same period a year ago. The loss recorded in the second quarter of last year was primarily due to impairment charges recorded against Hy-Tech's tangible assets. For the six month period ended June 30, 2017, we are reporting a loss before taxes from continuing operations of $68,000 compared to a loss before taxes from continuing operations of $8,69,000 last year. On an after tax basis for the three and six month periods ended June 30, 2017 we are reporting net income from continuing operations of $16,000 and net loss of $44,000 compared to net losses of $5,370,000 and $5,304,000 for the same period in 2016. Lastly, in May of 2017 we paid a $0.05 per common share of quarterly dividend and yesterday, our board of directors among other things approved a $0.05 per common share dividend which will be paid on August 21 -- to shareholders of record at the close of business on August 21. Stock buyback plan discussion will certainly come up in conversation during the Q&A. At this time Joe Molino will discuss our cash flows. Joe?

Thank you, Richard. Capital expenditures during the first six months of 2017 were $358,000 compared to $756,000 during the same period in 2016. Significant non-cash items affecting our cash flows during the first six months of 2017 or depreciation and amortization of $650,000 amortization of other intangible assets of $439,000 amortization of debt issue cost of $25,000 and restricted stock-based compensation of $22,000. Additionally, there was a non-cash credit attributable to deferred income taxes of $24,000. Other significant components which impacted cash provided by operating activities of continuing operations during the first six months of $568,000 those were driven by increases of $1,059,000 in accounts receivable. Decreases of $1,399,000 in inventory and $231,000 in prepaid expenses in other current asset. There were also decreases of $1,056,000 in total accounts payable and accrued expenses. With that I'd like to turn the call back over to Richard. Richard?

Thank you, Joe. In closing, I would like to just thank all of our employees and management for continuing to do such an outstanding job as all of us continue to believe in our company, products, and our customers. That's the end of our update for today and now we'll be happy to answer any questions anybody may have. Operator?

And we'll take our first question from Andrew Shapiro with Lawndale Capital Management.

Hi, sorry was a mute. First off, thank you very much for considering our thoughts before and adopting and putting in place some kind of buyback plan. So, I actually have no questions on that at this time. But regarding Jiffy, after owning Jiffy for a few months now what type of consolidation or cost synergies and revenue expansion synergies do you now expect to see from the acquisition?

On the con side, initially business as usual producing product out in Carson City. In the longer run, I think after we get some comfort level with the customer base we will consider potentially sourcing some components that were perhaps made by outside firms having them made at Hy-Tech. We have not gotten too far down that road yet, we're really kind of focused on the sales and marketing integration and addressing customer demands at the moment. On the sales side, we have begun to integrate the sales force which now reports to Florida directly and in addition to that we have shifted some resources of Florida Pneumatic to handling Jiffy product. So that integration is primarily complete, but the Florida guys are still getting up to speed on the full Jiffy product line and by the same token the legacy Jiffy salespeople are also getting familiar with some of the new products that will be coming online with the Jiffy brand from some of the Florida Pneumatic sources.

Having gone out to Carson City and visited the operations and all thank you for that. It seems like that there is some revenue expansion opportunities are you already seeing doors opened either for the legacy -- for Florida products side and similarly with the Jiffy customers?

Yes, we've had some preliminary conversations with customers regarding our thoughts regarding additions to the line and those have been favorably received So those are in process take a little while and do some of the engineering because some of them had to be redesigned. We are attempting where we can to integrate the muffling technology in some of these tools and that is in process and we're excited about that. That is absolutely going to happen and will be in the product line. So yes, we've created some opportunities and we've got more boots on the ground now. So, whatever the sales force was with just Jiffy alone we've now thrown some Florida Pneumatic bills, resources, additives well and we have deeper penetration into the country than Jiffy has ever had. So, I expect that that would pay some dividends. It's only been three or four months. So little early but clearly customers are being called on more frequently, newer customers are being called on they hadn't been called on before so we're pretty excited about those opportunities.

And are there any more actions you feel the company needs to take to expand the aerospace business or is this sufficient and by growing the current business?

Well, I think actions would be additional products that are in the design stage and I think we just need to get a better understanding of that market as you know we only Florida Pneumatic had a couple of SKU's that were being sold in aerospace. So, while we had an understanding of the market, it was somewhat limited and that we were really going after the high-volume parts and certainly did not have access to nearly the number of customers and distributors in the aerospace business that Jiffy. So, we're learning a little bit from talking to the customers out there but it's going to go at it, we're going to go out of a lot of ways. Geography, domestically and internationally and lots of new products that are in creation and in design and development. So, I don't know what else there is to focus on and we were certainly not working at another aerospace acquisition or anything like that at the moment, but if one comes along we'd be happy to take a look at it.

That's what I was thinking whether you felt there was a need for another aerospace acquisition to this?

I mean I wouldn't call it, I'm sorry to interrupt. I wouldn't call it a need, but I think now that we are in the market we are maybe more open to that than we might have been before and perhaps there could be a niche aerospace business out there that if didn't known Jiffy might have been too small to talk about. But now that we've got that platform, just taking on a product line might make a lot more sense now than it might have without the Jiffy brand in presence. So certainly, that's a greater opportunity than it would have been without the acquisition.

And I will add just one quick thing that Jiffy is out of the gate very very well whatever that means.

That was very impressive operation. -- on that as can you update us some status and focus of your acquisition process is it on hold for a quarter or two in terms of we're absorbing and ramping back Hy-Tech and we're focusing on Jiffy et cetera or are there - it is active of an effort as it was before you acquired Jiffy and are you seeing particular areas that are desirable from a synergy standpoint now?

It's still a very focused effort on our part and then Jiffy has some relation into Florida Pneumatic is already four months old. But they are fully looking and searching for two opportunities, either niche products or niche companies or other source as they are all related in our tool business and continues from the forefront of all of our minds at all times.

I would say, given the fact that Jiffy while it was a nice size wasn't so large that it precludes us financially from continuing the look and two it's not a full-blown integration of operation. So, it's a lot less of a project so to speak than if we had to close down a plant and do all that. So, I grew with Richard, we're still out there and continue to look and talk to people and no. we have not slowed down.

Okay. Last question before I back out. You called out a bunch of additional SG&A related to the Jiffy acquisition. So am I correct to consider those costs to be non-recurring and that SG&A ought to be meaningfully lower in the current quarter?

Well, with respect to just the operational expenses themselves which was something like $450,000 everything else we talked about was one-time and would not repeat in Q3.

Right, I guess I should have clarified it, meaningfully lower sequentially; of course it will be higher than last year.

Okay, I'll back out I do have other questions on Hy-Tech.

There is nobody else in the queue Andrew, so you can continue.

All right, I'll give you an opportunity to interrupt me again after my Hy-Tech questions. Your development efforts to open up new industries, industrial maintenance, food production transportation markets and channels for Hy-Tech have reached the level that you're now calling it out and releasing, that's great. Are there many customers or a few distributors through which these new products are currently being sold?

They're very customer specific and highly engineered solutions, so it's not really something that goes through distribution. So what we're really doing is calling on the end users; now in some cases there may be of distributor that got us in there but we're really dealing directly with the customer, trying to solve a very specific problems with a very specific solution that's surrounding our expertise in pneumatic and hydraulics and gearing. And not to say that we couldn't drive some more generic or distribution capable revenue out of some of these things but it's really very customer specific product.

Is it customer specific in all of those kind of market areas; industrial maintenance, food production and transportation or it's right now and only a few of those markets?

I'm not quite sure I'm understanding your question Andrew. Can you maybe…

Well, it sounds like it's a few customers and you're doing high engineering -- call it high mix work, and you had described over the last few quarters that you were doing development efforts in multiple industry markets; industrial maintenance, food production and transportation were the three that got called out. Is the success that you had right now; for example, solely in transportation or solely in food production or is it across the board?

No, it's in all three of those. I wouldn't have called those out if we weren't already successful in initial forays into those markets and the goal would be there are other customers with similar profiles; now that we're in there, we can move on to without having to really completely reinvent the wheel now that we kind of have at least one solution for one account. So no, it's all three and others to come.

Okay. And like Jiffy was in aerospace, are there are small fragmented competitors in these niches that might prove good acquisitions for Hy-Tech or are the competitors -- the big players who would one day view P&F as that niche acquisition to acquire?

Well, I don't know about the second part of your statement but we see -- what we're seeing are a fair number of smaller competitors and I'm not even sure I would call them competitors, they are business, parts of businesses that are somewhat related to what we do but or maybe something we could do with don't do at any major way. So we're looking for folks that have something that's unique and preferably patentable and -- but they might not even be a whole company or if they are a company they're small. So there is a lot of those out there, or not a lot but enough to have conversations with. And I wouldn't even necessarily call them direct competitors; so those are the sorts of things we're looking for Hy-Tech because it's a little more of -- it's a little different situation [indiscernible]; we're really looking to build things and take advantage of our internal capabilities and adding them to what might be an incomplete business or a smaller, not fully developed business.

Okay. And Richard called out in the script you had, I think over 700,000 of open orders and I think you said in the new industry markets, am I correct that it wasn't just total Hy-Tech open orders, it was…

No, that's just new business, just new based on this new initiative this is what I called our engineering solutions program. There is a more fit, the guys have a better name for that but I just can't think of the name, it's not at the top of my head.

So now on the last call you said that back in April you backed to overtime for pretty much the entire group of operators in Hy-Tech which was a very good sign, that supported the improved operating results reported today; so it sounds like the rate of orders has continued. If this is the open orders, are you in a multiple shift or overtime situation in Hy-Tech still?

Yes and we see that continuing, for the first time in a while we're out there looking for operators and other administrative people to help in some of these new areas. So yes, we expect this to continue.

And this was all prior to your oil and gas side of the business fully recovering to past levels, is that correct?

Yes, I mean -- as we've said in previous calls we're not waiting around for that to return, if it returns, that's great we'll sell the products that are sitting on the shelves or make them if we need to. But yes, this is really unrelated to that.

And we have not really seen a resurgence in that area because there is slight uplift of -- it's not really…

Well, rig count has grown a bit, it's not that good old levels but it is off its trough. And eventually, you -- presumably the tools that they used will need replacing, yes?

Well again, the rig count as I think we mentioned kind of drilling, upon intended to drilling down a little bit of that, a little bit further, it's really the offshore rig count that drives more of our business and there was a lot of idle equipment there. And those rig numbers to my knowledge have not moved as much as the land rigs have moved.

It's more of a shale; it's certainly shale in tight oil.

Yes, and that's less -- that's not really our market.

On Florida, is there anyone in the queue or I would move to the Florida question.

Operator, if you could let us know if there is someone in the queue, we can't seem to see it right now.

There is no one in the queue at this time. [Operator Instructions].

Thank you. Regarding the AIRCAT, on the last call you spoke to a suite of tools targeted towards bodywork and they had just launched, so you didn't really have much feedback on them yet but thought you would in the next couple of quarters. Can you give us an update on that progress and what the feedbacks been?

Couple of comments, relatively slow start out of the gate there and I remind you that that market is maybe a third; I think I'm right on that, third or fourth of the size of the repair work -- the maintenance work, excuse me. So it would be left noticeable anyway but we're still optimistic about that in the longer run and hopefully can report some more meaningful results in the next couple of quarters.

Okay. AIRCAT distributor who reduced its purchases to pay back its inventory -- I heard that was down for the June quarter. Has it begun this quarter returning to historic order rates yet or it's not yet?

Frankly, I haven't seen anything yet.

No, we do not see it and do not expect to see it for at least fourth quarter -- so some time in the fourth quarter.

What causes a distributor like that to get that far over inventory for a basically a two quarter hiatus?

It's not abnormal, it's -- we really see it with our many customers.

Yes, we saw with that March…

We see with retail customers, we see with many people.

We saw with that large industrial customer for Hy-Tech last year, they over estimate and get out in front of themselves; and then turned it all back when we used to see it every couple years.

Well, I certainly understand the fluctuations but the fluctuations could be six months or longer in terms of over ordering rates?

That one customer we have, that goes for nine months, and they just started again.

You know, it's made a bit of a mess with the trend -- the trend line is still up there but unfortunately it was so dramatically up in this large distributor; frankly, our largest distributor last year and then they shut -- they turned off to spike it, so it makes it look as if there is a downdraft in AIRCAT but really if you were to look at the longer term trend it's more of a steady growth. Unfortunately, it was good too -- last year it was overgrew so to speak and now they've had to retrench, but we still feel the long-term trend is up.

Okay. Can you discuss the decline in universal tool division in the U.K. and what you would attribute that to? Is it currency, is it product line?

It's almost exclusively a currency issue.

Okay.

I think I believe in pounds we're ahead -- in fact, I know we're ahead of last year's sales level in pounds.

Okay. So on a common constant currency or a local currency you're growing it. Do you treat any of the additional Europe even AIRCAT sales to be -- is it all considered part of the universal tool division in your reporting here?

I'm sorry.

When you sell into Central Europe or if you were selling AIRCAT into Europe, that's not -- that's all still considered universal tool division when you're reporting that to us, right?

Yes.

You were said to be developing AIRCAT and other tools and distribution opportunities for Europe and thought that Q2 would be the earliest for which it might start to become meaningful. Can you give us an update on those efforts and timing when the inroads might prove to be your call and outcome? Are you [indiscernible] still or you're still trying to get into them?

No, we are in there. We have a very tiny tale hold [ph] in Austria and Germany with a distributor This is a bit of a greenfield effort; while they have some experience in the area, they have not traditionally sold pneumatic tools in the automotive sector. So it's a slow start but they have started, I'm hopeful we'll have something meaningful to sell but it's slow going but at least we're off to a beginning, we have a distributor.

Okay. On the Sears wind down, your release said you expected to zero dollars Sears inventory September 30, you hope for zero dollars receivable at December 31. Having told Sears you're not renewing, have you seen them bring in another supplier yet?

Well, we don't know this for sure but we believe they're working with the factories that we worked with over there, and they've simply just transitioned to that direct relationship although I can't say for certain if that's the case. We think that's what's happened.

The molds and the tools and all that stuff, are they owned by Sears, those factories are you guys?

I believe they're owned by the factories.

Okay, all right. And are you still manufacturing or importing product for them? And up to what date would that activity continue to and then you're working down inventory only?

Our agreement ends on September 30 I believe. And at that time we will not be -- we will only be shipping the balance of the excess inventory that they have committed to take from us.

Maybe Andrew you were asking a different question. Were you asking about whether we're continuing to source?

Yes. Are you still…

That has been terminated. We are now working down inventory.

Okay, that's how you're doing. Great, all right. On the last call you said that your Sears exposure was in the seven figures with contracts scheduled to run out in September; what's that exposure down to now at June 30?

That's close to the same. So it's a little bit but not significant.

Because it's still kind of business as usual, we've got a whole quarter to go here. And we would run typically, it's not unusual for us to have at least a quarter's worth of inventory; so you wouldn't really see much at June 30.

Gentlemen, we do have another question in the queue.

Okay.

I can back out then. It's all right, I'll come back.

We'll take Hendry Dubrau [ph], a private investor.

Thank you, good morning to all. You mentioned that you had some executive recruitment expenses for Hy-Tech; could you choose briefly mention what type of changes were necessary at Hy-Tech?

Replaced the President of the Company at the beginning of the year.

The President of the Company?

Yes.

Just one person?

Yes.

It was one position, Okay. Thank you.

Yes, one position.

Okay. What is the Jiffy backlog at the end of June and compared to year before?

It's a seven-figure number, I couldn't tell you if that's off of my head what it is, but it is -- we don't really -- we don't just keep in mind that we didn't own the company a year ago so I can't really speak to their numbers. I can speak to the fact that the backlog has grown since we've owned them a fair amount. And it's a seven figure number.

Okay. And you mentioned that there were professional fees related to the Jiffy acquisition, besides legal and accounting anything else makeup that number?

Some bank fees, some -- I guess accounting would be our outside accounting as well, several accounting fees and then fees related to valuation work which would be also in the professional area.

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

We'll go back to Andrew Shapiro.

So back and forth to Pneumatic, what's your current experience in visibility with respect to Home Depot and Home Depot, Canada?

Our experience is pretty much business as usual, it's been fairly flat this year; maybe up a little bit if you exclude, we had a roll out last year that was fairly substantial for both Home Depot, Canada and possibly one or two other products. So I think of sales out the door in our product area slightly up but for the year I think flat or maybe even a little down on the revenue side but business as usual.

Okay. Now having been here a long time investor here and seeing somewhat Home Depot before than they left on their back but throughout Sears; these two big retailers often run big promotions and also I'm assuming I recall, it's sometimes for the holiday season; we're here in August, would the visibility and the plans for new product introduction or promotion for the holiday season already be known by August or when does that seasonally kick-in and…

We know the promotion is generally by the beginning of the year, each year.

And just to answer your question about seasonality; Sears was a much more seasonal customer than Home Depot. And obviously, as we're winding that down there is a seasonality there, were not involved in the year end stock fills. Home Depots approach is a little different, they tend to order more steadily throughout the year and take the holiday units that are their regular inventory, they just stock enough if that ends up not being really an issue. So as far as Home Depot is concerned, it's pretty much the same revenue almost every month.

And then it would be less fluctuation on P&F margins than as well, correct?

That is correct. Yes, that's right.

We have the nice promotion at the Sears and the revenues jumped but the margins compressed, the gross margins I should say.

Okay. Frankly, that's all I've really got this quarter. Thank you.

Thank you. Operator, any other questions?

[Operator Instructions] And no other questions at this time.

Okay, thank you. Thank you everybody for your time today and we look forward to speaking to you in a few months again in our third quarter. Have a good holiday everybody. Thank you.

Ladies and gentlemen, thank you for your participation. This does conclude today's conference. You may now disconnect.