Acme United Corporation
Q4 2015 Earnings Call Transcript

Published: 27 Feb 2016

[Operator:]

Good day and welcome to the Acme United Corporation’s Fourth 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 fourth quarter and year-end 2015 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 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 a record year in 2015. Our net sales were $109.7 million, compared to $107.2 million in 2014. Our net income was $4.8 million, which was the most we’ve ever earned and represented the seventh consecutive year of record performance. We made significant progress during 2015. In the Westcott family of school, home, and office cutting and measuring tools, we won the entire scissor category at a major office retailer. Our team introduced a new non-stick pencil sharpener that is building momentum in the craft and office markets. We developed and introduced new ceramic box openers that are going on to the shelves of large retail chains in the U.S., Canada, and Europe. The Camillus, Clauss and Cuda professional and sporting good tools continued to set the standard of innovation and excellence. Our high performance Clauss shears and industrial knives had market share gains in the industrial market. Our Camillus hunting knives with proprietary titanium carbon nitrite coatings were successful in expanding the retail sporting goods distribution in the U.S., Canada and Europe, and contributed to momentum going into 2016. The Cuda fishing tools won six Good Design Awards and set the stage for another record year. We completed the integration of the First Aid Only business, increased gross margins and improved operating efficiencies. This effort included closing our Norwalk, Connecticut, First Aid plant, and consolidating operations in our modern facility in Vancouver, Washington. We incurred expenses of approximately $400,000 in the third and fourth quarters for the plant closure. We would expect to generate $500,000 in annual savings in 2016 and beyond. Our international operations had headwinds due to the strength of the U.S. dollar. In Canada, revenues for the year declined 23% and 11% in local currency. The economy there was weak due to the drop in commodity prices and reduced consumer spending. Our team made good progress in placing Camillus and Cuda knives and cutting tools with new hunting and fishing customers. The currency translation impacts appeared to be over and we anticipate growth in sales and earnings in Canada in 2016. The European business had a profitable year and revenues grew 7% in local currency. However, they showed a sales decline of 10% when translated into U.S. dollars. The team was successful in placing Cuda and Camillus knives in new accounts, introducing our First Aid product lines and gaining market share with Westcott school and office customers. We believe our European business in 2016 will show revenue growth and be a solid contributor to earnings. Our balance sheet was strong with net debt of $23.5 million and $16.5 million available for borrowing under our bank line. We generated approximately $9.2 million of EBITDA in 2015, which funded our growth, justified a 10% increase in our dividend and financed the repurchase of 40,445 shares. As we look into 2016, we see a stabilizing currencies in Canada and Europe. The store closings of the U.S. superstores appear to have slowed, and our e-commerce business is quickly expanding. The new products and market share wins for 2016 are in place, and we begin to benefit from the consolidation of our First Aid facilities. We expect another record year in sales and earnings for 2016. Our current guidance is approximately $120 million in revenues, net income of $5.6 million, and earnings per share of $1.47. I’ll now turn the call to Paul.

[Paul Driscoll:]

Acme’s net sales for the fourth quarter were $23.1 million, compared to $24.7 million in 2014, a decrease of 6% or 5% in constant currency. Sales for the year ended December 31, 2015 were $109.8 million, compared to $107.2 million in 2014, an increase of 2% or 5% in constant currency. Net sales in the U.S. segment decreased 4% in the quarter, excluding the discontinuation of certain low-margin over-the-counter medications, sales decreased 1%. Sales for the year ended December 31 increased 6%, the biggest contributor to sales increase came from First Aid products. Net sales in local currency for Canada decreased 14% in the quarter and 11% for the year. As you know a major retailer exited the Canadian market at the first of the year. Excluding this impact, sales decreased 8% for the year, primarily due to weak economic conditions. Net sales in local currency for Europe decreased 9% in the quarter, but increased 7% for the year. Sales in the fourth quarter of 2014 included a holiday promotion that did not repeat in 2015. The overall trends are positive in Europe as we gain market share in the office products and other channels. In the third quarter of 2015, we began the consolidation of our first aid kit facilities. We moved operations from Norwalk, Connecticut, to our larger and more modern facility in Vancouver, Washington. We completed to move in December. In the third quarter, we incurred approximately $150,000 of one-time moving and severance costs. In the fourth quarter, we incurred approximately $250,000 of additional one-time moving severance and ramp-up costs. Excluding these one-time costs, the gross margin would have been 36.8% in the fourth quarter. We anticipate saving approximately $500,000 annually in fixed costs associated with the consolidation. SG&A expenses for the fourth quarter of 2015 were $7.6 million, or 33% of sales, compared with $7.9 million, or 32% of sales for the same period of 2014. SG&A expenses for the year ended December 31, 2015 were $32.2 million, or 29% of sales, compared with $30.8 million, or 29% of sales, in 2014. The increase for the year was primarily due to higher variable selling costs as a result of higher sales and the addition of sales and marketing personnel. Net income for both 2014 and 2015 was $4.8 million, excluding the $400,000 of one-time costs associated with the move and consolidation of first aid production. Net income would have been $5 million or an increase of 5%. Company’s bank debt less cash on December 31, 2015 was $23.5 million, compared to $21.9 million on December 31, 2014. Inventory increased by $1.8 million in anticipation of new business in 2016.

[Walter Johnsen:]

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

[Operator:]

Thank you very much. [Operator Instructions] All right, the first question comes from the line of Richard Dearnley from Longport Partners. Please go ahead.

[Richard Dearnley:]

Good morning. The $500,000 of savings does that trickle in through the year or does that kind of start immediately?

[Walter Johnsen:]

Dick, the $500,000 relates to the [indiscernible] utilities for heating the facility, the taxes and the maintenance. So with that done, it starts right away. Having said that there were some things that occur that are positive. For example, the absorption of fixed costs in the Vancouver, Washington facility.

[Richard Dearnley:]

Right.

[Walter Johnsen:]

But we’re not posting the savings, because in a beginning stage there is still some inefficiencies, but eventually we get the operating leverage from that as well.

[Richard Dearnley:]

Okay, good. And a difficult question, what – and it will probably require a wild guess. What percent of your sales do you think are from things that you sharpen with Clauss – the knives and what not are obvious whether the players with the cutting edge gets sharpened or not, I don’t know. So I was just – do you have a guess as to what that is?

[Walter Johnsen:]

It’s about half of our revenues.

[Richard Dearnley:]

Really. And half of the non-medical revenues or half of total revenues?

[Walter Johnsen:]

Half of total revenues.

[Richard Dearnley:]

Okay. Well then we get to the DMT sharpener. What do they do that is different than what you – I mean, you do some contract sharpening, I think, outside already. What does – is the DMT better because of the diamond, I just bought a new knife sharpener, which after…

[Paul Driscoll:]

Let me address this a little bit.

[Richard Dearnley:]

Okay.

[Paul Driscoll:]

First, Acme United and DMT do not provide knife sharpening services.

[Richard Dearnley:]

Okay.

[Paul Driscoll:]

We sell – what we sold before the acquisition of DMT were some – a single knife sharpener that for example at Walmart was a very, very successful item. What DMT provides is a way to sharpen very, very precisely of anything like cuts. And that anything like cuts is related to – it could be lawn mower blades, it could be knives, it could be scissors, chisels. And the high precision of that is extraordinary. One of the patents that we have relates to the finest and dispersion of diamonds on the surface of the tools, of the sharpening tools. And because it’s very consistent, we were able to get a very, very fine home. You will probably have seen some of the electronics knife sharpeners in kitchens. And those things tear apart blades and are truly not the same quality what we have here. So it’s not about a $5.5 million business with $1 million of EBITDA and high margins. If we’re successful in bringing those product line in to our European business and our Canadian business and expanding it within sporting goods and our industrial accounts, we have very, very high impact on the P&L and I believe we can do that. So it’s an adjunct to the cutting business with higher margin than anything else we have in the business. We’ve got about 50 patents and trademarks and it’s got real growth potential we think. But even without the growth potential, it’s an accretive acquisition that is helping us as we speak.

[Richard Dearnley:]

Right. So they make and sell sharpeners?

[Walter Johnsen:]

Yes.

[Richard Dearnley:]

Yes, I see. By the way the sharpener that I bought the promotional material didn’t say anything about rips the blade apart and really screw things up.

[Walter Johnsen:]

No, no, I wouldn’t. But I would suggest you to Amazon and there’s something like diamond sharpener or look at DMT and you’ll see the products, the pricing, the reviews and you’ve got pretty good idea of what they do.

[Richard Dearnley:]

Good. Okay, thank you.

[Operator:]

The next question comes from the line of Jeff Briggs of Singular Research. Please go ahead.

[Jeff Briggs:]

Hi. How are you guys doing?

[Walter Johnsen:]

Good, Jeff.

[Jeff Briggs:]

Good. So my first question is also about DMT and [indiscernible] interesting acquisition just because of all of the conjuncture markets and things that sort of touched – that you guys already touched. So that made a whole lot of sense to me. My question in regards to them has to do with sort of, I have been through their website and all things like that, but are there industrial applications for DMT that sort of extend beyond what you guys do? And I’m thinking of sort of like machine tools type applications whether it’s sharpening of machine tools to extend their useful life or actually selling sort of diamond coated machine tooling or grinding wheels or things of that nature?

[Walter Johnsen:]

Well, there are – in the early days of the company, they made diamond based grinding wheels and those were going into the precise machinery area for aerospace.

[Jeff Briggs:]

Right.

[Walter Johnsen:]

So you certainly go there. I don’t think that’s going to be the runway we pursue, I think more likely it will be in the sporting goods area. It will be in the wood working and chisel area. I’m sure we’ll have some items that are in retail places like a Walmart and that will maybe in the camping area. So, I don’t see that being a major thrust, but it could be.

[Jeff Briggs:]

All right. Could you currently do stuffs like that? It sounds like, they do historically, do you currently do that right now? And as am I speaking of from a – what you said is what I thought was the reason you bought it. I was just wondering if there is funding for that that was out there currently, not that you’d be pursuing it if it wasn’t?

[Walter Johnsen:]

For a distribution at Grainger and McMaster-Carr and Fastenal, which we hope to expand, those are places where if we start to do some product developments and is interest in other sharpening tools with the diamond technology. We’re in place to do it and we have a domestic manufacturing, which is ours now that will execute.

[Jeff Briggs:]

But, yes, it seems like just a great opportunity to sort of expand their distribution into the distribution you guys already have, so that makes a lot of sense.

[Walter Johnsen:]

Right.

[Jeff Briggs:]

The next question asking you is the you mentioned e-commerce is picking up for various things. And I just wanted to sort of get a little bit based on how you guys participate in that market because I’ve seen – it looks like you’re selling directly to say Amazon for certain things like Cuda and stuffs like that. Have you guys ever thought of I guess selling direct e-commerce or is it mostly selling to different distribution channels better than selling it in e-commerce that makes any sense?

[Walter Johnsen:]

Well, we have a team that’s dedicated to online sales. And so, they’re interacting regularly with Amazon, Walmart.com, Staples.com, target.com and many others. And there’s a big effort that we have in place for doing video and content and getting a substantial number of the products properly presented online. And then, of course, you’ve got search optimization, which we participate in. Interestingly enough DMT was also very active at Amazon. And combined where we’re growing very, very rapidly and I would tell you that that’s in excess of 100% a year. So at Amazon, also Walmart and staples.com are growing quickly for us. In the first aid area, we’re doing a lot of work pushing the smart compliance kits that give industrial accounts, compliance with OSHA regulations. And then we’ve got the refills that are available as well, and that’s driving. And not just at Amazon, it’s also at Staples, also at Grainger, and at Walmart.

[Jeff Briggs:]

Right. And I guess the last part of question is, are you – so with most of those players, it’s – you’re selling to them and they’re reselling it online or you guys actually sort of technically selling to the end customer through their channel?

[Walter Johnsen:]

Well, there’s a lot of ways of things get to market on Amazon. Some of them sell-through our customers, some of them Amazon buys directly; some of them show up from places that we don’t sell at all. And so, it’s a real diverse group of suppliers, but from our perspective we make the products, we give our customers the tools, we hope to merchandise. And then it goes in a lot of different ways.

[Jeff Briggs:]

Yes, and a lot – I mean the good thing is a lot of those products are conducive to online sales, just in terms of the size and weight of the product and the price points. So that it definitely works out for you guys.

[Walter Johnsen:]

Sure.

[Jeff Briggs:]

Okay, that’s it for me.

[Walter Johnsen:]

Thank you.

[Operator:]

[Operator Instructions] We have a question from the line of Ralph Marash. Please go ahead from First Manhattan Company.

[Ralph Marash:]

Good morning. Walter, the revenue seemed a little bit light based on what you were projecting for last year and they also trimmed this year’s revenues just slightly. Could you comment that?

[Walter Johnsen:]

Sure. Revenues in the fourth quarter, particularly December, just we’re light. And then the stock market fell apart in January and it started to be light and it’s not light anymore. We’re busy. So I don’t know what – if there is any correlation to any of that, but the sales were light in December. And it was not just in the U.S. and Canada; it was also in Europe and in Asia. So – and that’s why sales were down. But having said that we’re doing very well right now in February and then we’re looking at a decent book of business in March. I do trim back the earnings – the sales that I gave out as guidance. But I just want to make sure that we have the pleasure of hopefully of being able to raise it as the year goes on.

[Ralph Marash:]

Okay. And then an unrelated question on any issues at all with supply, the manufacturer – the contract manufacturers that you use outside the U.S.?

[Walter Johnsen:]

I’m going to China on Monday for about two weeks and I can tell you that I’ll have a much better feel when I get back. But we’re very busy in production right now for back-to-school for hunting and fishing areas, for fishing area, for spring deliveries, some of the garden items. First aid, of course, has been done in the U.S. But China our suppliers have been consistent on time. They just got back from Chinese New Year. And I know that those workers have fresh legs now. It seems pretty much normal. I read things about credit constriction, but we haven’t experienced it with our suppliers.

[Ralph Marash:]

Okay, thanks.

[Walter Johnsen:]

Thank you.

[Operator:]

There are no further questions at this time. Mr. Johnsen, do you want to continue?

[Walter Johnsen:]

Okay, well, I’d like you to thank you for joining us. This call is now complete. Good bye.

[Operator:]

Ladies and gentlemen, that concludes the conference call for today. We thank you for your participation. You may now disconnect your line and have a great day.