Acme United Corporation
Q4 2016 Earnings Call Transcript

Published: 23 Feb 2017

[Operator:]

Good day and welcome to the Acme United Corporation's Fourth Quarter 2016 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 fourth quarter and year 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 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 net sales of $124.6 million in 2016 and increase of 13% from 2015. Our net income grew to $5.9 million and increase of 22%; earnings per share were $1.64 and increase of 26% over 2015. Our team delivered excellent results throughout the year and I am personally very proud of their work. We raised our guidance twice during 2016 reflecting their performance and we've exceeded those forecasts each time. There are some highlights. Our Westcott team grew our scissors and pencil sharpener business to new product introductions and market share gains. They introduce new ceramic box openers and broaden distribution of non-stick cutting tool. They initiated a major effort to develop and commercialize a new category Gurgaon with non-stick and temperature sensing features. Responses been strong and we begin shipping Gurgaon this quarter. The Camillus Knives business gained market share with mass market distributors and specialty shops. We reintroduced the Western brand of knives and had excellent result. We expanded the Cuda fishing product line to include carbon fiber nets and gas and introduced new freshwater fishing tools. We grew the DMT diamond sharp in a business with new placement at hardware and sporting goods chain. We are in the midst of doubling production capacity at DMT and hiring is underway. The First Aid business grew double-digits with many new industrial customer conversions. The team won the First Aid requirements for all the stores, warehouses and offices and one of the largest retail chains in the United States. We built our online First Aid and refill sales. We consolidated the product line to reduce overlapping components from our Pac-Kit, PhysiciansCare and First Aid Only brand and reduced product cost. In September, the First Aid team introduced phone app to help our First Aid customers’ record usage and reorder component. Our Canadian business expanded mass market distribution of our Westcott cutting tools. The team builds the Camillus hunting knives business and grew overall sales 4% in a weak economy. Our European business grew 9% during the year due to market share gains in the Westcott office product family. The team in Europe successfully expanded the DMT customer base and grew online sales. More importantly it laid the groundwork for a very strong 2017 in Europe. We're expanding our infrastructure to support significant growth. During 2016, we expanded our physical facilities in Hong Kong, China two offices in China and Fairfield, Connecticut. We built the management department, the new product development, marketing, forecasting and logistics. We made investments in our infrastructure in IT with new equipment and software to manage our growing online sales. On February 1, 2017, we acquired Spill Magic, which fell still kind of absorbance to major U.S. retailers for internal use to reduce slips. We intend to integrated products and customers into our First Aid business and to use its components and still clean-up kits and blood borne pathogen kits for the safety market. Although it is early in the year, we are providing guidance for 2017 of $137 million in net sales $6.7 million in net income and earnings per share of $1.78. I will now turn the call to Paul Driscoll. Paul?

[Paul Driscoll:]

Acme's net sales for the fourth quarter were $26.4 million compared to $23.1 million in 2015, an increase of 14%. Sales for the year-ended December 31, 2016 were $124.6 million compared to $109.8 million in 2015, an increase of 13%. Net sales in the U.S. segment increased 13% in the quarter and sales for the year ended December 31 increased 15%. The growth came from Westcott's school and office products, Camillus knives, Cuda fishing tools, first aid kits, and DMT sharpening tools. Net sales in local currency for Canada increased 12% in the quarter and 4% for the year. Net sales in local currency for the Europe increased 25% in the quarter and 9% for the year. Growth in Europe came primarily from the office product channel and sales of DMT sharpeners. The gross margin was 37% in the fourth quarter of 2016 versus 36% in the fourth quarter of 2015. The fourth quarter of 2016 margin was helped by a better product mix and lower cost. Gross margin for the year was 37% compared to 36% in 2013 SG&A expenses for the fourth quarter of 2016 were $9.1 million or 35% of sales compared with $7.6 million or 33% of sales for the same period of 2015. SG&A expenses for the year-ended December 31, 2016 were $37.1 million or 30% of sales compared with $32.2 million or 29% of sales in 2015. The increase for the quarter in year was primarily due to higher variable selling cost as a result of higher sales and the added DMT business. Net income for the fourth quarter of 2016 was $550,000 or $0.15 per diluted share compared to net income of $440,000 or $0.12 per diluted share for the same period of 2015, an increase of 25% in net income and EPS. Net income for the 12 months ended December 31, 2016 was $5.9 million or $1.64 per diluted share, compared to $4.8 million or $1.30 per diluted share in the comparable period last year, an increase of 22% of net income and 26% in earnings per share. The Company's bank debt less cash on December 31, 2016 was $27 million compared to $23.5 million on December 31, 2015. During the year, we've spent $7 million on the DMT acquisition, $2.2 million on dividends and stock repurchases and generated $7.8 million in free cash flow. We expect to generate approximately $6 million in free cash flow in 2017.

[Walter Johnsen:]

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

[Operator:]

[Operator Instructions] We’ll take our first question from Andrew Burns. Please go ahead.

[Andrew Burns:]

Hi, everyone. Thanks for taking my question. Nice year in 2016. Walter, I was hoping you could expand a little bit your comments for building the foundation for better growth in Europe as you look forward [indiscernible] and what’s the opportunity ahead in that region? Thanks.

[Walter Johnsen:]

There are three things that are going on in Europe. The first is we're continuing to gain market share with our Westcott office products whether that’s our non-stick scissors or a titanium carbon nitrite scissors, the regular cutting tools we have the pencil sharpeners. We're gaining more customers, more placement and we're sustaining that increase. The second thing is our online sales in Europe are growing very, very nicely and exceeding any expectations that we’ve had previously. Finally, the DMT business is expected to about double next year in Europe from about US$400,000 to about US$800,000. So with that, we're expecting a very good European business in 2017.

[Andrew Burns:]

Excellent. Thanks. And I appreciate the revenue and EPS guidance, would it be possible to talk a little bit about the headwinds and tailwinds you’ll experience or expect to experience from a margin perspective over the course of 2017?

[Walter Johnsen:]

Well, we're expecting our operating margins with some good execution to improve during 2017. Part of that may come from expanding our gross margin both from some currency improvements if the dollar has strengthened against the Chinese currency and about 60% of our currency - sales come from Chinese source products. So we should pick up some improvement there. We will also actively bidding out the components and continuing to squeeze cost out of raw materials for our First Aid business. If you look at the mix of Spill Magic and DMT they have higher margins than our base business, and so in the case of Spill Magic its contribution will all be in 2017 as it didn't occur last year. And with DMT, we're laying the groundwork to increase its volume within the U.S. Finally, the North Carolina facility still has excess space about third of the 345,000 square feet there which is our major distribution center is available for expansion. So to the extent that we continue to grow and use more in North Carolina. We've already got the fixed cost in place, so we should pick up a little bit of operating margin in that area as well. On the headwinds, probably the biggest uncertainty would be interest rates and we are expecting some increase in our borrowing costs. Currently, we borrow at LIBOR plus 2% which at today's rate is 2.5% interest rate and my expectation would be that that would increase during the year somewhat. And if there were any duties for imported items from China or anywhere else in the world, we would intend to pass through that to the extent that we could, but there might be some margin impact there as well, that will be the headwinds.

[Andrew Burns:]

Great. Thanks. And one last one, as you look at Spill Magic over into the next one to three years, what are some of the biggest opportunities to integrate and grow that? Thanks.

[Walter Johnsen:]

Well, we've got a number of factors. First, they're selling to major retailers right now for the cleanup of spills on floor stores, for example if a customer knocked over a jar of pickles and it was broken glass. And slimy pickles on the floor, we put the Spill Magic around, mix it up with the material on the floor. It absorbs everything. It can be then swept up when the floor is dry. There are a number of our First Aid customers in the retail market that don't use this product. Although some do and we believe there's a reasonable amount of cross selling between our First Aid and safety products and the Spill Magic product line. We expect to see some improvement there in revenues. Secondly, we sell about $0.5 million are still clean-up kits today into the safety market and I still clean-up kit would typically be for some bodily fluids that on a surface and you've got to clean it up with cover your hands, you protect your face, you clean it up with a powder, prior we had purchased that from a third party and today we are basic in it and reasonably large cost saving. And we intend to be pushing now into the spill clean-up market from about $0.5 million base to something sizably bigger. And we don't know probably what that means right now. Finally, we're bringing the products into hopefully our office channel and our industrial distributors where the products are less represented, but we believe there are some pretty big opportunities. So to put some flavor on that this product is could be used in every one of our distribution channels and although it will take time to do that we're beginning that process right now.

[Andrew Burns:]

Great. Thanks for the details and best of luck in 2017.

[Walter Johnsen:]

Thank you.

[Operator:]

[Operator Instructions] We’ll take our next question from Robert Maltbie. Please go ahead.

[Robert Maltbie:]

Hello, Walter and Paul. It seems like I'm sitting in by the way for Jeff Briggs, he's outside business excursion today. Well, it just seems like the other day we were launching coverage on your firm. The first launch coverage $8, $9 stock that amazing? Just a real testament to your focus, your determination and [indiscernible] a game plan and execution, so congratulations for peak or the most consistent, most performing companies we've had under our historical performance.

[Walter Johnsen:]

Thank you, Robert. Thank you.

[Paul Driscoll:]

Thanks, Robert.

[Robert Maltbie:]

Well, my question is regarding Europe, a little bit of background or little bit further detail on the turnaround there that is magnificent. And secondly just trying to get a big picture of comment on what you foresee a Spill Magic acquisition contributing to the topline a couple years out to calibrate that into mix? Thanks guys.

[Walter Johnsen:]

Well that’s a tough question on the growth of Spill Magic. We generally don't buy businesses to be static and what we see here is something that is proven by major, major retailers in the U.S. and it's a mainstay of many of the largest in the country's safety products relative to Spill. So it works on oils and gasoline and fluids it just works across the Board. So to be able to take that product and expand it throughout our networks, just look at our customer base of [who is who] for their own use and for their customers. It could be big. Our plan is that in the next three years perhaps we'll be able to double the size. But at this stage we didn't model that we modeled a 20% return on our capital. But today we close without adjustment and everything else is craving. But I can tell you that our sales team has already been trained in the product line and the route trying to get placement as we speak. If we're successful the way I hope we could be - it could be perhaps a whole new product family for the company as we broaden of it. But right now just assume that’s $6.5 million business that we do a good job with keeping our customers and then try to grow that has [indiscernible] go much bigger.

[Robert Maltbie:]

Thank you and congratulations.

[Walter Johnsen:]

Thank you.

[Operator:]

[Operator Instructions] We’ll take our next question from Richard Dearnley. Please go ahead.

[Richard Dearnley:]

Good morning. Could you talk about the tax rate? What happened in the fourth quarter? Where do you get the credit?

[Walter Johnsen:]

I’ll give that to Paul.

[Richard Dearnley:]

Yes. Hi, Paul.

[Paul Driscoll:]

Hi, Dick. We used the annualized effective tax rate method to record our taxes. So during the year, we have to estimate the full-year tax rate charge. We go through the quarters, we're using an estimate for those 12-month and as we got to - and to the fourth quarter we were - our estimates were slightly higher. So we had to true it up and that's why results in a negative tax in the fourth quarter.

[Richard Dearnley:]

And was there another charitable contribution or something in there?

[Paul Driscoll:]

Well there was, but that didn't affect the fourth quarter. That affected the full-year tax rate. So the full-year tax rate on the income statement, I think was 22% and we did a generation earlier in the year and without that it would have been 25%. Does that help you?

[Richard Dearnley:]

Yes. And then while you're here, the SG&A in the fourth quarter and actually the second half was higher than usual. Was there more - could you quantify the bonus accruals I realize that versus zero last year. And any other extraordinary SG&A items with their R&D or just…?

[Walter Johnsen:]

Dick, let me add - respond to that. Saying our people is not extraordinary.

[Richard Dearnley:]

No, not that’s - it’s was a great year and it’s versus zero, so…?

[Walter Johnsen:]

Last year we reversed every bonus that everybody earned. We did that because we felt we had the hit numbers and we did. This year we accrued 840,000 for the entire company, and so that was a switch year-to-year, and so most of it was related to the bonus expense.

[Richard Dearnley:]

Right and - that that captures a lot of it, good with a year like that. I hope everyone was happy. Actually - usually everyone wants more.

[Walter Johnsen:]

You've got a great team.

[Richard Dearnley:]

Yes. Walter, could you talk about the project made, the DIY Craft market and what you're trying to bring to that that is they are?

[Walter Johnsen:]

Yes. So this is a family of cutting tools and players that are very high quality steel, very lightweight and they're intended for use mostly by women in project. Now it's also used by men, but they tend to have their own tools. So the largest customer of that right now is Michael, going out into a number of the major retailers as we speak. And what it's bringing is these are good quality tools, just lightweight. I mean great quality deal, great price and differentiated because you're getting real value and performance to something that is for lighter utilization.

[Richard Dearnley:]

I see, and well hope that works. Could you discuss what you see coming in you price negotiations is the one, roll it up to the one where it is now?

[Walter Johnsen:]

Well, that's complicated.

[Richard Dearnley:]

Right, yes. There is always a fight.

[Walter Johnsen:]

There's a lot of things. We pass on a lot of the savings to our customers and we want them to be getting the best size they can. Sometimes there is something that remains with us. And since September the RMB has weakened over 4% against the dollar. And I will be in China later this month, but I can assure you that the chunk of that will be going to our customers.

[Richard Dearnley:]

Okay. And your capacity utilization in First Aid at the moment, now with your SKU’s are down and then you might break that down between Washington and North Carolina, as you said, we got a lot of faith in North Carolina.

[Walter Johnsen:]

Yes. Well in Vancouver, Washington our facility is running full out and utilization is high. We've also got a third-party warehouse that storing both raw materials and some finished goods for us. In North Carolina, we have a great deal of space that we can expand in. And there it’s a question of which products are best suited to be made in each factory as well, the training and the hiring in North Carolina to bring up production to larger volumes. But you don’t have to look outside of our current footprint for sizable growth in the First Aid.

[Richard Dearnley:]

Right. So there is plenty of capacity or as you get the people union trained.

[Walter Johnsen:]

Yes. North Carolina just because we have space available for it.

[Richard Dearnley:]

Sure. Okay. Thank you very much.

[Walter Johnsen:]

Thank you.

[Operator:]

[Operator Instructions] Actually, we do have from Ralph Marash. Please go ahead.

[Ralph Marash:]

Good afternoon. I just want to clarify on your new tool - to new line of tools where you mentioned Michael's as a major customer. That's not for you currently, right because this is a new line for you?

[Walter Johnsen:]

We're shipping it now.

[Ralph Marash:]

And Michael's is sort of the initial major customer.

[Walter Johnsen:]

Yes.

[Ralph Marash:]

Okay. And then I also wanted to ask you about the free cash flow estimate for 2017. If I heard you right, it's $6 million, is that right?

[Walter Johnsen:]

I’ll turn it to Paul.

[Paul Driscoll:]

Yes, that's right.

[Ralph Marash:]

Okay. And that's a lot lower than this year which was $7.8 million, so could you just explain that?

[Paul Driscoll:]

Yes. In the last 12 months, we purchased two companies that are manufacturing companies and we need to upgrade some equipment there. So the biggest difference between the two cash flows is related to capital expenditures.

[Ralph Marash:]

Okay. Thank you very much.

[Walter Johnsen:]

Okay. Thank you.

[Operator:]

And we will take our next question from Mike Wasserman. Please go ahead.

[Michael Wasserman:]

Yes. Hi, Walter. I apologize if you addressed this issue, I was knocked off part of the call, but have you guys assessed what the potential impact of import tax should one be legislated. And what effect that would have on the Company?

[Walter Johnsen:]

That's a very good question, Mike and then we haven’t thought about it a great deal. I would first point out that the selling prices of our products are not very high. $8, $10, $12, so if there was a 40% increase in tax which doesn't makes sense to me, but if it happened, we are adding a couple of dollars to the selling price. And I don't think that would be impacted. Fortunately, we're not filling iPhones, we are filling cards or refrigerators. But from a practical perspective, the customers that shop at Wal-Mart, Home Depot, TVS, Costco basically all of America that shops the retail stores, they will be facing the equivalent if 45% duty were raised. The increase in price of some order of magnitude similar to that and I don't think that would be our country's interest. So I doubt those kinds of numbers happen. On the other hand if there was an import duty of 5% or 7% that would be a lot of money raise make all the duty, but really if the tax and revenues to build roads. And we would undoubtedly be passing that broke. And it would not be a very major impact on our customers, I don't think. But we watch this carefully and that's our assessment.

[Michael Wasserman:]

And what is your current assessment as to where the relative best places to be manufacturing, looked that in this years and are there any changes or new focus areas or the like that you’re either acting on or contemplating?

[Walter Johnsen:]

Well, there's a pattern in our acquisitions and in 2011 we bought the Pac-Kit for state company which was then in Norwalk, Connecticut. In 2014, we bought First Aid Only in Vancouver, Washington. In 2016, we bought DMT and Mongrel, Massachusetts. And in 2017, we bought Spill Magic in Santa Ana, California. So each of those U.S. manufacturers and it has shifted our sourcing from high reliance on China to still pretty high, but we're about 60% reliant on Egypt today and 40% pretty much U.S. production. And my guess is that will increase as we hopefully are able to grow more with DMT and as Paul mentioned we're making a major investment to double with capacity of DMT now and if we can get Spill Magic to grow and of course our First Aid business is thriving. So that mix probably will change more to like 45% to 50% U.S. production in the current year. Outside of the U.S. production China remains for us very, very powerful place to produce and we're very good at it from product development and scale up to prototyping, production, packaging, logistics and quality. So it's hard to replace what we have there. But we have two acquisitions diversified at least part of our sourcing.

[Operator:]

We will take our next question for Richard Dearnley. Please go ahead.

[Richard Dearnley:]

Could you if you just look that your First Aid business, what were sales in the year in the fourth quarter?

[Walter Johnsen:]

Dick, I don’t break it out that way because we haven't for a lot of reasons.

[Richard Dearnley:]

Okay.

[Walter Johnsen:]

What percentage in the fourth quarter was very strong as was Wescott and there will strong Camillus was up? But we're gaining market share at First Aid not only with our conversions are good large industrial customers, but also through Amazon sales and are frankly our office product sales and to office products dealers who are focusing on it. So it's more than double-digits - more than low double-digits.

[Richard Dearnley:]

Okay. Thank you.

[Operator:]

It appears we have no further questions at this time.

[Walter Johnsen:]

Okay. No further questions, this call has concluded. Thank you so much for joining us. Good bye.

[Operator:]

This concludes your teleconference. Thank you for your participation. You may now disconnect.