Good day and welcome to the P&F Industries Incorporated Q2 2019 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Richard Goodman, P&F's General Counsel. Please go ahead sir.

Thank you, operator. Good morning and welcome to P&F Industries Second quarter 2019 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 including but not limited to exposure to 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 disruptions, customer concentration, adverse changes in currency exchange rates, impairment of long-lived assets and goodwill, unforeseen inventory adjustments or changes in purchasing patterns, market acceptance of products, competition, price reductions, interest rates, litigation and insurance, retention of key personnel, acquisition of businesses, regulatory environment, and threat of terrorism, and related political instability and economic uncertainty and information technology system failures and attacks, and those 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 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 turn the call over to Richard Horowitz. Good morning Richard.

Good morning Rich. Thank you so much 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 our second quarter 2019 results and how this data compares to the same period last year. However, I direct you to our press release earlier today for more complete information. This morning's release presented P&F's balance sheet, statement of income, per share data along with most of management's discussion and analysis. I wish to re-emphasize that the purpose of today's call is intended to solely discuss and review the company's results for the three month period ended June 30, 2019. As such, I must insist that you please confine your questions to the topic at hand. After my report, I will then ask Joe Molino to briefly review key cash flow information and provide an update on any key events affecting the company, after which we will move to the Q&A session. I thought the most significant event occurring during the second quarter of 2019 was the sale of the Jupiter Florida property the home of Florida Pneumatic for $9.2 million. The building was listed on our balance sheet for $932,000. As a result of this transaction, the company recognized a pre-tax gain of approximately $7.8 million. Further after tax, fees and expenses, we received approximately $8.7 million from much we paid all bank debt, which at that time was $7.8 million in total. Simultaneous with the sale Florida Pneumatic entered into a five year lease with the buyer for approximately 58% of the space of the building. With respect to operations during the quarter, the company's second quarter 2019 consolidated revenue was $14,798,000 compared to $16,188,000 in the second period of 2018. As discussed in the company's press release published earlier today, a significant cause of the decline was a reduction in retail revenue, which was due to the Home Depot being in an overstock position at Florida Pneumatic tools. Additionally, we counted a significant decline in our aerospace revenue. These declines are partially offset by an increase in revenue in Hy-Tech specifically in our OEM sales. The company's second quarter 2019 gross margin was 37.2% compared to 36.3% for the same period the prior year. On a year-over-year basis Florida Pneumatic's gross margin increased 2.4 percentage points. This net increase was due primarily to a change in marketing strategy for our AIRCAT brand, partially offset by lower gross margin on sales to the Home Depot, which was due primarily to the previously agreed upon 2% price reduction after our line review in late 2018, and to a lesser degree product mix. Gross Margin at Hy-Tech were negatively affected this quarter by a slight uptick in his computation of obsolete and slow moving inventory as well as product mix Our selling, general and administrative expenses for the three month periods ended June 30, 2019 and 2018 with $5,453,000 and $5,355,000 respectively. Lastly, the company's interest expense during the second quarter of 2019 was $68,000 compared to $55,000 incurred during the same period a year ago. This increase was primarily due to increased revolver borrowings. Taking all the above into consider, for the three months period ended June 30, 2019, we are reporting a pre-tax income of $7,804,000 compared to 433,000 for the same period in 2019. On an after tax basis, we are reporting net income of $5,688,000 compared to 305,000 in the second quarter of last year. For the three months periods ended June 30, 2019 and 2018, we're reporting basic earnings per share of $1.74 and $0.08 respectively. Diluted earnings per share for the same periods are $1.71 and $0.08 respectively. Common shares outstanding as of August 5 were 3,143,810 shares. Again as a reminder, I refer you to this morning's press release for additional information. At this time Joe Molino will discuss our cash flows. Joe?

Thank you, Richard. Capital expenditures during the six months period ended June 30, 2019 were $920,000 compared to $1,224,000 during the second quarter of 2018. Significant non-cash items affecting the six months period ended June 30 cash flows were depreciation and amortization of $774,000, amortization of other intangible assets of $344,000, amortization of consideration payable to a customer amounted $35,000, stock based compensation of $62,000 and deferred income taxes at $364,000. Additionally, significant components that impacted cash used in operating activities during the six months period ended June 30, 2019 were increase in inventories of $1,255,000, an increase of $214,000 in prepaid and other current assets, a decrease of $1,040,000 in accrued compensation and benefits. Accounts Payable accrued liabilities and aggregate increased $1,824,000 With that, I'd like to turn the call back over to Richard. Richard?

Thank you, Joe. In closing, I would like to acknowledge all of our employees and dedicated management for their continued outstanding efforts in this increasingly challenging environment. That's the end of our report today. A And now we'll be happy to answer any questions anybody might have. Operator?

Thank you. At this time, we will open the floor for questions. [Operator Instructions] And we have our first question from Andrew Shapiro with Lawndale Capital Management.

Hi, I have several questions. I'll ask a few and then get back in the queue. To start off with as you mentioned, the biggest news was the sale of Jupiter for the huge gain and almost 9 million in proceeds and debt pay down. And it resulted in a commensurate jump in your net book value to $15 a share and net tangible book value to almost 11.25 a share. Where does the board and management lean to now with respect to future capital allocation? Is the view to focus more towards making new acquisitions to permanently lower and keep the company's average debt levels down from where they've been, which wasn't too high in the first place? Or to continue returning or even more aggressively returning capital to shareholders with a bump in dividend rate and/or pricing of stock buybacks?

We have a board meeting next month Andrew, but I would say that our attitude has been and continues to be to grow the business. And so we are actively pursuing that as a first line of defense. If at some point we find that we're not successful with doing that, then we may consider other avenues perhaps of dividend increase or whatever. But as of now, that's not the purview. I think the purview is and the board sentiment is to continue to try to grow the business.

Okay. And the company announced in the press release that you did buy back shares here in the month of July, starting the third quarter, but that purchase into the middle of July finished out the current authorized buyback, I guess, why not have created or addressed the reauthorization of that in advance of the completion of the program, rather than it sounds like – I don't know if you really have to wait till you have like an in person board meeting. When would be the timing for which you guys would – the board would meet and reauthorize and start on a new – a fresh buyback program?

We discussed it at our prior board meeting after the annual meeting, recognizing that we were going to be finishing the 100,000 shares, prior to our next board meeting in the collective wisdom was to wait until our next meeting, but just as a frame of reference so you understand and I'm sure you do. We have in the last two years purchased over almost 700,000 shares of stock 20% –

I know, it's phenomenal and it's fitting very accretive to all of us and frankly, as long as the stock is cheap especially after the sale of this facility taking – cleaning up the balance sheet so completely and putting the book value per share of this company at 15 bucks a share and net tangible book value to 11.25. I mean, right now the stock is below net-net working capital there are – there really aren't many – if any investments out there for the company to make that would be cheaper than our own stock, which is why it's surprising that the collective wisdom would be to allow a period of time to go by because you can't buy that many shares on a daily basis as it is to allow any period of time to go by without picking off 300, 400 shares a day as you've been doing.

Right, well, as I said, we spent quite a bit of time talking about it at our last board meeting. And there are other factors that go into our all of our thinking. And the board is and the board has been considering and will consider to repurchase additional sales at our next meeting. But there are many factors that go into this decision; including open induces to the cash and the restrictions. Other terms of our loan and other terms of our loan facility, just to mention, you think like that. And we would like – obviously, we would like to buy stock, but in a vacuum, we would say, of course, yes. But we need to delicately balance all those things and see what we come out, including our bank, so at the after next board meeting if there's something to announce, we will announce that. And I understand it, back we were just saying and I don't say we disagree, but recognizing that there are other factors.

Sure, I would assume the bank could be fairly malleable since you basically paid them off, but you do have a working capital line and revolver that you tend to need to use. So I just I guess the sooner you reestablish it, I think the better even if it was a Telephonic just because I feel that your buyback activities again, albeit it's only 400 shares to 1000 shares a day unless there's some big blocks like Fidelity and Mr. Stabosz in the past et cetera, when there's a block exemption. I do think that even though small amounts of shares just the company being there and in the market adds to the company's liquidity far more than any concerns about acquiring and retiring shares reducing liquidity. I think anyone who wants to buy shares in the company, when the stock is – when our valuation is so cheap looks to how the company chooses to allocate capital and it gives a buyer – a new investor comfort to know that the company is buying shares of the stock when cheap regardless, so just – and I know that some are listening on the call and I appreciate the opportunity, okay.

Yeah, we don't disagree and we'll just keep you informed even everybody else.

Continuing on this the capital allocation, a question or two I have and then I'll back out. On previous calls, you said you were still very actively looking at tool businesses, aerospace, automotive, industrial. Can you update us on the status and the focus of your acquisition process, if there's any particular sub sectors that you are seeing or if there's some valuation opportunities or valuation excesses that could give us a little bit of insight as to where your focus is on that acquisition path?

Yeah, well, I can tell you that everything as you just sited are the areas that we look into, but we also look into areas that – or products that go into our tools and perhaps that may be part of it as well. So there were a host of areas and we've spent an enormous amount of time looking at companies and going down the road the companies, et cetera, et cetera. And when the time comes, if there's something to talk about, obviously, we'll talk about it and we'll announce it. But I know you know like I know that we can't say anything – if there was anything to report we couldn't say anything, even if it was until as a formal agreement and a formal announcement. But that's the scalable we're looking at tools and ancillary products that go around the tools or into the tools. That's our – we broaden it in that way in that regard.

Okay, I have other questions. I have other questions. I'll back out into the queue but please come back to me.

No need to go because there's nobody else in the queue.

Okay. Alright, so then let's, let's go to this the second elephant in the room which is getting a handle on the aerospace and then maybe some Home Depot questions here. But on the aerospace side we saw the company saw some weakness in aerospace in Q1 last quarter from what you referred to was a commercial program customer, which today's press release inferred that that commercial program customer was not Boeing, and that it was somewhere and somewhere else. Has that program or tool set order level, the one that caused the headwinds in Q1, has that program or toolset, level returned this quarter or it's still absent?

I'm not sure what we said that gave you or other readers that impression, but that certainly was not what we're trying to do. The greatest part of the issue is Boeing. The biggest –

It was last quarter as well. Sorry, Richard, I didn't mean to interrupt, but last quarter was Boeing as well.

Yes, it was.

Let me retrace the steps. There's a major program that began in the first quarter of 2018, spilled over into the second quarter 2018, a major JET Program that was put in place. They ordered a ton of tools to kick it off. They told us that was going to repeat maybe not exactly at the same level but that was what we were told. The continuation of the – they're still building those jets but they did not, did not reorder all those tools they told us they were going to reorder. So on a comparative basis that affected Q1 and to a lesser extent Q2 and on top of that, as you know and all the press Q2 began all the craziness with the 737 MAX, that's the double whammy, so to speak. So hopefully that clears your doubt.

Yeah, okay. Yeah, it does because I think we had asked about it and we got the impression from Q&A last quarter and then even in go back to look at your words here just gave the impression that last quarter wasn't related to Boeing and that this quarter was, but now we understand it's certainly – there's a double whammy with Boeing this quarter. So now, when we talk about the current quarter and the aerospace weakness is due to the curtailed Boeing production, obviously the 737 MAX program, the backlog building up. You refer to an expectation of this week purchasing by them to continue through the third quarter and just trying to clarify to understand how these tools are acquired, inventoried, so to speak by the customer, they use them and some breaks, some get lost whatever, and then there's replacement going on. Can you clarify if these tools are – or you're referring to tools that are specific to the 737 MAX program or just Boeing's utilization of tools in general that in their own working capital conservation approaches, they're just – they're reducing their need for new and replacement tools to bring their inventory levels down as a cash or working capital management activity.

Okay, the tools themselves are not unique to Boeing, their general installation tools and tools that – drills and such, so they're used for constructing the fuselage and the final assembly on the Jets. We don't exactly know how they go about – what algorithm they use for buying tools. We do know that when they start up a line or they change the number of the speed at which they send jets off the line, we usually get a surge. And then the opposite happens. If they go from 52 planes a month to 42 planes a month, then they stop ordering tools for some period of time. And there's a little bit of a hole in the order rate. So I don't know if that answers your question.

Yeah, it does. It's the idea that the tools are general utilization. And so once they bring their tools level down in their working capital, if you want to call that or their PP, once they bring that level down to a particular level that matches whatever their adjusted production rate is, then presumably replacement tool purchasing would renew again with you. And of course, if and when the production line started the Holman go from 42 to 56, et cetera then you'd have a surge. And so there would be, presumably if the backlog doesn't go away, they're going to eventually – you're going to eventually make the sales that you would have made.

Yes, I'll make one other layer of complexity. Different parts of the jet are made in different places and then ultimately assembled in upstate or in Washington State. So there are other decisions made in other parts of the country separate and apart from the decisions made up in Renton where final assembly is. And there's significant other parts of the chat that are built elsewhere and those decisions on orders are separate. So you could be up orders, in one place down orders in another where they could all go in the same direction at the same time. So it's a fairly complex thing to predict.

It does have a domino effect, Andrew, because it's not just Boeing, but it's, as Joe mentioned, other companies that we sell that sell to Boeing for certain parts of their production.

Sure. It's just like an auto parts I mean, there's only so many airframe manufacturers here in the United States. So yeah, it's a whole industry.

Yeah. And our in our estimate about the third quarter, we don't have a crystal ball like nobody – and like, and nobody else does either. We're just giving you what our best guess is, but that could be – it could be short. It could be long. It could be before that.

Yeah. But yeah, but I what I was trying to clarify and you did clarify. What I was trying to clarify if your best guess was focused on the 737 MAX, which I feel is a more of a shot in the dark for you guys because that's really highly dependent on the FAA, or if it is your guests at again, their broader inventory or tools, inventory management for all of the different airframes that go off of their line. So there's other need for your tools, that's what I wanted to get at and that your tools were general in use rather than specific to the 737 MAX because God forbid – well, I don't want to say, God forbid, but if it's not a safe place it's on a plane, but if that program was cancelled and you had tools specific to the program that would be obviously much more debilitating than just Boeing being back on their heels for X amount of period of time. And then your tools start selling again. So that's what I wanted to get. So thank you. Lastly, on this particular issue, then I'll back out. Is that – you've discussed a couple of large aerospace customers, not Boeing, that you were working on some of the R&D in connection with those – with potential accounts in other countries and whether that was to utilize and get designed in tools and products from the Pneumatic's product line that you are acquired hit out of Pennsylvania or alternative or additional customers for Jiffy. The main airframe manufacturer that would benefit from 737 MAX issues is Airbus. Have you made headway with them as well as other airframe manufacturers yet with your tools? And I do realize that this is a several quarters, maybe more than a year type of process, but we ask about it only every three months and so want to get your insight?

We have made since the last call significant progress in moving some projects along with some very, very large international jet manufacturers. And that's all I can say. We're happy with how it's going. We're optimistic that it will result in business. But as you said, it's going to take a few more quarters. And when there's something to report, we will that we can report progress. And where we feel – I feel confident that we're eventually going to get to a point where we'll have meaningful orders, but we're just not. We're not there yet. And we can't say much more than that.

Great, thank you for that clarification. I'll back out. I do have more questions.

[Operator Instructions] And we have a follow up from Andrew Shapiro with Lawndale Capital Management.

Okay. On the last couple of calls you spoke of concrete initiatives beginning to marry up Florida Pneumatic, Jiffy, Hy-Tech resources to I guess, go – I don't know if it's Florida Pneumatic more as Jiffy and Hy-Tech to – and particularly AIRCAT for distribution opportunities and tool sales in the Europe with a new hire that's now been on the ground for a while. Are these efforts running into headwinds with the slowing European economy there or since this is brand new territory for P&F its products and brands, you have market share and growth is still on the horizon, even in a slowing European economy?

Our changed initiatives started at the beginning of the year. So we're like eight months into it. And I would say it's more the latter than the former. And that we're starting from such a low base that we're having good success so far, not dramatic, meaningful in the overall scheme of P&F, but building blocks and we're getting some very nice orders and very good recognition and we're turning over a lot of stones. Joe, do you want to add to that?

Yeah, and I would just add that we've had a number of issues to work through and we've never really had a major push on to the continent. So there are some intellectual property issues we had to get into and research and make sure we were square on that. And like Richard said, we are starting from nothing and it is just one person. And it's a pretty big continent. So we're happy with progress, but if we had five or 10 people there, obviously we'd be going a lot faster, but we want to make sure there's something to this we think there is and we're pretty happy with the penetration we've made. But again, we're dealing with large companies for the most part and very entrenched competitors as well. But having said that, we're pretty confident we're going to – it's going to make some headway here. But it's there's not much more to report other than progress.

Okay. In what ways do you have visibility of Home Depot sell through and stocking? We discussed this quite a bit on the last call and it seems like this quarter might have been a continuation or is it a different type of lack of visibility that occurred with the Home Depot and the stocking of the new products? Has visibility improved at all since last quarter's surprise or it's still the same? And then I have a follow up.

Visibility is very, very hard for us to get. They don't really share that information with us for the most part. We do get some things from time to time. But I think that the second quarter was – Joe can confirm it than I would. I think the second quarter was an improvement over the first quarter since we kind of had a void there for weeks with no waters at the beginning of the year. So it's been of a more steady pace, but still not as robust as we were hoping it would be. Joe, do you want to add to that?

The only thing I'll add is we do know that we were told that they were still cleaning out a little bit of some older inventory. I don't exactly know how much that affected the sales of the new product, but they did admit to us that there is some of the old stuff that's still moving out and to wherever that was – to wherever those tools are, would obviously have some impact on us. But we don't – to answer your question a little earlier about stocking levels we don't have any idea about stocking levels. We do have some idea about what's selling at the store. We don't know how many units were at the store, we don't know how many units were at the distribution centers so it's on – we can't gauge when they might need to order because it's their level one thing, we just don't know when they are, they only tell us when they need product. But we didn't believe we're at fairly steady pace now on a weekly basis of what we expect from them order wise.

Okay. Now as of the end of March, on the May call, you said that the response from Home Depot – that you do had sales, I guess, figures or some visibility at the store level and obviously you don't know from their distribution centers and wherever, yeah, that but you at least had some insight as to how the new product was selling. And you said that that the consumers seem to accept the newly refreshed product line and that sales might have actually increased 10% of their bouts is what you had thought, but that do you have a better sense at the store level in the coming months? Has the increase and the sales throughput of the new product lines at the stores continued at that pace has it scaled back? How is the new product line performed? And do you have a feel of how it fares against other Home Depot labels that they were to offer.

Well, you're saying there was 10% growth. I don't remember that. But we obviously can check.

Well, there's speculation about how sales of the new product line might have been up as much as that, in that overall. It's just that you guys are seeing are getting very favorable reports of sell through at the store level, but again, not allowing you the visibility on the whole stocking issue.

We do know they're happy with the new tools. They liked them better than what they replaced. It did appear for a period that they were outselling the tools from the same period in the prior year. At this point, as I said, we kind of know what the run rate is overall, I couldn't tell you on a skew-by-skew basis, but we do know that they have a – I think it's a half a dozen tools of another line in there. It's a different price point. But that has had some impact on our business that didn't exist before.

And then was expected too.

Yeah. No, we knew that going in that when we replaced. We swapped out the tools that they were going to bring in a different price point for a very small suite of them. It's hard to say exactly what the impact of that is, but we're going head-to-head with something else, a non-Husky brand. We think we're doing pretty well. But at this point, things are fairly steady. And some tools are a little bit better than the prior ones. Some are about the same, but we're – they're happy with how things are going. And things seem to have stabilized since the Q1 issue and the inventory management issue.

Okay. And then Hy-Tech with such sizable gains in OEM engineered solutions. Are there any particular areas, industries, products, worthy of any call out and collaboration?

No, not really. Not really as well, the same stuff and but they're doing very, very nicely.

Yes, yes. And you recently announced a new line of ATP Magnum Force Industrial Air Impact tools. Can you give a little more information on what is new about these tools? And the potential markets and size for them or is this just – it was a small industry trade promotional piece?

Now, I think it was a little more than that. I mean, we put a lot of R&D into upgrading the tools for really the 21st century and I don't know the exact date, but the tools we were selling, that tech was decades old. So in the interim, not that our competitors had gotten that far ahead of us, but we needed to create some features to replicate what was out there, things having to do with how much torque in the reverse position, how much torque in general per weight, just the ergonomics all those things needed to be upgraded. And based on the feedback we got during the design phase from some of our customers that we involved in the process, they think we did really well and we're very happy with the results so far. So we feel we've got a tool that looks and feels and performs as better if not better than anybody else's out there, whether it's IRs or CPs. And so it was a little more than just a marketing piece. It's a real attempt to solidify our share in the channel and remind you there, that's a bit of a pole channel, people just tend to order what they need. It's a little less susceptible to slick marketing programs, having said that, if we've got a tool that's better than other people's, we'd like to think that it'll get ordered more. So we're just getting started with that we'll probably have more to report. But again, our engineering efforts are really focused in other areas where there's a lot of opportunity for growth. The impact line was nice to improve it, and we're happy to get a little bit more share. That market is saturated, and a long- term growth varies and isn't as much of an opportunity as the OEMs engineered solutions business.

Right, are the margins on the new product equal or better?

Yes.

Okay, so it helps enhance your margins, even if you – and are you seeing any sales increase as a result of the introduction of the new line or is it just maintenance of share?

It's way too early. I don't think they've even been on the shelf in the distribution channels for 30 days.

Okay, well, we'll ask you in another three months then. On a previous call, we discussed how the first round of tariff motivated price increases were put in place and the next round of tariffs occurred was also absorbed within the suppliers and customers. While these price increases have been absorbed, have the products themselves experienced any slowdown in unit sales as a result of all this?

No, not to our knowledge.

Okay. And then do you have any increased concerns given the recent developments regarding tariffs from the latest round of tweets?

We would be foolish if we didn't, but nothing is affecting us thus far.

Yeah. And just to be clear that the latest tweet with the other 300 million in goods had no effect on us those were not our products.

New products, it's new products. They've already hit us square on the head.

So when they widen to the 300 million that is – those things are consumer stuff outside of your realm?

That's correct.

Okay, good. Can you update us on Universal's local currency, actual performance during the quarter in the year? I don't know the currency has had an impact in your reported numbers.

I mean, I can't give you specific numbers, but I can tell you that we've restructured the management there in the last few months and we're actually pretty happy the results have actually improved on a local currency basis. Obviously, the pound, dollar rate is not working in our favor, but locally there we're pretty happy with the results with respect to our expectations for the year so far.

Okay, now, your press release made no mention of any current shares outstanding number or even the one used I think for the EPS calculations, so all we have is your like April proxy to go off of. Can you provide us with the more current outstanding share or fully diluted share count?

That's what I said in my report 3,145,000 believe. Let me just double check my thing.

And that was as of what date?

August 5, that was as of August 5, 3,145,000.

I might have dialed in – I probably dialed in late on that. So, thank you on that. I don't have any further questions. I don't know if anyone else is in the queue. I hope so, but not done.

Okay, thank you. Thank you for your interest and your support as always Andrew.

Thanks.

[Operator Instructions]

Okay. Thank you, operator and thank you everybody for your time today in the call and we look forward to speaking to you with our Q3 later in the year in November. Have a good day. Thank you everybody.

Thank you, ladies and gentlemen. That concludes today's teleconference. You may now disconnect.