Acme United Corp (ACU) 2006 Q1 法說會逐字稿

Good day, everyone, and welcome to Acme United's first-quarter of 2006 earnings call. As a reminder, this call is being recorded. I would like to introduce the speakers for today's call -- Mr. Walter Johnsen, President and Chief Executive Officer, and Mr. Paul Driscoll, Chief Financial Officer for Acme United.

At this time I would like to turn the call over to Mr. Walter Johnsen. Please go ahead, sir.

Good morning. Welcome to the first-quarter 2006 conference call for Acme United Corporation. I am Walter C. Johnsen, President and CEO. With me is Paul Driscoll, our Chief Financial Officer, who will first read a Safe Harbor statement. Paul?

Thanks, Walter. The 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 anytime 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.

Thank you, Paul. Acme United reported net sales of $12.3 million for the first quarter of 2006 compared to $10.6 million in 2005, an increase of 16%. Net income for the quarter was $760,000 or $0.20 per share compared to $650,000 or $0.17 per share in 2005. We experienced across the board sales increases in each of our subsidiaries and successfully rolled out a major Office Depot scissor and cutting implements program worldwide. We had increases in Canada with new sales to a major retail chain and growth in Europe with additional manicure, medical and office trade sales.

Our Asian business benefited from greater direct import sales to large global customers. The U.S. business had increases in the Clauss Kitchen & Sewing share line, growth in the office channel and new business in the craft market. We anticipate continued growth during the year based on our new product placement and new customers. Our new pencil sharpeners are now on the shelves at a major U.S. retail chain, and they are placed in at least one office superstore for back to school this year. Our new line of personal trimmers are receiving an excellent reception in the mass office and craft markets. Our new school scissors won the coveted "Teachers Choice Award," and they are now being shipped for back to school.

Products introduced during the past 36 months now account for more than 30% of revenues. These new products open new markets and accounts, answer the what's new question posed by buyers and provide a way to increase the productivity of our customers' retail and catalog spaces.

We are in the process of demolishing our old Bridgeport plant. It is sad to see the old structures fall, but it is clear that the redevelopment will soon be on its way. We have listed the property for sale for $2.8 million. However, this will be reduced by environmental cleanup costs that specifically relate to the buyer's planned development. If we make an attractive return, we plan to sell; otherwise, we will do nothing and continue to collect rent. Last year we understand that property in Bridgeport appreciated 24%, the highest in Fairfield County.

I will now turn the call to Paul Driscoll to discuss the financial performance in-depth. Paul?

Acme's net sales for the first quarter were $12.3 million compared to 10.6 million in 2005, an increase of 16%. Net sales for the first quarter in the U.S. segment increased 19% as the result of a significant promotional sale to a large warehouse club chain and the initiation of a continuing program at a global superstore. Sales in Europe and Canada increased by 5% in both U.S. dollars and local currency. Gross margins were 45.3% in the first quarter of 2006 versus 45.9% in the first quarter of 2005. The lower margin in 2006 is due to expedited airfreight costs and other onetime expenses associated with the launch of a new program to a global customer in Europe in 12 countries. We expect the margins to improve in the second quarter.

SG&A expenses for the first quarter of 2006 were $4.3 million or 35% of net sales compared with 3.7 million or 35% of net sales for the same period of 2005. The majority of the increase was due to higher sales commissions and freight costs associated with higher sales, the addition of sales, marketing, logistics and quality control personnel and the expensing of stock options. SG&A expenses for the first quarter of 2006 included $66,000 in stock option compensation expense to the Company's adoption of the new FASB 123 accounting rule.

Operating profit was $1.3 million in the first quarter of 2006 compared with 1.1 million in the first quarter of 2005. Operating profit for the U.S. segment, which includes Hong Kong, increased by $273,000 or 24%. Operating profit in Canada increased by $18,000 or 35% due to a 6% increase in sales. The European operating loss was $183,000 in the first quarter of 2006 compared to an operating loss of $42,000 in the first quarter of 2005. The increased loss was primarily due to the onetime expenses associated with the launch of the new program. We expect results to improve in the second quarter. Net income for the first quarter of 2006 was $760,000 or $0.20 per diluted share compared to net income of $650,000 or $0.17 per diluted share for the same period of 2005, a 17% increase. The Company's bank debt less cash on March 31, 2006 was $6.8 million compared to $1 million on March 31, 2005.

During the 12 months, we spent $3 million on stock buybacks and dividends and increased inventory by $5.2 million. Our level of inventory on March 31 of last year was not sufficient to support the back to school sale in the second and third quarters. Consequently we incurred significant airfreight costs in those quarters. The increased inventory enables us to minimize these costs. Also included in inventory is additional safety stock put in place during supply chain system upgrades last year. We expect inventory turns to improve the second half of 2006 which will generate cash flow.

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

(OPERATOR INSTRUCTIONS). Harris Hall, Singular Research.

Congratulations on the quarter.

Thank you.

Just a couple of questions here. What would the shares outstanding be if you can dilute it for the quarter?

3.5 million and diluted 3.75.

Okay. It looks like your tax rate ticked down a little bit. It has kind of bounced around all over the place. Which tax rate should we use for projections going forward?

38%.

38%. You mentioned in the release the airfreight expenses hit your gross margin, but I thought that last quarter you had already increased inventory to kind of avoid that. Is this still kind of an ongoing issue?

This is something different, Harris. In Europe we implemented for Office Depot all their cutting implements in 12 countries. And as you may remember in the fourth quarter, they were not ready for delivery, and so we did not deliver it to them. There were a number of packaging changes and language changes that seemed to have been made again and again by the customer until we finally got it right.

By the time we finally got it right, they had run into stopping some items, so we expedited product. We brought it in from Asia. It was not as good an execution as it could have been, and I think a large part of that was because coordinating with 12 countries was quite difficult. But, of course, Office Depot, as any of our customers, are customers, and we're delighted to have that kind of opportunity to grow our business with them. We eat about $100,000 in expenses.

Okay. And then lastly, are you guys sticking with the same guidance of 58 to 60 million in sales for '06 and $1.16 in earnings?

Yes. Our internal numbers, the numbers we reported exactly matched our forecast.

Okay. Great. I will jump back in the queue. Thanks.

[Chris Duset], Sterne, Agee & Leach.

Congratulations on the quarter. Harris asked most of my questions, but I wanted to ask you guys a question about the debt. Your debt went from what, 5.6 million at the end of the year to about 7.8 million at the end of the first quarter. What was involved in this increase in debt? Was it inventory or was it stock repurchases?

It was entirely inventory. I believe receivables also increased.

Yes.

What kind of -- I know your bank line comes due at the end of the year, and so I guess my question is, what level of debt are you guys comfortable in having on the books?

Paul, why don't you answer that?

Well, our facility that is available is 15 million. We are not expecting to reach those levels once we get an acquisition or bought back more stock. But we anticipate by the end of the year our debt will be at a level of 5 million, 6 million.

Or it could be less.

Or less. Our cash will go up as well. So the net effect is probably about -- our net debt less cash will maybe be about 3 million compared to 4.5 million at the end of the year.

The facility was extended for what was it, Paul, three years?

Three years, yes.

And we reduced the interest rate to LIBOR plus 1.

Okay. All right, gentlemen. Those are my only questions. Congratulations and good luck with the second quarter.

(OPERATOR INSTRUCTIONS). [Michael Wasserman], Moors & Cabot.

Nice quarter, Walter.

Thank you, Mike.

What are you gentlemen preliminarily thinking about 2007 in terms of revenue increase potential, and what other plans are on the drawing board going beyond this year?

Mike, I would like to hesitate a little bit on forecasting 2007. We get a much better idea around the June quarter on the next quarter, and the reason is because when we see the success of the placements that we have, you are able to forecast with a little bit more precision. But there are a number of areas that we are excited about.

In the Clauss line, we're making significant progress in the garden area, in the commercial florist. We're making real progress with the professional cutting tools in the kitchen area. If you were to go into Sam's Club today you would see a three pack of our Clauss cutting implements there, and they are selling quite well.

In the cutting area, we have a whole new line of paper trimmers. They are portable ones. They are small. They are used in craft. They are used in digital photography. We are getting pretty good placement with that, and I think when you see the sell-through in them, we will have a much firmer understanding.

We also in the European line as we start to see the rollout of Office Depot and the other products that we can tag on that backbone, and they are the largest superstore chain in Europe, I will get a better feel for that.

And then finally, the pencil sharpeners that we have introduced, if you were to go into Target today, you will see the new top loading sharpener that when the pencil is sharpened automatically, it rejects it. Those are being placed now in other places for back to school, as well as catalog for the office trade. By June we will have a much better understanding of what that will roll out to be for next year. But we expect the momentum to be continuing.

Okay. Can you expand a little bit upon the building or the property in Bridgeport? You said you put it on the market for 2.8 million, is that right?

Yes.

You made a comment about environmental costs being deducted from that and that if you did not get a fair price, you were just going to hold it. Is that what you said?

That is what I said, Mike. The building is on -- well, there's a number of buildings, but there are 2.3 acres on the Pequonnock River, and there is another 4 acres across the street from that waterfront property. It is in an area that is targeted by the City of Bridgeport for development. It is something called Steel Point Development, which is on the Pequonnock River, a little bit closer to Long Island Sound. Our area is called the Milton Street development. It has been getting a lot of press lately, most recently in the New York Times last week.

The reason they are focusing on it is because they envision a series of, I would not call them high income housing because it is not, but it is more affluent housing than has normally been in Bridgeport. There is apparently a lot of grant money right now available to remediate all this waterfront property and get it to standards for either housing or in a simpler case into industrial use.

Our property falls in that area. The City has been working with us to bring it back to life. That is pretty exciting.

The 2.8 million appraisal is a point in time appraisal, and it seems to be -- it was professionally arrived at in February, so it is a current one. The environmental relates to 100 years of production on the facility, and we had plating, we had grinding, we had degreasing. Those things are in the soil.

We have been using a firm called Fuss & O'Neill, which is a well-known environmental and civil engineering firm to characterize the site. The results are the system environmental problems, but nothing that has to be remediated. In the event of a sale, depending on how the property is developed, you may cap some areas, you may put barriers on some areas, you may excavate some. Working hand-in-hand with the design allows you to optimize the net price.

I was surprised to see the appreciation of real estate in Bridgeport. When we leased the property 10 years ago, we literally thought we had a good deal at $1.00 a year if they could just keep the maintenance and security expenses off our income statement. Today it is a very different scenario. So we are optimistic that we will be able to realize a decent return on it.

Am I correct in that there is no longer any book value to the property or is that wrong?

When we bought back the master lease, we paid the developer who had it a little over 400,000. That related to the cash flow directly coming over the term of the leases of the property. We are depreciating it over three years. So that is I guess a book value for the property. But the leases -- the tenant is a New York Stock Exchange Company. They are very busy. I don't see any reason why we won't extend those leases well into the future.

Okay. Finally, was the cash flow roughly comparable to these earnings for the quarter?

As you know in the first -- Mike, in the first quarter of the year, we bring in as much inventory as we can to get ready for our biggest quarter of the year, which is the second quarter. So we have got a lot of inventory that will be shipped through June, and then the third quarter is usually very strong as well. So you are buying inventory to do that. In the third quarter, those [bumped] sales for back to school tend to turn into receivables, and the real cash comes in in the October range. So I hope that answers it.

Harris Hall.

On the raw material costs, you had mentioned earlier that you're facing higher costs for steel and other things. Is that still an issue, or are you able to pass it on to your customers?

Well, when you've got 30% new product, you have a chance to reprice every new product. We're passing it on.

(OPERATOR INSTRUCTIONS). It appears we have no further questions in the queue at this time. I would like to turn the conference back to you for any additional or closing remarks.

If there are no further questions, then this call is complete. Thank you for joining us. Good-bye.

That concludes today's teleconference. We appreciate your participation. Have a wonderful day.