Acme United Corporation
Q4 2020 Earnings Call Transcript

Published: 3 Mar 2021

[Operator:]

Good day and welcome to the Acme United Corporation's Fourth Quarter 2020 Earnings Conference Call. At this time, I'd like to hand the conference over to Walter Johnsen. Please go ahead.

[Walter Johnsen:]

Good morning. Welcome to the fourth quarter and year end 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 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.

[Walter Johnsen:]

Thank you, Paul. Acme United had a record fourth quarter and year in 2020. Our net sales in the fourth quarter were $40.9 million, an increase of 21% over 2019. Our net income for the fourth quarter was $2 million, an increase of 109%. We had similar strong performance for the entire year. Net sales for 2020 were $164 million, an increase a 15% over last year, and net income increased 47%. Our earnings per share for 2020 were $2.31 compared to $1.60 last year, an increase of 44%. We have been investing in our e-commerce teams and platforms for many years and by 2019, online sales represented 16% of revenues. We've also been actively building our mass market presence with retailers such as Walmart, Home Depot and Costco. And we have made acquisitions of Pac-Kit, First Aid Only, DMT. Spill Magic, First Aid Central and Med-Nap, all US and Canadian-based manufacturers. When the COVID-19 epidemic occurred, we were positioned to quickly shift our sales focus to e-commerce and mass market retailers that we believed would be heavily shopped. We use our sourcing team in Asia to procure large quantities of masks, full of nitrile, gloves, and disposable personal protection gowns to be used in our first aid kits bodily fluid kits and personal protection kits. We built large quantities of Westcott craft scissors, and tools, and those hunting knives and crude efficient tools, not knowing whether the supply chains would operate smoothly or what demand would be. We kept our entire team focused on growing our new business, selling our products and responding to market shifts. As you may recall, we increased our inventory by approximately $10 million starting in July. This proved to be a good move, as it helped us respond to supply chain disruptions and customer demand well in excess of forecasts. The results of these actions are apparent. We had outstanding performance in every one of our subsidiaries and business units during 2020. Behind the scenes, of course, we were trying the best we could to operate remotely with operations in Europe, Canada, the US, China and Hong Kong. Our supply chains were damaged with COVID creating shortages of workers at the factories, barriers to movement of goods to the ports, port congestion, container shortages and shipping delays in the US. We closed our warehouses in US factories for deep cleaning multiple times. At overtime, hazard and weekend pay and incurred many other inefficiencies related to the pandemic.

[Paul Driscoll:]

[Walter Johnsen:]

Thank you, Paul. I will now open the call to questions.

[Operator:]

Absolutely. And it does look like we've had a question come on the line from Tim Call with Capital Management Corporation. Please go ahead.

[Tim Call:]

Congratulations with another strong quarter and a strong year. All that hard work -

[Walter Johnsen:]

Thank you very much, Tim. Yeah, thank you.

[Tim Call:]

You have this industrial cutting tool business and scissor business and industries were closed and schools were closed and offices were closed and keep picking up new distribution and winning new accounts. When America reopens, are you going to be able to supply enough cutting tool inventory to your standard distribution? Because it looks -

[Walter Johnsen:]

Tim, that's a very good question. And it's hard to forecast demand. But we have a good quantity of inventory in the US right now, specifically focused for when things reopened. And we are seeing strength with some of the office superstores and the distributors as we speak. And of course, that's in addition to the mass market, which has been strong. So, I would anticipate that we will have a strong demand as people go back into the office, we'll see but we feel we are prepared.

[Tim Call:]

As sales rebound there and we have ongoing growth in healthcare. Do you think as Acme grows, because of economies of scale, margins might expand over time?

[Walter Johnsen:]

Well, I don't think it will come from growth, margins have been impacted, because we've been very inefficient with our production either COVID and the cost of shipping and extra handling, and it's an extra people and social distancing and working weekends, all these things are going into unplanned closures. That's all showing up in our cost of sales. And despite that, during the gross margins for the year got comparable with last year. When these strings are removed, it's possible that we'd see some improvement in margins based on no longer having these kinds of costs.

[Tim Call:]

Well, congratulations again on such a strong year and all your hard work and as mentioned, that's all great news.

[Walter Johnsen:]

Well. Tim, thank you for your support.

[Operator:]

We'll take our next question from Peter Mork with Mork Capital Management. Please go ahead.

[Peter Mork:]

Hey, Walter. Yeah, just first off, obviously, great year, what I mean - great job navigating a really difficult year and just outstanding results. You know, just kind of a quick follow-up on the inventory. And you know, you talked about in your comments, it's, you know, this past July, it's about, you know, $10 million above where it would normally be, you know, as we look at the year-end number of $50 million, is that, you know, still reflective of the buildup that you preemptively did, you know anticipating some of these supply chain disruptions or is this a new level just with the sales and acquisitions, you know, how should we think about that? Is there some working capital that can be freed up there?

[Walter Johnsen:]

I believe there is, in our internal models, we're assuming that the inventory holds and hopefully we grow. But as we speak, if it was a static inventory, I mean static sales, it certainly works off some of that inventory. There was a question earlier from Tim Call about people returning back to work, and will that stimulate demand? We think it will. And we think we're prepared to supply into that growth. If we wind up growing at the pace that I hope we do, then, we'll have less inventory reduction and more that will be into working capital, but if it was just static in revenues, would clearly be driving down the bulk of that $10 million.

[Peter Mork:]

All right, sounds good. And then yeah just kind of like higher level question on the - you also mentioned the capacity expansion, both to the Med-Nap and then the DMT. How in terms of the DMT where are you at just in terms of being supplied constraint there and you know, any additional color you could give on that product, it would be appreciated.

[Walter Johnsen:]

Yeah, so what's the DMC product line? We have been capacity constrained for the past couple of years and every time we seem to get more capacity, we sell it, which is a terrific thing. Which is a terrific so the time margin. And is getting better and better utilization in the plant. So we went through another expansion starting around September of last year of 2020. And that is mostly installed now. And we're seeing benefits from increased production, we're going to be doing some the layouts of the facility, so that we'd like to be able to increase capacity by about 50%. But what we're finding is, our customers want more and more. And it's a good problem. In the case of Med-Nap, it's a little bit different. Because there's a lot of potential volume that we could generate through Acme's sales efforts, so Acme is a customer and a reasonably important customer to Med-Nap. But we can be a far bigger customer by opening up our industrial distribution, our distributions into retail and into the mass market and into Amazon. And there, we've added three machines that, in time, generate about $2 million or more in revenues each. So they'll be coming on stream between now and of August. And I really don't know what we're going to do after that we'll probably be evaluating the sales levels or possibly investing again at year end, we continue to grow.

[Peter Mork:]

That's great. Well, congrats again on a great year and of selecting 2021.

[Walter Johnsen:]

Thank you so much, Peter.

[Operator:]

And it would appear at this time there are no further questions on the phone lines.

[Walter Johnsen:]

While with no further questions, this call is complete. I would like to thank you for joining us and we look forward to sharing our first quarter results in April. Good bye.

[Operator:]

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