Acme United Corporation
Q4 2014 Earnings Call Transcript

Published: 26 Feb 2015

[Operator:]

Good day, and welcome, to the Acme United Corporation’s Fourth Quarter 2014 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 Johnson. Please go ahead, sir.

[Walter Johnsen:]

Good morning. Welcome to the fourth quarter and year end 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 our 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:]

Thank you, Paul. Acme United has just completed a record year of sales and earnings. Our revenues for 2014 were $107.2 million compared to $89.6 million in 2013, an increase of 19.6%. Net income was $4.8 million compared to $4 million last year, an increase of 20%. Our earnings per share were $1.36 compared to $1.22. Every quarter during the year set records. Our fourth quarter had revenues of $24.7 million compared to $21.4 million, and earnings per share increased to $0.19 from 15% last year. I am very happy with this performance and I would like to congratulate our team. In June 2014, we acquired First Aid Only for $13.8 million. The company was an innovative supplier of first aid kits for the industrial and office market, and had thousands of its smart compliance kits in place in key accounts. We started opportunities to increase its distribution across our broader customer base and to bring greater value to our customers. We are delighted with our progress. Our new product efforts have also been successful. The Westcott family of school, home and office products introduced new high performance Carbonitride scissors, Orbit pencil sharpeners and new lettering products. All have been well received, and are contributing to our growth. The Clauss team introduced new gardening tools, non-stick scrapers and cutting products and proprietary line of knives, which truly resist rusting. The Camillus family expanded its array of high performance knives and experiments of the European and Asian markets. Our First Aid business now constitutes about 35% of revenues and positions us well with our office product customers. We’re expanding beyond traditional office supplies. We’re broadening a range of industrial first aid kits and expanding the retail business. There is increasing activity with sales to our mass market customers and also to [scoring] good dealers. The customer mix in our business during the past five years has changed. In 2009, sales to the office channel represented about 65% of revenues. In the intervening years, this channel continued to grow for us, but without faced by other customers in the mass, industrial and sporting goods markets. Our customer mix in 2014 was approximately 34% office, 38% mass market and 28% hardware industrial and sporting goods. We believe this broadening of our customer base has created new sales opportunities and reduced our reliance on any single market sector. On our operational front during 2014, we closed two warehouses in North Carolina and moved into our new 33 acre warehouse and office complex in Rocky Mount. The move was ambitious but it was successful. We believe we are positioned for growth during the next three years with much of the distribution infrastructure now in place as to the operational efficiencies as we grow. As we look to 2015, we see revenues of $120 million to $125 million and net income of $5.5 million to $5.8 million. If we achieve these levels, our earnings per share would be well in excess of $1.50. I will now turn the call over to Paul.

[Paul Driscoll:]

Acme’s net sales for the fourth quarter were $24.7 million compared to $21.4 million in 2013, an increase of 15%. Sales for the year ended December 31, 2014, were $107.2 million compared to $89.6 million in 2013, an increase of 20%. Excluding First Aid Only, sales increased 8% or 9% in local currency. Net sales in the U.S. segment increased 22% in the quarter and 24% for the year ended December 31st. The biggest contributors to the sales increase came from Acme First Aid products, First Aid Only products, the introduction of a new lawn and garden product line, as well as growth in iPoint pencil sharpeners and Camillus knives. Net sales in local currency for Canada were constant in the quarter and increased 17% for the year. The sales increase for the year was mainly due to increased back-to-school business and higher sales of Camillus knives. Net sales in local currency for Europe decreased 15% in the quarter and 10% for the year. In the fourth quarter of 2013, we had a large Christmas promotion that we were unable to repeat in 2014. The fourth quarter gross margin was 36% compared to 35% in the fourth quarter of 2013. The gross margin for the year ended December 31st was 36% for both 2014 and ’13. SG&A expenses for the fourth quarter of 2014 were $7.9 million or 32% of sales compared with $6.6 million or 31% of sales for the same period in 2013. SG&A expenses for the year ended December 31, 2014 were $30.8 million or 29% of sales compared with $25.9 million or 29% of sales in 2013. The increase for the quarter and the year was primarily due to the added First Aid Only business, higher variable selling cost as a result of higher sales, the addition of sales and marketing personnel, higher spending on new product development and office moves. Operating profit in the fourth quarter increased from $763,000 last year to $1,104,000 this year, a 45% increase. Operating profit for the year ended December 31, 2014 increased 26%. Net income in the fourth quarter and year end increased by 31% and 20% respectively. The Company’s bank debt, less cash, on December 31, 2014 was $21.9 million compared to $11.3 million on December 31, 2013. During 2014, Acme purchased First Aid Only for $13.8 million, spent $900,000 on refurbishing the new distribution facility in North Carolina and paid $1.2 million in dividends. In 2014, we also generated $4.6 million in cash flow from operations.

[Walter Johnsen:]

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

[Operator:]

(Operator Instructions) We’ll take our first question from Richard Dearnley of Longport Partners. Please go ahead.

[Richard Dearnley:]

Paul, quick data question here. You said European sales -- your numbers didn’t match the numbers in the release. The quarter decreased 23% in dollars and 15% in local currency. You said something else.

[Paul Driscoll:]

I only referred to local currency.

[Richard Dearnley:]

And so they were down 15%?

[Paul Driscoll:]

They were down 15%...

[Richard Dearnley:]

In the quarter and -- okay, 10% for the year.

[Paul Driscoll:]

Yes.

[Richard Dearnley:]

The -- was the bump up in SG&A in the quarter -- year-over-year in the quarter. How much of that was related to essentially sales short fall?

[Paul Driscoll:]

Sales short fall in the quarter?

[Richard Dearnley:]

Yes.

[Paul Driscoll:]

Short -- well the sales increased.

[Richard Dearnley:]

Sales were -- did you all feel that sales in the quarter were a little less than expected?

[Walter Johnsen:]

No, they were right no budget.

[Richard Dearnley:]

Okay, and the European sales, I take it promotions over there are totally unpredictable.

[Walter Johnsen:]

Well, the icing on the cake, if you get them, it’s terrific but consolidated business is based on, and similar in the U.S. as well. It’s just that when we get them in Europe, as a percent of revenues, they’re substantially impactful.

[Richard Dearnley:]

How much of the gross margin increase -- and gross margins were really great. How much of that was First Aid Only synergy?

[Walter Johnsen:]

Well, we’re clearly getting First Aid Only synergy. And in 2015, it should be about $1 million of improvement in our cost of sales. However, that wouldn’t be the case in 2014 because we were working through inventory and that’s mostly depleted now. In the fourth quarter, we did have a pick up there. But one of the things that occurred was because we did not get a $1 million promotion in Europe which was very thin margin. We had higher margins for the rest. And we were selling quite a number of Orbit pencil sharpeners to some major retailers, which have good margins, and they were very successful.

[Richard Dearnley:]

Great…

[Walter Johnsen:]

So that’s typically mix customer mix product mix.

[Richard Dearnley:]

And how much of the Cuda line got shipped and in the stores for the fourth quarter? And did they really have any effect in the fourth quarter?

[Walter Johnsen:]

No, Cuda -- for those that don’t know, the Cuda fishing line is a line of rust resistant knives and tools for salt water fishing. And we introduced them mid last year and we’re overwhelmed with orders for the first quarter of 2015. So, while we shipped some, really, it’s going out right now.

[Richard Dearnley:]

Well, it’s good to have overwhelming orders.

[Walter Johnsen:]

It is a great product, so…

[Richard Dearnley:]

Yes, I am looking forward to use it. The inventories seem to be higher, maybe than expected. Was that relative to new products or -- what happened there?

[Paul Driscoll:]

Well, big part of the increase was just that we buying First Aid Only. Of course we added inventory, and that’s about $2 million. Other than that, it’s just prepping out for new business in 2015.

[Operator:]

(Operator Instructions) And currently there are -- looks we have another question from Richard Dearnley. Please go ahead.

[Richard Dearnley:]

Well, no one else is going to ask anything. How’s the integration of First Aid Only is EDP and what not?

[Walter Johnsen:]

The integration of First Aid Only is progressing very, very well. The most important thing after we purchased the company was not, in any way, impact the customer experience. And I think we’ve been able to accomplish that. So we ran the First Aid Only brand in parallel with PhysiciansCare and Pac-Kit, our other two First Aid lines. And that was complicated on the back-end. But to the customer, they didn’t see it. And we’ve got our systems integrated throughout First Aid Only we’re narrowing down the components that are more consistent across the brands. We’re beginning to do more training with the combined sales forces and our customer sales forces. So, at this stage, we’re really building on the revenue base. It’s going well.

[Richard Dearnley:]

And do you think it will be complete by June?

[Walter Johnsen:]

It depends what complete means.

[Richard Dearnley:]

I am sure it’s ongoing.

[Walter Johnsen:]

Yes, I mean, as far as rationalizing some of the components that go in first aid kits that’s been accomplished, and we’re working very hard now to improve some of the productivity in the First Aid Only plans. We’ll be accessing some of our Asian sourcing to take components from Asia directly to our First Aid business bypassing intermediaries. So there is a lot of work yet to do. But in the initial stages that we’ve set out, that’s bearing fruit today and it’s well underway.

[Operator:]

And it looks like we have a question from Steve Percoco of Lark Research Please go ahead. Steve, your line is open.

[Steve Percoco:]

Could you talk about your capital spending budget for next year? How big will it be and where do you anticipate spending the money?

[Walter Johnsen:]

Our current plan is about 1.2 million in capital spending. Some of that will be going into computer systems, some of it will be going into equipment as the First Aid Only facility. For example, screen printing it was a pretty modern line for the cases. It’s going to be substantially down from the previous two years. As you know, we bought the plant in North Carolina in 2013 and then we refurbished it in 2014. But that’s behind us now. So, it’s really -- the money being put into our computer systems and into First Aid Only’s production. And it’ll be about 1.2 million.

[Steve Percoco:]

Okay, and then finally, could you talk a little bit more about Europe? I mean, as I look at it, except for, I think, 2012 and 2013, the business there has been consistently unprofitable. I don’t know, from a cash flow point of view, whether it’s positive or not. But just seems to me, I understand you’re rolling out some new products to Europe. Obviously you’re staying with it. But was it profitable in 2014? And if it wasn’t, what are your longer term plans? I mean do you see that it make sense to stay there over the long-term?

[Walter Johnsen:]

Well, the answer on Europe is we service our global customers. And so, it is growing with Staples and Office Depot and our office channel. We are leveraging our customer relationships with Costco, and as Walmart subsidiary. And so it’s very important from a customer service perspective. We have seen back a couple of positions which should put it in a pretty good place for being lucky in the future. And what that means is we’ll have some promotions that just extra gravy, which is what you wanted anyway. The markets for First Aid and our hunting and Camillus and Cuda fishing lines are -- those markets are just as big in Europe as in the U.S. and they’re asking for those products. So there is a lot of opportunity that we think we can build on. Having said that, if we had landed just one mass market account, you wouldn’t be asking that question because it wasn’t thrown off a ton of cash, but we didn’t do that. But again in the scheme of building a business that’s sort of insignificant.

[Operator:]

We have a question from Michael Wasserman of Moors Cabot. Please go ahead.

[Michael Wasserman:]

Could you comment on any recent developments in China, for better or for worse, in terms of labor cost and the like currency, and how it’s affecting the company at the moment please?

[Walter Johnsen:]

The labor costs continue to rising and that’s been a trend for about the last five years. And in the past year they’ve increased about 10% for our workers in China and 5% to 8% in Hong Kong. So, there has been clearly upward pressure. The offset to that has been a fair amount of automation and that’s continuing. It’s done at the factory level so we’re not paying for that automation. But we are benefiting from pretty stable costs. With the dollar so strong, it has pretty much stopped the decline that we’ve had over the past five years, wherever you were facing the headwinds of the dollar loses its buying power. And that’s no longer the case at least it hasn’t been for the past 12 months. And as we are looking into 2015, we’re not seeing any pressure from the rise in the RMB or decline in the dollar. In fact, it’s just the opposite. So, with a stable currency, that allows us to be able to generate cost savings and work to possibly raise the margin in this year and going forward. Again, if the dollar were to weaken substantially, then that wouldn’t be so easy. But I am looking to try to recover some of the margin that we used to have five years ago. So are the big changes.

[Michael Wasserman:]

Any changes in shipping cost that are material?

[Walter Johnsen:]

Well, the shipping costs are not so material as changes are. What has been a very big hassle is the U.S. workers in the Long Beach and L.A. ports and the reason there is just continue the work-down and dickering about wanting more money. We haven’t used the L.A. ports very much for the past several years and we shipped through the Panama Canal and then over the Norfolk, Virginia. But we did get hung up with some Cuda items outside of Long Beach -- in Christmas we might have been able to ship this year but that were in 2014. It’s up to cost so much -- it’s just workers that don’t want to work.

[Michael Wasserman:]

And given the costs of that bigger deal on the East Coast side of things, is it fair to assume that you will not benefit very much from the expansion of the Panama Canal and the ability of larger ships to make it through, which in theory, should lower shipping cost attached?

[Walter Johnsen:]

That would be terrific for us because Norfolk, Virginia is very close to our major distribution center in Rocky Mount, North Carolina, and we’re currently using Norfolk for the bulk of our fleet. So a larger vessel going through the Panama Canal would be wonderful.

[Michael Wasserman:]

That’s not far away.

[Walter Johnsen:]

Yes.

[Operator:]

(Operator Instructions) And currently there are no questions in queue.

[Walter Johnsen:]

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

[Operator:]

This does conclude your teleconference for today. Thank you for your participation. You may disconnect at any time.