Acme United Corp (ACU) 2007 Q1 法說會逐字稿

Good day, everyone, and welcome to Acme United's first-quarter 2007 earnings call.

As a reminder, today's call is being recorded.

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

Good morning. Welcome to the first-quarter 2007 conference call for Acme United Corporation. I'm Walter C. Johnsen, Chairman and CEO. With me is Paul Driscoll, our Chief Financial Officer, who will first read a Safe Harbor statement. Paul?

Thanks, 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 involves 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, 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 in the first quarter of 2007 of $12.2 million, which is flat with last year. Net income was $650,000, compared to $759,000 in the first quarter of last year. Earnings per share were $0.17 compared to $0.20 last year.

The first quarter of 2006 had strong comparisons to meet. In the beginning of 2006, we filled a major warehouse club chain with Clauss chef shears, began initial global shipments of scissors to one of the largest office superstore chains, and shipped the first iPoint Pencil Sharpeners to a mass-market chain. These initial pipe landfills were well over $1 million in sales in the first quarter of 2006.

We continue to ship these items, and our internal growth in the first quarter of 2007 reached the high from last year's [load-ins]. Net income was off $109,000, due to lower gross profit and continued investment in the business.

Our European operations made forward progress. Net sales were $1.4 million compared to 1.1 million last year, and the loss narrowed from $220,000 to $185,000.

We continue to increase our revenues of proprietary, higher-margin products through the office channel and have reduced headcount. We had no air freight expenses and expect to see continued improvement.

The performance of the Company for the rest of the year looks strong. During the second and especially third quarter, we expect to have heavy shipments of iPoint pencil sharpeners to a major warehouse club for global distribution. We begin sales of private-label paper trimmers to a major office superstore chain for distribution in the U.S., Canada and Europe. We will get the full benefit of back-to-school sales to new customers in the mass-market and drugstore chains.

In the fourth quarter, we begin shipments of new sewing scissors and implements to a major mass-market chain. iPoint pencil sharpeners will begin shipping to Office Depot, Boise OfficeMax, United Stationers, SP Richards, Costco, and Sam's Clubs at various points for the remainder of the year. Our newly designed mechanical pencil sharpeners, the new iPoints, will be presented in the fall for shipment in 2008.

During the last conference call, we projected net sales of $65 million in 2007 with net income of $1.25 per share. At this stage, we see that this is a reasonable estimate. As the second and third quarters progress, we will be able to begin to better define the success of these programs and refine the projections.

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 $12.24 million compared to $12.26 million in 2006. Net sales for the first quarter in the U.S. segment decreased 4%. Sales in the first quarter of 2006 included over $1 million of initial new product shipments to three major retail chains. The first quarter of 2007 only included restocking shipments of these products. We expect sales growth in subsequent quarters.

Combined sales in Europe and Canada increased by 11% in local currency. Gross margins were 44% in the first quarter of 2007, versus 45% in the first quarter of 2006. The lower margin in 2007 is primarily due to selling a higher proportion of European sales at lower margins as compared to the U.S. segment.

SG&A expenses for the first quarter of 2007 were $4.2 million, or 34% of net sales, compared with $4.3 million or 35% of net sales for the same period of 2006.

Operating profit was $1.2 million in the first quarter of 2007, compared with $1.3 million in the first quarter of 2006. Operating profit for the U.S. segment decreased by $100,000 due to the sales shortfall. Operating profit for Canada and Europe combined remained constant. The European loss was $185,000 in the first quarter of 2007, compared to a loss of $220,000 in the first quarter of 2006.

We had a slight gross margin improvement in the first quarter of 2007 and expect more improvement in the coming quarters.

Net income for the first quarter of 2007 was $650,000 or $0.17 per diluted share, compared to net income of $759,000 or $0.20 per diluted share for the same period of 2006.

The Company's bank debt less cash on March 31, 2007 was $7.1 million compared to $6.8 million on March 31, 2006. We increased inventory from the end of Q1 2006 to the end of Q1 2007 by $1.8 million, paid $1.1 million to demolish the former manufacturing site in Bridgeport, Connecticut, and spent $400,000 in stock repurchases. All of this was offset by earnings.

Accounts Receivable at March 31, 2007, compared to March 31, 2006, remained constant, which is consistent with the sales activity. Inventory increased 13% in anticipation of future sales growth. Stockholders equity increased from $14.8 million at March 31, 2006 to $18.6 million at March 31, 2007.

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

Thank you. (OPERATOR INSTRUCTIONS). Harris Hall, Singular Research.

Good morning, guys. I am wondering if I could get the actual dollar amount for the geographic breakdown of sales.

Yes. The U.S. was 9.3 million in 2007 and 9.7 in 2006; Canada, 1.6 million in 2007, 1.5 million in 2006; and Europe, 1.4 million versus 1.1 million last year.

Okay. Also, you guys had said there was no air freight charge in the quarter. I noted for a while you were building up inventory to try and find the right balance of safety stock. Do you guys think that you are at that point now that you've kind of put that issue behind you?

Well, you never really put it behind you, Harris, but it's much improved over last year. We've done a number of things in the past 12 months. One of them is we balanced out our factory production so that we brought in more earlier, even though we didn't have necessarily all of the forecasts from our major customers, but we matched them to historical numbers. That eliminated a lot of the last-minute frenzy that occurs when a customer comes in late and they forget a major batch of rulers or they forget that they have something on promotion. It may be amazing to you, but it occurs.

There will still be air freight but we're not running at a very high level right now.

Okay. Also, you had said that your gross margins took a hit because of an increasing share of European business. I know that was an issue last quarter. You've made the management changes over there. I mean, should we continue to expect the European business to be a drag on margins, or (multiple speakers)?

Yes, Harris, the margins in Europe are lower than in other areas of our business, and so for example, in first quarter where the sales were less than last year in the U.S. and the European business grew, it pulled it on the margin. However, I believe the margin in the fourth quarter for the Company was 41%, and now we are running at 44 combined. So, you can see that the European margin is improving and it is as well in the U.S.

Right. I remember you had said once before that you had to get those initial orders with the European retailers at lower-end commodity type products before you could get your higher margin products out. Is that still the case? What's kind of the timeline on that?

Yes, that is the case. We will be beginning to sell in some volume in June some higher-margin proprietary products in Europe through one of the big chains.

We've also added, starting in the summer, a number of -- or two fairly large and high-profile buying groups in Europe which will be selling some of our proprietary items. And so we see internally that the European margins will be picking up a little bit in June and then in the third quarter, moving more substantially forward and then we believe that will be sustained.

Harris, it's not so much that the European margins were poor; it's just that their margins in general are lower than the U.S. and the mix is causing a slight decline.

Right, I understand that. Lastly, I know that you opened up an office in Arkansas to try to increase your penetration with Wal-Mart. I was wondering if you could give us an update on how that's going.

The business at Wal-Mart and Sam's continues to grow nicely, and the sell-in business in the fourth quarter is coming directly from that Arkansas office.

Did you say the sewing business or sell-in business?

Sell-in.

Oh, the sell-in, okay. Great, thanks.

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

A question -- given the forecast for this year, if I recollect, I think that $1.25 is pretty close to what we might have envisioned about 1.5 years ago for 2006, which -- the question is, given that the iPoint is going to be shipping in quantity here during this year, one would think that the earnings estimate would be higher for last year if in fact there isn't something else going on. Is it Europe that's got the estimate derailed a year without being more than compensated for by the iPoint, or am I missing something?

No, Europe -- Paul will have to help me with the numbers but I think Europe lost about 1.1 million last year.

Yes.

That was much worse than the year before, which I think was on the order of 300,000 in a loss.

Yes.

So Europe derailed last year.

Right.

We are projecting narrowing that lost this year, and so Europe will continue to be having a loss but it will be narrowing.

The iPoint Pencil Sharpener clearly is growing, but we are also broadening the business to continue to build it. For example, we are entering into the hardware and industrial markets in a more substantial way. We've made the investment in Bentonville for our office and staffed it. Those expenses are directly related to some of the new business that will be coming in 2008.

But I think the summary, the real short answer is yes, we were derailed last year by the European loss.

Okay, so then, if I understand correctly, between the European loss being narrowed and the increased shipments of iPoint, those are the primary ingredients of what will cause the earnings to move up to your estimated 1.25 range this year?

Well, it's not just iPoint, but iPoint we think will be a major product. One of the mass retailers is carrying quite a number of new back-to-school scissors and rulers and [math] kits. The Clauss line is sort of a wild-card because there's some new business with industrial distributors that we think could be giving us a lot of (inaudible), but we don't know that yet.

The iPoint business, it has the distribution and where we've got orders, so we know that piece and we know the [sewing] piece.

Yes. What is of the status of the Bridgeport property, if you could just elaborate on where that stands, please?

Bridgeport, the demolition was finished last year, and we paid everything out that had to be paid for knocking it down. I met with the Bridgeport Port Authority last week and discussed possibly jointly developing that with the City of Bridgeport. It's hard to know whether that will happen but there was some interest in doing that.

We've had a number of developers approach us but the issue with the developers we've met is that we haven't considered them to be deep enough pocketed and responsible enough. So right now, the property is generating about 170,000 of free cash flow. It's essentially written off, and we are working to put it in good, responsible hands.

Will Acme have to incur any additional costs that you can envision with regard to that property?

If we do a Phase III for development, we would probably spend about 140,000 to $170,000 to do the Phase III. I've also looked at developing it separately from Acme but I haven't really formulated how that would happen. I have inquired about forming an industrial revenue bond and working with the City to build it out and responsibly develop it that way as well.

Jeff Matthews, Ram Partners.

I wondered, first of all, the competitive landscape, how it looks to you going into this year. I ask this because I recently spent time with [Acko], who is telling analysts that they are going to be raising prices, that their brands are very powerful and they are going to leverage their strengths and basically put it to Staples and whoever else they sell to because they think they can. Yet when I go into Staples, two things -- you guys have tons of shelf space in your niches, and every time I'm there, they've added another private-label somewhere in the store. It seems to me that you guys have done a great job in the private-label area. I wonder if you see your opportunities getting larger or diminishing with companies like [Acko] going one way and on the other hand, the scissors company whose name escapes me right now that you've been taking share from -- whether they're getting their act together and making life tougher for you?

Well, that's a pretty big question, but the competitive landscape is -- it's really competitive. The pressures we have from currency are real because the dollar continues to devalue on the global market. We don't make policy but we sure live with that devaluation, that loss of buying power, whether we are buying in Europe or we are buying in China.

So what we have as a positive is we fill factories in Asia and we fill factories in Italy. When we do that -- and in Mexico. When we do that, I think we get about as close to the world price often as there is. I think we buy, given our volumes, better than a Wal-Mart or a Kmart or a Staples and that's why, when they are working with and -- it is on a private-label -- we are delivering the value that is probably comparable or better to than what they can do individually. Plus, we are able to service them.

My view is that the end-user, the customer that walks in the street, is our customer and we will give them whatever they want to buy. I think, in the case of private-label, you can't walk into a store and see all [red] as if it was Staples or all Office Depot, and the differentiation is important.

In the case of [Acko], their ability to raise prices is a remarkable thing. I wish them luck with it. We look at it as a very competitive business and it's the last thing we put in our mind. Of course, when you have to, you have to.

Financial question -- I wondered if -- I think Paul said you bought $400,000 worth of stock back.

Yes.

Was that for the year or in the quarter or --?

It was in the quarter.

Oh, okay. All in the fourth quarter?

Yes, we did (multiple speakers).

In the first quarter.

Sorry, the first quarter. We didn't buy any last year.

Okay. Your cash -- where do you think your debt will be at the end of this year?

I think our net debt will be between 5 million and 5.5 million. That's assuming if we didn't buy any shares back.

Okay, great. Thank you very much.

(OPERATOR INSTRUCTIONS). Harris Hall, Singular Research.

Yes, I just wanted to get a little more color on the share buyback, too. I think that's great that you guys are doing that. Was that mostly done after the stock sold off in late March, kind of opportunistically, or just all throughout the first quarter?

Well, when it sold off, we thought it was a good price and we bought.

How much remains on your authorization there?

100,000 shares.

Okay. What was the average price you guys bought back at?

It was like in the 13.90s.

Super. That's a great move, I think. I hope you guys do more of that.

Thank you.

Rick Fetterman, Fetterman Investments.

Good morning, everybody. I wonder. In Europe, my recollection was that, one of the previous calls, you have mentioned something about perhaps another 1 million or maybe a little more than 1 million in revenue in Europe would get you around breakeven. If that recollection is correct, does that suggest you'll be close at the end of this year? If I am incorrect, how much more revenue do you expect it will require? What revenue level would you need to achieve in Europe to a get to a breakeven?

Rick, that's an interesting question. That issue is in which customer base is the revenue coming from? For example, if it's a superstore, it would take a number of millions of dollars to breakeven. If it's some of the specialty retailers, it's a lot less.

What were doing is we're pushing on the specialty retailers with higher-margin product and we are introducing the higher-margin products into the large chains. First, we had to get the chains; we have Office Depot and Staples now. So introducing them, we think we will be able to build pretty nicely, but you don't see that in revenue. You don't see whether it came from seatbelt cutters, which is a pretty good margin business and we are selling those into all the first-aid kits in Europe, practically. It had good margins in the specialty retailers; we get very poor margins in an Office Depot or a Staples.

When you asked -- we asked the question perhaps a couple of years ago, we really didn't have the Office Depot business and we were much smaller at Staples.

All right, thank you.

(OPERATOR INSTRUCTIONS). Having to further questions in the queue, I would like to turn the conference over to Walter Johnsen for any additional or closing comments.

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

This does conclude today's conference. Thank you for your participation. You may now disconnect.