Acme United Corporation
Q4 2019 Earnings Call Transcript

Published: 28 Feb 2020

[Operator:]

Good day, and welcome to the Acme United Corporation's Fourth Quarter 2019 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 morning. Welcome to the fourth quarter 2019 and year-end 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. One, the company's plans strategies objectives expectations and intentions are subject to change at any time at the discretion of the company; two, the company's plans and results of operation will be affected by the company's ability to manage its growth; and three, other risks and uncertainties indicated from time-to-time in the company's filings with the Securities and Exchange Commission.

[Walter Johnsen:]

Thank you, Paul. Acme United had an excellent year in 2019. We had our ninth record year of sales in a row reaching $142.5 million. Our net income was $5.5 million, an increase of 20%. Our earnings per share were $1.60, a 23% increase. There were many accomplishments during the year.Our First Aid Only team had a record year in sales and earnings. We successfully expanded sales of our SafetyHub replenishment system for first aid refills, which digitizes the requisition process for components that were consumed or expired and gives the consumer analytics to manage costs and optimize inventory. We gained major new distribution in the industrial, energy, food service and retail markets.Our team managing the Westcott family of cutting tools navigated a tough office market. We successfully transitioned distribution through independent dealer's mass market stores, and online retailers. We sold our proprietary glide scissors to major mass market retailer's distributors and office supply companies. The glide scissors have a very smooth swish, when they are opened and closed and an adjustable tension at the fulcrum.In the craft and mass markets, we gained distribution of our glue guns, which have proprietary non-stick nozzles and temperature-sensing features. We also placed our ceramic cutters for safely opening boxes and packages into major fulfillment sites and warehouses.The Camillus and Cuda hunting and fishing tools, Clauss industrial shears and DMT sharpeners with solid performance in 2019. We increased capacity of the DMT facility during the year and are expanding production to meet the strong demand. Our Canadian sales were slightly below last year due to weakness in the office products market. However, profitability was strong. We acquired First Aid Central in Québec in January 2020 and have a new vector of potential growth. We're excited about integrating our first aid products into the Canadian sales mix and leveraging our large customer base. The European business had record sales and earnings. We have substantial growth due to market share gains in the office channel and retail channel.Our online sales increased substantially and Amazon is now our largest customer in Europe. We reduced debt by nearly $10 million during 2020 through inventory reduction and strong earnings. At year-end, we had over $20 million of excess borrowing capacity enabling us to continue to finance growth and make accretive acquisitions without equity dilution. We made substantial progress in improving our environmental footprint. We lowered virgin plastic use through recycled material for many of our scissors and rulers.We reduced cardboard and plastic packaging by 25% in our major product ranges in school and office scissors, by introducing smaller footprint packaging. We introduced new Camillus knives and cutting tools with carefully finished bamboo a fast-growing and renewable wood. We removed the cardboard packaging on our best-selling first aid kits and replaced it with a simple hang tag. The inner boxes to hold multiple products now made a brown corrugate rather than bleached board. There is much to do, but these steps represent millions of units of scissors, shears, rulers, knives, first aid kits and inner boxes. I'm proud of our work in this area and I'm sure we will continue to make additional positive steps.At this time, we believe we are well positioned for 2020. While many companies are worried about their global supply chains, we built much of the Westcott back-to-school products during the fall of 2019 and have been in inventory. We sourced reserve stocks of first aid components in anticipation of greater growth than our internal forecasts. We expanded our production in the U.S. at DMT, Spill Magic and our first aid facilities. We've also diversified our supply base outside of China to India, Italy, Colombia and other countries.As we enter 2020, we expect to benefit from a very strong inventory position and expanded domestic capacity. Many customers have inquired about our ability to meet tight delivery schedules that some competitors may not be able to meet. We are evaluating these as new business opportunities. We intend to provide sales and earnings guidance after our first quarter 2020 earnings are released on April 17.I will now turn the call to Paul.

[Paul Driscoll:]

Acme's net sales for the fourth quarter were $33.9 million compared to $31.1 million in 2018, an increase of 9%. Sales for the year ended December 31, 2019 were $142.5 million compared to $137.3 million in 2018, an increase of 4%. Net sales in the U.S. segment increased 11% in the quarter and 4% for the year. The major contributor to the sales increase came from first aid and safety products. Net sales in local currency for Canada declined 4% in the quarter and 3% for the year, mainly due to lower sales in the office channel.Net sales for Europe decreased 7% in local currency for the quarter, due to a large promotional sale did not repeat in the fourth quarter of 2019. Sales for the year increased 14% in local currency, primarily due to new customers in the office channel as well as higher sales of DMT sharpening products. The gross margin was 36.3% in the fourth quarter of 2019 versus 36.5% in the fourth quarter of 2018 and gross margin for the year was 36.5% compared to 36.9% in 2018.SG&A expenses for the fourth quarter of 2019 were $10.9 million or 32% of sales compared with $10.3 million or 33% of sales for the same period of 2018. SG&A expenses for the year ended December 31, 2019 were $43.6 million or 31% of sales compared with $43.2 million or 32% of sales in 2018.Operating profit increased 28% in the fourth quarter of 2019 and 13% for the year. Interest expense declined $185,000 in the fourth quarter mainly due to lower bank debt as well as a lower interest rate.Net income for the fourth quarter of 2019 was $977,000 or $0.28 per diluted share compared to net income of $591,000 or $0.17 per diluted share for the same period of 2018, an increase of 65% in net income and earnings per share.Net income for the 12 months ended December 31st, 2019 was $5.6 million or $1.60 per diluted share compared to net income of $4.6 million or $1.30 per diluted share in the comparable period last year, an increase of 20% in net income and 23% in EPS.The company's bank debt less cash on December 31, 2019 was $30 million compared to $39.6 million on December 31, 2018. During the year, we spent $1.6 million in dividends and generated $13 million increase in free cash flow. We expect to generate approximately $5 million in free cash flow in 2020.

[Walter Johnsen:]

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

[Operator:]

Thank you. At this time, we'll open the floor for questions. [Operator Instructions] And our first question comes from Jim Marrone with Singular Research.

[Jim Marrone:]

Yes, good afternoon gentlemen. I guess the first question would be in regards to what everybody seems to be discussing and wondering about right now and obviously that's the impact from coronavirus. So, perhaps if you can just share some perspective in regards from both a supply perspective as well as a demand perspective in regards to all the segments that you guys carry in regards to first aid, back-to-school, and different product lines. Thank you.

[Walter Johnsen:]

Sure Jim. Those are good questions. As I alluded to in the presentation, we're sitting with a very strong inventory position. And so as we look in the back-to-school area -- most of the major -- now have inventory in place and ready to go. Similarly, in the area on first aid, we have a strong supply. The question on resupply is a very good one.And I can give you some statistics. One of our major ports is in Ningbo and the -- February 16th, there were five 20-foot equivalent containers leaving the port. Five is nothing. On February 22nd, there were 13,235 20-foot equivalent containers and that's up about -- well, that's up a lot but it's about 20% of what goes through the port. It's coming through.In the southern ports, we're writing higher numbers. The operators for the cranes for the customs inspectors are now in place. Truck drivers which were in big shortage are still short. But last week there were 7,000 in the Ningbo port and two weeks before that, it was a very small number. The number of truck drivers in total is about 30,000 for the port.So, it's not in place totally but we have flow coming in. All of our factories now with just a few minor exceptions have staffs of at least 50% being in production. We have raw materials in those facilities for our major programs for the next six months and they're being actively worked on now.Because we were looking at alternative sourcing, we are in a far different position than many of our competitors, particularly as we're looking in the first aid area where we're sourcing from places outside of the China complex and that's very powerful.Relative to demand going forward, you can imagine that every major retailer in some fashion is doing both direct import purchasing as well as using suppliers such as ourselves. Where they're doing it on direct import, chances are it's on a just-in-time basis and there are problems.For the experienced suppliers of products, some of them have taken advantage of the lull time before Chinese New Year as we did and built the inventory. Some are flat-footed. And again, these are opportunities that we're looking at as we speak.So, for us, we see this as an unfortunate opportunity to expand not only for a narrow window market which is the back-to-school where shipments have to be received by June as well as on the first aid side, where our products are in demand and we're finding very strong sales there. So, again, it's an unfortunate scenario. But I feel very confident that we're not only able to address our customers' needs, but grow our business.

[Jim Marrone:]

Thank you for your color gentlemen. Thank you.

[Walter Johnsen:]

Thank you.

[Operator:]

And we'll take our next question from Tim Call with Capital Management Corporation.

[Tim Call:]

Congratulations on a great quarter.

[Walter Johnsen:]

Thank you, Tim.

[Tim Call:]

Your hard work is paying off well. And I noticed that interest expense is down as well. Is that because of lower interest rates and you pay down debt?

[Walter Johnsen:]

Well yes. And they'll be down more substantially this year, but we paid down $10 million of debt which is at year end was $40 million in 2018 is now basically net debt of $30 million. So, that $10 million, of course, had interest and then the interest rates also dropped. So, it was a combination of something we had no control over which were the interest rates, but the bigger one was a $10 million of debt shrinking the debt by 1/4.

[Tim Call:]

That's tremendous and you're still generating a lot of excess cash. Do you plan to use that for more accretive acquisitions share buybacks or debt pay down?

[Walter Johnsen:]

Well we may find some other very interesting acquisitions this year. And if we do then we'll clearly take advantage of them or 1. In the meantime it will be used to pay down debt.

[Tim Call:]

And just as a side note, does the shortage of facemasks affect your business in any material way?

[Walter Johnsen:]

Well, I don't want to sound too bright here. But we bought a 20-foot container of masks when this first broke and shifted to all of our critical locations. So we can operate in a very effective way, not really anticipating where this would go, but we did it. And so relative to our operations in Rocky Mount, North Carolina which is critical for distribution and manufacturing of first aid and our Vancouver, Washington first aid facilities. They're fully set. Our operations here are -- and DMT and Spill Magic. So the shortage of mass for us -- we're covered to be able to offer should there be a problem in the U.S..

[Tim Call:]

Well terrific. Congratulations. Thanks for all your hard work and its great to see it all paying off.

[Walter Johnsen:]

Thank you, Tim.

[Operator:]

And we'll take our next question from Louis Moser with Mayfax Investors.

[Louis Moser:]

On the facemask conversation, do you have enough suppliers that will enable you to increase your distribution if it gets out of control sort of in the United States?

[Walter Johnsen:]

Louis, that's a very good question. We're not a primary supplier of facemasks to our customers. The facemasks that we bought were for our internal use and that was a lot of them. Now we do use some facemasks in our first aid kits and we have an adequate supply for those. But we are not selling them in the open market.

[Louis Moser:]

Right. Okay. Is there any thought in terms of increasing your dividend?

[Walter Johnsen:]

Yes. Historically, we've increased it every six or seven quarters and the intention has been always to have the earnings growing stronger than the dividend. And at this point, we now have the current dividend level for four quarters. So if we were to keep that pattern then in the next couple of quarters, it would increase.

[Louis Moser:]

Good. Is there any possibility of getting additional coverage for the company? I mean your growth is excellent compared to the price of your stock. And I was wondering, I think you have one or two analysts that cover you even though you have low cap. Is it possible to -- or are you interested in additional exposure on Wall Street?

[Walter Johnsen:]

Well of course, we're interested in doing that. We run into a problem that we generate fair amount of cash and we've been able to self-finance our growth from $30 million to our current run rate of close to $150 million without any outside equity. And that's totally unattractive to investment bankers. We also have generated the bulk of our acquisitions through internal development and again there's not been -- we haven't been generating fees for bankers. So research doesn't pay. And it's unfortunate, but we're not an attractive candidate for research for the simple reason that we're not spending the fees on the banking. And I think that's pretty common among many companies. However we are attending investor conferences and have an active schedule of that plan for 2020 and we had one in 2019 as well.

[Louis Moser:]

Next question I have is, is it possible to -- I saw your earnings come out about 9

[Walter Johnsen:]

I'll research that. I've never had the question before and it's a good question. So Louis, we'll -- if that's something that's appropriate we will.

[Louis Moser:]

Yes because I watch the Dow Jones News. And I see many, many repeat reports even though, it's already announced prior -- earlier in the day. So you might want to look into that. It will help you out I think in terms of the price of stock.

[Walter Johnsen:]

Thank you for the suggestion.

[Louis Moser:]

Thanks very much. Good work.

[Operator:]

[Operator Instructions] Our next question comes from Richard Dearnley with Longport Partners.

[Richard Dearnley:]

Could you talk about the -- you mentioned the office channel distribution change to independents. What -- could you elaborate on what happened there?

[Walter Johnsen:]

Well what we're addressing is the office superstores and that's office depot and say, at their retail level they had pretty weak shopping. They have been buying independent dealers. And business-to-business sales that we have both through the deals that they purchase as well as the independent office dealers in general is a very good business, it's a very consistent business. And independent dealers do a great service to the larger office and industrial customer base.So as we've worked our sales organization, so it's really simple. You sell your products where people buy. And if the ones that are moving our products and the retailer for the office superstores are not doing well then you go to different places. Similarly with the online business, which is now -- one of the customers is our number two largest. And they're growing very quickly both in the U.S., Europe and Canada.

[Richard Dearnley:]

So, it really wasn't a change. It's just part of the evolution that's been happening?

[Walter Johnsen:]

Well, it's a change in that we're focusing our sales organization to call more carefully on the independent dealers and making sure that they're properly serviced. We have a very strong installed base there and we have for years. It's been one of the core strengths of the company. But they're gaining share and they're independent businessmen.

[Richard Dearnley:]

Right, I see. And if the office super chain stores are using more private label, where do the dealers come in there?

[Walter Johnsen:]

Well, dealers tend to like the branded product.

[Richard Dearnley:]

Right. Okay. And now your -- and your inventory was down $2 million. And yet you're saying you have sort of pre-inventoried for back-to-school. That's quite impressive.

[Walter Johnsen:]

Yes, it is. And it's been -- not only did we reduce the inventory last year, but we narrowed the product ranges. We narrowed some of the items that sold at high margins, but not often and cleaned those out, moved the money into faster-moving inventory. And then we placed -- remember the currency has -- the Chinese currency has weakened over the past year. And so we placed orders at very favorable pricing in the fall and brought it in at very good exchange rates.

[Richard Dearnley:]

Is -- so the -- it would seem like you've restructured the inventory management and supply chain to be able to work at lower inventories versus say, two years ago or in that kind of time frame.

[Walter Johnsen:]

It's a different inventory. As I said, we were able to pre-buy major high-moving things in advance that we haven't been able to do before. So we've put more emphasis on that and narrowed the number of items and then watch them out of inventory. And by doing that, we've got a deeper inventory than we had say a year ago of those selling items. And that really wasn't a system change. That was really just work.

[Richard Dearnley:]

Okay. Good. Thank you.

[Walter Johnsen:]

Thank you.

[Operator:]

And we'll take our next question from Louis Moser with Mayfax Investors.

[Louis Moser:]

Yeah. I had mentioned before the conversation about the facemask. And I was wondering if you have suppliers, and I understand your response prior in that you incorporate them into your kits and so forth. But couldn't there -- if you have access to supplies that have those wouldn't that be an opportunity to increase your business speculating on the fact that this virus might get really out of control and probably some money in it?

[Walter Johnsen:]

Well Louis, I share your sympathy. One of my very -- one of my friends imports a huge number of those masks to the American hospital market, and its production is being diverted to China. So for us to be able to reasonably believe we have access to the masks, I don't. I also think there's a potentially very large shortage in the U.S. of a number of items like that.

[Louis Moser:]

Right. All right. So that context is not valid any more at the moment. That's too bad. Okay. Well, it's not really the question anyway. Thank you.

[Walter Johnsen:]

Thank you.

[Operator:]

[Operator Instructions] At this time, I'm showing no further questions in the queue.

[Walter Johnsen:]

Well, if there are no further questions then this call is complete. We look forward to giving you another update after we complete the first quarter and at our annual meeting. Thank you, and goodbye.

[Operator:]

Ladies and gentlemen, this concludes today's call. Thank you for your participation and you may now disconnect your phone lines.