Acme United Corp (ACU) 2007 Q2 法說會逐字稿

Good day, everyone, and welcome to the Acme United second-quarter 2007 earnings call. As a reminder, this call is being recorded. At this time I would like to turn the call over to Mr. Walter Johnsen, Chairman and CEO.

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

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 risk 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 operations 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'll turn the call back to Walter.

Thank you, Paul. Acme United reported net sales for the second quarter of 2007 of $19 million, an increase of 12%. Our net income for the quarter was $1.5 million, or $0.41 per share. It was a record performance for our company, but we expected greater profitability.

The sales increases were across the board. We had good growth in Canada and Europe. The U.S. performed well. We began shipping iPoint pencil sharpeners globally and had a good start on our back-to-school season.

The Company's gross margins in the second quarter declined to 42% compared to 43.7% in the comparable period last year. Mix was the primary driver, with growth of lower-margin private-label school products at a major U.S. superstore and a delay of higher-margin products to a large mass retail chain.

During the past two years, we have had a continual increase in costs. Inflation in China has been running between three and 4% for years. The dollar has declined in purchasing power against the Chinese RMB by 7.2% during the past 24 months. These increases have been largely offset by working carefully to improve factory productivity, close attention to packaging costs, and new product introductions.

It is ironic that the last major domestic scissor factory is being a liquidated as we speak. The Fiskars plants in Wausau and Spencer, Wisconsin are being sold in a multi-day auction right now. This means all of our major competition is China-based and faces similar cost pressures.

We have not increased prices in many years and chosen instead to work smartly to offset costs. This has resulted in market share gains across the board and the ability to gain category captain positions in all the office superstores, office wholesalers, and now some categories within the largest mass-market retail chains. We have developed the Westcott, Clauss, and PhysiciansCare brands and positioned ourselves as a leader.

Acme has announced Adobe increasing prices on a number of items beginning Oct. 1. We will be careful to continue to provide outstanding value to our customers, but the increases are reflective of the entire basket of products that our China-sourced. We would expect similar increases by our competitors.

Our growth for the remainder of the year appears strong. In the third quarter, we began shipping new private-label trimmers globally and continue to ship iPoint pencil sharpeners. As the year progresses, we will load in sewing scissors as category captains to a large retail chain and begin shipping at many Clauss items to the industrial market. The power pack cartridge-based utility knife has had very strong interest and we hope to begin shipping this item at the end of the year.

I will now turn the call to Paul Driscoll.

Acme's net sales for the second quarter were $19 million compared to $17 million in 2006, and increase if 12%. Sales for the six months ended June 30, 2007 were $31.2 million compared to $29.2 million in the same period in 2006, an increase of 7%.

Net sales in the U.S. segment increased by 11% in the quarter and 4% for the six months ended June 30, a significant part of the increase was due to higher sales of the new iPoint electric pencil sharpeners. Net sales for Canada increased by 22% in the quarter, or 20% in local currency, and 15% for the six months ended June 30, or 14% in local currency. Sales of the iPoint electric pencil sharpeners contributed to the growth as well as other new school products.

Net sales for Europe increased by 5% in the quarter, or flat in local currency, and 17% for the six months ended June 30, or 9% in local currency. Sales in the second quarter of 2006 included the load-in of an expanded product line with a major European drug chain.

Gross margins were 42% in the second quarter of 2007 versus 43.7% in the comparable period last year. For the first six months of 2007, gross margins were 42.6% compared to 44.4% in 2006. The gross margin decline is mainly due to greater sales of lower margin products and also higher product costs as a result of increased raw material costs and the appreciation of the Chinese currency.

SG&A expenses for the second quarter of 2007 were $5.4 million compared with $5 million for the same period of 2006. SG&A expenses for the first six months of 2007 were $9.6 million, or 31% of sales, compared with $9.3 million, or 32% of sales, for the same period of 2006.

Operating profit was $2.5 million in the second quarter of 2007, compared with $2.4 million in the second quarter of 2006. Operating profit for the six months ended June 30, 2007 was $3.7 million, compared to $3.7 million in the same period of 2006. Operating profit for U.S. segment for the six months ended June 30 increased by approximately $100,000, or 4%. Operating profit in Canada increased by $68,000, or 17%, due to higher sales.

The European operating loss was $330,000 in the first six months of 2007, compared to an operating loss of $390,000 in the first six months of 2006. Gross margins in Europe have improved and will continue to improve.

Net income for the second quarter of 2007 was $1.522 million, or $0.41 per diluted share, compared to a net income of $1.506 million, or $0.40 per diluted share, in the same period of 2006. Net income for the first six months ended June 30, 2007 was $2.172 million, or $0.59 per diluted share, compared to $2.265 million, or $0.61 per share, in the comparable period last year.

For the balance sheet, accounts receivables are up 21% compared to a year ago, which is consistent with the sales growth. Inventory has increased by 13%, which is also consistent with the sales growth. The Company's bank debt, less cash, on June 30, 2007 was $9.6 million compared to $9.2 million on June 30, 2006. We expect the net debt level to decline to approximately $5 million to $6 million by the end of the year.

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

(OPERATOR INSTRUCTIONS) Jeff Matthews, RAM Partners.

The large part of the sales increase coming from the iPoint, is that all sell-in or do you have a sense of sell-through?

We have a sense of sell-through. It is selling very, very well. You would expect that at this time of the year, because it is back-to-school, but the tests were down in January and February, when there was no back-to-school. At that point, it was strong enough to displace, in one retailer, Panasonic. But right now, it is going gangbusters.

Okay, and is it strictly at that one retailer or is it more broadly based?

The iPoint placed at office Depot, OfficeMax, SP Richards, United Stationers, Costco, some Sam's stores, and it will be in some Staples stores. So it is pretty broadly placed right now.

So from what you have seen so far, all in all, you are happy with it and with the inventory commitment you made to it?

We're trying to produce it as fast as we can.

Okay, great. my second question is just in terms of general weakness at office retailing companies, such as Office Depot. Are you seeing any impact on your business because of that?

Actually, we have been noticing that SP Richards, Office Depot, I think Avery all reported down sales, but we continue to be gaining market share in our school business right now, in our office channel, in Clauss. Then we have got the iPoint and a whole family of pencil sharpener-related items moving through the category. I can't tell you we're seeing a softness in sales.

Great, then my final question is in terms of the debt load by year-end, once you get your receivables all paid, what do you think your cash -- what do you think your net debt will look like at year-end?

It'll be in the $5 million to $6 million range. You can see it, as our receivables have fallen right now, but it is because of the shipments.

But you're comfortable with it and the commitments you've made?

Yes.

Okay, thanks.

It appears we have no further questions.

If there are no further questions, I would like to thank you for joining our conference call. Goodbye.

That does conclude today's presentation. Thank you for your participation and have a wonderful afternoon.