Acme United Corp (ACU) 2006 Q2 法說會逐字稿

Good day, everyone, and welcome to Acme United's second 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. Paul Driscoll, Chief Financial Officer, and Mr. Walter Johnsen, President and Chief Executive Officer for Acme United. At this time, for opening remarks and introductions, I will turn the call over to Mr. Walter Johnsen. Please go ahead, sir.

Thank you. Good morning. Welcome to the second-quarter 2006 conference call for Acme United. 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?

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.

Thank you, Paul. Acme United reported record second-quarter sales and earnings, and we are pleased with the performance. Our revenues for the quarter were $17 million compared to $14.9 million last year, an increase of 14%. Net income for the quarter was $1.5 million compared to $1.3 million last year, a 15% increase.

The second quarter is historically the strongest one of the year because we ship back-to-school products in addition to our normal business. We have seen particularly strong reception from our new school scissors, which won a Teachers' Choice Award in the fall. The iPoint pencil sharpeners are now moving into broader distribution in time for back-to-school sales. Our personal trimmers are particularly well-designed and are showing strong appeal.

The Clauss professional and industrial product line has continued to gain momentum. Our professional kitchen shears are selling very well at one of the mass market clubs. The Clauss sewing and craft line is gaining at specialty and mass market accounts. We recently strengthened the Clauss industrial sales force with the addition of an experienced professional from Black & Decker.

Our safety business is also gaining as offices, schools and industrial facilities upgrade their first aid and emergency preparedness. We continue to gain product placement in our stationery, wholesale and contract accounts, and recently hired a marketing executive from Unilever to drive growth in the category.

The business in Europe is very competitive, but we are making progress in a strategic market. Acme's revenues in Europe were $1.4 million in the second quarter compared to 1 million last year, a 40% increase. But our loss increased from breakeven to a loss of $200,000. During the last six months, we rolled out our scissor product in 12 countries with a major superstore and mail-order company and a new manicure item program with the largest drug chain in Europe.

Our sales growth reflects the new business. Our losses to date are directly related to tight margins and implementation costs for new artwork, packaging, logistics, setup and freight. From a longer-term perspective, we are building the customer infrastructure to deliver innovative products to a very broad and deep market.

The demolition of our Bridgeport plant is now complete. They have removed two in-ground oil tanks and excavated the soil underneath in compliance with the Department of Environmental Protection regulations. This was accomplished within budget.

The marketing phase began in June, with the property listed for $2.8 million. We will need to remediate this site in accordance with the Connecticut Transfer Act if we accept an attractive, so the net will be lower. However, there is no further remediation necessary if we decide to hold the property and manage the warehouse rentals.

As we enter the third quarter, business continues to be solid. At the beginning of the year, we provided guidance of $58 million in revenues for the year and net income of about $1.16 per share. We're moving toward those estimates, and I am pleased with the pace of new business for next year.

I will now turn the call to Paul Driscoll. Paul?

Acme's net sales for the second quarter were $17 million compared to $14.9 million in 2005, an increase of 14%. Sales for the six months ended June 30, 2006, were $29.2 million compared to 25.5 million in the same period in 2005, an increase of 15% or 14% at constant currency.

Net sales in the U.S. segment increased by 13% in the quarter and 15% for the six months ended June 30. The increase resulted from sales initiatives with several major retailers and superstores. Net sales for Europe and Canada increased by 18% in the quarter, or 10% in local currency and 12% for the six months ended June 30, or 8% in local currency. The major drivers of the growth were new sales to a large pan-European superstore and an expanded product line with a major European drug chain.

Gross margins were 43.7% in the second quarter of 2006 versus 45.2% in the comparable period last year. For the first six months of 2006, gross margins were 44.4% compared to 45.5% in 2005. Margins have been negatively impacted by the one-time expenses associated with filling the large orders on an extended basis for the new business in Europe. The costs consisted of packaging material, labor and airfreight. The good news is that this new business amounts to approximately $1 million on an annual basis. The European margins are expected to improve in the second half of the year.

SG&A expenses for the second quarter of 2006 were $5 million compared with $4.6 million for the same period of 2005. SG&A expenses for the first six months of 2006 were $9.3 million or 32% of sales compared with $8.3 million or 33% of sales for the same period of 2005. The majority of the increase was due to higher sales commissions and freight costs associated with the higher sales, the addition of marketing logistics and quality control personnel, and the expensing of stock options.

Operating profit was $2.4 million in the second quarter of 2006 compared with $2.2 million in the second quarter of 2005. Operating profit for the six months ended June 30, 2006, was $3.7 million compared to 3.3 million in the same period of 2005.

Operating profit for the U.S. segment increased by $748,000 or 25%. Operating profit in Canada increased by $68,000, or 21% due to improved margins. The European operating loss was $390,000 in the first six months of 2006 compared to an operating loss of $5000 in the first six months of 2005. The increased loss was primarily due to the one-time expenses associated with the launch of the new customer programs. We expect results to improve in the second half of the year.

Net income for the second quarter of 2006 was $1,506,000 or $0.40 per diluted share compared to a net income of $1,314,000 or $0.34 per diluted share for the same period of 2005. Net income for the first six months ended June 30, 2006, was $2,265,000 or $0.61 per diluted share compared to $1,964,000 or $0.52 per diluted share in the comparable period last year. This represents a 15% increase in net income and an 18% increase in earnings per share for both the second quarter and the six months.

On the balance sheet, accounts receivables were up 18% compared to a year ago, which is consistent with the sales growth. Inventory has increased by 35%, which is in anticipation of additional back-to-school sales and increased safety stock, which was not sufficient on June 30, 2005.

The Company's bank debt less cash on June 30, 2006, was $9.2 million compared to $4.4 million on June 30, 2005. During the 12 months, we spent $1.8 million on stock buybacks and dividends to shareholders and increased inventory by $3.8 million. Additionally, we spent $1.5 million on the Bridgeport demolition project. We expect the net debt level to decline to approximately 4 to $5 million by the end of the year.

Thank you, Paul. We'll now open the call to questions.

(OPERATOR INSTRUCTIONS). Jeffrey Matthews, Ram Partners.

Congratulations. I wanted to make clear the operating earnings breakdown that Paul gave. I was trying to make them add up to the total in the quarter and I couldn't. Could you run those by me again -- the U.S., Canada and Europe?

Yes. The U.S. -- I'm sorry, what I gave you was not for the quarter; it was for the six months. So maybe you were trying to add up the quarter.

Do you have a quarterly breakout or not?

Yes, the quarter -- just a second -- can we come back to that in a minute?

He is going to look it up, Jeff, because he reported on six months.

Right. In the meantime, first of all, congratulations are due for everything you have accomplished this year.

Thank you.

And could you give a little more color on the European effort? Was the loss anything out of line with what you might have expected to spend, given what you think you are accomplishing as far as this being what Walter called a strategic market? And is the competitiveness that you mentioned in the margin structure anything that is likely to be temporary or a permanent issue? Is the margin structure over there going to be lower than here?

The prices are very similar to here, to the base products. What changes is that until you get the distribution in Europe in the office product area, it's very difficult to just sell the specialty items and the innovative items. So the book of business we have in the U.S. is a broad range from basic commodities right up to specialty titanium scissors. And we've got that distribution channel very well-oiled.

In Europe, the strategic advantage of the office superstores and major mail-order firms is that by taking on the commodity scissor business, it then lays the platform to bring in all the innovative products that frankly add value to the sale of these customers. But until we had that base of business, there wasn't enough volume to get their attention.

When you roll out in 12 countries, you have got a lot of packaging, there's a lot of languages, there's quite a bit of confusion as one country manager argued with another country manager to figure out whose language is at the top or third in the queue. So we bore a lot of those expenses. On the other hand, they are our customer and we work with them. And it was expensive to do that. But now we've got that base, and our next goal is to begin to give them some really innovative scissors. And we're selling them here in the U.S.

And would you say, Walter, that where you are now in the superstores and mail-order channels over there is anything different than what you had hoped to achieve? Is it any less than you would have hoped to achieve at this point?

It was much more expensive than I ever dreamed to get the implementation done. But it is a multiyear contract -- a series of multiyear contracts. And I think we're going to be surprised as we work through the rest of the execution. So no, I certainly wouldn't say I expected that. And frankly, the U.S. performance, Canadian, Hong Kong, all have helped us cover and exceed the losses that Europe had.

I guess what I am really asking is do you think it's worth the effort?

Absolutely. Absolutely.

Jeff, the operating income for the U.S. in the second quarter was 2.3 million, and Canada was 300,000, and Europe was minus 200,000.

(OPERATOR INSTRUCTIONS). Harris Hall, Singular Research.

Congratulations, guys, and good morning. I was actually looking for the revenue breakdown, the U.S., Hong Kong, Canadian and Europe. Do you have that for the quarter?

The quarter -- the U.S. was 13.2 million, Canada was 2.4, and Europe, 1.4.

Okay. And how did that compare with last year?

The U.S. was 11.7, Canada was 2.2, and Europe was 1 million.

You said the constant dollar overall sales gain was 15% for the quarter?

The constant dollar was 14%.

So the 15% was the six-month number?

15% was the six-month -- that is 14% in constant currency. And the 14% increase in the second quarter was about 13% in constant currency.

13% constant dollar sales gain in the second quarter?

Right.

And in the past, you guys have given the percent of revenue from products introduced in the last 36 months. Do you guys think you have given that?

I don't think we prepared it, but I will tell you the percents have continued to increase.

It was about a third. Does that sound about right?

It is at least that right now.

On the share buybacks, I thought I heard you say you bought back 1.8 million, but the press release said 1.4 million.

That included the dividends.

So it was 1.4 million shares buyback?

Right. And those were done in the second half of last year. [multiple speakers] not had any purchases this year.

So no share buybacks this year.

No share buybacks this year.

Are you thinking about doing that again?

Well, it depends on the stock price. But our view right now is that we'll strengthen the balance sheet with earnings and cash flow in the next six months. We'll see where the stock is.

Do you have the share count? I don't think I saw that in the release.

It's 3.5 million.

And what is the diluted shares -- at 3.816 still?

It is 3.75.

And could you reiterate the revenue guidance again? I think you said $1.16 per share.

Yes -- and 58 million in revenues.

[Michael Weiss, Joslinda Capital].

Good quarter. For some reason, I got cut off for a few things. So I just want to -- hope I'm not causing a repetition. How much of the loss in Europe was -- I was going to ask if you didn't have the one-time expenses in Europe, would it have been normal margins? I mean, how [multiple speakers] --

No. If we didn't have the new business, we would've had higher margins. We took some very competitive business. But then we had implementation costs that were bigger and longer than we expected. As I pointed out, it's that foundation, it's the skeleton, now we can add on the innovative products and the value-added.

But going forward, your margins in Europe should be better?

Sure.

And then another thing -- I got cut off for part of it. The property is being -- did you sell the property or you're listing the property?

We listed it for $2.8 million.

But you haven't sold it yet?

Right. And when we -- if we sell it, we will have to comply with the Connecticut Transfer Act, which means that we will remediate it through probably industrial standards. And so there's an offseting cost to the $2.8 million.

So U.S. and Canada, would you say, are tracking ahead of plan so far this year?

Yes, they are about on plan.

They are about on plan.

They are on plan.

Any new products we should be looking for in the next --

You will be seeing the iPoint pencil sharpener at a lot of retail places for the summer. And that is the electronic pencil sharpener where you place the pencil at the top and it automatically pulls it down, sharpens it and returns it. It is at Target. It's at Staples -- those two come to mind right now. But it's got pretty good distribution. We are also doing a promotion with iPod and the iPoint where it's a giveaway of and iPod in a drawing. And you will see those at Staples as well.

And anything in the medium term that we should be looking for? Or just more brand expansions?

There's a lot of new products that are out. I mentioned the kitchen shears at the Sam's Clubs. And you can see them right now. When we add those to the lines, we are breaking into the categories or customers that we haven't been in. And that's all incremental.

Rick Fetterman, Fetterman Investments.

Sorry I got cut off for a couple of minutes. I hope I'm not going over old ground. Did you mention what the annual rental was on the property currently -- the Bridgeport property?

Yes, that is about 100 -- what was it? -- 170,000?

Yes, the income is 170.

Yes, the income is 170. And we have been depreciating at a pace that about covers that. So we are not bringing it in as income.

Yes, just cash flow.

Cash flow.

Did you mention what kind of gross profit margin expectations you might be looking for for the second half? Are they going to be in line with the last quarter, or do you expect them to be improving?

We expect them to improve in the second half of the year, primarily because of the one-time costs we experienced in Europe for these two new customer programs. So we will -- our gross margins will improve in the second half.

And final question is regarding the inventory, is the current level something we should look for as an ongoing level? Or is this a little seasonal or due to the orders that had to be filled on an expedited basis?

The inventory on a normal basis would increase in the second -- probably first and second quarter as we are preparing for back-to-school. But we were short a year ago, and so we built the inventory. And from this point forward, for this year, it is declining, and we expect that to continue. Obviously, as we are growing, if we continue to grow, which we are intending to, inventory will follow that pace.

Was the vast majority of back-to-school shipped in the second quarter?

No. The second and third quarters are back-to-school.

Thank you very much. Great quarter.

Harris Hall, Singular Research.

Just a quick follow-up on -- what was the constant dollar sales growth for Canada and Europe in the quarter?

For the quarter, the constant sales were 18% in U.S. dollars and 10% in local currency.

That is for Canada or Europe?

No, it is in total.

I was trying to get the breakout, if you have it.

Okay. Canada was even with last year in constant currency, and Europe was 40% higher.

40% higher in constant dollars. Wow.

Yes.

Also, I was wondering if you could give us an update on the Wal-Mart business. I know you guys moved an office there to Bentonville, or whatever.

Well, it is a very large potential account, and it is a growing account with us. I don't have the numbers to share with you, because I just frankly don't know them. But I will speculate that we're up somewhere between 50 and 100% in the past year with Wal-Mart. We are growing a lot.

Great. That's all my questions. Again, congrats on a great quarter.

Jeffrey Matthews, Ram Partners.

It's Jeff. Is the debt level -- you are obviously comfortable with it -- is it any more or less than you anticipated being at at this point, given your plans for adding the backup inventory?

No, it is about where we expect. And we negotiated a reduction in the interest rate three or four months ago to LIBOR for -- was it 1?

1.

And that was down from LIBOR plus 1.5?

Correct.

So the bank is obviously very happy. They are happy that we are borrowing.

Absolutely. And then, I was cut off, too, and I don't know if this was covered, but are you seeing any changes in the landscape on the cost side out of China that might impact things going forward?

Well, we are. But we are continuing to innovate new products that reflect higher costs in the price. There's a small currency increase in the U.S., probably 3%. Steel a little bit -- we just saw a vendor make a proposal to raise the steel price and then decided the consequences weren't worth it and retracted it. Plastic in handles and rulers -- we've just aggregated our production and purchasing and it seemed to have offset most of that. So we really haven't had that much of an impact. The currency is the currency. But that has been reflected in new product pricing.

And then --

Harris Hall, Singular Research.

Sorry, guys, just one last question on the air freight charges. I know the last few quarters have been hit pretty hard with that as your inventory levels have been a little bit low and you've been rushing to meet customer orders. Is that pretty much behind us? Because I was a little bit surprised to see that there was still some of that going on in this quarter in Europe.

Well, Harris, there will always be air freight. It's the nature of -- we got a call, and this is real life, a week ago -- how much of a certain product can you ship us, and how fast? Well, that is a great question, and you want to be able to respond to it. And maybe you do, but then another customer is waiting for that product. And before you know it, you have a backorder and you're air-freighting. And that continues. The air freight in the first six months was less than last year.

Well, in North America, the air-freighting in the first six months was about 30 to 35% lower than last year. But Europe didn't have these types of air freight expenses last year.

So I think the answer is it's dropping, Harris, but it's the nature of our business. So a long, long supply chain.

But there's not a lot of obsolescence in your product, right? Can't you increase inventory levels so that --

Well, we have. And we're not going to be doing much more of that. So when a customer says, how much can you ship us and how fast, we jump at those things. But it leads to a headache sometimes at the back end with another customer.

So you don't want to increase inventory any more than you already have, because you are worried about --

Well, it may not be obsolescence, but we don't like it sitting. And it is a fine balance. But that air freight is -- part of it is just the cost of doing business.

So you said that the cost of shipping stuff -- shipping scissors on airplanes is lower than the carrying cost of the excess inventory?

Well, no. But what would probably happen, Harris, is that we would build up a lot of inventory and then we would get something, get an award, and all of a sudden a whole other area is demanding it. It's very difficult because the customers are forecasting and we are forecasting off their forecasts. When products move -- we wouldn't be wise to continue to build inventory, I don't believe.

Maybe increase the safety stock.

No, we have.

Jeffrey Matthews.

(technical difficulty) being, like, five, six, 10 years ago.

Jeff, you cut off on the beginning part.

I was just saying, I agree with your last point. I am glad to hear you say that you don't want to have too much inventory.

We have a hefty amount right now. And the other area that is important to note is the single one-time shipment fill rate is a parameter that all our major customers monitor and demand high performance. And as that bar continues to get set, it means you've got to have depth in your product families, in your inventory, so that you are filling at high rates. And we are doing that. And that's really customer service. But the flipside is it is more inventory.

Right. And then along the lines of where that risk of having too much inventory could go, there has been a clear deceleration at retail, ranging from Wal-Mart to Target to HON Industries this morning and all sorts of companies. Do you see any indications that you may end up suddenly not needing that inventory that you've built up? Or do you think your plans are pretty well-set as far as back-to-school goes?

I can think of a couple of accounts that are negative in growth for us -- in other words, a decline in sales. But every other one is in double digits. And the couple that are down are because either we moved the product to direct import from warehousing it in the U.S. -- in that case, they get a savings until our selling price is lower -- or we did a private label that cannibalized some of our branded products, and we do that sometimes, if the customer wants that. But other than a couple of examples, almost everything is in the double digits. I can't really respond to it. I'm not seeing a decline.

Great. And then my final question is more of an observation; I'm passing it along. Company AC Moore yesterday had their conference call. They are a large arts and crafts supplier, retailer. I don't know if you do business with them --

It's not a major account. We'd like to do more.

Well, they've got a new CEO. And he was talking about one of the initiatives that they haven't done much in is private label. So I just bring that to your attention.

Thank you.

Congratulations. Thanks again.

(OPERATOR INSTRUCTIONS). Gentlemen, there are no other questions at this time. I would like to turn it back to you for any additional or closing remarks.

I would like to thank you for attending. And if there are no further questions, then the call is complete. Have a good day.

That does conclude our conference today. We would like to thank everybody for their participation. Have a great day.