Acme United Corp (ACU) 2003 Q2 法說會逐字稿

Good morning and welcome, ladies and gentlemen, to the Acme United Corporation's second-quarter earnings release conference call. At this time, I would like to inform you that this conference is being recorded and that all participants are in a listen-only mode. At the request of the Company, we will open up the conference for the questions and answers following the presentation. I will now turn the conference over to Mr. Walter Johnsen.

Welcome to the Acme United conference call to discuss second-quarter 2003 results. I'm Walter C. Johnsen, President and CEO. With me is Paul Driscoll, our Chief Financial Officer. We will first read a Safe Harbor statement. Paul?

Thank you, Walter. Forward-looking statements in this conference call, including, without limitation, statement 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; three, risks and uncertainties indicated from time to time in the Company's filings with the Securities and Exchange Commission. Now, I'd like to turn the call to Walter.

Thank you, Paul. Acme United reported today the net sales and earnings grew during the second quarter of 2003. Net sales increased eight percent to $10.1 million and net income was $615,000. The earnings for the quarter were 17 cents per share, compared to six cents per share last year. I would like to explain the sales growth by some examples. At Staples today, you will see Acme products as you enter, along the back wall, in two aisles and at checkout. You'll see the Critters, which are whimsical scissors in the shapes of crocodiles, birds, butterflies and ladybugs. Our weekly store reviews tell us they're selling well. You will see the Titanium for Kids scissors, new Wescott rulers and our titanium adult products.

At OfficeMax, nearly every scissors sold is from Acme, and they carry all our new products. At Wal-Mart, you'll see our Critters, titanium kitchen shears and Wescott rulers. There is momentum at Wal-Mart and it is gaining. We just won all the office scissors at Target Department Stores. This is a new customer, and shipment start in November. Nearly every major account was ahead in sales of our products this year and we're adding new customers. Our sales efforts are making progress.

Gross margins have improved due to new products and continued attention to costs. Margins are more than five percentage points higher than this time last year. We are investing more in sales support, logistics, new product development and patents. The SG&A is higher this year than last year. As we came customers, we're spending more to provide outstanding service. The push for new products is expensive, but when they hit market, they can add excitement, sales and good margins, as we're seeing. We're spending more in patent work to build a protected franchise of products.

The European subsidiary is making progress. It lost $73,000 from operations in the second quarter of this year, compared to 203,000 from operations in the first quarter of this year. The German factory has now stopped manufacturing and the reduction in employment there will be complete in the next three weeks, ahead of plan and lower than budget. We are slowly gaining customers in Europe and sales are improving. We expect the loss to narrow during the next two quarters. I will now turn the call to Paul to review our financials. Paul?

Thanks again to all (indiscernible) taking the time to listen to our presentation. Acme's net sales for the second quarter were 10.1 million, compared to 9.4 million in 2002, an increase of eight percent. Net sales in the U.S. increased eight percent, due to the successful launch of new products. International sales increased by eight percent, primarily due to currency gains. European sales were soft, due to discontinuing product lines in the UK and a weak economy in Germany. Total net sales for the first six months ending June 30th were 17.3 million, compared to 16.2 million in 2002, an increase of seven percent.

Gross profit for the second quarter was 3.9 million, or 38.7 percent of net sales, compared to 3.4 million, or 35.9 percent of net sales for the second quarter of 2002. Gross profit for the first six months of 2003 was 39.3 percent of net sales, compared to 34.4 -- sorry, 34.1 percent in the same period of 2002. The introduction of new products, coupled with improved product mix in the U.S., positive impacts from product rationalization efforts in Canada and the UK and the manufacturing rationalization in Germany were the main reasons for the improved gross margins.

SG&A expenses for the second quarter of 2003 were 2.9 million, compared with 2.7 million for the same period of 2002. SG&A expenses for the first six months of 2003 were 5.2 million, compared with 4.7 million for the same period of 2002. Investments in new product development and the addition of sales executives in Canada and Europe were the main reasons for the increase. These investments are beginning to pay off.

Income before income taxes was 958,000 in the second quarter of 2003, compared with 299,000 in the second quarter of 2002, an increase of 659,000. Income before income taxes was 1.3 million for the first six months of 2003, compared with 437,000 in the first six months of 2002. Income tax expense for the second quarter of 2003 was 343,000, compared to 72,000 in the second quarter of 2002. Income tax expense for the first six months of 2003 was 617,000, compared to 88,000 in the first six months of 2002. Our tax expense was minimal in 2002, due to a tax benefit associated with the liquidation of our subsidiary in the UK. In 2003, the U.S. business was fully taxed at approximately 40 percent.

Net income for the second quarter was 615,000, or 17 cents per diluted share, compared -- (technical difficulty) -- or six cents per share diluted share for the same period last year. Net income for the first six months of 2003 was 693,000, or 20 cents per share, compared to 349,000, or 10 cents per share in the comparable period last year.

The balance sheet continues to strengthen. Total debt less cash on June 30, 2003 was 5.8 million, compared to 7.9 million on June 30, 2002. Also, for the first six months of 2003, we repurchased approximately 2.5 percent of the Company for $293,000 at an average cost of $3.52 per share. Now, I'd like to turn the call back to Walter.

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

Thank you, sir. The question-and-answer session will begin at this time. (OPERATOR GIVES CALLER INSTRUCTIONS). Sam Rabowski (ph) with SER (ph) Asset Management.

Good morning, Walter and Paul. This is a wonderful quarter -- (indiscernible due to multiple speakers) -- that you've accomplished. I mean, you've worked very hard at this and you've sort of finally made a breakthrough. Can you talk about the backlog compared to the same time last year? You expect sales to increase. Do you expect a greater than eight percent sales increase, going forward, for the balance of the year?

Thanks for the compliments. The work on Acme in this quarter really does reflect a lot of the product rationalization we did last year, the closure of the UK facility, things that were expensive and we had to work our way through, and finally, the wrap-up of our German business, which is making a lot of progress. Going forward in the sales backlog -- (technical difficulty) -- I can tell you that we are busy. The first two quarters have been seven percent growth, the second quarter eight percent growth, corporately. There seems to be a trend. I announced today that we won the Target Department Store business for the office area. That starts in November; that should be kind of helpful in the fourth quarter. I think there's a trend that maybe it might continue.

So, it appears you quite possibly might do better than the eight percent in the second quarter for the balance of the year?

It's possible. It is possible. The hard one is the second quarter, which is always our biggest in sales, and to climb over that means you've moved a lot of volume. July looks good so far in each of our subsidiaries and the U.S.

At this point in time, you don't have -- you're paying taxes and I guess your next step would try to figure out to reduce them as possible, so you fully utilize your NOL, I presume?

Yes, we have.

Now, as far as you've developed products internally and you've looked at your competition and you've sort of been taking away business from competition, have you been looking any potential acquisitions and as the stock has gone up, what is your expected buying of stock in the open market? Is there any kind of price cap or anything like that? Are you authorized to continue to buy stock?

We've completed the stock buyback that we were authorized. Sometimes, that stock seems to us to be pretty attractive and so we will initiate a new buyback, but right now, we don't have one in place, so that's completed. As far as acquisitions, we are always looking -- at least, lately we have been. A lot of our competitors are struggling, in part because I think we're gaining a share (indiscernible). I know that in some cases, it's just plain cheaper and smarter for us to just keep attacking, but there may be a competitor or two that eventually becomes part of it.

That's good. Your China situation -- has that improved -- whatever problems you might have had or not had, is that clearly improved (indiscernible due to multiple speakers)?

I just got back from a trip to Hong Kong on Sunday and I can tell you that, at least in Hong Kong, the SARS problem is pretty much solved for the summer. There is a concern that it might pick up again in the fall and that's troubling. But right now, there is no problem. It seems to be seasonal. We have built more inventory than we historically have had -- and it's not built; from China, we order into the U.S. and into our subsidiaries because in the event there's a continued problem in the fall, we want to be prepared for it. Frankly, the volumes that are moving out right now are a little bit unpredictable as new customers come on and the demand/supply isn't truly understood from the history. But so far, the SARS problem doesn't exist right now.

Good luck, Walter, and I'll get back into queue.

(OPERATOR GIVES CALLER INSTRUCTIONS). Another question from Mr. Robowski (ph).

Yes. Walter, do you expect to start telling your story with -- as far as achieving all of the goals that you have set and creating this greater profitability?

Yes. I think it's time to start talking about what we're during, and we will be doing that.

The stock purchase -- was that a negotiated transaction, or is that many transactions -- or is that --?

Well, there weren't negotiated transaction generally; they were generally blocks that would come up and we would just by.

Well, that's good. That's good. Let me just say again, I think, over the last three years, you really have turned the Company around and done a great job, along with your team. Hopefully, that is the beginning of further growth and profitability. That's all I have to say.

Jeff Matthews with Ram (ph) Partners.

I don't want to give you a swollen head here. (LAUGHTER).

Well, sometimes, we don't feel like having these conference calls. Today is a good one!

Well, I can hear it in your voice and seriously, congratulations. Now, I'm going to complain a little bit. I'm kidding. I think the press release could have more information in it, especially that P&L you've had.

Yes.

Just I don't know why you don't have line items -- SG&A, cost of goods, the whole bit. I've got to believe your systems are working pretty well because you are reporting earnings fairly quickly now versus years past, so...

That's a good suggestion. It's easy for us to do (indiscernible) -- a good suggestion.

Then on that inventory build, I was interrupted by a call. You've built a buffer because of the SARS issue?

We don't have the SARS issue right now. We have two things; we have customers coming on and programs coming on that we don't have a history with, so that's the first thing. They're big enough, some of these customers -- for example, Target -- that we just don't want to miss. Second, SARS in the spring did not impact, in any meaningful way, our delivery. But if it were to happen in the fall, we've got a whole long time of people being concerned. I don't know what's going to happen, so we wanted to get some inventory. The second thing SARS does is it makes it more difficult for new products because you can't fly to China, so it delays things; you're doing much more by videoconference and FedEx and items back and forth.

That's an excellent reason and that's good forward thinking, and you have the balance sheet to be able to do that now.

Oh, it's wonderful.

That's great. In terms of Germany and Europe, which didn't cost you the way it did last quarter, what do you think the endgame there is in Europe? How do you think that looks in a couple of years for Acme?

Well, in three weeks, we will have 14 people in Germany, so basically, we will be a distributor with sales (inaudible). We will have a couple of people in England also selling in a sales office. So, that's Europe. Our biggest competitor, as many of you know, is a company called Dollie (ph), and it's bankrupt in Germany. In the UK, while it's not exactly owned by the same entity, it's part of the group -- (indiscernible) as well. We're gaining business in the UK from poor deliveries from Dollie (ph) and in Germany, it's a similar story. So, we're putting a pretty intense effort right now to build the sales, but there's a lead time and it takes an awful lot of effort to move that momentum. But we're seeing evidence of it. I've got our international team here at the end of next week, just going over sales by customer. What's very nice is that as we get these multinational customers, it translates from one country to another and their buying power is pretty strong. So, what I would hope is that our German subsidiary, which has a $3 million tax loss, could not only breakeven but then start to make us some money. Now, at the last conference call, someone asked "could you break even by year-end in Europe?" At this point, that seems to be pretty achievable. Maybe we could make a little, too.

Terrific. The business that you're getting with the -- you are in Office Depot now, correct?

Yes.

Are you in OfficeMax?

We sell almost all the scissors at OfficeMax.

Staples -- you had a lot in Staples when I was there last time.

Well, we have almost taken the entire chain. We don't have it exclusively but it's very close.

Okay. A two-part question -- number one, do you see any trend in that channel of improvement overall because it's an important channel for business in general? I'm just wondering what you see out there.

Improvement for us in that channel?

Well, if you can broaden it to how strong that channel is in general as a reflection of the U.S. economy.

Well, the superstores at retail are selling primarily to small businesses and individuals. We're seeing very strong growth at the retail level in both OfficeMax and Staples. In the contract side, which is the offices, we're seeing growth but it's slower. That would be the larger companies, the Fords and the Boeings. They are laying off people, and they -- we're showing growth, but I think it's mostly just market share gain.

That's interesting. Then secondly, does the OfficeMax purchase by Boise Cascade do anything to your sales there?

Well, we sell 100 percent of the scissors at Boise -- (indiscernible due to multiple speakers). That's the largest office products dealer in the U.S. So, the combination means they will be a bigger customer and a more important customer, and we have a great relationship with them, so I think it could be -- we should be fine. It should be good.

Congratulations again.

(OPERATOR GIVES CALLER INSTRUCTIONS). I'm showing no further questions in queue at this time.

If there are no further questions, we will end this call. Thank you for joining us. Goodbye.

Ladies and gentlemen, if you'd like to access a replay for this conference, you may do so by dialing 1-800-428-6051, or 973-709-2089 with an ID number of 300956. This concludes our conference call for today. Thank you all for participating and have a wonderful day. All participants may now disconnect. (CONFERENCE CALL CONCLUDED)