Acme United Corporation
Q3 2013 Earnings Call Transcript

Published: 18 Oct 2013

[Operator:]

Good day and welcome to the Acme United Corporation’s third quarter 2013 earnings conference call. Today’s conference is being recorded. At this time I would like to turn the conference over to Mr. Walter Johnson, Chairman and Chief Executive Officer. Please go ahead sir.

[Walter Johnson:]

Good morning. Welcome to third quarter 2013 earnings conference call for Acme United Corporation. I am Walter C. Johnson, Chairman and CEO. With me is Paul Driscoll our Chief Financial Officer. We will first read a Safe Harbor statement. Paul.

[Paul Driscoll:]

Forward-looking statements in this conference call including without limitations statements related to the company’s plans, strategies, objectives, expectations, intentions and adequacy of researches 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 risk and uncertainties including without limitation the following

[Walter Johnson:]

Thank you, Paul. Acme United had a good quarter for 2013. Our net sales were $22.1 million, which was an increase of 9% over last year at this time. We set a new record for third quarter revenues. Our net income was $959,000, up 20% over last year. The back-to-school sales were at record levels. Our titanium kids and stainless scissors were particularly strong as we gained distribution and had excellent sales from all available new products. We also had record sales of our first aid kits to both the office and industrial markets. Crouse Industrial Tools and Camillus Knives also had an excellent quarter. Our Canadian business was down 15% in local currency due to weak office product sales. However this was offset by growth in Europe of 19% in local currency due to increased mass market sales. We were particularly happy with the performance in Europe, especially since our team there has more than offset the loss last year of their largest customer due to liquidation. During the quarter we acquired a new 347,000 sq. ft. distribution and manufacturing facility in Rocky Mountain North Carolina for $2.8 million. The site was formally owned by Room Store which went bankrupt and was liquidated. Our purchase price was $8.30 per foot, which is less than many rental rates per year for warehouse space. We intend to consolidate our Goldsboro North Carolina warehouse in to the new space by January 1, 2014, and our Fremont facility by March 1, 2014. We were repaid the mortgage from the sale of our former Bridgeport Connecticut site in July and this resulted in a cash inflow of $1.74 million dollars. Our Fremont North Carolina facility is now on the market for $900,000. While we have duplicate operating costs and moving expenses for the fourth quarter, we will begin to realize savings after the first of the year. More importantly, we have put our U.S. distribution facilities in one location and have room for growth. Also during the quarter we hired John Ward to run our Canadian operations. John has extensive sales and management experience at Newell Rubbermaid and Esselte Corporation. We look forward to building our Canadian business with him. The fourth quarter of 2013 looks strong. We are seeing a hump in fourth quarter sales for Camillus Knives for hunting and Christmas time gifts, new hazard protection kits, and mass market promotions in Europe. We are providing guidance of about $90 million in sales for the year and earnings per share of $1.20 - $1.22 per share, less any duplicate running costs of the new Rocky Mount facility. Although we are not giving guidance yet for 2014, we are rolling up our budgets and we see solid growth based on existing and new business. I will now turn the call to Paul.

[Paul Driscoll:]

Acme’s net sales for the third quarter were $22.1 million compared to $20.4 million dollars in 2012, an increase of 9%. Sales for the nine months ending September 30, 2013 were $68.2 million compared to $64.8 million in the same period in 2012, an increase of 5%. Net sales in the U.S. segment increased 11% in the quarter and 8% for the nine months ending September 30. The biggest contributors to the sales increase came from higher sales of Camillus Knives, the added sales of the See Through business acquired on June 7, 2012, back-to-school products and first aid kits. Net sales in local currency for Canada decreased 15% on the quarter and 8% year-to-date. Sales were lower in Canada due to soft conditions in the office products industry. Net sales for Europe increased 19% on the quarter in local currency but declined 7% for the nine months ending September 30. The year-to-date sales decline was primarily due to the loss of Schlecker, a large customer as a result of their bankruptcy and liquidation in the second quarter of 2012. We expect the increased mass market business for the remainder of 2013 to offset the loss of Schlecker. SG&A expenses for the third quarter of 2013 were $6.5 million, or 30% of sales compared with $6.1 million, or 30 % of sales for the same period of 2012. SG&A expenses for the first nine months of 2013 were $19.3 million, or 28% of sales compared with $18.3 million or 28% of sales in 2012. The SG&A increase was mainly due to higher variable selling costs as a result of higher sales and the addition of sales and marketing personnel. Operating profit in the third quarter increased from $1,360,000 last year to $1,410,000 this year, a 4% increase. Operating profit for the nine months increased by 5%. Net income for the third quarter of 2013 was $959,000, or $0.29 per diluted share compared to a net income of $798,000, or $0.26 per diluted share for the same period of 2012. Net income for the first nine months was $3.5 million, or $1.07 per diluted share compared to $3.1 million, or $1.00 per diluted share in the comparable period last year. The company’s bank debt less cash on September 30, 2013, was $13.2 million compared to $14.2 million on September 30, 2012. During a twelve month period ending September 30, Acme purchased the new distribution facility in North Carolina for $2.8 million and paid $900,000 in dividends. During this period the company also received $1.7 million from repayment of a mortgage receivable and generated $3 million of cash flow from operations. Net debt should end the year at approximately $12 million. This compares to $14.6 million at the end of last year.

[Walter Johnson:]

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

[Operator:]

(Operator Instructions) And we will take a question from Richard Dearnly with Longport Partners. Go ahead, your line is open sir.

[Richard Dearnly:]

Good morning. Could you talk about the investments that you plan to spend in the new distribution center – what’s necessary there and then take a stab at what the moving costs will be and how they are going to hit in fourth quarter, first quarter, whenever.

[Walter Johnson:]

I will start with the physical description. Paul perhaps you could fill in a little bit better some of the timing of the investments. So we bought a building that, in my view, we got an incredible price on. But there were some things that needed to be done. It had been vacant for a year so there was damage in the offices. So we are stripping out the offices and refurbishing them. That is about 6,000 sq. ft. and so that is going on. There is a lot of cleaning. Cleaning of dust; and this is a big facility with ceilings 40 feet and 50 feet high. So there is a lot of cleaning of dust and then debris and then power washing floors and then preparing the floors for our level of operations. So that is going on. There was not a certificate of occupancy because it had been vacant a year so all of the air conditioning, water, septic, electrical and sprinklers all had to be tested. That is going on. We are pulling out a couple of oil tanks that did not leak but we do not want them on the site. That is in process. We are painting the outside. We are working on the loading docks so that they have the proper height for our trucks. Then finally we are bringing in, we believe, a new conveyor system that we are buying at a very good price from another company so that we begin to automate that operation. We are also working on the facility’s rewiring so that we have got scanners that are up to our standards and right now the wiring is several generations old, so that is coming in. We are putting in a new phone system. So most of that is happening between now and year end. Why don’t you go over, just ballpark, what that means in capital.

[Paul Driscoll:]

We have spent $2.8 million for the property to the end of September. We will spend approximately a total of $1.2 million for the refurbishments and the additional equipment that we need and probably $600,000 in the fourth quarter and another 600,000 in mostly the first quarter with a little bit in the second quarter. So the total will be $4 million all in. And as far as the moving the duplicate operating costs and the moving expenses; we expect that to be approximately $160,000 in the fourth quarter of this year, and the maybe $80,000 in the first quarter.

[Walter Johnson:]

When I had originally given guidance on that, I estimated the costs of duplicate occupancy and moving to be about $300,000 so we are coming in below that business is doing well so the impact in the fourth quarter may be less than that number.

[Richard Dearnly:]

Right, I see. And then the $90 million for the year implies a flat sequential fourth quarter versus the third quarter where usually the fourth quarter sales are significantly less than the third quarter. What is causing the change this year?

[Walter Johnson:]

We are seeing a shift in our business in the seasonality and I mentioned the bump that we are seeing in the fourth quarter. Part of that is Camillus Knives where we know that we have got some Christmas time and hunting promotions. We have got industrial business which is moving in all our quarters, going up. But it is having an impact of raising the fourth quarter revenues. In the first aid business we started to make hazard protection kits for things like hurricanes and snowstorms and we had a pretty big order, some of which we really thought was going to be a third quarter shipment but it is falling in to the fourth quarter. Well that is something else. And then finally in Europe the mass market promotions are lined up to be quite strong and last year some of that did not occur so all told the fourth quarter will be at least equal, we think, or stronger than the third and that will be the first time it has been like that.

[Richard Dearnly:]

Would you guess that that is going to be a new – that will stay the same way in years to come? I realize this is a guess.

[Walter Johnson:]

What will be changing, and that is the garden area with our Scott’s Miracle-Gro of things that a year from – some of that may be Christmas time promotions that will certainly be impacting our first quarter in a favorable way in 2014 because we ship those. I think it is fair to say that we are hitting new levels in the fourth quarter in sales but the seasonality – we may find the first quarter now also being kind of stronger because of the garden shipments.

[Richard Dearnly:]

Right, I see, and then Paul, you are looking to be short of 30% tax rates this year, or is there a big makeup coming in the fourth quarter. Do you have a new look at tax rates?

[Paul Driscoll:]

I expect our tax rate to be 28% for the year. At this point that is where we are at 28% and that is our expectation for the 12 months.

[Richard Dearnly:]

And is that a new level going forward or is that a one-time special?

[Paul Driscoll:]

28% to 30% is the range where we will be going forward.

[Richard Dearnly:]

Right, okay, and is – going forward, do the new businesses – in the past if you sort of normalize inventory and receivables they are about half of sales. Is that – with the different mix, is that likely to stay the same as well.

[Walter Johnson:]

Let me address that. It depends on the business. For example, if they are products that we are bringing in from Asia, and that would be the Camillus line, our Westcott line, those have lead times, both at the factories, time on the water and customs and our penalty for not shipping is air freighting and we lose all of the profits that we could possibly have made. So that portion of the business, there may be some optimization we can do a little bit better but that is basically what it is.

[Richard Dearnly:]

You need the inventory to get the margin.

[Walter Johnson:]

The other side of the business is the Pac-Kit and the PhysiciansCare first aid side which is growing nicely. And there particularly the Pac-Kit, we make to order. And so we have got inventory, picture a big Lego set, in our warehouse, and when we get the orders we are picking different components off the shelf, turning it and shipping it out and we are doing custom printing on the boxes. Those are very quick turnarounds and to the extent that Pac-Kit and PhysiciansCare continues to grow, and it is, that increases the inventory terms. So the net, net [ph] – we should see some improvement but on the imported items – that is how we believe it is best to be running the business right now.

[Richard Dearnly:]

Right, okay, thank you very much.

[Operator:]

(Operator Instructions) We will go next to Frank DiLorenzo of Singular Research. Go ahead your line is open.

[Frank DiLorenzo:]

Thanks, I had a question about Canada. Can you talk about anything that you are planning or may be able to do in the future, say beginning in 2014 to try and turn around that situation? Thanks.

[Walter Johnson:]

Our Canadian business has consistently been a very profitable cash generating business. It has been an excellent business for us. It has had some slowness particularly in the last two quarters and it related to the office business and it related to a couple of the customers which may be it is something to do with their inventory plans, I am not sure. We are seeing a pick-up this quarter so that is helpful. We made a change, as I mentioned, with John Ward, who is now our head of Canada, highly energetic, very strong sales and marketing background and well known in our industries. He alone will make a difference in sales but he certainly will be, I think, fresh energy. There are other areas though that we have growth that we didn’t last year. For example, the Scott’s Miracle-Gro that we know has now been placed in some fairly large accounts in Canada and that will be impacting our growth next year. Camillus Knife business is making inroads and the Crouse Tools have a chance to break in to some of the big distribution for next year. All these things are additives but what hurt the business this year was the softness in a couple of big accounts and that may be temporary. In any case I am not expecting this to be indicative of the fourth quarter for Canada and we will certainly have programs to drive for next year.

[Frank DiLorenzo:]

Thanks. Going to Europe, could you talk about 2014? Is there the potential in Europe for an additional presence in the retailer space, new clients, distribution and things of that nature?

[Walter Johnson:]

This was in Europe?

[Frank DiLorenzo:]

Yes, Europe, thanks.

[Walter Johnson:]

Well, let me tell you some things we have done. We are showing growth in Europe especially when you factor – well the nine months were not showing growth. Third quarter we clearly did have growth and fourth quarter we do. We are adding some distributions, for example in Camillus Knives. We are now selling Camillus and Les Stroud throughout Scandinavia and those are happening. We have just signed a large German distributor for Camillus Knives. Shipments start this quarter for that. The garden area would be new for us in Europe. We are making presentations. We have gained some good office business and this is market shared gains, in continental Europe as well the UK. And finally in the mass market we will sell about a million knives this year and these are for the consumer in their kitchen and this business is something that has been growing very nicely for us there. Knives that are used in the industrial market here in the U.S., upgraded for packaging and ergonomics, but they are very high quality fairly inexpensive knives and they are hitting very well in Europe. So all those things are working in its favor but the new distribution really is the Camillus Knives.

[Frank DiLorenzo:]

And just going back to Scott’s, you mentioned that should be strong in the U.S. in 2014 and also helpful in Canada. You are working for that for Europe but nothing concrete at this time.

[Walter Johnson:]

Right.

[Frank DiLorenzo:]

Okay, thanks.

[Operator:]

And we will take our next question from Ralph Marash with First Manhattan Company. Go ahead your line is open.

[Ralph Marash:]

Good afternoon. I just wanted to go back to the inventories again to see if I understand it. So they are essentially flat – they are down a little bit year over year and as the Pac-Kits and the first aid kits become a higher percent of your sales – is that really the reason why our sales our increasing and the inventory is not?

[Walter Johnson:]

Well no, we did some things that made that happen. One of the things was the reset points on inventory in general; we scaled it back by a week. You don’t see that the first day that you do it but you do see it over the course of the use of inventory in a year and then the replenishment levels in the future. We have also worked on the minimum order qualities with our factories so if you can reduce the minimum order quantity – for them it means they have more turnovers in production and for us it means we have a faster cycle time. So we have done that. We have also worked on some inventory that is duplicated. And duplicated might be in one type of packaging versus another type and standardized it and then sold off so you have one packaging instead of two. These things sound simple but they have thrown off a fair amount of cash this year. I think the inventory is down about $700,000 and we have grown during that period. We are continuing to work at that and frankly if we are able to do it I want to keep pushing but the tradeoff is being shorthanded and then having to air freight so it is a very careful mix. First aid though clearly has a much quicker turnaround because you are making to order or you have your own factory and you are able to turn it around. One of the exciting things is that eventually as we continue to grow that first aid business, our Rocky Mount facility is a space to be able to store semi-finished components and probably increase our overall volume.

[Ralph Marash:]

Okay, good, thanks for that helpful information. Also on the balance sheet accounts payable are down substantially, could you talk about that?

[Walter Johnson:]

Paul, that is yours.

[Paul Driscoll:]

At this time last year our inventory was higher and the accounts payable relative to inventory was higher so this year – at this point our inventory is down so our accounts payable is down.

[Ralph Marash:]

Okay, thank you.

[Walter Johnson:]

Thank you, Ralph.

[Operator:]

So it seems that we have no further questions at this time and I will turn the program back to our presenters for any closing remarks.

[Walter Johnson:]

If there are no further questions then this call is complete and I would like to thank you for joining us. Goodbye.

[Operator:]

Thank you for your participation.