Acme United Corporation
Q1 2017 Earnings Call Transcript

Published: 20 Apr 2017

[Operator:]

Good day and welcome to the Acme United Corporation's First Quarter 2017 Earnings Call. As a reminder today's conference is being recorded. At this time, I would like to turn the conference over to Chairman and Chief Executive Officer, Mr. Walter Johnsen. Please go ahead sir.

[Walter Johnsen:]

Good morning. Welcome to the first quarter 2017 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 a solid first quarter of 2017. Our net sales increased 10% over last year and net income increased 17%. Earnings per share were $0.18 compared to $0.16 in the first quarter last year, an increase of 13%. During the quarter, we began shipping a very innovative line of Westcott glue guns and glue sticks to retailers in the U.S. These products have non-stick internal parts, insensitive tips that glow when they are hot and patent trending designs. We believe this product line has the potential to impact sales significantly later in the year as additional retailers begin to carry these items. We increased distribution including Cuda fishing tools and rolled out our new freshwater fishing items. The Camillus knives business gained market share in the hunting as well as camping departments of major retailers. We discontinued the licensed Scotts and Miracle Growth garden tools and did not repeat a promotion at a large retailer during this quarter. However, we will be replacing these items with new products under our Clauss brand in the future. The first stage in safety business has a strong growth due to market share gains with our smart compliance kits and robust sales of First aid refills to online customers. We installed our resale app at a chain of 40 franchised restaurants and are beginning to do the same with other customers. The app aggregates use of First aid components at the site of an injury and provides for automatic replenishment. The European team performed well with 38% growth due to new office customers and success filling our Camillus, Cuda and DMT product lines. Our Canadian business was even with last year. During the quarter, we purchased Spill Magic for $7.2 million. This company provides Spill cleanup materials and supplies for many major mass market retailers and it’s product compliment our First aid and safety efforts. The Company had revenues of $6.3 million in 2016 with EBITDA of $1.4 million. We are excited about integrating the Spill Magic family and to our broad distribution of industrial; safety and office wholesalers and we are expanding sales of Spill clean-up kits and blood borne pathogen kits. We increased our gross margins for the quarter from 36% to 38% due to improved efficiencies at our First aid manufacturing facilities, greater sales of higher margin products and improved cost of imported items. Our operating income increased 25% reflecting leverage of our facilities over a larger revenue base and improved gross margins. We have been actively working to reduce inventory by narrowing the product families, lowering our order quantities and trying to more carefully align stocks to forecasts. This work is difficult to accomplish given the uncertainties of on forecast customer requirements but we are making progress. Our inventory at the end of March 2017 was $37.3 million compared to $37.6 million a year ago despite our growth in the Spill Magic acquisition. As we look to the remainder of 2017 we are reiterating our guidance of $137 million in net sales and $6.7 million in net income. This translates to $1.76 earnings per share. I will now turn the call to Paul. Paul?

[Paul Driscoll:]

Acme's net sales for the first quarter were $27.7 million compared to $25.3 million in 2016, 10% increase. Net sales for the first quarter in the U.S. segment increased 9%. Excluding the newly acquired Spill Magic product sales increased 4% in the U.S. segment. Net sales in Canada were constant in U.S. dollars and declined 3% in local currency. Net sales in Europe increased 38% in both U.S. dollars and local currency due to market share gains in the office product channel and increased distribution of DMT products. Gross margin was 38% in the first quarter of 2017 versus 36% in the first quarter of 2016. The improvement was mainly due to lower cost in our Vancouver, Washington First aid facility. Also there was a better product mix mostly coming from our recent acquisitions. SG&A expenses for the first quarter of 2017 were $9.4 million or 34% of net sales compared with $8.2 million or 33% of net sales for the same period of 2016. The SG&A increase was due to higher variable selling cost as a result of higher sales, the added Spill Magic business and the addition of sales, marketing and IT personnel. Net income for the first quarter of 2017 was $650,000 or $0.18 per diluted share compared to net income of $565,000 or $0.16 per diluted share for the same period of 2016, a 17% increase in net income and 13% in EPS. The Company’s bank debt less cash on March 31, 2017 was $38 million compared to $34 million on March 31, 2016. During the 12-month period, we purchased Spill Magic for $7 million and paid $1.3 million in dividends. Additionally we generated $6.3 million in free cash flow. We expect to generate approximately $6 million in free cash flow in 2017. Thank you, Paul. I would now like to open the call to questions.

[Operator:]

[Operator Instructions] We’ll take our first question from Michael [Indiscernible] with D.A. Davidson. Please go ahead, your line is open.

[Unidentified Analyst:]

Hey guys, this is Michael on for Andrew. Thanks for taking my questions. On the Spill Magic acquisition can you just give us an update on the integration there and are you seeing some of those cross selling opportunities materialize?

[Walter Johnsen:]

Sure Michael. The first thing is there is a lot of work to be done with this company. And our vision is to be able to take its product into a very broad distribution that we currently have. So, we of course done a lot of brochures and price lists and collateral material, we’ve trained ourselves organization both in the safety and First aid area as well as our office and industrial channels, we’ve shipped samples over to Europe to begin the process of being certified in the EU, we’ve made many, many presentations to our customers. I can tell you that we now are getting distribution placed for next year in the office channel and we hope to be doing that very shortly both online and in industrial accounts. We are making one on one customer presentations the Spill Magic customers with some of our First aid items and versus the same buyer in many cases that we would like to sell to where we are. So we are making on the sales side a lot of very forward progress. The system is still the current system that they had, our first objective was make our current customers happy, begin to work on the sales effort and now we are working on the back office. So it’s ahead of plan on the sales side, on the integration of the system that will probably be done sometime around August which is about on plan.

[Unidentified Analyst:]

Awesome thing. And then a really great quarter in Europe. Can you just elaborate a little bit more on what you are seeing there; was there a big acceleration in online sales?

[Walter Johnsen:]

I’m sorry, I didn’t catch the question.

[Unidentified Analyst:]

Sorry. Really great quarter in Europe. Can you just elaborate a little more on what you are seeing or was it a big acceleration in online sales?

[Walter Johnsen:]

Well in Europe, we are doing very well on a number of fronts. First, we continue to be gaining market share with the Westcott products family to the office customers. And that was the single biggest growth. The online sales are growing at a very high percentage rate and are now big enough that they are for this year will be impacting the overall European sales. DMT which we acquired in February of 2016 had a European customer base but they will be in service out of Massachusetts. They are now being serviced, the European customers are now being serviced locally through our German operation and the products are being sold in Europe. And that has led to good growth and one of the things about DMT is it had sporting goods customers who started to buy Camillus products in Europe. So that has reinforced. We are very happy because the margins in Europe are also increasing at the same time, so they have done a good job.

[Unidentified Analyst:]

Awesome thanks. And then just one for a clarification, I think on the EPS guidance last time you said 178 for the year and now you are saying 176, is that just a product of a slightly higher share count?

[Walter Johnsen:]

That’s exactly what it is. And frankly we are forecasting the share count so that maybe a lower number in which case we are back at $1.78. But we are running the business on the P&L and that number hasn’t changed.

[Unidentified Analyst:]

All right thank you so much. Thank you.

[Operator:]

We’ll take our next question from Mike Mork with Mork Capital. Please go ahead, your line is open.

[Mike Mork:]

Yes just a couple of questions. One is the when do you think you will be ready for another acquisition of the size of the Spill Magic or whatever from a balance sheet standpoint and just operationally you don’t’ want to get stretched within? Just wanted if something came along would you have to wear with all the go-ahead and make another acquisition?

[Walter Johnsen:]

Mike, that’s a very good question, and we are preparing ourselves in a number of ways. One of those ways is by working on the inventory and managing it carefully and the skews because it will be generating cash if we do our job right. And the second is, there is some real growth opportunities with the acquisitions we have done, whether that be in the First aid area, with First aid only which is doing very, very well with DMT. We are putting money and resources behind the glue gun business at Westcott, and now the Spill Magic business we are integrating. So the question to that is, we’ve got our hands full with quite a number of things and we are strengthening the balance sheet from the last transaction. However, our goal is to build this business smartly and I want to be prepared and we are driving our team to be prepared should something come sooner than might be expected.

[Mike Mork:]

Okay, great. And then what percent of your business now is going through Amazon?

[Walter Johnsen:]

We don’t break that out, but what I can tell you is that Amazon five years ago was not a very large customer and it’s becoming one of our – it is one of our top five now. And its growing faster than any of our other larger companies. So I wouldn’t be surprised if by year end it would be maybe our second or third largest customer.

[Mike Mork:]

Okay, great. And then it’s interesting, one last thing. You talked about the glue gun, what is different about this product, and you said you expect significant growth possibly later this year, would there be because of more acceptance of going in more retailers or what exactly is ...

[Walter Johnsen:]

What we did with the glue gun is we utilized first some of our non stick technology which is ceramic based and is heat resistant. And we put that within the barrel of the glue gun so that the glue didn’t stick there when it is hardened at the tip when you press the glue gun handle, it heats up and tip turns red. And when it's red it's ready to dispense the glue and in addition to that not to touch the tip. Finally, it’s a very lightweight glue gun into the family. At our price point that retailers are saying, wow. So you can find it currently at Michael’s Stores and we’ll be getting other major distribution around the fourth quarter. So that’s the beginning of what we think will be a family and as we lay out what we do for next year you can picture a lot of differentiation of the types of glues that you put in the glue sticks possibly figured that there might be some that are proprietary and you probably can see that are more industrial. So it's a beachhead for a product family that has legs we hope.

[Mike Mork:]

Okay. It sounds good. Thank you.

[Walter Johnsen:]

Thank you.

[Operator:]

[Operator Instructions] We can go next to Richard Dearnley with Longport Partners. Please go ahead.

[Richard Dearnley:]

Good morning.

[Walter Johnsen:]

Good morning

[Richard Dearnley:]

Was there a promotion in Europe that didn't happen in the fourth quarter but did happen in the first?

[Walter Johnsen:]

No.

[Richard Dearnley:]

No.

[Walter Johnsen:]

Most of this growth was organic normal every day growth.

[Richard Dearnley:]

That’s nice. Then the comment on your slides about expanding the First Aid compliance gets into larger solution. Is a larger solution just a bigger more comprehensive kit or is that a factory kind of kit as opposed to a little section tip or what does that talk about?

[Walter Johnsen:]

What that’s addressing is SmartCompliance kits were three shelves and they were identified originally spec for a number of locations of medium-size manufacturers, and we’ve since broaden distribution of First Aid kits since SmartCompliance gets a major industrial sites where you need four and five shelves of components and some of them are more industrial. And because we had the demand for that we develop them and introduce them that currently go into distribution at places like Grainger and Fastenal.

[Richard Dearnley:]

That's just starting now.

[Walter Johnsen:]

Well, we’ve been working out quite some time and shipments are starting now.

[Richard Dearnley:]

Right. And then did you say in the discussion about discontinuing the Scotts branded garden tools and things that you're replacing those with clouds?

[Walter Johnsen:]

Yes. In other words what we thought we would get from the Scotts and Miracle-Gro programs was broader distribution that we were able to achieve and rather than pay royalty to continue that we have shipped the product line over to our brand files which is the very high market share anyway in the professional florist market.

[Richard Dearnley:]

Right. Okay. Thank you.

[Walter Johnsen:]

Thank you.

[Operator:]

And it does appear we have no further questions. I'll return the floor to our presenters for any additional or closing remarks.

[Walter Johnsen:]

If there are no further questions then this call is complete. As you can see we're off to a good start. We’ll forward to updating you on our progress in July. And I’d like to thank you for joining us.

[Operator:]

And this will conclude today's program. Thanks for your participation. You may now disconnect.