Acme United Corporation
Q2 2019 Earnings Call Transcript

Published: 19 Jul 2019

[Operator:]

Good day, and welcome to the Acme United Corporation Second Quarter 2019 Earnings Conference Call.At this time, I would like to turn the conference over to Walter Johnsen. Please go ahead sir.

[Walter Johnsen:]

Good morning. Welcome to the second quarter 2019 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, including without limitation, the following

[Walter Johnsen:]

Thank you, Paul.Acme United reported net sales of $40.2 million for the second quarter of 2019, up 1% from last year. Net income for the quarter was $2.7 million, compared to $2.4 million in the second quarter last year, an increase of 10%. Earnings per share were $0.77 compared to $0.67 last year, up 15%.Our sales during the quarter benefited from strong performance of our Cuda fishing tools and first aid and safety products. Our DMT diamond sharpeners, which as I mentioned last quarter, have been gaining a strong following worldwide, had production constraints which prevented growth. Sale for the Westcott back-to-school line was softer than last year.We are very pleased with the new Westcott glide scissors for precision cutting which have been well-received by end users. While revenues in the U.S. were approximately even, sales in Europe increased 22% with growth in Westcott office products, new first aid customers, and excellent execution of our online strategies. Revenues in Canada were 10% below last year, due to a decline in the office channel.We completed an expansion of our production of DMT at the end of June. This increases our capacity, and we're beginning to fill back orders. Demand from the DMT products have been particularly strong with our industrial and hardware accounts and in Europe.In the U.S., the tariffs on sharpening tools imported from China make our U.S. production of these items much more price competitive in the large mid-range market. We look forward to additional growth at DMT, now that we have new capacity.Our productivity continues to improve at major distribution operations in Rocky Mount, North Carolina, due to new software and continued training. As you may recall, this was a major initiative we undertook in 2018. We are now handling our online and seasonal shipments much more efficiently than in prior years and we are seeing the results.During the past 12 months, we've reduced inventory by $2.9 million and net debt declined by approximately $5.3 million. Our cash flow is strong and we plan to continue to pay down debt. We also continue to evaluate acquisition opportunities. They've helped the Company more than double since 2010. And we anticipate acquisitions to continue this trajectory in the future, building value for our shareholders in the process.As we look into the next six months, we see growth in sales in first aid and safety products, DMT sharpeners and Cuda and Camillus hunting and fishing tools. We see revenues of the Westcott school and office products at levels approximately the same as in 2018.Based on what we see now, we are reiterating our guidance for 2019 of $140 million to $143 million in revenues, $5 million to $5.3 million in net income, and earnings per share of $1.41 to $1.50.I will now turn the call to Paul.

[Paul Driscoll:]

Acme's net sales for the second quarter were $40.2 million, compared to $39.8 million in 2017, an increase of 1%, or 2% in constant currency. Sales for the six months ended June 30, 2019 were $71.6 million, compared to $71.5 million in the same period in 2018.Net sales in the U.S. segment increased 1% in the quarter. Sales of first aid and safety products was strong. However, there was softness in sales of school and office products, in particular pencil sharpeners. Net sales for the first six months of 2019 in U.S. segment were constant compared to the same period in 2018.Net sales in local currency for Canada decreased 6% in the quarter and year-to-date. Net sales for Europe increased 28% in local currency for the quarter and 22% for the six months ended June 30th. The sales increase for both periods was primarily due to new customers in the office channel as well as higher sales of DMT sharpening products.Gross margin was 36.7% in the second quarter of 2019, compared to 37% in 2018. The year-to-date gross margin was 37.1%, compared to 37.6% in last year's period.SG&A expenses for the second quarter of 2019 were $11 million or 27% of sales, compared with $11.1 million or 28% of sales for the same period 2018. SG&A expenses for the first six months of 2019 were $21.3 million or 30% of sales, compared with $21.8 million or 31% of sales in 2018.Net income for the second quarter of 2019 was $2.7 million or $0.77 per diluted share, compared to net income of $2.4 million or $0.67 per diluted share for the same period of 2018, an increase of 10% in net income and 15% in earnings per share. Net income for the first six months ended June 30, 2019 was $3.5 million or $1.01 per diluted share compared to $3.2 million or $0.88 per diluted share in a comparable period last year, increases of 9% and 15%.The Company's bank debt less cash on June 30, 2019 was $41 million, compared to $46.3 million on June 30, 2018. During the 12-month period, we paid $1.5 million in dividends and $0.4 million on stock buybacks, and generated approximately $8 million in free cash flow. We expect to end 2019 with approximately $36 million of net debt and to generate between $5 million and $6 million in free cash flow.

[Walter Johnsen:]

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

[Operator:]

Thank you. [Operator Instructions] We will now take our first question from Michael Kawamoto from D.A. Davidson. Please go ahead.

[Michael Kawamoto:]

Hey, Walter. How’s it going?

[Walter Johnsen:]

Good, Michael.

[Michael Kawamoto:]

Thanks for taking my questions. First off, just on the softer Westcott sales, any idea what's driving that? Is that heightened competition or some maybe less promotional activity on your part, or any thoughts there?

[Walter Johnsen:]

Well, a part of our business in Westcott are pencil sharpeners, and they tend to be back-to-school items. It's not a huge segment for us, it's certainly not like scissors. But, they were, in particular, softer. You may remember that a number of years ago, there was an activity of adult coloring. And that really drove pencil sharpeners. And that's since gone away. So, it's at a more normal level. But unfortunately, that was the softest part of the business.

[Michael Kawamoto:]

Got it. That's helpful. And Cuda sounds like is doing really well. And I think you just got back from ICAST a couple weeks ago or last week. Can you just talk about any takeaways you had from the show?

[Walter Johnsen:]

Well, Cuda had a very, very successful ICAST show. And one of the products is a fish remover, bait remover that just caught the show by surprise and excitement. And it allows you to take menhaden and some -- about 3 to 4 inch baits, and remove them without touching them. And by doing that you're not taking the slime and the scales off the fish. And they pop right into a bucket. And so, there was a display of that down there. And it was sort of amazing. If you're a fisherman, this was very exciting. And in general, we had excellent meetings with our customers, including some that have been smaller customers, and we're interested in taking on some of these new items. So, I think, it was probably the best ICAST we've ever had.

[Michael Kawamoto:]

It's great to hear. And then, just lastly, on the working capital. Nice job on inventory reduction so far this year. How should we be thinking about that for the rest of the year? And is that driving the higher free cash flow outlook for this year compared to the previous guidance?

[Walter Johnsen:]

Well, the answer is yes. But, I'll let Paul go into details.

[Paul Driscoll:]

Yes. The change in the free cash flow projection compared to Q1 is primarily due to inventory. It’s declined at a greater level than I was expecting. But, I'm expecting that between now and the end of the year, it’s going decrease from where we are today. But, we'll still -- that's why the cash flow is projected $6 million in free cash flow.

[Operator:]

[Operator Instructions] We will now take our next question from Sam Namiri Ridgewood Investments. Please go ahead, Sam.

[Sam Namiri:]

I have questions. In terms of using or paying down debt with free cash flow, can you walk me through why you find that to be the most useful use of your free cash?

[Walter Johnsen:]

Well, Sam, we pay interest on the free cash. We've increased our dividend consistently every six quarters or so. And we're building up liquidity for our next acquisition. So, I think, it's a very smart way to be deploying it right now.

[Sam Namiri:]

Okay. But, I guess, not in terms of paying dividend versus paying down debt, but in terms of buying back stock versus paying down debt. Why is that a better use versus buying stock, more stock?

[Walter Johnsen:]

From time-to-time, we are buying more stocks and we certainly did in the first half. We are a little bit cautious, because we don't have a tremendous float of our stock. And some have said, it's probably counterproductive to the buying much more in. Although, we think it's a very good value at the levels of that. So, in the short term, we've been putting cash away.

[Sam Namiri:]

And then, you also mentioned, I can’t remember it was last call or two calls ago, about some operational efficiencies that you are hoping to, I guess, get in the business. Have you -- I guess, like how far along are you in terms of that? And I guess, how much of that showed up this quarter?

[Walter Johnsen:]

Well, we completed those operational efficiencies when we announced them. So, we may not have -- as an example, if somebody had left the Company, because we no longer needed the position, that work was done. It might have been that there was some salary that continued for several months or a quarter or so. But at this point, what we announced, we're achieving.

[Operator:]

It appears there are no further questions at this time. Mr. Johnsen, I'd like to turn the conference back to you for any additional -- someone has appeared. It appears that Michael Kawamoto from D.A. Davidson would like to ask another question. Please go ahead.

[Michael Kawamoto:]

Yes. Hey, guys. Thanks for squeezing me in again. Just curious what your thoughts are on gross margin for the rest of the year. Should it start to improve in the back half? And then, also, it seems like to get to that EPS number, SG&A growth takes up a little bit in the 3Q and 4Q. Can you just talk about what's driving that a little bit?

[Paul Driscoll:]

Well, first time the gross margin. We had some very -- very favorable improvements in our product costs relative to the currency, the Chinese currency compared to the U.S. dollar. And that was excellent. On the other side, we moved some inventory, a little bit lower margin than we normally would have. And we did that because we wanted to drive the inventory down because it was an opportunistic thing to do. We also took in the second quarter a large order in Europe from a mass merchant that was lower than our traditional margins. So, that brought it down a little bit. The fundamentals of the business are good for increasing the margin, particularly as we're getting more and more first aid sales. And in the back half, a lot of the growth will be coming from that area.

[Michael Kawamoto:]

And then, is 3Q still scheduled to be the big quarter for growth? I think you had a new customer coming on and maybe some new products as well?

[Walter Johnsen:]

Paul.

[Paul Driscoll:]

Q3 is similar growth that we talked about three months ago.

[Michael Kawamoto:]

Okay. Sounds good. Thanks, guys.

[Walter Johnsen:]

Okay. Thank you.

[Operator:]

We will now take our next question from Sam Namiri of Ridgewood Investments. Please go ahead.

[Sam Namiri:]

Hi, again. I had a question. Do you guys have a sense, or an idea of how much the tariffs are actually affecting your business?

[Walter Johnsen:]

Well, I think, we have a very good sense of that and we manage it regularly. Only a small part of our business is impacted by tariffs, at this point. And that would be in measuring, so some of the Westcott rulers were covered by the tariff. Some items that go into first aid kits were covered, some paper trimmers were covered. But the bulk of our business are not impacted at all by the tariffs. And you may be aware that we import about 60% of our products in total from China. So, when the currency weekend, we picked up better pricing on many items that aren't covered by the tariff.When we put some price increases for the items that were covered, we were generally successful in achieving those increases. And part of the reason for that is the supply base that our customers have today is very narrow. And they've done that for operational efficiencies and they've done that for their own interests. But the impact of it is there is not a lot of choice. And so, as we pushed through price increases, tended to know what the market was and we have high market shares. So, the net of it is, it's been slightly positive for us. And then over DMT, we've got a lot of new demand because the competition against imported Chinese products has been somewhat leveled in price because of a 25% increase in their cost.

[Sam Namiri:]

So, from Acme perspective, are the tariffs net positive or do you hope for a trade deal to go through?

[Walter Johnsen:]

Of course we do, of course we do. I doubt that tariff would be rolled back. But, I think, that our Chinese partners are excellent. And I think that trade deal is in everybody's interest.

[Operator:]

It appears, there are no further questions at this time. Mr. Johnsen, I'd like to turn the conference back to you for any additional or closing remarks.

[Walter Johnsen:]

If there are no further questions, then this call is complete. We look forward to giving you an update after the third quarter and providing insight into the remainder of the year. Thank you for joining us. Goodbye.

[Operator:]

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