Acme United Corporation
Q2 2016 Earnings Call Transcript

Published: 22 Jul 2016

[Operator:]

Good day and welcome to the Acme United Corporation's second quarter 2016 earnings call. Today's conference is being recorded. At this time, I would like to turn the conference to Chairman and Chief Executive Officer, Mr. Walter Johnsen. Please go ahead sir.

[Walter C. Johnsen:]

Good morning. Welcome to the second quarter 2016 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 G. 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 C. Johnsen:]

Thank you, Paul. Acme United had the single best quarter in its history in the second quarter of 2016. We had net sales of $41 million during the quarter, an increase of 21%. Net income was $3.3 million, an increase 21%. Earnings per share were $0.91, an increase of 23%. We had record back-to-school sales led by our new Westcott cheap scissors and proprietary non-stick pencil sharpeners. Our Westcott shares gain the market share in the office channel. We broaden our distribution in the craft market. The Clauss, Camillus and Cuda cutting tools performed well in the industrial and sporting goods markets. Promotions planned in the first quarter include efficient tools totaling about $4,000 shift in the second quarter. More importantly, however, the group has had strong momentum going into the rest of the year. Sales of first aid kits and components were excellent. Our smart compliance industrial first aid kits led the growth. These kits have been expanded in size and range and are gaining placement in major industrial accounts. On average, our revenue from refills of the kits annually about equals the initial sales and we are continuing to build a recurring revenue stream. Internationally European sales increased 34% in local currency, and 36% in U.S. dollars. The Brexit vote sharply impacted the British pound and we saw about €25,000 Euros decline in the trade weighted value of our UK receivables. This is minor in a corporate sense, but frustrating. Ongoing, we expect to increase selling prices to our UK customers. In Canada, sales were approximately even with last year. The Canadian currency appears stable and we are no longer facing the headwinds we had last year. There are number of new business initiatives in place that should lead to continue on growing profitability. The uncertainty from the potential Staples Office Depot merger was reduced for us when the transaction was terminated. In particular, we had anticipated about 1,000 stores to be closed during the next three years and now far fewer appear to be impacted. Our manufacturing strategy for first aid kits has changed from nine months ago, largely due to greater sales than forecast. As some may remember, we closed our packed kit manufacturing facility in November 2015, and shifted most first aid production to our plant in Vancouver, Washington. This step saved about $500,000 annually in facility and other cost. However, we then had far more first aid orders than forecast, led by smart compliance sales. We then added a second shift in Vancouver and a third-party warehouse. We have now begun a full second production site in our large Rocky Mountain, North Colorado facility. We have excess space there and excellent workforce and room to leverage our fixed cost. More importantly, we have a runway to substantially roll the first aid business. Based on the strength of our current business we are raising our guidance for 2016 to $123 million in revenues, $5.8 million in net income and $1.55 earnings per share. I will now turn the call over to Paul.

[Paul G. Driscoll:]

Acme's net sales for the second quarter were $41 million compared to $34 million in 2015, an increase of 21%. Sales for the six months ended June 30, 2016 were $66.3 million compared to $56.8 million in the same period in 2015, an increase of 17%. Net sales in the U.S. segment increased 22% in the quarter and 18% for the six months ended June 30. The growth in the quarter and year-to-date came from Westcott school and office products, first aid kits, Camillus knives and the DMT sharpening tools that the business we recently acquired in February. Net sales in local currency for Canada decreased 2% in the quarter, but increased 5% year-to-date. The lower sales in the second quarter, was primarily due to a July shipment that occurred in June last year. Net sales for Europe increased 35% in local currency for the quarter and 16% for the six months ended June 30. The sales increase was primarily due to higher sales in the office channel. Gross margins were 36% in the second quarter of 2016 versus 37% in the second quarter of 2015. The gross margin percentage was slightly lower mainly due to a heavier back-to-school product mix. We expect gross margins in the second half of the year to approximate 38%. SG&A expenses for the second quarter of 2016 were $10.1 million or 25% of sales, compared with $8.7 million or 26% of sales for the same period of 2015. SG&A expenses for the first six months of 2016 were $18.3 million or 28% of sales compared with $16.3 million or 29% of sales in 2015.The SG&A increase for the three and six months was due to high variable selling costs as a result of higher sales and the added DMT business. Operating profit in the second quarter increased from $3.9 million last year to $4.6 million this year, a 20% increase. Operating profit for the six months increased 19%. Net income for the second quarter of 2016 was $3.3 million and $0.91 per diluted share compared to net income of $2.7 million or $0.74 per diluted share for the same period of 2015. Net income for the first six months ended June 30, 2016 was $3.8 million or $1.8 per diluted share compared to $3.1 million or $0.85 per diluted share in the comparable period last year. The Company's bank debt less cash on June 30, 2016 was $38.7 million compared to $28.2 million on June 30, 2015. During a 12-month period Acme purchased DMT for $7 million and paid $1.3 million in dividends and $1.6 million in stock repurchases. We expect net debt to decline to approximately $28 million by year-end. We also expect to generate $4.5 million to $5 million in free cash flow for the 12-months ending December 31, 2016.

[Walter C. Johnsen:]

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

[Operator:]

[Operator Instructions] And we'll take our first question from Andrew Burns with D.A. Davidson.

[Andrew Burns:]

Hi guys, congrats on a great quarter.

[Walter C. Johnsen:]

Thank you Andy.

[Andrew Burns:]

Just a couple of quick ones here, you know on the last call you mentioned in the Vancouver facility running less efficiently but anticipated as you were ramping to meet demand, it wasn't called out in terms of any sort of margin impact this quarter, just looking for an update there?

[Walter C. Johnsen:]

Well, we obviously have positive volume variances, because we've got volumes that are far greater than expected. The labor that we are bringing in are less trained, because we are ramping up at a pretty fast pace and honestly they have out cancelled each other. So, as we get more efficient, we should be taking up some additional gross profit, but for this past quarter it was about even.

[Andrew Burns:]

Okay, great and it sounds like if I heard it correctly the second half gross margin could be approximately 38% that’s a nice year-over-year improvement, I was just wondering if you could provide any color whether that's your mix, efficiencies just to how to think about that improvement?

[Walter C. Johnsen:]

I think the primary one is we have a strong back to school which tends to have lower margins in the second quarter and that dropped at a little bit, although still very profitable. In the third and fourth quarters, there is less reliance on that because a lot of it gets shipped by June. Also we've got new products coming out, we've got a lot of Cuda item and I think those items all of which tend to raise margin and first aid business continues to be very robust. So, I’m at this stage pretty comfortable with the 38%.

[Andrew Burns:]

Great and you mentioned - are there any thought falling ICAST in terms of how the brand is being received or potential products here in the any upcoming season?

[Walter C. Johnsen:]

So for those that don’t know, the largest fishing show in the United States is the ICAST show and was held in the Orlando last week. I was there for two days and we had a very, very active booth both with customers and fishing pros that were interested in the new product lines we've got, we had tremendous really tremendous enthusiasm for some new nets that are carbon fiber and float, new gaffs, line of professional Cuda fishing tools that resist rusting. In all, I would say, it was a very, very good show.

[Andrew Burns:]

Great. Thanks and I'll jump back in the queue.

[Operator:]

And we'll go next to Mike Mork with Mork Capital Management.

[Michael Mork:]

Hi Walter, good quarter.

[Walter C. Johnsen:]

Thank you Mike.

[Michael Mork:]

Just wondered with you balance sheet now it's going to improving through year-end, at what point would you feel comfortable making another descent size acquisition? And are there any particular areas you are looking at, in others words do you think of any existing product line or something new?

[Walter C. Johnsen:]

Well, the first part is, DMT is operating ahead of expectations and integration is going very well, and so that purchase in February is well ahead of plan and we are delighted with that. There is a couple of things that we want to do there yet, one is we are expanding the productive capability, because we have more orders and the second is we're in the next couple of months integrating our computer systems onto theirs. As soon as that's done, it will be pretty much fully integrated, it certainly is as far as the product line. So that's the base. The cash flow is being generated throughout the rest of the year until we find something that fits well in large part we apply the strength in our balance sheet. I have a number of things that look interesting and some of them are in the first aid areas, some of them are in the sporting goods areas. Most of them are in the United States. The timing for that is still some months out, but we're already starting to review our list of candidates and as you may know we've been looking at companies to acquire for at least 10-years now. So there is a backlog of companies that we've contacted in the past that aren't being shopped, that we continue to have a sort of proprietary list of candidates. So, although I don't have something I can tell you that we tend to buy now and I probably couldn’t anyway. You can probably expect that sometime in the next 12-months we will find something that's appropriate for us.

[Michael Mork:]

Okay, well that sounds good and just as an aside, I went halibut fishing last week, my granddaughter caught a huge halibut and we cleaned with one of your flay knives.

[Walter C. Johnsen:]

Terrific, terrific, that makes me happy.

[Michael Mork:]

Okay.

[Walter C. Johnsen:]

Thank you.

[Operator:]

The next question is from Jeffrey Briggs with Singular Research.

[Jeffrey Briggs:]

Hi guys, it’s great to see everything coming together this quarter. I would like to ask a couple of questions about the strong growth you saw in Europe. I know that there were plans to try to introduce some of the first aid product lines over there and also possibly, some of the DMT products. And I was wondering if any of those were contributors to that growth that you saw or whether it was sort of all the existing product lines that you are already selling over there?

[Walter C. Johnsen:]

The major contributor to the growth was our office channel, which we continue to be gaining market share both in the U.S. and in Europe. DMT had one month of sales in Europe, which was maybe about for €40,000.

[Paul G. Driscoll:]

Yes, it was €50,000.

[Walter C. Johnsen:]

€50,000. So, it’s a small contributor, but for the rest of the year DMT sales will now start to be shipped out of our European subsidiary, which is terrific both for customer service for European customers, as well as them being able to purchase in Euros and hopefully we're able to move the top-line there, because we have a local presence. In the first aid kit area, we are gaining some share, it's now full blown first aid kits, but it's adhesive bandages, and it’s some dispenser packs, and the mother items all of which eventually will be a full first aid line. And we do have now the appropriate certifications to be selling first aid kits in the EU. So, while its only small compared to the overall business, it is a growth opportunity, but in the second quarter the big growth was our office channel

[Jeffrey Briggs:]

Okay, that’s a good information, I mean it's good to see that I mean even though the numbers might be fairly small compared to the whole picture that saw incremental growth. So, that gives you guys some opportunities down the road.

[Walter C. Johnsen:]

Absolutely.

[Jeffrey Briggs:]

Thank you.

[Operator:]

And we’ll go next to Jeffrey Matthews with Ram Partners.

[Jeffrey Matthews:]

Hi Walter.

[Walter C. Johnsen:]

Hey Jeff.

[Jeffrey Matthews:]

DMT is off to a great start, was there any particular surprises, I know last quarter you talked about some of the synergies of channels that you could introduce them into to and they could introduce you into, was there any particular surprises there?

[Walter C. Johnsen:]

A particular surprise was how well respected the DMT quality is among its user base, which is very loyal and we really didn’t know that. The second is the product line is very, very functional in its excellence for its current users, but there is an opportunity for us to improve the ergonomics and improve some of the - to create new sharpening tools all for that base technology. And I have been surprised how fast we might be able to get some of that into the market. So, so far, it's been upside. The one thing that was a down side was our ability to produce and we are expanding some of the equipment that’s there, but that’s a good problem.

[Jeffrey Matthews:]

Yes, yes. In Massachusetts?

[Walter C. Johnsen:]

Yes.

[Jeffrey Matthews:]

Okay. And on the first day, you mentioned that refill in the year can be the equal to be initial selling, how does that work? What I am getting at is, is normal industrial usage of the first aid products or is there a regulatory issue where they all have to be up to a certain standard and they are getting inspected or is this just normal wear and tear and the stuff gets used a lot?

[Walter C. Johnsen:]

Well first, there are quite a number of regulations, particularly OSHA regulations to properly protect your workforce. There are OSHA instructions, but the real driving forces isn’t that. The real driving forces that you provide a safe workplace for your employees and one is in accident its far cheaper to respond to it immediately and stabilize the situation as appose to not be prepared. In order to be prepared, there is two approaches, one is you have a first aid kit that is regularly filled by vans and you may have read about ZEE medical and Cintas merging and that’s an expensive business model. It's expensive because its delivery site-by-site with somebody driving a van and filling the first aid kits., but it provides the user with a fully and set first aid kit that’s prepared to the use. Now another approach, which is the approach we are doing, if you provide the first aid kits, one they are consumed either by an accident or through expiration of the components. For example, the antibiotic vials has expiration dates. Then they typically are buying through either Staples or at Amazon or Ranger to get their refills and we're supplying the refills to that end user. And it's a business that is very important, because if you keep your kits fully compliant, you have got a safe workplace. Now we are making inroads against the bandage businesses, because we will stay about 30% on the cost of the refills for the industrial customer compared to someone who is purchasing them from a van and that's the driving force that's leading us to a lot of this growth.

[Jeffrey Matthews:]

Got it. And congratulations on the Rocky Mount - being able to double its production capacity with a great facility.

[Walter C. Johnsen:]

It was not part of the plan a year ago, but it's really clear to us right now. We've got space there, it's in a great location for servicing our customers, we've got a good workforce and it gives us that a platform that doesn’t require additional space. So it's a very good thing.

[Jeffrey Matthews:]

Absolutely. I'll get back into in line. Thanks so much. Good luck.

[Walter C. Johnsen:]

Thank you.

[Operator:]

[Operator Instructions] And we'll go next to Richard Dearnley with Longport Partners.

[Richard Dearnley:]

Good morning.

[Walter C. Johnsen:]

Good morning.

[Richard Dearnley:]

What is the mix of first aid sales in second quarter or in first half?

[Walter C. Johnsen:]

By that, what do you mean?

[Richard Dearnley:]

Percent of sales or you know, it was running in 40% range last year, has that increased?

[Walter C. Johnsen:]

I'll turn that over to Paul. Everything is growing in the business so.

[Paul G. Driscoll:]

I think it’s still roughly 40%. I think, last year it was 35%. So it's somewhere between 35% and 40% now.

[Richard Dearnley:]

I see. And as I remember, you had $5 million give or take of sales of Aspirin, Anacin, Advil and that discounted in something like the third quarter of 2015?

[Walter C. Johnsen:]

No. there was about $3 million of branded medications that we discounted with some of our customers, because we're just tapping through these products everything basically as a service to them.

[Richard Dearnley:]

And when did you eliminate that?

[Walter C. Johnsen:]

I think the final impact of that was about January of this year.

[Paul G. Driscoll:]

No, actually its June of last year.

[Walter C. Johnsen:]

Probably last year, but right now there is not offset.

[Paul G. Driscoll:]

No, there is no impact at this point. A year ago we had disconnected as well.

[Richard Dearnley:]

Great, alright. Then your comments about debt reduction in the second half are most impressive. In light of that, this is a difficult question to ask and answer, you have talked about a few rationalizations, but in the way of that I read an article about how walmart.com is adding million skew per month to their online, but their online is a fraction of Amazon. But as you have more skew online like you show or list lots of skews, but assuming that the online turnover works to the 80/20 rule, that get's in the way of skew count reduction. How do you balance all that?

[Walter C. Johnsen:]

It’s not quite that complicated Dick, if a product doesn’t sell much and it’s got a lot of margin, it's gone. We call it GMROI, gross margin times turns. And so whether it's going out through the online systems, or it's going out through our customers, if it’s got a low ratio and there is no vector to make it grow, we terminate and clean out the products. And that might show up on Amazon, but then once it’s gone it's gone. But you are right the tail of products that are on these Amazon and wallmart.com and others is far greater than what we have in the retail store or in the catalogues and it's easier to change. And that piece surprisingly sometimes has different waiting than you would normally expect, based on what is in retail. And one example of that is Kevlar Shear that we developed for Boeing so that it could cut carbon fiber in the Dreamliner and it's doing terrifically well at Amazon, because people have figured out that it will also cut fiber glass, and you have got the tail makers and boat builders and users that we just never accessed before. Sometimes there is a surprise that you don't expect, but the way we cut the product family is by the GMROI analysis and it doesn't matter where we are selling. If it's doesn't sell, it's gone.

[Richard Dearnley:]

Okay. Thank you.

[Walter C. Johnsen:]

Thank you.

[Operator:]

There are no further questions at this time. I'll turn the call back to today's speakers for any additional remarks.

[Walter C. Johnsen:]

Well I would like to thank you for joining us today. I'm very proud of the quarter, I hope we can continue to deliver as well as we did this quarter and I look forward to speaking to you in October. Thank you for joining us. Good-bye.

[Operator:]

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