Acme United Corporation
Q1 2020 Earnings Call Transcript

Published: 17 Apr 2020

[Operator:]

Good day and welcome to the Acme United Corporation's First Quarter 2020 Earnings Conference Call. At this time, I would like to turn the conference over to Mr. Walter Johnsen. Please go ahead sir.

[Walter Johnsen:]

Good day. Welcome to the first quarter 2020 earnings conference call for Acme United Corporation. I'm Walter C. Johnsen, Chairman and CEO. With me is Paul Driscoll, our Chief Financial Officer, who will first read a Safe Harbor statement. Paul?

[Paul Driscoll:]

Forward-looking statements in this conference call, including without limitation, statements related to the Company's plans strategies, objectives, expectations, intentions and adequacy of resources are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.Investors are cautioned that such forward-looking statements involve risks and uncertainties, such among others those utilizing and kind of results of the effects of the COVID-19 pandemic including the ongoing economic downturn and the other risks and uncertainties described in our periodic filings with the Securities and Exchange Commission and in our current earnings release.

[Walter Johnsen:]

Thank you, Paul. Acme United had a strong first quarter of 2020. Our net sales were $35.8 million compared to $31.4 million in the first quarter of 2019, an increase of 14%. Our net income was $1.27 million, an increase of 58% over the first quarter of 2019. Earnings per share increased from $0.24 to $0.36 or 50%.Sales of first aid and safety products drove the growth. The Company has gained market share with its SmartCompliance industrial first aid product line and patented SafetyHub digital replenishment system. We have new sales of some of the largest home improvement and industrial distributors in United States.Our online sales with consumer first aid kits, antiseptic wipes, medications and refills have all been at record levels. The growth in the first aid and safety area was very strong in the first two months of the quarter and then surged with what we believe with additional COVID-19 demand. Revenue of our Westcott product line in the U.S. declined compared to last year, but this is offset by growth in Camillus knives and DMT sharpening tools.Sales in Europe increased 19% due to growth in Westcott, DMT, First Aid and online business. Our revenues in Canada without the impact of First Aid Central were comparable to last year. Critical factor in achieving our strong first quarter results is that our production and distribution facilities both domestic and international have remained open during the COVID-19 pandemic.In January 2020, we acquired First Aid Central, the first aid and safety supplier in the Laval, Canada. This company expanded our ability to provide safety products, which means Health Canada regulations to our existing Canadian customer base as well as our large multinational customers. First Aid Central has a strong online presence. Together, we are leveraging both our customer bases and source and strengths.First Aid Central contributed about $1 million to our revenues in the first quarter. As we're all aware, the world is battling a global health crisis and significant economic disruptions. Our first aid and safety products are essential to meeting a small portion of a very large problem. There is extremely strong demand for masks, gloves, protective equipment, and many other items that go into our personal protection, steel cleanup, bodily fluid, blood-borne pathogen and first aid kits.We're also seeing a record demand in our fever reducing medications. In many cases, we are purchasing items on the spot market at costs well above normal, but then adjusting prices to our customers. Acme’s goal is to consistently deliver supplies to our customers at the best values we can. Our first concern has been the safety and wellbeing of all employees, if they fulfill our operational activities.In our production and warehouse sites, we are monitoring health, providing protective gear, scheduling shifts, and doing regular deep cleaning. Our sales teams and our associates in offices in the U.S., Hong Kong, Canada, and Germany are working remotely together. Acme’s five plants and warehouses in United States are running multiple shifts. Our offices in Guangzhou and Mingo, China are fully staffed, and our factories in China are generally running at 65% to 80% of capacity.Our Canadian and European offices are working remotely, but their warehouses are functioning. I'm truly proud of our teams. We're making a small but global difference. We finished 2019 with strong results, and our team again delivered in the first quarter of 2020. Demand for our first aid and safety products remains very strong. However, we believe that the global demand for Westcott cutting tools, DMT sharpening products, Cuda fishing tools, and Camillus knives will be weaker than last year.Many of these items are sold in stores that are either closed or have limited traffic. We see our online business continuing to grow, which may help to offset some of the projected leads into our sales. Overall, we believe we are in a strong position to move forward. However, due to the many COVID related uncertainties we face, we will not at this time be providing guidance for the coming quarters or year.I will now turn the call to Paul.

[Paul Driscoll:]

Acme United's net sales for the first quarter were $35.8 million compared to $31.4 million in 2019, a 14% increase. Net sales in the U.S. segment increased 11% in the quarter. The sales increase came from first aid and safety products, primarily market share gains and to a lesser extent gains from COVID-19 related surge demand.Net sales in Europe for the first quarter of 2020 increased 19% in local currency compared to the first quarter of 2019, mainly due to new customers in the office products channel increased e-commerce sales and continued growth of DMT sharpening products.Net sales in Canada excluding First Aid Central products for the first quarter of 2020 increased 1% in local currency. Sales the First Aid Central product amounted to $1 million in the first quarter. The gross margin was 37.8% in the first quarter of 2020 versus 37.6% in the first quarter of 2019.SG&A expenses for the first quarter of 2020 were $11.5 million or 32% of net sales, compared with $10.3 million or 32% of net sales for the same period of 2019. Operating profit in the first quarter of 2020 increased 31% compared to the first quarter of 2019. Interest expense declined $187,000 in the first quarter due to a lower interest rate as well as lower bank debt.Net income for the first quarter of 2020 was $1,277,000 or $0.36 per diluted share compared to net income of $807,000 or $0.24 per share for same period of 2019, a 58% increase in net income and 50% in earnings per share. The Company's bank debt less cash on March 31, 2020 was $32.9 million compared to $41.2 million on March 31, 2019.During the 12-month period, we paid $2.1 million for the First Aid Central acquisition, spent $1.8 million on dividends and stock buybacks, and generated $14 million in free cash flow. We’ve reduced inventory by $4 million during the 12-months. Our credit facility with HSBC Bank is $50 million. Availability on the line was $16.1 million at March 31, 2020. We firmly believe that the line is sufficient for the foreseeable future.Thank you, Paul. I will now open the call for questions.

[Operator:]

[Operator Instructions] We have a question from Chris Lahiji with LD Micro. Please go ahead.

[Chris Lahiji:]

Thank you, gentleman, a question on the supply side. Are there any disruptions that you guys are already kind of seeing right now? And where do you feel the most demand is going to come in the next 6 to 9 months moving forward?

[Walter Johnsen:]

Well, Chris, there's a lot of disruption on the first day of the safety side. As you can imagine, many of the items that we're selling gloves, masks, protective gear, which go in our first aid and isolation kits as well as sold individually. Well, there's a lot of competitors buying and so we’re buying on the spot market in some cases. Relative to our own stock, we’re stocked quite well and we've been very aggressive with our team on site, many sites in China. Buying, getting things on vessels and coming in and then packed out more facilities.The ability to be able to respond hands on, on site, write a check, right to our Hong -Kong office is a reasonably big advantage relative to distant purchases. And in most cases, these are suppliers that we've worked with for many years. There are disruptions relative to air freight. A great number of the air freight carriers are focused right now on delivering safety supplies to governments around the world. And so to get claims for doing air freight is very expensive right now. It's approximately three times what's normal. So, supply disruptions challenges, but I'll tell you, it's an opportunity as well, for people that can execute well.

[Chris Lahiji:]

I just have a one more question. There has been significant demand on the gun and ammo side in the last 6 to 8 weeks. Have you guys seen any type of search on the knife side on your end?

[Walter Johnsen:]

Yes, we have. The Camillus knives business both in the U.S. and in Europe has been doing well online. Many of the not every year, but in some places gun shops are closed. But online, it's kind of amazing. And what they you buy seems unusual for example, machetes. We sold an incredible number of machetes and that's a product that we sell regularly, but we didn't expect that kind of demand.

[Operator:]

And our next question comes from Richard Dearnley with Longport Partners. Please go ahead.

[Richard Dearnley:]

In the Annual Report, you’ve talked about being ready for back-to-school because of getting inventory, what's got and related, which was good planning. I guess any feel for how much extra inventory in the end of March is kind of early inventory?

[Walter Johnsen:]

Well, the number of births in the United States tends to run about 3.8 million young babies born each year, and a few years later, they're in fifth grade, sixth grade, seventh, eighth grade. And so the back-to-school, as a reasonably predictable population, and there will be a back-to-school. And our customers are lined up and are buying and taking deliveries and back-to-school products.We know that some schools have closed, most schools are closed early. We believe that most of the supplies that are in lockers are going to be removed. And there's going to be a lot of fresh demand, we think. In any case, the purchase orders that we executed against in the fall and bought inventory in early, if in our warehouse, it does shift in the April, may, June timeframe, a little bit in July.Our factories are producing some items for you business that we want at some of those largest mass merchandisers, particularly in craft area. So that inventory has a place in a home and I'm not saying it's business or warm up because of business. But again, when you remember the number of students that each year going through the grades, it hasn't changed that much.

[Richard Dearnley:]

In a bigger look at inventories, your inventories were down 4 million or so last year. Is there a more tighter inventories still to go?

[Walter Johnsen:]

Well, there is some work, but one of the things we've done over the years, and I'll tell you in the past five years. Through acquisitions, they've moved more and more of our business into manufacturing sites. The Pac-Kit first aid companies, the First Aid Only acquisition, the DMT acquisition, the Spill Magic acquisition and now First Aid Central.These are all manufacturers and the turns on manufacturing are much quicker than they are when you got a long delivery from China, time on the water, through customs, intermodal to your warehouse. And typically for us, the products that we import will return to the 2.5 times a year. With a good manufacturing site, you should be able to move that up substantially. To look at four times turns on manufacturing is not a goal unreasonable. So as we do that, what we're seeing as we're freeing up inventory and turning that to cash, and then we're also using that to pay down debt at this point.

[Richard Dearnley:]

In the current environment where, there's a liquidity squeezing and so on. It's hard to contemplate acquisitions that I would think there might be some distress appearing here and there?

[Walter Johnsen:]

Well, I hate to look at that as an opportunity because there are companies struggling and they may find that would be a good home for them. We had a call as recently as this morning for something that did not work for us, but there may be opportunities and we certainly welcome the phone calls, if we can help.

[Operator:]

And our next question from Jim Marrone with Singular Research. Please go ahead.

[Jim Marrone:]

Good afternoon. My apologies, if you've already covered it, if you have perhaps just if you could provide maybe a little bit more color. But in regards to the emphasis on PPE as of late as well as going forward. Just can you give us a sense or a little bit more commentary in regards on how that could impact your first deadline? And can you capitalize on it? And, yes, just a little bit more commentary with regards to that?

[Walter Johnsen:]

We sell a full line of first aid and safety products as you know. And typically, that's been about half of our global sales. It's higher right now in part because we won some major new business with large industrial distributors and hardware chains in the United States that came online in the first quarter and will hopefully be long term business for us. We've got a piece there that continue to grow and that's being driven in part by our SafetyHub replenishment system in part just through competitive pricing and good service, but we're winning new business.And the second thing is a portion of the first aid product line all physicians care medications which are fever reducing, we carried them for years. The blood-borne pathogen kits and the bodily fluids kits which are used to clean up various bodily fluids, that's all incorporating our Spill Magic material as the active ingredient with those kits around them. That business is not only growing, but because we're manufacturing the active ingredients, we're leveraging two plants that are making the product.And we believe that's a business that will continue to grow nicely because I think many of the changes that we're making in our behavior globally impacts isolation and proper cleanup of still open bodily fluids. With the isolation gowns, the masks and gloves, every first aid kit that we sell, has a pair of gloves in them. So, it's been a long-term product for us incorporated in the kits. When we started to get more demand for a acrylonitrile gloves in packages, we sold them when we had resources. And that business we think will be a continued good business for us going forward.In the case of masks, the N95 masks are used in our spill cleanup kits, our bodily fluids kits, or isolation kits and we also sell them individually and that's been a strong for us business. It's not been the main business and PPE is not the main business. But there's an extra piece where it's now being required by our distributors, and we're happy to supply them. The thing that we have that will stay with us is our distribution base. It is the largest industrial distributors in the world, the largest foodservice distributors, or the largest contract distributors have offices and those kinds of supplies were locked into some major distribution both in the US and in Europe and we're feeling that demand.As we're looking into the fall, what I see is a continuation perhaps with some different kits, utilizing some of the personal protection, some of the alcohol prep pads that we sell and the alcohol wipes, to clean wounds but putting them in different forms and including those and kits. And that for us is one that I see had continued growth, it probably will be a catch up in operating kinds of gowns because there's massive production going on with that right now for the hospitals. We don't really participate in that market, and I would not expect this to. But for the broad based people working in factories, working at home working in offices, we are very much in the mainstream.

[Jim Marrone:]

Excellent. Thank you for that commentary. And just as a follow-up, if you just discussed any of the other product lines. Now I know you mentioned quite a bit about the back-to-school supplies, but maybe more a little bit more specifically in terms of the sharpeners and the scissors and that type of product line?

[Walter Johnsen:]

Well, so if you took the scissor business as an example, my guess is, in the past two days almost everybody on this line has opened a FedEx package. And many people use scissors to open those and the demand for these products tend to be higher performance ones that and cut to a cardboard, don't -- non-stick is a good feature because we lead in that category in the craft area or an area where our scissors are constantly in use. And with a separation in retailers as we see, there were large mass merchants, mass merchant accounts, such as the Walmart or Target, or Costco, which offer food and they’re thriving.There are others where they don't have food where they have special niches and they tend to be closed right now. And so, you’ve got a migration going to some retailers who are thriving in a very big way. And then of course, you have a migration online. But we found on our online business, is that last year online, this is off the profits about 12 % to 13% of our revenues. It's somewhere in the first quarter is up to 18% and it continues to climb. So, more info online and we're certainly seeing that in the scissors area, we're seeing in the cutting arena in general.When we gave the cautionary statements about Westcott, our concern was that the stores are closed. The sales that we normally go there have to get diverted and some do get diverted to the driving stores and online and some probably is lost. Plus my guess is there is some lesser than, because people have less disposable income. But in general, the Westcott product line is a good product line, it’s a healthy product line, and particularly back-to-school, it's quite predictable.

[Operator:]

And our next question comes from Ralph Marash of First Manhattan Company. Please go ahead.

[Ralph Marash:]

As you increase sales of certain products and divert certain products into different distribution, certainly in terms of online or in your first aid product category, you're obviously going to have increased costs that normally don't get factored in. Can you quantify at all the relationship of increased cost to increased sale?

[Walter Johnsen:]

Well, Ralph, that's pretty granular. I'll take a crack at it for a sec. So if you sell to an office super store, the margins tend to be very compressed at a small number of products. It's very competitive business. If we sell that same product online, the margins probably are better, because there's some more costs on the backside of on shipment, we spent a lot of money improving our North Carolina major distribution center. And as you may remember over the past year and a half, it was not only capital spending, which is continuing growth capital spending with training and systems and we've gotten a lot more efficient there. And you see it frankly in the operating income.The online business also has the one piece, which means the, say an Amazon is buying it for retail and also tends to be more profitable than a sale to say an office superstore. On the other hand, if this fell into a small specialty store, you'd get a very good margin. And so you have that, then you have a mixed change. And again, that's complicated a higher margin thing like the nonstick products and the titanium coated scissors have a lot of high performance attributes, but they tend to be harder margin. And we feel a lot of that online.The good news is whether it's been an online account or it's been or existing business with other accounts or new accounts. Most are, we have a customer base where we're not getting new accounts. We just ship it more to them. And so those orders are effectively managed. If I were to point you to the gross margin in the first quarter and compare to last year is about flat. So, the net of all that it is about flat. You look at how we processed those orders, he did a better job and that's showing up in the operating income.And as we continue to work on that area, I think we can even do better. We are seeing more cost in the first aid side when we buy on the spot market. For example N95 masks, which are in the news a lot. Well, they're in our first aid kits. And so when we've been buying those, we've had to increase the price to our customers to reflect our higher costs or supplying the products to the customers and sell them a need that they really have. When we're running our factories, we not running at as efficiently as we might in normal times because we have staggered shifts, we have overtime this weekend.Most of our factories are working on Saturday, so more costs to meet demand. There's also extra wages that we're paying. There are two plants that I can think of immediately, we shut down for two full days in order to do deep cleaning because with respect to an employee had COVID virus both each of the two plants. They didn't, but you down for two days and you're continuing to pay workers. So, there's some inefficiency that's popping around both in our costs as well as how we're running the factories. But the flip side of that is, the volumes have been more than covering and in aggregate, even with that in the first quarter, we were about comparable in cost of sales in gross margin.

[Ralph Marash:]

So, what I heard was that the increase, the puts and takes in gross margins versus the increased sales, the increased revenues, the increased throughput that we saw in the first quarter are likely to carry through during the emergency period?

[Walter Johnsen:]

Well, our attorneys have been careful to tell us not to give that kind of guidance because there's a lot of uncertainty. But they said, you can certainly be factual and what is factual is, we're running overtime right now in our factories. And sales at this point are headed over this time last year in the second quarter.

[Ralph Marash:]

Okay, I mean, essentially, so I understand, I'm not really obviously trying to get you to say anything that you don't ordinarily guide to. But in the puts and takes, so there's -- on the negative side, there's increased over time, and as you said, other factory overhead that factors in. On the positive side, there is more through-put. In the case of some of first aid supplies, there's the extra cost first of all on the spot market and second of all in terms of shipping. On the negative side on the positive side is you may sell X times the number of drugs that you used to sell.

[Walter Johnsen:]

Right and we're passing through price increases when we buy on the spot market. It doesn't match exactly what we're trying to ask the best value to our customer. But on the other hand, if our cost goes up by double, which it could, then that's going be passed on.

[Ralph Marash:]

Thanks, I appreciate that. That's actually good color. And I understand that you can be as specific as maybe my question was framed but thanks.

[Walter Johnsen:]

Thanks, Ralph.

[Operator:]

And our next question comes from Stephen Percoco with Lark Research. Please go ahead.

[Stephen Percoco:]

Thank you. Walter, I know you've said both in your press release and on the call that you're not giving guidance for the full year, but you just alluded that or told us in the second quarter that so far, your sales are running ahead of last year. I wonder then, if it's possible to provide some kind of picture on what the second quarter should look like more completely?

[Walter Johnsen:]

Well, I'll take a crack at that. We can expect probably the Westcott sales to be softer because there are stores that are closed. But not soft so much that it's a terrible quarter in Westcott because you still have a very strong back-to-school and we won some of new business in the craft area with some major customers. So, I don't see that as a growth segment, but I don't see it as falling the way, way off way.On the other hand with the first aid business at the levels we're at now. So, far it's been leading the Company as it did in the first quarter, and I think that that should continue in the closing knife business and the crude efficient tools in the fishing area. A lot of those smaller stores are closed, so that's a small business so the down a little bit close nice. They've been holding their own maybe not through some nice shops partly but more food, the online sales and through some mass market retailers.So, as I look at it, if you were down a little bit in the bulk of the non first days and the first day continued as a strong level, then you're coming in with a decent quarter.

[Stephen Percoco:]

Okay, and then the other side of that, you said your costs are a little bit elevated. Are there any other factors that you can talk about there? And then also, are there any cash flow items whether it’d be working capital or whatever that might be markedly different this quarter compared with a year ago?

[Walter Johnsen:]

While the working capital, the inventory, receivables tend to go up in the second quarter of back-to-school. So, that will happen because we'll be giving terms and shipment and the second quarter tends to be the biggest quarter of the year because of back-to-school. And that trend, it's hard to call that might have. The interest rate has dropped. So, we're borrowing as Paul helped me here it is one in the quarter.

[Paul Driscoll:]

Right, so it's a bargain time is three and a quarter now. So, we're buying it to 2% interest.

[Walter Johnsen:]

Yes. And so see the year ago, I think we were borrow and Paul helped me here would you like to...

[Paul Driscoll:]

It was 200 bps higher.

[Walter Johnsen:]

Alright, so we're borrowing a 4% instead of 2%, and we’ll cut the debt by let's say, net debt $9 million.

[Paul Driscoll:]

7 million, yes.

[Walter Johnsen:]

7 million, so there is the…

[Paul Driscoll:]

On average 7 to 9.

[Walter Johnsen:]

So, you know you’re down from 4% to 2% and got 7 million less debt. So there'll be a swing -- continued swing in that. We are working to manage our inventory tighter. But on the other hand, you're writing checks to take inventory in on the spot market so they can be resold. So really probably, inventory is still the same.

[Stephen Percoco:]

And then if I can maybe push a little bit. You've got back-to-school, you said is for you guys is mostly a second quarter event. It sounds like with the retailers being closed that it's possible that some of those orders could shift into the third quarter or to the extent that your retailers have sold through inventory, maybe the ordering is not quite as strong into the third quarter. I mean, I understand, that you may not have visibility into all of it. But at the same time you're doing planning presumably. And so the issue is, if the economy starts moving back to normal over the next couple of months or so as push to end the lockdown.It seems to me like while some of your business could be impacted in the third quarter that you shouldn't have based upon what you've told us right now, that your business should not go through as much of a dip in the second and third quarters. Again, assuming that, we start to move back to normal. Your business shouldn't go through as much of a gift as maybe other manufacturers or retailers or like what experience. Is that fair? Can you provide some color on that?

[Walter Johnsen:]

Well, I think you're right, Steve. As I’ve mentioned, you've got the same number of kids going to school each year and so they need supplies, and this is really globally. So what we're doing in Canada and Europe and the U.S. or in Asia, there’s base demand. Now whether, it goes mostly in the second quarter or the third that used to be all in the second. And lately, we've been seeing more online business moving to the third quarter because parents were buying from, say, Amazon before the kids went to school. And some of them went to school in the beginning of August will be buying in July. In some areas, they went to schools in end of August beginning of September, so they’re buying at the end of August.And so, the Amazon piece probably shifts more into the third quarter. And it's been doing that as a trend. Amazon Prime, we understand has been shifted to August of this year. And so what was going on in July is now August and that still in the same quarter, but tends to be a lot of help. When we're stocking stores, and please don't think that all stores are closed. There were some stores that are closed. But if you look at the biggest retailer in the United States, they're absolutely open. And if you look at Costco, they're open and Target's open. And a lot of shoppers are going to those places, and they're going to Amazon. And so while some are closed, others are getting them share and making an impact. And of course the shipping works for these. So it's, I think overall, there'll be less demand because of disposable income. So you still have the underlying requirement for the kits.

[Operator:]

[Operator Instructions] Our next question comes from Richard Dearnley of Longport Partners. Please go ahead.

[Richard Dearnley:]

Hello again, I forgot to ask, what was the mix between first aid and sharpening and other in the quarter?

[Walter Johnsen:]

Paul, do you have those figures?

[Paul Driscoll:]

We believe that first aid was close to 55% and the remainder of the cutting was 45%, right.

[Richard Dearnley:]

And then to expand on Ralph's questions about gross margins, essentially. Taking the same kinds of work at G&A or SG&A, there's been a 200 or 300 basis point increase in the SG&A to sales over the last couple of years. Do you think that's permanent? Or can SG&A erode...

[Walter Johnsen:]

Yes, what we did exactly is, we were concerned that maybe there's going to be more bad debt. And so, we reserved for some things like that in the event that one major customer or another had more difficulty. So, we’ve increased the results there.

[Richard Dearnley:]

And I think if the customer didn't go bust but is still around.

[Walter Johnsen:]

Oh, we don't even know which one we're talking about. It just seems there's enough uncertainty, put things cautious.

[Operator:]

There are no further questions at this time.

[Walter Johnsen:]

Well, if there are no further questions, this call is complete. Our thoughts are with anyone who's ill and their families. We look forward to speaking with you again in the second -- in the third quarter. Thank you.

[Operator:]

This concludes today's call. Thank you for your participation. You may now disconnect.