Acme United Corporation
Q3 2018 Earnings Call Transcript

Published: 19 Oct 2018

[Operator:]

Good day, and welcome to the Acme United Corporation's Third Quarter 2018 Earnings Call. At this time, I would like to turn the conference over to Mr. Walter Johnsen, Chairman and Chief Executive Officer. Please go ahead.

[Walter Johnsen:]

Good morning. Welcome to the third quarter 2018 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 had net sales of $34.7 million in the third quarter of 2018, an increase of 3%. Net income declined to $800,000 compared to $1.2 million in the second quarter last year. Earnings per share was $0.23 compared to $0.32. Our sales for the quarter and for year-to-date has set new records, however, we expected to do better. Gross margins were about comparable to last year. SG&A and inventory increased in preparation for stronger growth, but actual sales were below our expectations. Severe weather conditions added to the difficulty of the quarter. We are addressing costs and inventory through a series of steps that I'll describe in a moment. Total sales in the quarter was split about evenly between first aid and cutting tools. Our first aid growth was driven by new business at industrial distributors and additional SmartCompliance accounts, but was offset by softness at our largest online account. Overall, first aid growth was 7%. Our office customers are continuing to go through transitions. As you know, Staples plans to continue to close stores, and they are acquiring office products dealers and purchasing – when attending to a purchase, ascended a large office product wholesaler. Both are good customers, and we're supporting their efforts. However, when stores closed, their inventory has shifted to other stores, and we temporarily moved sales. We have to successfully make the shift to other nearby retailers and increasingly online. NPD data shows that less customers have gained 7% in market share this year, so we were executing well in the shifting environment. We had record back-to-school sales of scissors online and had excellent sales of Clauss fishing tools and Camillus hunting knives. Sales of pencil sharpeners at a major retailer and office shears online fell during the third quarter. I want to recognize our team in North Carolina for successfully coping with Hurricane Florence in late September. We were closed for four days with no power and flooded roads. Our employees helped their neighbors and community and came back to work with a huge backlog of unshipped orders. They dug in and tackled that successfully, with perhaps only $1 million of potential sales that shifted to the fourth quarter. Also in late September, Hong Kong had a direct hit with a typhoon that landed with 175 miles per hour winds. It blew out windows in our office building, and of course, disrupted shipping. Our team in Hong Kong responded, and we met all shipments. Approximately 10% of our products are covered by the new tariffs against China. We've increased prices as appropriate, and are working with customers to implement them. Our goal for the next 18 months are to deliver 5% to 7% organic sales growth, continue to evaluate add-on acquisitions, improve our gross margins and reduce selling, general and administrative expenses as a percent of sales. We began taking steps to achieve these goals in August 2018, with the reduction of about $700,000 annually to personnel expenses. We streamed that line to our print advertising and put more focus on social media, saving $400,000. We started productivity initiatives with annual savings of about $400,000. We are looking at selling expenses and taking steps there. We were also addressing inventory. It hit a peak in June 2018 of $42.5 million and dropped to $42 million by the end of September. We're working to drive another $1 million off by year-end. The inventory will build seasonally next year, but we are focused on continuing reduction overall. Looking into the coming quarters, with many innovative products in our pipeline, which are the lifeblood of our company's sales. We have introduced a totally new line of Westcott scissors that incorporate glide technology. These scissors, which have a low friction pivot and adjustable tension, cut extremely fluidly and efficiently and enhance the field of the cutting tool. We’ve shown them to major craft and retail chains and are having success in new placement now. We announced new ceramic box openers that are geared to industrial safety as well as the consumer market and have trials ongoing with a major online retailer. Westcott has introduced new glue guns, glue sticks and cutting tools for the craft market that we’ll be selling next year at major retailers. Our first aid business has introduced the next generation safety hub ecosystem and a completely new line of modern first aid stations that can be customized with different industries. Distribution of Spill Magic cleanup absorbents have expanded to industrial wholesalers, online customers, and new end-users, and we have incorporated the product to new bodily fluid and blood-borne pathogen kits. We’ve introduced a new line of DMT diamond sharpeners that automatically adjust the sharpening angles and are expanding distribution. The Camillus hunting knives continue to set new sales records, include efficient tools that are poised for another record year. However, we will not meet our guidance for 2018. We see a solid fourth quarter and feel comfortable adding our current internal forecasts to the last nine months of sales and earnings. If this occurs, we would have net sales of $139 million, net income of $4.7 million, and earnings per share of $1.30. I will now turn the call to Paul.

[Paul Driscoll:]

Acme’s net sales for the third quarter were $34.7 million compared to $33.8 million in 2017, an increase of 3%. Sales for the nine months ended September 30, 2018, were $106 million compared to $100 million in the same period in 2017, an increase of 6%. Net sales in the U.S. segment increased 3% in the quarter and 6% for the nine months ended September 30. Growth in the quarter was impacted by a major online retailer slowing down purchases due to overstocked inventory in some of our key scissor and first aid kits. Net sales in local currency for Canada decreased 6% – or sorry, increased 6% in the quarter and 2% year-to-date. The third quarter sales increase mainly came from Camillus knives. Net sales for Europe increased 3% in local currency for the quarter and 6% for the nine months ended September 30. 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. The gross margin was 36% in both the third quarter of 2017 and – 2018 and 2017. The year-to-date gross margin was 37% compared to 37% in last year's period. SG&A expenses for the third quarter of 2018 were $11.1 million or 31.9% of sales compared with $10.3 million or 30.4% of sales for the same period of 2017. SG&A expenses for the first nine months of 2018 were $32.9 million or 31% of sales compared with $30.2 million or 30% sales in 2017. The SG&A increase for the three and nine months was due to higher outbound freight costs and sales commissions as a result of the sales growth, and the addition of sales and marketing personnel. Net income for the third quarter of 2018 was $800,000 or $0.23 per diluted share, compared to a net income of $1.2 million or 32% – $0.32 per diluted share for the same period of 2017. Net income for the first nine months ended September 30, 2018 was $4 million or $1.12 per diluted share compared to $4.7 million or $1.25 per diluted share in the comparable period last year. The company's bank debt less cash on September 30, 2018, was $46.5 million compared to $39 million on September 30, 2017. During the 12-month period, we purchased our first aid manufacturing and distribution facility in Vancouver, Washington for $4 million and paid $1.5 million in dividends. Inventory increased $4.5 million, mostly in anticipation of new business. We expect to end 2018 with approximately $38 million of net debt, and to generate approximately $3 million in free cash flow.

[Walter Johnsen:]

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

[Operator:]

[Operator Instructions] Our first question will come from Michael Kawamoto with D.A. Davidson.

[Michael Kawamoto:]

Hey Walter. I hope you’re doing well. Thanks for taking my question.

[Walter Johnsen:]

Sure.

[Michael Kawamoto:]

Appreciate the color on the tariffs. color on the tariffs. Just near term, it sounds like you’re raising prices. Longer term, would you look at shifting the sourcing, just given that these issues with China looks like they’ll be going on for a while there? What are your plans there? And then, just what are you seeing on the input cost front?

[Walter Johnsen:]

Well, first on the tariffs. Currently, as I mentioned, only 10% of our products are covered. And those items tend to be folding knives, the Westcott ruler business and some first aid components that go into our first aid kids. There is a possibility of sourcing in other places with some of those products, but we currently don’t have the quality control teams in some of these countries where we might be sourcing. So there’s really a trade-off. If the current tariff of 10% holds, I doubt there’d be much change in sourcing. If there was a 25% tariff, which is what we’re talking about at year- end, if they get implemented, on these items, that would probably drive us to put some people to be looking at quality control in some additional countries on a transient basis as we produce. But I don’t see a big impact, because such a small portion of our business is currently covered.

[Michael Kawamoto:]

Got it. And then, just on the input cost front, what are you seeing there?

[Walter Johnsen:]

On the input cost?

[Michael Kawamoto:]

Yes.

[Walter Johnsen:]

I’m sorry, I’m not following that, Michael.

[Michael Kawamoto:]

Just your input cost for your products. It seems like gross margin was a little bit lower than we were expecting.

[Walter Johnsen:]

Well, I think the gross margin had something to do with mix. We did not get as much office scissors in the third quarter as we’d planned and that was one of the driving forces for the shortfall. And they tend to have higher margins in the Kid scissors, which we had a record online quarter as we expected. So it was a little bit of a mix issue, but really it was the shortfall of the office scissors and also some first aid.

[Michael Kawamoto:]

Got it. It’s helpful. Then on the productivity initiatives and the cost savings you highlighted. Can you just talk a little bit more about what you’re doing there? And then, maybe a time line as when you think you’ll get to that $1.5 million run rate?

[Walter Johnsen:]

Well. The $700,000 in personnel costs have been implemented. And it’s typically a period where you continue to be paying salaries for some short period. So some of that will accrue in savings in the fourth quarter, but by the first quarter, that piece will be fully implemented. The print advertising that we cut, and we put more emphasis on social media is a little bit in the fourth quarter, but in the first quarter, it’s in full effect. As you can imagine, especially in print, what’s been scheduled tended to be executed, because you don’t have the flexibility to change quickly. But by the first quarter, by the beginning of the year, that piece will be fully implemented. In the productivity, that is coming in part from our warehouse in North Carolina, which reported its best performance we’ve ever had in productivity. And that’s continuing. As you know, we currently spent a lot of money and effort, and attention, and training, to get the major distribution center Rocky Mount, North Carolina up and going and the net results are coming in very strong. That’s particularly special, because with the hurricane to bear with a lot of over time on that.

[Michael Kawamoto:]

Got it. And then just a last one for me on the Westcott. It’s tougher, even with a better back-to-school, when you talk about some excess inventory on one of your online retailers. Has that situation improved at all? Or are your expectations tempered for the rest of the year, just as that get floored through?

[Walter Johnsen:]

Well, the – there are a number of things going online. First, our largest online retailer was soft with us in the third quarter. However, some of the other retailers are moving aggressively with their own online businesses. So that’s good news as it spreads our distribution. Relative to our largest online retailer, it had less sales. And as we dug into that with the office product area, it appeared that some of it was shifted off to their own private label and some of it was shifted to other retailers. So, we have some plans in place working with that customer to increase its sell-through of our – some of our office scissors, and I’m sure that’s going to be successful. But not expecting some big pickup in the office area higher than the level we’re running at right now in the fourth quarter.

[Michael Kawamoto:]

Got it. Thank you so much for your time today and good luck for the rest of the year.

[Walter Johnsen:]

Thank you.

[Operator:]

Thank you. It looks like there are no more questions at this time. [Operator Instructions]. Okay. It looks like there are no more questions at this time.

[Walter Johnsen:]

Okay. Well, if there are no further questions, this call is complete. We look forward to sharing the results of our sales efforts and cost savings program in the next call. Thank you very much for joining us. Goodbye.

[Operator:]

Thank you. Ladies and gentlemen, this concludes today’s teleconference. You may now disconnect your lines and have a great day.