Acme United Corporation
Q2 2015 Earnings Call Transcript

Published: 22 Jul 2015

[Operator:]

Good day, and welcome, to the Acme United Corporation’s Second Quarter 2015 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 second quarter 2015 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 a solid sales and net earnings in the second quarter of 2015, in fact, both set records for the period. Nevertheless, they did not meet our expectations. Net sales were $34 million compared to $33.4 million last year, an increase of 2%. Net income was $2.7 million compared to $2.5 million last year, an increase of 6%. While we did well in many areas, we also faced a number of challenges. Our back-to-school sales of Westcott scissors, rulers, pencil sharpeners, and other supplies were less than forecast. We saw declines in purchases from the office retail chain, which are closing hundreds of stores. While we believe demand for our products continues to be strong, inventory in the closed stores were send to other sites resulting in reduced purchases by our customers. In Canada, one large retail chain exited the entire country and closed over 100 stores. We'd won some wonderful back-to-school business for 2015 that unfortunately never had a chance to materialize. Both Canada and Europe had reduced sales and gross margins due to the weakness of the Canadian dollar and euro compared to the U.S. dollar. The impact of the currency in those locations was about 16% reduction in their sales. The diversification strategy that we began implementing over ten years ago showed its value in the quarter. When we purchased Clauss Cutlery in 2004, we entered the industrial and hardware markets. Our acquisition of Camillus Cutlery in 2007 brought us into the sporting goods market with the oldest knife company in North America. In 2013, we developed and launched the Cuda line of fishing tools, which is proving to be very special. And of course, our recent purchases of Pac-Kit in 2011 and First Aid Only in 2014 strengthened our presence in first aid throughout the industrial and safety market. The second quarter of 2015 benefited from the new customers and product lines this diversification brought. In particular, sales of our first aid items, the Cuda fishing line, and our Camillus knives overcame the weakness in the office channel. We are hardworking -- we are working hard to manage product mix, reduce cost and leverage operations. We are raising prices were appropriate, there has been an improvement in gross margins of about 1.5 percentage points during the past six months. We are consolidating our two first aid locations, which has resulted in additional cost of approximately $125,000 in the second quarter but it's expected to provide operating leverage in 2016 and beyond. There are a number of opportunities that we expect to enhance sales and earnings in the coming quarters. We recently won all the scissors at a large office superstore chain and shipments are now underway, we have a substantial pencil sharpener promotion at a large retail chain that ships this quarter now, the third quarter. We look forward to strong Camillus knives sales during the fall and holidays. The Cuda fishing line is gaining market share and new customers at a very strong rate. We are building new first aid promotions to the hardware market and expanding its presence in the industrial channel. Recently, we engaged LHA a New York based investor relations firm to help put our story in front of the investment community. Looking at the remainder of 2015, we are now forecasting about $115 million in revenues and earnings per share of $1.40 to $1.42. By comparison, we have revenues of $107.2 million and earned $1.36 in 2014. I will now turn the call to Paul.

[Paul Driscoll:]

Acme’s net sales for the second quarter were $34 million compared to $33.4 million in 2014, an increase of 2% or 4% in constant currency. Sales for the six months ended June 30, 2015 were $56.8 million compared to $52.5 million in the same period in 2014, an increase of 8% or 10% in constant currency. Net sales in the U.S. segment increased 6% in the quarter and 13% for the six months ended June 30. The growth in the quarter and year-to-date mainly came from first aid products, Camillus knives, and Cuda fishing tools.Net sales in local currency for Canada decreased 13% in the quarter and 11% year-to-date. Sales were lower in Canada for both periods mainly due to a major retailer exiting the Canadian markets and soft economic conditions. Net sales for Europe were constant in the quarter in local currency and increased 6% for the six months ended June 30. The year-to-date sales increase was primarily due to our higher sales in the office channel. Gross margins were 36.9% in the second quarter of 2015 versus 35.1% in the second quarter of 2014. The gross margin percentage was higher mainly due to our favorable product mix. SG&A expenses for the second quarter of 2015 were $8.7 million or 25.5% of sales compared with $8 million or 23.9% of sales in the same period of 2014. SG&A expenses for the six months of 2015 were $16.3 million or 28.6% of sales compared with $14.2 million or 27.2% of sales in 2014. The SG&A increase for the six months was due to higher variable selling costs as a result of higher sales, the additional sales and marketing personnel and the added First Aid Only business. Operating profit in the second quarter increased from $3.5 million last year to $3.9 million this year, a 10% increase. Operating profit for the six months increased 13%. Net income for the second quarter of 2015 was $2.7 million or $0.74 per diluted share compared to a net income of $2.5 million or $0.72 per diluted share for the same period of 2014. Net income for the first six months ended June 30, 2015 was $3.1 million or $0.85 per diluted share compared to $2.9 million or $0.83 per diluted share in the comparable period last year. The company’s bank debt less cash on June 30, 2015 was $28.2 million compared to $28.9 million on June 30, 2014. We expect net debt to decline to approximately $20 million by year end.

[Walter Johnsen:]

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

[Operator:]

[Operator Instructions] We will take our first question from Mike Mork with Mork Capital Management. Your line is now open.

[Mike Mork:]

Walter, how have you been?

[Walter Johnsen:]

Very good, Mike.

[Mike Mork:]

Two questions, one kind of short term. This year you ran into some problems that were unforeseen. Looking at 2016, is this a new base that we should maybe go 12% to 14% up for them, or will you have a bigger year in 2016, let's say, initially you are going to do $1.50 this year? Just wondering, is that going to -- should the $1.40, $1.42 be the base we work off of or with these extraordinary things this year and you will leapfrog up, it should have been in 2016 anyway?

[Walter Johnsen:]

That's a really good question. One of the things with these store closings and it's kind of hard to read into what some of these superstores are thinking, but the Office Depot/Office Max merger -- of course, we knew there were store closings and we have been the year before but when they accelerate, it’s that extra piece that was unforeseen. Staples had the composing stores, but this year they’re closing 250 stores. I mean these are big numbers. Of that base, if they do the same thing next year, then we would have consistency and I would one-off the --

[Mike Mork:]

Of the $1.40, $1.42 then?

[Walter Johnsen:]

Probably. In the longer-term, demand for our products I believe is very strong. So -- and I say that because while we just won one major superstore chain of -- in the scissor category, entire category, and that’s all new business and the new products that are coming in for the fall are strong we hope. So, if they accelerate -- if Office Depot and Staples would complete their merger and instead of between them closing 350 stores, if they close 500, well, that would again result in some excess inventory that you work off. The impact is really biggest in the second quarter because that’s where your back-to-school shipments primarily are, some in the third, but mostly second and so, if stores close, if it’s pushed over into remaining ones and they sit there until that second quarter when they can then liquidate them and then temporarily reduces demand from our perspective but there is a lot of good things going on that as we roll up into September, October into the buying area and we roll it into the budget, I will have much better sense of visibility, but I’m pretty optimistic that we’ll get back on track.

[Mike Mork:]

Okay. That sounds good. Then the next one just kind of a longer-term thing, looking at this value line, they go back to 2006. In 2006, ’07, and ’08, your operating margins were 12%, 13%, your return on investment, return on stockholders’ equity is about 20%. Now their operating margins are 8%, return on stockholders’ investment is 11% -- 12%. Is something changes in the business, it’s just got more competitive or can you get back to these higher numbers?

[Walter Johnsen:]

From 2006 until about 2013, the US dollar lost $40 of its buying power and relative to the RMB in China. And that 40% impacted both our gross margins as well as the operating income margin because we’re buying with potentially weaker currency. Now, we overcame the bulk of that 40% on new products, by productivity improvement, by pricing strength but that’s where the margin was hit. We have started to pickup gross margin in the past year or so and we’re seeing that because if the dollar hold, the ability to then reprice with new products -- now with new products, it’s also base that we then can -- we gain some of that margin. I think it would be unrealistic to say that you’re going to go back up to 12% operating margins from we’re somewhere around 8% now.

[Mike Mork:]

You’re at 8% right now, right.

[Walter Johnsen:]

I think we can certainly gain the dollar hold and what we’re seeing is that the dollar is strengthening and it may in fact continue to do that even against the RMB and that’s the key currency for us.

[Mike Mork:]

Okay, very good. Thank you very much.

[Operator:]

[Operator Instructions] We’ll take our next question from Richard Dearnley with Longport Partners. Your line is now open.

[Richard Dearnley:]

Good morning. Could you talk about the effect of the historic closing and the inventory going to other stores and -- versus the increase in inventory, which looked high? Was that left over because the -- you didn’t ship the Canadian business that you expected and then the store closings. And then part two of that is, is the new office chain that you won able to absorb that inventory?

[Walter Johnsen:]

I’ll let Paul answer the first part of that.

[Paul Driscoll:]

I’ll answer the inventory part. The inventory, some of that is just timing. We expect the inventory to decline by 2 million between now and the end of the year, so it will correct itself between now and the end of the year.

[Walter Johnsen:]

Relative to the new chain, we just started shipping that really in late June, but mostly starting now. And those items typically are different than what we had in inventory before, it just always work that way. It’s a major initiative for us and we are excited about it.

[Richard Dearnley:]

And the -- is it the safety -- you mentioned, you can raise price where appropriate, my guess is with the sort of savvy economy that you’re not tracking huge increases. But was that significant -- raising price significant in your gross margin increase?

[Walter Johnsen:]

I don’t think that would the most significant. There was clearly productivity in our first aid area where we have resourced many, many of the components when we had Pac-Kit, First Aid Only and PhysiciansCare. We have been working to combine that into a single brand and in bidding that out to the suppliers very aggressively. We are picking up some gross margin there. We are also picking up operating margins in Vancouver, Washington in the First Aid Only facility because we are shifting more production into that from Pac-Kit, which eventually will be phased out. And during the quarter, we had about 125,000 of expenses related to the unfavorable variances at Pac-Kit, but that’s going to be eventually gone. Relative to price increases, in Europe, we have had price increases, in Canada, we have had price increases and that’s consistent with the weaker currencies there. We have also had selective price increases in our first aid area where PhysiciansCare might have had a higher price than First Aid Only for example, so we harmonize them at the higher level. So there has been some impact to that.

[Richard Dearnley:]

The margin recovery from productivity is quite impressive.

[Walter Johnsen:]

There is a lot more to go with that and when we finally get the Pac-Kit facility closed, and while running through First Aid Only and some of the production goes to our Rocky Mountain, North Carolina facility, but basically eliminated a plant and we will put them in fixed cost, which run somewhere between 750,000 million annually. By year end, we should be starting to see some of that impact.

[Richard Dearnley:]

Great, thank you.

[Operator:]

We’ll take our next question from Jeffrey Matthews with Ram Partners. Your line is now open.

[Jeffrey Matthews:]

Hi, can you hear me?

[Walter Johnsen:]

Yes, Jeff.

[Jeffrey Matthews:]

Hi, Walter. Thanks. Couple of questions. One is, how much of that inventory build in the quarter was unplanned roughly? I am thinking of the --

[Walter Johnsen:]

The inventory -- our inventory build?

[Jeffrey Matthews:]

Yes.

[Walter Johnsen:]

Total [ph] was planned.

[Jeffrey Matthews:]

Okay. And when – and I assume, you’re talking about in Canada closing stores.

[Walter Johnsen:]

Well, we just try not to.

[Jeffrey Matthews:]

I understand, it’s just hard not to say the name, because it’s – so when a big retailer like Target closed a lot of stores, when you see that headline across the page that they are going to do it, what do you do, and I am not asking sort of retrospectively why didn’t you do certain things that would have avoided the impact, but how do you – what are your actions?

[Walter Johnsen:]

Then typical one is if we got production and – you can imagine, we start production for back-to-school shipment in say, May, we are doing that in the fall, November, December. And if there is an announcement like that, we may have to repackage the products into different language, example, Canada is French English and it would be going to the US with just English and it might be a different model number, but by and large, we just shift the production into one of the other location.

[Paul Driscoll:]

Yeah. And to put into perspective though, the target in Canada for the company wasn’t significant. It was important in Canada, but we only made our first real sale in 2014. So for comparable purposes, the back-to-school in the second quarter, it had a big impact.

[Walter Johnsen:]

Well, it had a big impact, because the impact is…

[Paul Driscoll:]

Yeah, right. We never did -- I mean, in 2013, we did zero for the most part. In 2014, we had our first sale and now it's gone. So it's not that big of a deal, but it definitely impacts the change in sales for the second quarter of Canada if you didn’t get it.

[Jeffrey Matthews:]

Sure, I understood. And then, did I hear correctly that you’re going to get your bank debt down to 20 million by year end?

[Walter Johnsen:]

Yes. That's about right.

[Paul Driscoll:]

To get the net debt down to 20 million, so the bank debt should be at around 21 million.

[Jeffrey Matthews:]

Okay. And that's a pretty big drop. Is there anything special in there or just normal inventory reduction and --?

[Walter Johnsen:]

Work in the inventory.

[Paul Driscoll:]

Yeah. We worked in the inventory -- we peak this time a year, get always the highest on June 30th because of our inventory and our receivables.

[Jeffrey Matthews:]

Okay. And you mentioned in China – the Chinese, the yuan is the only currency in the world that's up against the US dollar this year. Is there any change in your commitment to manufacturing there? Are you just continuing what you've been doing, modernizing and then looking at some other places?

[Walter Johnsen:]

Well, honestly, we’re very good with our operations in China, very good and the infrastructure, the development team, the engineering, the – our coating lab [ph], all that just working very well for us and if the dollar basically stays pretty close to the RMB's current levels, we’re in good shape. It's when the dollar weakens that we get killed.

[Jeffrey Matthews:]

Right. Okay, thanks very much.

[Walter Johnsen:]

Thank you.

[Operator:]

And it appears that we have no further questions at this time.

[Walter Johnsen:]

Well, if there are no further questions, then I'd like to thank you very much for joining us.

[Operator:]

Pardon me, gentlemen. We did have somebody re-queue if you’d like to take his question.

[Walter Johnsen:]

Of course.

[Operator:]

We’ll go back to Jeffrey Matthews with Ram Partners. Your line is reopened.

[Jeffrey Matthews:]

Hi, sorry about that. I was just thinking if somebody else might want to ask something. Walter, are you thinking at all about, well, first before I ask that, I hear very good things about the Cuda line and I wonder what your – what surprised you about it so far, what distinguishes it from other products out there, because there have been guys out there selling stuff like that for 100 years?

[Walter Johnsen:]

Okay. Let me refresh a little bit, the Cuda line is our line of fishing tools and we started developing that in 2013 and launched it about a year ago at ICAST in 2014. It's a line of all kinds of fillet knives, chunking knives, pliers, needle nosed pliers, crimpers, hook removers and we’re using a very high-quality German steel where we’re putting it through some proprietary processing, the net result of that is that the steel can withstand 5% salt spray test for 500 hours and there’s really nothing we’re aware of on the market that does that. And so when it was introduced, the ability for it to withstand rusting, now stainless, even though we would think it doesn't rust, stainless rusts in a salt water environment and these tools perform remarkably well. The designs of them are special in that the handle – the blade goes right through the handle as a special grip that is patterned after fish scales and moisture naturally runs off the handles. You have a strong grip and the price point is right in the sweet spot. So we introduced them at the ICAST show last July. We won the Best of Show award in the category, totally unexpected. We then quickly broadened the distribution to many accounts that we never had before. And it's in the sporting goods area and fishing area, it's in Australia, it's in Europe. So we created a stir with this product family in an area that I guess hadn't had serious innovation in a long time. But the most important thing is that the products really don't rust, so they perform. And we have a number of sponsors that have been using these products regularly on their shows including Wicked Tuna, Deadliest Catch and the [indiscernible] in Canada. And there is about 21 pros now that have joined and are working with us. We just had the second ICAST show for us which was in July and there was a buzz and it was tangible and we really do believe we have something special in this category for accelerating the product development and the product introductions all of which we will be showing to customers from now through November. The potential for this market is a lot more than knives and I think you will begin to start seeing that in gaffs and in nets and in perhaps gloves where maybe it’s hard for fish to bite through, so a lot of stuff going on. So it's a line that we are very excited about and I think next year we are really into production, it will begin to have an impact.

[Jeffrey Matthews:]

That's great. I appreciate that. That's really terrific and comprehensive. Then just one final question. I wonder if you are thinking at all or if the acting board is considering at all joining the folks at GE and Aetna for reconsidering their headquarters in Connecticut given the potential tax situation there?

[Walter Johnsen:]

Well, at this stage, I think we are letting GE and Aetna fight it out with the state and see what that impact is. When Pac-Kit closes, we will have about 35 people in the state, so we substantially reduced presence from what we currently occupy.

[Jeffrey Matthews:]

Alright, thanks very much, Walter.

[Walter Johnsen:]

Thank you.

[Jeffrey Matthews:]

Best of luck.

[Operator:]

And it appears we have no further questions at this time.

[Walter Johnsen:]

Well, again, thank you for joining us and I look forward to giving you an update on our initiatives this fall. Good bye.

[Operator:]

This does conclude today's teleconference. You may now disconnect. Thank you and have a great day.