Acme United Corporation
Q3 2014 Earnings Call Transcript

Published: 23 Oct 2014

[Operator:]

Good day and welcome to the Acme United Corporation’s Third Quarter 2014 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 Johnsen:]

Good morning. Welcome to the third quarter 2014 earnings conference call for Acme United Corporation. I am Walter C. Johnsen, Chairman and CEO. With me is Paul Driscoll, our Chief Financial Officer, who will first read the 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

[Walter Johnsen:]

Acme United had an excellent third quarter in 2014. Our sales for the quarter were $30 million as compared to $22.1 million last year, an increase of 36%. Excluding the impact of our First Aid Only acquisition, revenues grew 16%. Net income for the third quarter of 2014 was $1.2 million, an increase of 24%. EPS for the third quarter was $0.34 compared to $0.29 last year, an increase of 17%. Our internal growth resulted from strong back-to-school sales, robust first aid revenues and increased demand for Camillus knives. Particularly though was the growth in iPoint pencil sharpeners throughout the year and the increase in customer base with our Camillus knives family. Our Westcott kids scissors won the Teacher’s Choice Award, which is particular rewarding since it reflects the overwhelming opinion of educators in the classroom. The financial and operational performance of First Aid Only was excellent. We delivered strong sales and made headway in the integration process. Our initial focus operationally was to combine the sales forces and products with attention to improving customer service and expanding the items that we could provide. We believe this has been done well. Our next step is the rationalization of duplicate products, integration of our computer systems and shifting some production to the First Aid Only site to leverage fixed costs. First Aid Only has been accretive from the first month of ownership and we anticipate generating savings as we move forward. Sales in Canada were strong due to an excellent back-to-school as well as new lawn and garden sales and new customers for Camillus knives. In Europe, we had excellent back-to-school and office product sales and there our medical instruments were very strong. However, Europe did not have the same promotional revenues this year compared to last. We’re working to regain the mass market momentum for next year. We donated over 150,000 respirator masks to MAP International, which promptly sent them to Liberia to fight the Ebola crisis. There were many reasons to do this. West Africa is overwhelmed with the disease and the doctors do not have the medical supplies to treat the population. We’re positioned to supply blood [bone] (ph) containment kits, fluid isolation kits and custom kits. We’ve had many inquires for various items from large cities, police departments, as well as medical and industrial distributors. In the coming months, we expect to work with these groups to meet their needs. Our guidance for 2014 is about $107 million to $109 million in sales with EPS of approximately $1.34. For 2015, our preliminary revenue guidance is $125 million, but we are still developing the bottoms up forecast. I’ll now turn the call to Paul.

[Paul Driscoll:]

Acme’s net sales for the third quarter were $30 million compared to $22.1 million in 2013, an increase of 36%. Sales for the nine months ended September 30th were 82.6 million compared to 68.2 million in the same period in 2013, an increase of 21%. Excluding First Aid Only, sales increased 12%. Net sales in the U.S. segment increased 41% in the quarter and 25% for the nine months ended September 30th. Excluding First Aid Only, sales increased 16% and 13%, respectively. The growth in the quarter came from Acme First Aid Only products and Camillus knives. The year-to-date growth came from first aid, pencil sharpeners, Camillus knives and the introduction of a new lawn and garden product line. Net sales in local currency for Canada increased 28% in the quarter and 19% year-to-date. Sales were higher in Canada for both periods mainly due to a strong back-to-school, introduction of lawn and garden products and higher sales of Camillus knives. Net sales for Europe decreased 5% in the quarter in local currency and declined 8% for the nine months ended September 30th. Gross margins were 35.8% in the third quarter of 2014 after adjusting for the donation versus 35.9% in the third quarter of 2014. SG&A expenses for the third quarter of 2014 were $8.7 million or 29% of sales compared to $6.5 million or 30% of sales for the same period in 2013. SG&A expenses for the first nine months of 2014 were $22.9 million or 28% of sales compared with $19.3 million or 28% of sales in 2013. The SG&A increase was mainly due to the added First Aid Only business, 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 $1.4 million last year to $1.9 million this year, a 37% increase. Operating profit for the nine months increased by 23%. Net income for the third quarter of 2014 was 1.19 million or $0.34 per diluted share compared to a net income of $959,000 or $0.29 per diluted share for 2013. Net income for the nine months ended September 30th was $4.1 million or $1.18 per diluted share compared to $3.5 million or $1.07 per diluted share in the comparable period last year. The company’s bank debt less cash on September 30, 2014 was $24.5 million compared to $13.2 million on September 30, 2013. During the 12 months, we purchased First Aid Only for $13.8 million, spent 1.5 million on refurbishing the new distribution facility in North Carolina and paid $1 million in dividends. Also during the 12 months, we received $800,000 from the sale of our Fremont, North Carolina property and generated $5 million in cash flow from operations.

[Walter Johnsen:]

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

[Operator:]

Thank you. (Operator Instructions) Our first question is from the line of Jim Collins with Portfolio Guru. Please go ahead.

[Jim Collins:]

Just one question on the working capital. Accounts receivables went up 37%, payables up 31% and sales was 21%, how much of that is attributable to First Aid Only? And should we be modeling out a higher sort of daily sales outstanding going forward given a different business mix that you have today?

[Walter Johnsen:]

Well I will attempt to address that. Paul's closer to the numbers. The primary reason for dated receivables was the back-to-school and we had a pretty strong back-to-school season this year. So, those typically get collected about four weeks later than the normal receivable. However, First Aid Only has had an impact -- in part, the inventories for the manufacturing operation turned faster than our typical import business. So, we’ll see an improvement in the turns. I would guess because of the customers that we overlap and these are the big office customers and many of the industrial distributors that they would tell you about the same. So I wouldn't suggest you that the inventory would be the primary change and it would be favorable to the company. Paul, do you have any specifics?

[Paul Driscoll:]

Yeah. As you said, the receivables are up 37% and the sales in the quarter are up 36%. The average days sales outstanding is about 60 days and that’s pretty close to a quarter. So, the cash receivable increase is consistent with the sales increase. And the inventory increase is mostly attributed to the First Aid Only addition.

[Operator:]

(Operator Instructions) Our next question is from the line of Richard Dearnley with Longport Partners. Please go ahead.

[Richard Dearnley:]

What percentage or could you give a feel for how big back-to-school is as part of Westcott or as part of the company, either one?

[Walter Johnsen:]

Well, that’s changing, because now the First Aid Only – obviously the first aid is having a more consistent base, so that growth that occurs as a percent has declined with the impact of First Aid Only. I would really be misleading to tell you that I know that number offhand because FAO has changed the ratios. However, I can tell you that if you look historically, the sales in the second and third quarter were the strongest for the company. And that impact is gradually shifting to more in the fourth quarter as we get more Camillus knives and hunting in back-to-school. The first aid business tends to make a base broader across all quarters. The garden business is much stronger in the first quarter and that’s going to be a change over previous years as we continue to grow that. So we’re seeing a little bit more balance than we had only a couple of years ago. So, but I don’t have the specific numbers. I don’t think we've ever broken that out.

[Richard Dearnley:]

And then when you say back-to-school was strong, is that just more kids' scissors, is that iPoint and other product in gaining SKU share?

[Walter Johnsen:]

Well, when I say back-to-school is strong, we’re specifically talking about the Westcott product shipment. And it’s not just kids, because the teachers are also purchasing heavy duty pencil sharpeners for the classrooms, schools are as well, they’re also buying some of the rulers, the Westcott rulers, some of the see-through products that we have, the lettering and stencils. The kids' scissors did have a good back-to-school. The iPoint pencil sharpener continued throughout the year to be stronger than it had ever been and was a strong contributor. We’re also making product with our non-stick scissors which are being used in classrooms. So just in general it was very encouraging. And then to get the Teacher’s Choice Award was sort of a confirmation that, guys, you’re doing something right here.

[Richard Dearnley:]

When you’re getting an award like that, do you notice that in sales or that product line do better than, noticeably better than last year?

[Walter Johnsen:]

Well, it helps when you’re in the selling season, for example, we’re right now. So for next year those items will have some attention and I think buyers pay attention to that. But there are so many variables that relate to it and cost is a pretty big one. It’s nice to win awards, but at the end of the day you have to deliver value.

[Richard Dearnley:]

Could you take a guess at any margin drag in the quarter from First Aid Only?

[Walter Johnsen:]

I’ll turn that to Paul. I know that First Aid Only’s margins as we speak are about comparable with our corporate margins and there is an opportunity as we leverage our combined purchasing with Pac-Kit and PhysiciansCare to improve them. But Paul, why don’t you be a little bit more specific?

[Paul Driscoll:]

Well, there isn’t drag in it. As Walter said, they’re comparable to the corporate margins. So they’re not affecting the margins one way or the other at the moment.

[Richard Dearnley:]

And is that both gross margin and operating margin?

[Walter Johnsen:]

No. The operating margin on First Aid Only is higher.

[Richard Dearnley:]

Higher now?

[Walter Johnsen:]

Yeah. And it will continue to be higher than corporate as we begin to put more and more into the facility.

[Operator:]

(Operator Instructions) And we have a follow-up from the line of Richard Dearnley with Longport Partners. Please go ahead.

[Richard Dearnley:]

I forgot to ask about Westcott’s mix. How has that been trending in the last quarter or two?

[Paul Driscoll:]

You said the mix?

[Richard Dearnley:]

Yeah. The higher price versus lower price sell-through?

[Paul Driscoll:]

I think the mix has been fairly neutral. There really isn't much of an effect on mix.

[Operator:]

And we have a follow-up from the line of Jim Collins with Portfolio Guru. Please go ahead.

[Jim Collins:]

Yeah. Just one quick one. I was checking my notes from the last conference call and it looks like you’re talking about earnings of about $1.34 for 2014 and revenues of $125 million for 2015. On the last conference call you said $1.35 to $1.38 for this year and revenues at $125 million to $130 million. I realize these are very, very small differences, but is that a reflection in your outlook at all or is that just more granularity at the year ahead?

[Walter Johnsen:]

Well, first looking out to 2015, I could have said $125 million to $130 million. We really don’t have that nailed down yet. When we do our modeling, we tend to be looking at 10%-ish internal growth plus the impact of First Aid Only and other acquisitions. Well, that gets you to a pretty quick $125 million plus. This quarter we grew 16%, so it was greater than our internal modeling for next year. 2014, there were a couple of things that -- there is some more granularity. One of the things is we’re in the midst of moving our operation here in Fairfield because we need more space. We had to move to Hong Kong because we needed more space. So there is a little bit of expense here that we’re incurring. And then when we donated the masks to MAP International, that reduced the earnings per share by about a penny this quarter. But I can tell you that we were in the mainstream of many, many quotes and it raised our visibility quite significantly. So, there was a benefit to that in addition to the – there is a lot of talk about getting supplies over to Liberia in particular and nothing happens. Well we've got plane-loads of things going over now. So, I know it’s trapped a little bit also [indiscernible] but people don’t act on it. We're going to have a pandemic and it’s exponential. So you can’t think it's isolated. And so we were happy to play a very small part in that.

[Jim Collins:]

And it sounds like the respirators were about a penny and moving offices was about a penny, so maybe that we’re now $1.34 where we might have been $1.36, is that sort of safe to say?

[Walter Johnsen:]

That’s ballpark right.

[Jim Collins:]

These are just such tiny differences, I get that. And then just a follow-up, obviously we've heard a lot of Ebola plague and things like that. But I think the bigger issue is that – and it's just so blatantly obvious that protocols were not followed on the ground, especially in Dallas. So is that really where you’re seeing the interest in greater supplies is from sort of what would be normal first responders? So, I think you mentioned police, municipal governments, physicians, I’m just wondering a little more color on that.

[Walter Johnsen:]

So, as an example, in New York two days ago, Governor Cuomo announced that he was working to properly equip first responders. And what that means is, when you have an event, you don’t then try to buy yourself in, because it's too late. And so a number of locations are being proactive right now and they're awaiting their needs in the event that there's some reason to use the mask, the isolation kits, the full body suits which we don't sell. So that’s what they're working on right now. I think the lack of protocol was really a wake up call. And these things come across borders. I can tell you that when I’m on an airplane, which tend to be on sometimes, I'm worried about where that plane has been, especially some of the international flights.

[Operator:]

(Operator Instructions) Next question is from the line of Michael Wasserman with Moors & Cabot Investment. Please go ahead.

[Michael Wasserman:]

I was wondering if you would perhaps comment a bit on your broad brush view of the world as we sit here in late October versus say a year ago in terms of the varying impacts on Acme’s businesses, including currency, raw material cost, overall economic environments, et cetera.

[Walter Johnsen:]

One of the things that we found is that the dollar is strengthening. And although I’m not an expert on forecasting where the dollar goes, because a lot of that’s policy, it appears to me that the dollar is in a good place to continue strengthening. So, for the U.S. buying in the Chinese goods, which is our primary activity, that helps us. For many years we were facing something quite different which was the headwinds of the dollar depreciating over five years about 40% until there were price increases, there were intense cost savings, product redesign, a lot of things to be able to offset 40% decline in our buying power. Well, in the past year we’ve had pretty much stability with the U.S. dollar against the RMB. In fact it’s been the dollar has strengthened slightly. So that's a plus. And what I’m hearing is we can expect more of that in the coming year. Regarding interest rates, we have cash in Asia and we have 20 some million of debt here in the U.S. And so obviously we’re sensitive to interest rates. We borrow at LIBOR plus 1.75, so that's a little over 2% interest. What I’m hearing is that we’re expecting stability in that perhaps on a 10-year bond and maybe it’s going to be up to, instead of 2.10, it might be up to 2.30 next year, but that's insignificant to us [of our own] (ph). I worry about some of the political things that are going on. In particular, I worry about gas in for Europe, in the Ukraine. I worry about the U.S. being aggressive with borders against China. These things can be disruptive to our business. Frankly, I worry about Ebola, because that could be a pandemic. But I think there is enough attention now that that's not going to occur. As we’re laying out our plans, we’re seeing good interest in our products in both the Camillus knives, the new fishing line, the Cuda line. We’re continuing to see growth in our first aid business Westcott's holding and growing. So I’m feeling good. But I think probably, if you ask me where the biggest concern is, it's the political environment which can be kind of dicey.

[Michael Wasserman:]

Yeah. And you didn’t comment, I don’t think, about raw material cost generally.

[Walter Johnsen:]

Raw material in a scissor, the biggest raw material is stainless steel and then the second largest is a plastic handle. The plastic has not dropped in the past two months, from our purchasing anyway, and so it’s about the same, although I would guess that in time as the feedstock prices drop, then we should pick up a little bit. With stainless steel, we’re about the same as we were a year ago. So there has not been inflation, and that’s good for us, because if we have a stable or slightly more favorable cost of materials, it gives us the ability to offset perhaps a labor increase in China, which will occur.

[Michael Wasserman:]

So that’s going to continue as it has for years and likely to for years more?

[Walter Johnsen:]

What? The wages in China?

[Michael Wasserman:]

Yes.

[Walter Johnsen:]

Well, I think that’s going to be continuing for quite a while. I will point out that we pay our employees in China – it costs less than our healthcare in the U.S. and they’re both appreciating in double digits. So it's not that there is an alternative of bringing it here, although there are places elsewhere in the world that we’re looking at right now and that’s really a change from the past.

[Operator:]

(Operator Instructions)

[Walter Johnsen:]

Well, if there are no further questions, this call is complete. And I would like to thank you for joining us. Good bye.

[Operator:]

Thank you. Ladies and gentlemen, that does conclude our conference for the day. We'd like to thank you for your participation. And you may now disconnect.