Acme United Corp (ACU) 2005 Q2 法說會逐字稿

Good day, everyone, and welcome to Acme United's second quarter of 2005 earnings call. As a reminder, this call is being recorded. I would like to introduce the speakers for today's call, Mr. Paul Driscoll, Chief Financial Officer, and Mr. Walter Johnsen, President and Chief Executive Officer for Acme United. Now at this time I would like to turn the call over to Mr. Walter Johnsen. Please go ahead, sir.

Good morning. Welcome to the Acme United second-quarter 2005 conference call. I am Walter C. Johnsen, President CEO. With me is Paul Driscoll, our Chief Financial Officer, who will first read a Safe Harbor statement. Paul?

Thank you, Walter. 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.

Now I will turn the call back to Walter.

Acme United reported net sales for the second quarter of 2005 of $14.9 million, an increase of 21% over the same period last year. Net income was $1.3 million or $0.34 per share, an increase of 22%. We have had strong demand for our back-to-school products. Our school scissors are well placed at Staples, OfficeMax and the mass market. Our new measuring and math products are in Target, Staples and a number of large drug chains. Our titanium paper trimmers have begun making good progress. The Clauss professional product line continues to grow in the industrial and craft markets. We are putting resources behind this family and expect to expand the product offering and its distribution in the coming quarters.

The safety product line also continues to grow and benefits from heightened attention in the current workplace environment.

Gross margins increased slightly in the second quarter to 45.2%. We expect them to stabilize at about these current levels. Many of Acme's large customers placed heavy back-to-school orders on June 2nd and June 3rd. They must have been using the same supply chain software; it was overwhelming. And we worked extraordinarily hard to expedite their requirements. This was also costly, and we incurred substantial extra expenses in air freight and handling.

We intend to review our inventory carefully and increase our stock levels on some of our best-selling items. This appears to be prudent based on current order patterns, and also provides a hedge for potential increases in currency values.

During the first six months of 2005, Acme added sales and marketing personnel to focus on the craft market and to build the Clauss floral and industrial sales efforts. We strengthened the logistics team and upgraded our warehouse management systems. In Asia, we opened and staffed our Guangzhou, China office to enhance product development, provide more hands-on quality control and, again, assist in logistics. We are focused on training and integrating this team and look forward to their contributions. I will now turn the call to Paul Driscoll.

Acme's net sales for the second quarter were $14.9 million compared to 12.3 million in 2004, an increase of 21%. Net sales in the U.S. increased by 23% due to market share gains, sales of new products and the Clauss business acquired in June of 2004. Combined Europe and Canada sales were up 7% in local currency.

Sales for the six months ending June 30, 2005 were 25.5 million compared to 20.9 million in the same period in 2004, an increase of 22% or 20% at a constant currency.

Gross margins were 45.2% in the second quarter of 2005 versus 44.9% in the comparable period last year. Margins in the second quarter were negatively impacted by a higher volume of inbound air freight costs due to orders in excess of those planned. We have taken corrective action and do not expect a reoccurrence at this level. This also affected our ability to grow earnings at a more substantial rate in the quarter. For the first six months of 2005, gross margins were 45.5% compared to 44.3% in 2004.

The increased percentage of new products with higher gross margins coupled with positive impacts from product rationalization efforts and sales of a more profitable product mix in Europe were the main reasons for the improved gross margins. However, these positive factors were partially offset by increased raw material costs and air freight.

SG&A expenses for the second quarter of 2005 were $4.6 million compared with 3.6 million for the same period of 2004. SG&A expenses for the first six months of 2005 were $8.3 million or 32.5% of sales compared with 6.6 million or 31% of sales for the same period of 2004. The majority of the increase was due to selling-related expenses, investment in new products and the addition of sales, marketing, logistics and quality control personnel.

Income before income taxes was $3.1 million for the first six months of 2005 compared with 2.5 million in the first six months of 2004, an improvement of approximately $600,000. Pretax income increased by $250,000 for North America and Asia.

The European operations had a net loss of $60,000 in the first six months of 2005 compared to 390,000 in 2004. The profitability in Europe is improving due to higher sales and product rationalization. Sales in Europe for the first six months of 2005 increased by 15% compared to the first six months of 2004. The higher sales are primarily due to increases in the sales force and increased advertising.

Net income for the second quarter of 2005 was 1,314,000 or $0.34 per diluted share compared to a net income of $1,075,000 or $0.29 per diluted share for the same period of 2004. Net income for the first six months ending June 30, 2005 was 1,964,000 or $0.52 per diluted share compared to 1,468,000 or $0.40 per diluted share in the comparable period last year.

Some notes on the balance sheet. Inventory has increased by 34%, which is in anticipation of additional back-to-school orders and increased safety stock on new products and new business opportunities. The Company's debt, less cash, on June 30, 2005 was 4.4 million compared to 4.6 million on June 30, 2004. And, during the first six months of 2005, the Company repurchased 146,000 shares at a cost of $2.2 million and paid dividends of $146,000. Shareholders' equity increased to $14.3 million at June 30, 2005, from $11.8 million in June of 2004.

On June 28 of this year, the Company announced a 50% increase in the quarterly cash dividend to $0.03 per share. Now I would like to turn the call back to Walter.

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

(OPERATOR INSTRUCTIONS). Jeff Matthews, RAM Partners.

I had a question about the inventory that may be redundant, and I apologize. It's been a little bit of a distracting morning, given what China announced. And I wonder if you could just go through again the inventory build, which was fairly large, and the comment that you may want to build more inventory in the future as a hedge against currency changes, and what you think inventory needs will be for the coming quarter. Because it sounds like the orders are coming in -- the orders are still strong.

Yes, that's a good question, Jeff. The first part of it is that we were surprised by some of the orders that came in on June 2nd and 3rd of this year. And as I said, it appeared that our customers were at least using the same set points for their purchases and then deliveries out. And in some cases, what we were overwhelmed with on orders were things that we expected either to be shipping later in the year, or, frankly, we did not expect some customers to place orders for. And as a result, we did a lot of air freighting. Air freight is very expensive, and when you're shipping scissors, that's the equivalent of shipping steel by an airplane.

Inventory on a normal basis during the year is very adequate, but when we didn't get the proper forecasts from our customers -- and of course, they are right -- we were shorthanded on some of the items. And I intend to build those particularly new items that are now selling very well.

Secondly, we are going through the inventory. I am currently in Germany, and Paul is in the U.S. And we are going through, Company-wide, our inventory to make room for building more of the new products that appear to be getting very strong reception. I wouldn't expect much of a build from our current level, particularly because in the third quarter, much of that inventory will be shipped as sales.

Finally, regarding the unlinking of the Chinese currency to the U.S. dollar, that was anticipated for a while. And in our case, we purchase in U.S. dollars. So there is not really any direct link. Most of our suppliers expected something under a 3% increase in that devaluation of the world economy, the world market versus the Chinese currency. And that's nothing new. I'd be surprised if we see any impact at all on our current business.

So when I mentioned the build of inventory, what I meant was that the levels we are at now, which are higher than the great growth would have supported, at least gives us a buffer, should something unusual happen. But we are not anticipating that.

Mark Cooper, Wells Capital.

Actually, that just answered my question. Thank you.

Do you have any other ones, Mark?

Cash flow from operations for the quarter?

Paul, would you answer that?

Well, I will tell you to kind of look at it more on a trailing 12 months basis. And it's 2.1 million, which is similar to where we were a year ago, and obviously that's been impacted by a higher inventory that's been discussed.

All right. That's it. Thank you. Oh, I'm sorry, the share count. I must have missed that. Was the current share post the buyback that you've done?

Paul, would you answer that one too?

I'm sorry; what was the question?

The current share count outstanding?

The remaining balance of the -- for program?

No, the actual shares outstanding post what you've purchased. So what is the share count today?

3.5 million.

3.5. Okay. Thank you.

Michael Wasterman (ph) of RBC Dain Rauscher.

Great progress overall, doing a wonderful job. Can you clarify what the actual cost was in earnings per share of both the increased material costs as well as the increased freight costs?

Yes. I will do it in a general sense and then turn it to Paul, who I think could be more specific. In the case of the material costs, it has not been particularly meaningful. The inflation in China has been 2%-ish recently, and by and large, we are not bearing those costs. So there are some increases, but it's not very large.

The air freight was quite different, because, as I mentioned, it's the equivalent of shipping plane fulls of steel, and then expediting and running two shifts in our warehouse and through weekends to meet the demand of our customers. And we have not quantified -- at least, I don't know that yet -- how much overtime it was. But, Paul, could you address the air freight?

Well, your question is probably amounting to around $0.05 a share in the second quarter. So, where we were at $0.34, we probably would have been closer to $0.40 because it had a pretty big impact.

We always have some air freight.

No, this is the incremental air freight.

Oh, this is the incremental, Paul?

Yes.

Walter, do we -- given the increased levels of demand we are seeing, do we now feel we have an adequate number of people on board to do everything that is needed? I know you ramped up somewhat, you said. But do you feel comfortable where you are?

Well, where we are adding people right now are to drive the top line, primarily. And, for example, I am in Europe right now, and we are making good progress there. We have a big contract with the National Health Service in the UK, but the execution of that is going slower than we would like because the hospitals are not -- they just don't cut you orders; you have got to get someone out there. So in that case, we probably will add somebody to go out and execute that contract.

But by and large, we are fairly stable with our hiring right now. I think we've got a good, solid team. And maybe there is a person here or there, but it's basically done.

Last question. Given that you've taken some action on the inventory level and presumably won't have the air freight problem in the quarter we are in, is it fair to suggest that the current quarter's earnings are likely to exceed the ones you just reported?

Mike, I probably can't answer that right now, and I will -- no, I don't think I will. I just I'm not prepared to answer it. What I know is that we've got a lot of sales momentum, and that we had a lot of air freight in the second quarter. And so many things happen with our customers between the beginning and the end of a quarter, it's very hard for me to tell. But we are going into it with good momentum.

(OPERATOR INSTRUCTIONS). Harris Hall of Singular Research.

Congratulations on a great quarter. One of my questions was kind of answered, on the share count. If you guys bought back so many shares, how come the share count was up as much as it was?

Paul?

We also issued some shares upon exercise of stock options.

Okay, so you had a bunch of option exercise in the quarter?

Yes.

The second question was, the last couple of quarters, you have talked about the gross margin improvement due to new products and product rationalization. Can you elaborate on what those new products are and what the product rationalization efforts have been?

Well, the first part is the new products. We introduced an entirely new family of rulers and mass kits (ph). And those are at Target right now. They are, frankly, in many of the retail chains; they are in Staples. We introduced a new family of scissors for kids; they are called Swirl scissors. And again, they are almost everywhere.

Swirl, S-W-I-R-L?

Yes. We have had some success with our paper trimmers, the titanium paper trimmers. And now with the back-to-school, we are getting sales of those. In Europe, the titanium scissors are doing very, very well and increasing margins as well as getting more customers. That's the key part. The rationalization part relates to products that, frankly, are more mature in the product family. It's not that they aren't in scissors, but we might replace a more commodity scissor with one that is newer and then just drop the line. We have done quite a bit of that. So that is the rationalization.

Great, thanks. The last question was on -- not to put you in a bind with the last questions about earnings ahead of last quarter, but how much of back-to-school comes in Q2 versus Q3?

They tend to be about equal. Again, it just depends when the orders get placed and when you fill them. We have got a lot of momentum right now, and I would guess that it's going to be somewhere in the same kind of range.

Jeff Matthews, RAM Partners.

Two more that I wondered about. Number one, this issue that the retailers all of a sudden wake up one day and the computer says, time to buy -- the environment that we're in, with the amount of computer technology that's been adopted by retailers to rationalize their supply chain is geared towards minimizing inventory, maximizing inventory turn. And I'm wondering if this sudden surge of business, rather than suggesting that they just kind of screwed up and didn't have the right --

I don't think they screwed up, Jeff. I think you're exactly right; they timed their deliveries. We have slotting times for deliveries at many of our major customers, and they say, you will deliver at our warehouse on June 4th at 11 AM with these items. So there's a very, very, very mechanized and timed process. But some of our customers wanted to direct import and wanted products coming from Hong Kong, and then we didn't hear from them, and all of a sudden, for some reason the buyer hadn't thought it through properly; and they need the things now and it's coming out of the U.S. Well, except it might not be in the U.S.; it might be in Hong Kong. And we ship it and the customer is right. But it makes it -- that's what happened.

So the bottom line of what I'm getting at is this is not really a case -- in the old days, what you have been worried about is that they just were over-ordering and they didn't really know what they were ordering.

Oh, no, no; this is not over-ordering.

This is real stuff and -- okay. And the second question, you are in Germany, which is a different picture now than it was a few years ago. China just revalued their currency today, which we probably wouldn't have been talking about three years ago, particularly, given what you have done in the meantime to shift production. How has the world changed for Acme in the last few years? And how does where you stand right now alter your view of the next few years for Acme? How have things changed for you?

Well, we truly are on a global platform. And just this morning, I was with one of the major global customers working on a major global program which we may or may not get. But that would not have been conceivable, at least to Acme, three years ago; but today, we've got products that have a common base. A lot of the products are proprietary, particularly the titanium-coated products, whether that's in paper trimmers or in scissors. And our customers compare what they pay in one location to another, as they should; and they aggregate their volume. And so, when we're working on a program in Germany, very likely, that will also be one that will work in the U.S.

Similarly, in Hong Kong and in England, we are selling products right now to Costco that are selling in the U.S. and in Canada and it's all because of that global orientation of our customers. Three years ago, the customers were thinking that. They are doing it now, and it's a very exciting thing for us.

And you're able to accommodate it?

Yes. Well, we opened the Hong Kong office. We opened the Guangzhou office. We have got quality control people, we have got the factories. That's all something that, three years ago, was in a far more primitive format.

On the computer systems side, managing a far-flung operation is one that just requires a great deal of communication, e-mail and, frankly, systems management and training. The nice thing, and we had it happen last night -- we needed to get some pricing for our presentation in Germany, and we were on the phone in Pakistan and in Hong Kong. And by the morning, our UK operation had come in with the answers to the questions and we were very prepared. So that wouldn't have worked that way three years ago.

(OPERATOR INSTRUCTIONS). Tom Spiro, Spiro Capital.

Tom Spiro, Spiro Capital. I got on a moment or two late; I'm sorry if you have addressed this already. But Walter, are there any developments with respect to our Asian sourcing relationships that we should think about?

I mentioned earlier that the change in linkage to the U.S. dollar was in the range where we expected that and our suppliers expected it. And as near as I can tell, this is nothing that's of much impact to us. We also buy in U.S. dollars, so the fact that the yuan de-linked doesn't have a direct import, because we continue to buy in dollars. And that's also true whether it's in the UK or in Hong Kong or in Germany; it's all U.S.-dollar based.

Now, of course, if the currency were to change in a much more substantial way, then the materials would increase in China, and eventually, that would come to us in a form of a price increase. But that is not what we're anticipating. And frankly, with the inventory we have now, there's a buffer.

Have we opened the new warehouse in, I think it was going to be southern China, or are we planning to soon?

Tom, we're looking at a lot of things in China. And one of them that may happen is, as we continue to grow, we put a warehouse in southern China, which would give us the flexibility to do the packaging for our global customers there, with low-cost labor. But we haven't made that decision yet. You can imagine, when you are growing at 20% and you're adding products like paper trimmers, which are bulky, we are gaining requirements for space. And this might be a logical thing to do, down the road. But right now, we haven't done that.

Gentleman, it appears we have no further questions. Mr. Johnsen, I would like to turn the call back over to you for any additional or closing remarks.

I would like to thank you for joining us on the conference call. And if there are no further questions, then it's now concluded. Thank you.

This does conclude our conference for today. We'd like to thank you all again for your participation, and have a great day.