Acme United Corporation
Q2 2017 Earnings Call Transcript

Published: 25 Jul 2017

[Operator:]

Good day and welcome to the Acme United Corporation's Second Quarter 2017 Earnings Call. 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 second 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 net sales of $38.8 million in the second quarter of 2017 compared to $41 million last year. Net income was $2.8 million compared to $3.3 million. And earnings per share was $0.75 versus $0.91 last year. As you know, our online sales have been growing very rapidly in recent years. And their order and fulfillment patterns are effecting the timing of our revenues. In 2017, the level of our online sales was sufficient enough to impact our second quarter results. In past years, we shift the majority of our back-to-school Westcott products from Asia to the distribution centers of major retailers in April and May. Retailers then received the containers in three to four weeks and distributed them to their stores the sales in July and August. With our online sales, we are receiving purchase orders that closely match the timing of actual purchases by end users resulting in later purchases. In the U.S. most schools go back in session in August and early September which pushes more of our sales into the third quarter. In addition, we had a large promotion of Westcott products in the second quarter of last year that did not repeat in 2017. However, we have a verity of new promotions in the second half of this year including new Camillus knives, food efficient tools, Westcott glue guns and first aid kits. By their nature promotion would vary each year and we expect the second half activities to be stronger this year than in 2016. Turning to Europe, second quarter 2017 sales increased 10% in local currency with growth in e-commerce, Westcott office products, food efficient tools and DMT sharpeners. In Canada, sales for the second quarter were down 2% local currency. Our gross margins in the second quarter increased from 36% to 37%. We had favorable impacts on margins from sales of DMT sharpeners, Spill Magic clean-up materials and we sold less low margin back-to-school items. The Spill Magic business acquired in the February 2017 continues to perform well. We've integrated this product line into our first air business and are actively selling its products to our industrial, retail, food service and school accounts. Its performance has been above last year and our internal budget. To continue to make progress with inventory reductions. There is a balance between reducing our inventory of high moving items and dealing out of stock due to one forecasted demand. However, we've reduced the stock for slower moving items and sold the remaining inventory of discontinued Scotts-MiracleGro product families. As we look into the second half of 2017, we see growth of over 20% compared to last year. We are reaffirming our guidance of $137 million in revenues, net income of $6.7 million and earnings per share of $1.76. I'll now turn the call to Paul.

[Paul Driscoll:]

Acme's net sales for the second quarter were $39 million compared to $41 million in 2016, a decrease of 5%. Sales for the six months ended June 30th, 2017 were $67 million compared to $6 million for the same period in 2016. Net sales from the U.S. segment decreased 6% in the quarter, and were constant for the six months ended June 30th. Net sales in local currency for Canada decreased 2% in both the quarter and year-to-date. Net sales for Europe increased 10% local currency for the quarter and 23% for the six months ended June 30th. The sales increase for both periods was primarily due to new customers in the office and supporting good channels as well as sales of DMT sharping products. Gross margin was 37% in the second quarter of 2017 versus 36% in the second quarter of 2016. The year-to-date gross margin was 38% compared to 36% last year. 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 second quarter of 2017 were $10.6 million or 27% of net sales compared with $10.1 million or 25% of sales for the same period of 2016. SG&A expenses for the first six months of 2017 were $20 million or 30% of sales compared with $18.3 million or 20% of sales in 2016. The SG&A increase for the three and six months was mostly due to the added Spill Magic. Net income for the second quarter of 2017 was $2.8 million or $0.75 per diluted share compared to net income of $3.3 million or $0.91 per diluted share for the same period of 2016. Net income for the first six months ended June 30th, 2017 was $3.5 million or $0.94 per diluted share compared to $3.8 million or $1.8 per diluted share in a comparable period last year. Company's bank debt less cash on June 30, 2017 was $41.3 million compared to $38.7 million on June 30, 2016. During the 12-month period, Acme purchased the assets of Spill Magic for $7.2 million and paid $1.3 million in dividends. Additionally, the company generated $7.2 million in free cash flow. It succeeded in the reducing inventory on our existing business by $3.3 million or 9%. We expect to generate approximately $5 million to $6 million free cash flow in 2017.

[Walter Johnsen:]

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

[Operator:]

[Operator Instructions] We can go first to Andrew Burns. Please go ahead.

[Andrew Burns:]

Good afternoon.

[Walter Johnsen:]

Hello Andrew.

[Andrew Burns:]

Just a question in terms of the magnitude of the two items you highlighted in terms of the revenue decline, is the timing of shipments are much larger impact in the promotional cadence or they equally balanced, what was…?

[Walter Johnsen:]

The online shipments are growing very, very rapidly. And we are keeping market share which is - we are probably gaining it, which is exciting as some of the stores close and loose share. But that's SKU in a much bigger way are quarterly shipments and it's just moving as closer to the customer. The Westcott business that we did not repeat was sizable but it wasn't that big.

[Andrew Burns:]

Okay. And could you provide some color around online trends, what online represented as a percent of sales during the quarter or the growth trajectory?

[Walter Johnsen:]

We haven't done that but in our presentations, we've shown that we've grown to online being over 14% of our sales last year and they are growing by far the sales is part of our business right now. And I don't know the number but it might be something that I'll disclose the next quarter if it's relevant.

[Andrew Burns:]

Thanks and in terms of the promotional cadence, you mentioned not repeating the Westcott promotion from 2Q 2016 but in the second half it sounded like Camillus first aid, some other brands are going to be inside from a promotional cadence, what's the change there the underlying driver?

[Walter Johnsen:]

Well, one of them is the glue guns, there is a promotion going on in the fourth quarter with the Westcott glue guns. The glue gun [ph] business is with a life and there is a lot of things going on. I just got that from the ICAST show in Orlando and the retailers are very excited about it. In the case of Camillus, we picked up some private label promotion business of one of the big retailers. That will be held in the third and fourth quarter. And relative to first aid, Amazon has now is one of the leading probably the leading first aid kit and that's getting promoted often on and when its shows up, it's big. So my guess is Black Friday and so forth there will be quite a number there.

[Andrew Burns:]

Thanks and then just on the modelling side, are you still thinking 6 million is a good target for free cash flow for the year and you talked about 20% growth in the back half, I imagine lot of that would be waited into 3Q that any color there would be helpful? Thanks.

[Walter Johnsen:]

The 3 million - the 6 million of free cash, at this point we are comfortable doing that. The third quarter will show substantial growth over last year, but the fourth quarter will be bigger. And in total will be over 20% in the back half compared to last year.

[Andrew Burns:]

And bigger in terms of growth rate not revenue?

[Walter Johnsen:]

Growth rate, yeah.

[Andrew Burns:]

Growth rate, terrific. Okay. Thanks and good luck.

[Walter Johnsen:]

Thank you.

[Operator:]

We'll go next to Jeffrey Briggs. Please go ahead.

[Jeffrey Briggs:]

Hi. First question regarding sort of cost of goods and exchange rate things like that. In terms of where the dollar is and potentially you know the dollar coming down, what sort of impact you see that having sort of on your cost of goods in dollar terms. I know sort of it's a dollar increase, you are able to sort of extract some savings from some suppliers. How do you see that playing out Acme go the other way a little bit?

[Walter Johnsen:]

That's a very good question Jeff. As the dollar has strengthened, would have been able to negotiate savings for all of our overseas source items. And my last trip was in May to China and that was successful. The dollar RMB exchange since May has shown a weakening in the U.S. dollar by about 2%. But these kinds of fluctuations change pretty much. And so I don't see much increase in cost of sales but I may not be able to negotiate further declines either in the - and out there again in September.

[Jeffrey Briggs:]

Okay. Yeah, it's not - definitely - probably not like quarter by quarter thing, I am thinking more of sort of long term. But - okay, it sounds good. And then in regards to the first aid kid replenishment as you guys announced yesterday, is that more of a different way for people that order and just be more convenient or is there any affect there sort of going more direct to certain customers where they may have gone through the third party to order the same supplies at some other time?

[Walter Johnsen:]

Let me explain that a little bit on app. When you buy an industrial first aid kit and certain components are used because of an accident, the app allows you to scan the barcode on the boxes that contain for its use. Those get aggregated in central supply at the company and when it reached the fulfillment level, it then placed an automatic fulfillment order to either through distributor that sold it to them or the distributors that they want to go to or us. The app also triggers to the safety manager that these components have been used so that new components can be put in the first aid kit, so it's cart. What that avoids is the alternative of system where people drive around in a truck physically load each week these component which have to be by definition, very high margin to support that delivery system. So we see about a billion dollars of potential business if we can use our app and online delivery as a way to avoid the higher cost land based deliveries. And we are finally success with that.

[Jeffrey Briggs:]

Okay, thank you, it's helpful clarification.

[Walter Johnsen:]

Thank you.

[Operator:]

And we can go next to Mike Mork. Please go ahead.

[Mike Mork:]

Hi Walter.

[Walter Johnsen:]

Hi Mike.

[Mike Mork:]

Question on the Amazons 14% of your business, to some of your categories, I mean is that like 14% plus or minus few points across the board or there some of your products that are kind of completely Amazon and some that and some that don't Amazon and once that are the lower on the Amazon scale, can you boost those up since Amazon seems to kind of taking over the world?

[Walter Johnsen:]

Well my first, the 14% online includes other online sellers.

[Mike Mork:]

Okay.

[Walter Johnsen:]

For example Jet.com is growing nicely with us now, that's part of Wal-Mart. Staples has an online component as well which is not flat, not growing the way Amazon or Jet. Then there are other retailers that have smaller online presence. Regarding Amazon itself, certain products are just selling in a bigger way with them and we have had before. For example we make some first aid kits that from time to time will be at a Home Depot or there will be at some other retailer, but with Amazon, it just has volumes that took us a while to adjust. We are also finding that some of our customers are bypassing distribution and buying directly online and that's volumes that we never had online before although we more sold to a distributor. So this change is going on. The good news is as we are grappling with these changes, we are gaining our position.

[Mike Mork:]

It sounds good.

[Walter Johnsen:]

Thank you.

[Operator:]

And we can go next to Kevin Deeds [ph]. Please go ahead.

[Unidentified Analyst:]

Thanks. Walter, given some of the changes and timing and selling on the online side, I was wondering if you had consider changing your marketing strategy and what the implications might be in order to do that from a P&L perspective?

[Walter Johnsen:]

Well, the changes that are occurring in the sales occurring because we have changed our marketing strategy. And we've got a very strong I think team of people that are working search optimization, content, video all sorts of support portions for our online customers. And that's not at the expense of the retailers but it's an addition to that. And then because have been growing that's just in part of that SG&A expense. I'll be at Amazon in about three weeks, I am sure we're throwing out some new plans for the rest of the year and probably putting more money into it. But strategy has generated the sales, so it's not as if we have to make the change in the marketing, the marketing has generated the sales.

[Unidentified Analyst:]

Okay, good to know. And what's the plan to expand presence beyond the environment with Amazon?

[Walter Johnsen:]

Well, our team is also working with Jet.com as an example which I think has a lot of potential. And it's where Wal-Mart is the parent and the ability to get a discount when you pickup with an online delivery at a Wal-Mart store is brilliant as it avoids the cost of packaging, shipping and handling. And at the same time people can buy groceries and other items. And I think that this will be an avenue that will expand substantially. And there are other retailers like Staples that may do that kind of model, although I don't know that. So as this happens, we'll be expanding the presence across the board and in the Europe, Amazon is growing nicely and it's now become our largest customer there which in part reflects the growth that we've had in the past year.

[Unidentified Analyst:]

How is the online marketing effort in Europe differ than what you've done in the U.S.?

[Walter Johnsen:]

In Europe?

[Unidentified Analyst:]

Yes.

[Walter Johnsen:]

Well, we create a lot of content here, content being video, photos and so forth. In Europe, they are translating but basically they are pulling it off the common drive here and using it in New York and they do some of their own creative as well, but much of it done here and they leverage that which is a real benefit because it keeps the cost scalable.

[Unidentified Analyst:]

Has any of it been in conjunction with you know brick and mortar retailers effort?

[Walter Johnsen:]

Well, yeah, we coordinate with the brick and mortar retailers in their promotions and the content that supply them, but they read their programs and that's a little bit different than say an Amazon where many cases we are generating the initiative.

[Unidentified Analyst:]

Okay, okay. Thanks very much Walter, I appreciate the color.

[Walter Johnsen:]

Thanks Kevin.

[Operator:]

[Operator Instructions] And it appears there are no further questions at this time.

[Walter Johnsen:]

With no further questions, I would like to thank you for joining us. We look forward to speaking to you again soon and delivering good results. Thank you. Good bye.

[Operator:]

Thank you. This does conclude your teleconference for today. We appreciate your participation and you can disconnect at any time.