Acme United Corporation
Q3 2015 Earnings Call Transcript

Published: 16 Oct 2015

[Operator:]

Good day, everyone. Welcome to the Acme United Corporation’s Third Quarter 2015 Earnings Call. Today’s call 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:]

Thank you. Welcome to the third quarter 2015 earnings 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 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

[Walter Johnsen:]

Thank you, Paul. Acme United had record sales and earnings in the third quarter of 2015. Our net sales for the quarter were $29.9 million compared to $30 million last year. Net income was $1.21 million versus $1.19 million in the comparable period last year. Earnings per share were $0.33 compared to $0.34 in 2014. As described in this morning's release, we would have had $0.35 earnings per share without the first-aid consolidation expenses. Let me give you more details by segment. In the U.S. revenues increased 2%. This was led by the Westcott family of school and office products, which grew 7%. We had record back-to-school sales, with particularly strong growth in our titanium scissors and iPoint pencil sharpeners. More significantly, it appears that the closing of office superstores may have peaked as evidenced by our record third quarter back-to-school sales. The first-aid business in the U.S. grew 9% after adjusting for discontinuation of low margin sales, branded medications to several large customers. We ended new accounts in the industrial market, continued to support our office products customers in their business to business sales and started shipping refills to a large industrial wholesaler for use in a vending machine rollout throughout the United States. We also introduced ANSI 2015 compliant first-aid kits, which exceed newly issued OSHA safety regulations. These items are beginning to be shipped now and we are actively quoting new programs for 2016. Revenues in the Clauss, Camillus and Cuda product families were $900,000 lower than last year due to a retail promotion that did not repeat. We are gaining market share with new Camillus knives in camping and hunting and have booked new business for 2016. The Cuda fishing family has broadened distribution for next year and we have expanded into fresh water tools. There were a number of market tests with large retail chains of our Clauss tools that are getting strong results and this would represent upside if the products were taken chain-wide. Turning to international, overall sales declined 11% when revenues were translated into U.S. dollars. In Europe, revenues were $2.1 million or 21% above last year in Euros and 5% in U.S. dollars. Our European businesses are $112,000 in operating profit compared to $17,000 in 2014. Canadian sales were $1.7 million, which was a decline of 11% in local currency and minus 24%, when translated into U.S. dollars. The Canadian economy is in a recession and demand continues to be soft. Operating profit in our Canadian business was $30,000 compared to $95,000 in the third quarter last year. During the past several months, we have focused on generating cost savings. We have lowered our cost of sales with many international suppliers, which have made us more competitive in generated savings. We have integrated a number of sales and support functions within the first-aid only operation that have streamlined our business and generated savings. During the third quarter, we shifted most first-aid production from our packet manufacturing facility in Connecticut to the first-aid only site in Washington. We incurred severance and moving expenses of about $150,000 in the third quarter. We expect to complete the consolidation by year end as planned. We anticipate operating leverage from these actions in 2016. As we look into the remainder of 2015, we are seeing a solid fourth quarter and full year. We are maintaining the estimate we provided in the last quarter of about $115 million in net sales and net income of approximately $5 million or $1.38 per share. This would make it a record year for our Company. In 2016, we see growth from new products and customer initiatives, which may generate total net sales of $120 million to $123 million. We will give more specific guidance on the coming year after we release our year end 2015 financials. I will now turn the call to Paul Driscoll. Paul?

[Paul Driscoll:]

Acme's net sales for the third quarter were $29.9 million compared to $30 million in 2014. Approximately even in U.S. dollars and an increase of 3% in constant currency. Sales for the nine months ended September 30, 2015 were $86.7 million compared to $82.6 million in the same period in 2014, an increase of 5% and 8% in constant currency. Net sales in the U.S. segment increased 2% in the quarter and 9% for the nine months ended September 30th. Growth in the quarter came from iPoint pencil sharpeners, titanium scissors and first-aid kits, partially offsetting this growth was the discontinuation of some low-margin over-the-counter medications and as Walter indicated Camillus knives promotion from last year that did not repeat this year. The year-to-date growth came from first-aid and Westcott products. Net sales in local currency for Canada decreased 9% in the quarter and 11% year-to-date. As you know a major retailer exited the Canadian market at the first of the year, excluding this impact sales decrease 6% in both, the quarter and year-to-date. Net sales for Europe increased 24% in the quarter in local currency and 13% for the nine months ended September 30th. We had a special promotion in the third quarter 2015 gross margins were 34.5% in the third quarter of 2015 versus 35.4% in the third quarter of 2014. In the third quarter of 2015, the Company spent approximately $150,000 on one-time moving and severance cost associated with the move of first-aid production to Vancouver, Washington. Excluding the one-time cost, the gross margin would have been 35% in the quarter. We expect to spend an additional $125,000 in the fourth quarter. Starting in first quarter of 2016, we anticipate saving approximately $450,000 annually in fixed costs associated with the consolidation. SG&A expenses for the third quarter of 2015 were $8.3 million or 28% of sales compared with $8.7 million or 29% of sales for the same period of 2014. SG&A expenses for the nine months of 2015 were $24.6 million or 28% of sales compared with $22.9 million or 28% of sales in 2014. The SG&A increase for the nine months was mainly due to the added first-aid only business and higher variable selling costs as a result of higher sales. Operating profit in the third quarter increased from $1.9 million last year to $2 million this year or 3% increase. Operating profit for the nine months increased 6%. Net income for the third quarter of 2015 was $1,208,000 or $0.33 per diluted share compared to net income $1,189,000 or $0.34 per diluted share for the same period of 2014. Excluding the one-time consolidation cost, earnings per share would have been $0.35. Net income for the first nine months ended September 30, 2015, was $4.4 million or $1.18 per diluted share compared to $4.1 million or $1.18 per diluted share in the comparable period last year. Excluding consolidation cost, earnings per share would have been $1.20 per diluted share. The Company's bank debt less cash on September 30, 2015 was $23.9 million compared to $24.5 million on September 30, 2014. During the 12 months, we generated $2.6 million in cash flow from operations.

[Walter Johnsen:]

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

[Operator:]

[Operator Instructions] We will go first to Steve Percoco from Lark Research. We will go next to Beth Lilly from Gamco Investors.

[Beth Lilly:]

Good afternoon.

[Walter Johnsen:]

Hi. Beth.

[Beth Lilly:]

I was wondering, Walter, if you would spend a minute, just you know you made some comments about just the overall environment. As you look at the consolidation in the office superstores if overall demand trends. Can you just give us a sense of where you think the economy is at and demand for your products is?

[Walter Johnsen:]

First on the office superstores, between Staples and Office Depot, we have closed about 400 stores this year.

[Beth Lilly:]

Yes.

[Walter Johnsen:]

Which is a huge number, and what we saw I believe in the second quarter was the shifting of particularly back-to-school inventory, integral [ph] stores, because they could not sell the back-to-school in any volume during the months until they come to the back-to-school period. While that softened our demand in the second quarter, I believe, they washed through that and so in the third quarter we were seeing normal demand for back-to-school and have turned out to be a record. I have heard that Staples has closed most of their non-performing stores, which would be terrific news. Now if Staples and Office Depot complete the merger, there has been talk of about a 1,000 stores being closed and if the estimate turns out to be somewhere between two-and-a-half and three years, that would be at a lower rate of store closers than we currently have experienced, and I am perfectly comfortable that comping against those numbers, because the demand overall within our markets continues to be pretty strong. In Canada, the economy is just dreadful, and I say that - when I just talk to colleagues and people that I know that are doing business there, between oil and commodities, particularly Western Canada, is just really slow. What we are seeing though is that, we are getting placement for next year and some this year, in the hunting and fishing area that we did not have placement before and we just had a very strong September in Canada, which was sort of a rebound in office sales, so overall the macro in Canada is not good, but we are seeing a way to carve our way to recover. In Europe, we are finding it to be fairly robust in Germany, France and U.K. had a decent quarter for us. Overall, I think, we are in an okay environment. I mean, I do not see some big issues in our market. Is that a little helpful?

[Beth Lilly:]

Yes. Very helpful. You know, so even though there is consolidation going on in the office superstore market, it seems to me that even as those stores are closing and that is the demand for scissors and pencil sharpeners, I mean, even though the stores are closing, the demand is growing in the market, so you can just increase your distribution to other outlet, is that?

[Walter Johnsen:]

Sure.

[Beth Lilly:]

Yes.

[Walter Johnsen:]

So, if there are less retail stores, there will be probably a pick-up with online. There will be a pick-up with many of the independent dealers so we are the primary supplier of our products to both, Office to SP Richards and United Stationers, which then distribute the independents, so demand gets redistributed.

[Beth Lilly:]

Yes. Okay. For the most part, would say that the inventory that was - and you talked about this, but I want to be clear, so as they have shutdown these stores, the excess inventory that was in the system has that for the most part cleared out now?

[Walter Johnsen:]

Well, if Staples does not close any more stores, then that would accurate. Office Depot, I am frankly not sure where they are. I have not heard. My guess is, there are still stores in Office Depot that will be closed, but if they close at a slower rate, then we have less of a problem going forward, so we should benefit from that.

[Beth Lilly:]

Yes. Okay, but that has been a headwind for the last several months and potentially that could be a headwind for the next year or so.

[Walter Johnsen:]

It could be, but again the base continues to shrink, so it is less important relative to the superstores and their impact. They have run out of stores. They can't keep doing 400 stores a year, so that inventory issue will become smaller.

[Beth Lilly:]

Yes. Okay. Good. A - Great. All right. Those were all my questions. Thank you very much.

[Operator:]

[Operator Instructions] We will go next to Jeff Briggs with Singular Research.

[Jeff Briggs:]

Hello.

[Walter Johnsen:]

Hi, Jeff.

[Jeff Briggs:]

A quick question for you, in some of the past calls, you guys had mentioned due to the exchange rate situation, both Canada and Europe that you may be looking around or just seeing [ph] in terms of acquisitions that maybe more attractive to our exchange rates and I guess the current economic situation in Canada right now. I guess, do you have any comments on has anything looked intriguing or as you have kind of taken look on some things and nothing really pops out.

[Walter Johnsen:]

Well, we have seen a number of things in Europe and a couple in Canada. I could not tell you whether we are actively working on anything even if I could. I mean, I just can't, but we are seeing something, and the buying power in the dollar is favorable to us so that would be terrific if we found something that was appropriate.

[Jeff Briggs:]

I guess, I mean, knowing that you can comment on any particular deal, I guess, in terms of the types of deals that might make sense, would it be I guess a couple of options would it be sort of like a wholesale, new product line or sort of extension current things you are doing into other markets. I guess, can you speak a little bit as to the types of things that may make sense for your guys?

[Walter Johnsen:]

One of things we are doing is, we are expanding our first-aid business, which is primarily in the U.S. today. - The Europe. In Canada, we have got the health safety - health Canada license, so that we can sell the products that we intend to sell. If we were to find the Canadian first-aid company that could complement those efforts that would be terrific. In Europe, we will have the license to be selling first-aid kits in January. Similarly, there have been a few things looked at in Europe that are in that arena, but we decided not to do them. They were not what we wanted, but we may find one. Other products could be the companies that we acquire would be a half step away from our current. It might be in cutting area. It might be in the Camillus knife area, but I think it would be unlikely for us to be doing a major acquisition that puts the company at risk. I just do not see a reason to do that.

[Jeff Briggs:]

Okay. Thanks. It's helpful.

[Walter Johnsen:]

Thank you.

[Operator:]

[Operator Instructions] Next, we will take Tim McCall from Capital Management.

[Tim McCall:]

Good afternoon. Stock option dilution continues to cost a good amount of the earnings per share growth. Do you look at that at all and how do you look to contain that? Would you ever consider share buybacks or cutting the stock option issuance? Then separate issue, with the Chinese currency devaluation, how much does that affect your business?

[Walter Johnsen:]

Okay. First on the stock option, we have a pool of options that we have not awarded in any size this year and at this stage, we are being very cautions with that except we need to be retaining somebody. Clearly what you do not want to do is continue to issue options and dilute earnings when the earnings are not growing as robustly as we would like them to, so you can pretty much assume that we have held where we are. One thing about the options is they are exercisable at prices mostly $10 a share, $15 a share, so they bring in capital when they were exercised and that has been over $1 million in the past year. The Chinese currency is one of the things that has provided a tailwind for us and that is an important one, because we buy in dollars and it increases our buying power for most of that 60% of our cost of sales and that decline in currency was somewhere between 3.5% and 4%, so we are successful in getting some price reductions based on currency that would improve our gross margins and our operating income, so obviously we are working on that. We can be sure that our customers are also aware of that and we are working with them to pass on savings where it is appropriate, so it is a plus.

[Tim McCall:]

Is that more of a 2016 issue?

[Walter Johnsen:]

Well, it is a thing that you address as soon as you can we have certainly addressed it, but when you product in it has to work its way through our inventory turns and that eventually work its way out, so our inventory turns 2.2 times then six months now you have got the full impact of any savings.

[Tim McCall:]

Then if you could about…

[Walter Johnsen:]

…getting direct import sales, because that would be priced at the time of shipment.

[Tim McCall:]

If you could talk about share buybacks and dividend increases?

[Walter Johnsen:]

We have a share buyback program in place and it is currently 10b5, at $17 a share, so when the stock dropped a little bit in September, we bought about $100,000 of stock, and opportunistically if that were happening again, we think that would be a very good think for the company. Relative to dividend increases, we tend to increase our dividends about every five or six quarters and that has been the history since we started. Some of you may not really know this, but we started dividend at a penny a share around 2003, I believe, and today we are at $0.09 a share, so there has been some sizable increases over that time period. I guess, we would keep that up, but again I do not want to exceed the earnings growth.

[Tim McCall:]

Thank you.

[Walter Johnsen:]

Thank you.

[Operator:]

We have no further questions in the queue. I would like to turn it back to you for any closing remarks.

[Walter Johnsen:]

Since there are no further questions, I would like to conclude this call. Thank you for joining us and we look forward to giving you another update after year end. Good bye.

[Operator:]

That concludes our call for today. Thank you for your participation.