Acme United Corp (ACU) 2007 Q3 法說會逐字稿

Good day everyone and welcome to Acme United third quarter 2007 earnings conference call. As a reminder this conference is being recorded. At this time I would like to turn the conference over to your moderator for today, Mr. Walter Johnson, Chairman and Chief Executive Officer, please go ahead sir.

Good morning. Welcome to the third quarter 2007 conference call for Acme United Corporation. I'm Walter Johnson, Chairman 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 limitations, 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: 1, the company's plans, strategies, objectives, expectations and intentions are subject to change at any time at the discretion of the company. 2, the company's plans and results of operations will be affected by the company's ability to manage its growth. And 3, other risks and uncertainties indicated from time to time in the company's filings with the Securities and Exchange Commission. I'll turn the call back to Walter.

Thank you Paul. Acme United reported net sales in the third quarter of 2007 of $17.1 million, which represents an increase of 10%. Net income was $1.3 million or $.35 per share, an increase of 7%. These were the best results we have ever recorded in the third quarter, and reflect the success of new product introductions and improved performance in Europe. However, we found that September sales were weaker than expected. Many retail accounts were flat year over year during the month. And this sluggish performance reduced the overall growth for the quarter. It also reduced our profits for the quarter since we were spending on plan. We are too early into the fourth quarter to identify a trend, but our new products and expansion into the industrial market are expected to continue to drive growth.

Sales of our I Point pencil sharpners were strong. In some accounts they appear to increase retail returns by 25 to 40%., which is a very compelling incentive to new customers. We have just introduced an entire family of smaller I Points for the mass market. The early reception is positive. The company announced an agreement with Microband to incorporate their antibacterial products in our new back-to-school line of scissors, rulers, protractors, compasses and other tools. We have just begun showing these new items and we're getting them placed for 2008.

The Clauss Industrial Market penetration continues to grow. We have been gaining shares in the cutting market and now have begun sales from placement in major distributor catalogs. There are many new items being introduced including titanium bonded tin snips, Kevlar shears, performance sewing scissors and a complete line of food processing knives. We have been introducing the Speed Pack Utility knife with its cartridge-based cutting system to the hardware and industrial markets. There's been a great deal of interest in this product family and we're making presentations for next year right now. If this product does what we believe, we may put it on the front cover of our annual report in the coming year.

The European business is improving. Sales increased 25% in the third quarter of 2007 to approximately $2 million and gross margins were higher. Our loss for the quarter was $63,000, compared to $145,000 during the third quarter last year. We continue to be making progress with new accounts and increased sales of new products. Acme announced two acquisitions during the quarter. We purchased the patents, trademarks and brands of [Camillus] cutlery for approximately $245,000 at a bankruptcy auction.

Camillus was founded in 1877 and is the oldest knife company in the United States. It's made millions of six blade and folding knives during its long history and has built a reputation of first rate quality. It brings Acme a broad platform to sell our knife products in the hardware, outdoor recreation and potentially military markets. Tiger Sharp Technologies was acquired for 355,000. We purchased it its removable blade patent for knives, complete tooling and customer base. We are pleased to say that our sales team has already placed the product on promotion in the November, December 2007 MSC catalog and we are making presentations to major hardware accounts right now. Both Camillus and Tiger Sharp are expected to be accretive to earnings next year, but that is a very low bar. We purchased them to build a business.

We also announced an agreement with Old Harbor Outfitters to distribute a line of our titanium bonded knives, pliers and tools to the commercial and recreational fishing markets. This leverages our product line into a new segment with a highly regarded partner. Our goal is to see Old Harbor Outfitters and Clauss branded tools in catalogs and stores in 2008. I just returned from our Asian operation. Our direct import business through our Hong Kong office continues to grow. We have been evaluating a third party warehouse in China to facilitate a much larger direct import program to our customers in Australia, Asia, the U.S. and Europe. We just doubled the size of our [Wanjo], China office and I am very proud of our team of engineers, quality control inspectors and logistics personnel who are facilitating our growth there. I will now turn the call back to Paul.

Acme's net sales for the third quarter were $17.1 million compared to 15.5 million in 2006, an increase of 10%. Sales for the nine months ended September 30, 2007, were $48.3 million compared to $44.8 million in the same period in 2006, an increase of 8% or 7% in constant currency. Net sales in the U.S. segment increased by 7% in the quarter and 6% for the nine months ended September 30th. A major contributor to the increase was higher sales of the new I Point electric pencil sharpener.

Net sales for Canada were down 4% or 9% in local currency in the third quarter. This was due to heavier back to school sales in the second quarter. Second quarter sales increased by 22% or 20% in local currency. Year-to-date sales for Canada are up 9% or 6% in constant currency. Sales of the I Point electric pencil sharpener contributed to the growth as well as other new office products. Net sales for Europe increased by 25% in the quarter or 17% in local currency. Year-to-date sales have increased by 20% or 12% in local currency. The increase is mainly due to an expanded line of manicure products with a major European drug chain and increased sales in the office trade channel. Gross margins were 43.2% in the third quarter of 2007 versus 42.6% in the comparable period last year. The higher gross margin as a percentage of sales in the third quarter is due to improved margins in Europe and the success of new products. For the first nine months of 2007 gross margins were 2.8% compared to 43.8% 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 cost and the appreciation of the Chinese currency.

SG&A expenses for the third quarter of 2007 were $5.2 million compared with $4.5 million for the same period of 2006. SG&A expenses for the first nine months of 2007 were $14.8 million or 31% of sales compared with $13.8 million or 31% of sales for the same period of 2006. The majority of the increase was due to higher sales commissions and freight costs associated with higher sales and the addition of sales, marketing and quality control personnel. Operating profit was 2.2 million in the third quarter of 2007 compared with 2.1 million in the third quarter of 2006. Operating profit for the nine months ended September 30th, 2007, was $5.9 million compared to 5.8 million in the same period of 2006. Operating profit for the U.S. segment for the nine months ended September 30th, decreased by approximately $90,000 or 2%. Operating profit in Canada stayed the same. Although sales in Canada increased by 6%, margins are slightly lower due to a higher level of private label sales. The European operating loss was $395,000 in the first nine months of 2007 compared to an operating loss of $540,000 in the first nine months of 2006. Sales growth and improved gross margins have attributed to the progress in Europe.

Net income for the third quarter of 2007 was $1.305 million or $.35 per diluted share compared to a net income of $1.225 million or $.33 per diluted share for the same period of 2006. Net income for the nine months ended September 30th, 2007 was $3.476 million or $.94 per diluted share compared to $3.490 million or $.94 cents per diluted share in the comparable period last year. For the balance sheet accounts receivable are up 9% compared to a year ago, which is consistent with the sales growth. Inventory has increased by 12%, which is also consistent with the sales growth.

The company's bank debt left cash on September 30th, 2007, was $8.7 million compared to $9.3 million on September 30th, 2006. During the 12 month period we spent $485,000 on stock buy backs and $600,000 on two acquisitions. We expect the net debt level to decline to approximately 6.5 million by the end of the year.

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

(OPERATOR INSTRUCTIONS) We will take our first question from [Gary Holdsworth] at Singular Research, please go ahead sir.

Hello Walter and Paul. Hi Gary. I want to say this first thing, I like the sale growth but also you touched briefly on it your expenses, particularly your SG&A expenses rising faster than sales growth. Could you just give a little color as far as some of the investments you may be making and how you think those might pan out in future quarters.

Well, the increase in the SG&A was pretty much consistent with what we expected to spend. What happened was the sales in September just ran out of gas. And Staples sent us a letter asking for additional payments to help them make their numbers, which we said no. Office Depot also was slow and these are major accounts. I'm not quite sure I know why that happened, although it seems to have picked up again.

What we're spending our SG&A on is mostly in the development of product, which we expense. The I Point pencil sharpener in the reduced size, it's called a Razor, is going to be retailing for about $9. And that product was spent a lot on the packaging, development and now into the promotions. We believe it's going to be quite a good product for next year, because it's adaptable to sales into the mass market such as Wal-Mart and Target as well as to the drug chains. We have also been spending a fair amount of money doing research relative to our health care industry. Our first aid and safety. And what we're doing there is redesign of our packaging as well as some of our kits and the hearing and eye protection that we're providing our contract accounts. Spending money there.

In the Clauss area, there's been a fair amount of investment in, not only more industrial products, but also now into the outdoor market. And we think that's going to have a fair amount of growth. So if you look at the SG&A spending it's not on salaries it's really on the development of product for next year.

Fair enough. And so in that regard, you're comfortable that as those products get out the door in '08, you're going to maybe start to leverage some of that expense next year or will you still-- this is not a persistent trend to grow your expenses faster than you're revenue, I'm assuming.

No. We were caught with soft sales. We could have reacted to it if we didn't have September slow down. But you would expect to leverage your sales growth and get higher earnings.

Final question, since I'm relatively new to the story here, do you ever look at your mix of sales industrial versus, I guess you would call it commercial or retail, and how that's changing with some of these, not only the acquisitions, but also some of the new product development. Are those demonstrable changes in your mix say '08 versus '07.

We believe that the Clauss line which is primarily industrial will become very meaningful portion of our business going forward. And I alluded to the Speed Pack Utility Knife, which has the cartridge that allows you to change blades one after another without touching them, and I said that if it does what we think it will be on the cover of the annual report. That's millions of dollars of business. Now, we haven't sold any yet, so put that in perspective.

But the Clauss line in general because it's placement is now selling through in the industrial and wholesale accounts should be showing some substantial growth and that does change the product mix. Also in Europe the Clauss brand is one that sounds European and because of its high quality we believe it's going to be getting some pretty good distribution there. So the mix will lien more toward the industrial.

And does that have a favorable or unfavorable effect on your gross margin do you believe.

New products also raise margins. We're just constantly innovating them, so I would guess the margins at least on the Clauss side will continue to be very strong.

All right, thank you very much.

Thank you.

We will go next to [Michael Wasserman], at (inaudible) please go ahead.

Hi Walter, how are you.

Good Michael.

Does this September weakness in the sales cause your overall estimate of earnings for the year to go down? I think you were at one and a quarter, is that where we were estimating?

Well, that's correct, Michael. And we-- in September comparable to last year we were off $.06 and we expected to be growing over that. So usually you don't get that back.

Okay. So is that a simple math then that you now expect in the 119 vicinity?

No. I can't really give you guidance on that other than we're running ahead of last year right now and the fourth quarter, assuming that we're hitting our budget, we'll have a very strong quarter relative to last year and it will show growth and it will show operating leverage.

And do you think the fourth quarter, this one included and going forward, is going to be better than it has historically been relatively speaking because of the changing mix of products?

No. The reason the fourth quarter, unless the bottom were to fall out of our market , the reason is will be stronger is because we've got promotions at Wal-Mart, we've got promotions at Sam's, we've got probably the beginning shipments of I Points to other customers, we've got more distribution at Clauss, Those are all legs that drive the top line. In Europe they're continuing to broaden the distribution, so although they grew 25% last quarter, I don't think that would be the number I'd use, but Europe is also growing and their margins are up. So you'll see comparable P&L just from Europe in the hundreds of thousands of

Maybe I should rephrase my question just a bit. The expansion into the industrial area as well as the newer acquisitions, do you think they will be incremental to profits per quarter on a-- relatively equally or will it disproportionately affect some quarters as we now have back to school quarters which are very strong.

Oh, I see what you're saying. I can only speak, Michael, based on the timing of the introductions. The Speed Pack Utility Knife ought to begin shipping in the first quarter. So that will clearly have an impact on growth. And depending on who's bringing that on and the timing of it, that will be driving growth first quarter, second quarter, you know, that's when construction is pretty strong in preparation for the summer. To the extent that some of the outdoor products begin to get legs, again that's springtime shipping. Less so in the fall. So I guess we will be seeing some balancing of the quarters, but still the second and third quarters will be by far the biggest because we just keep getting more and more back to school business.

Last question, when -- where does the stock buyback stand and when was the last time you bought back stock approximately, and what price range was the stock?

Paul, why don't you answer that.

We bought back stock last month, the price was around $13.90, that's about the price that we paid all year long approximately. That's the price per share of the, 35,000 shares this year. And there's another 90,000 still outstanding that's been authorized.

Okay, thank you.

Thank you, Michael.

(OPERATOR INSTRUCTIONS) We will go next to Allen Kaplan, private investor.

My question has been answered, thank you.

So Allen, nothing further for us?

We will take our next question from Tamara [Manukian] at Greenwood Investment.

Hi Walter and Paul, I'm also relatively new to this story, so correct me if I'm wrong, but I guess ACCO brands is serving the same end market as you guys are.

Yes.

A couple of weeks ago they had warnings, they downgraded their guidance and they said they are seeing double digit sales declines in September, both in U.S. and Europe, so are you seeing the same thing?

Well, I'm aware that ACCO has flipped. Part of ACCO's strategy has been to be somewhat price insensitive and more margin driven. And I think they have lost business. And some of it's their own doing. However, Office Depot, which is a big customer of ours, ACCO's just an office products supplier, Office Depot is down on same store sales and I know Staples, I don't know what the numbers are, but they are very soft. So we're in a market which is kind of sloppy, it's sluggish.

What we're doing and why we have the 10% growth, I'm assuming we're going to be growing in excess of that in the next quarter, is the new products. And the success of those. And we're driving through with market share gains frankly with competitors that aren't innovating their products. The overall market is a tough market right now.

Move towards more industrial do you think that you will be able to offset some of the sluggishness in the market?

Well, in the industrial market, the manufacturing sector, my guess will become stronger because the dollar is so inexpensive. But the housing market is soft and we're making presentations into the do-it-yourself market, the hardware market, but it's all incremental business. So even if they're soft everything we're pulling in there is pretty much growth.

Hello.

Yes, are there any other questions, do you have further questions?

So most of this industrial housing and hardware-- you're not serving these markets at this point, right?

Well, we don't sell yet to Home Depot or Lowe's, we don't sell in volume to Ace Hardware or True Value or the independent distributors to those types of accounts. But we hope to. Products like Speed Pack, the utility knife, are ideal for them.

Okay.

So we expect to be getting some placement..

Okay. And when do you think you're going to see-- some sort of timetable.

We will be seeing, we believe, some Speed Pack sales in the first quarter.

First quarter?

Yeah.

Okay. And also on your presentation, I think that in your forecast it says that you believe to achieve around 80 million in sales by 2008 or 2009, is that still a valid target?

When I told people that we were looking at 80 million I was saying that we're expecting Speed Pack to be a major product and at this stage we still believe that to be true. And I could identify growth from our existing products and the additional placement that totaled about $9 million. So there was a gap between where we came in and where Speed Pack would have to be and other products. But we're trying to do that.

Okay. Okay, thank you very much.

Thank you.

And we will go in ex to [Tom Spiro, Spiro Capital]

Tom Spiro of Spiro Capital. Good afternoon everybody.

Hello Tom.

Hi Tom.

Walter, you commented that the market is a little sloppy now, I was curious is it easier to introduce new products in a tough market or is it harder to do it or is there no impact at all?

Well, I think it's harder. And the reason I say that is with one of the accounts in the housing area where we're trying to -- it's a retailer that services the building industry, there's been a lot of change over in the buyers, they're just downsizing. So it's hard to get people's attention when they're focused on other things.

Similarly with at least one of our office products customers, a big one, there's been a fair amount of turnover in the buyer area. Again I think it's been because they have been eliminating layers of management. The good news is they don't make decision for change if you're the major supplier, but you would rather have them to be in top form so that you can get the new products properly supported. So I think it's harder.

And as I recall from our last quarterly conference call, Walter, Acme was planning some price initiatives in the fall, early winter of this year. Given the sluggishness in the market do you still plan to do it or have you already done it and have they stick, could you update us on that.

That's a very good question. What I said in the last conference call was that we were raising our prices in regard to increased cost due to Chinese currency. Also inflation in primarily China, but also Asia where we get source products. And that there was a value added tax rebate that was reduced for many, many items coming from China. And we were going to be passing those items-- those costs along to our customers. I also said that because we were the market leader in the cutting area in the United States, that we would be taking leadership role in that. What happened was we have had acceptance of the price increases and our competitors have followed suit.

And you're done with that now, you've got the price initiatives in place that you would like for '08, assuming the world doesn't change dramatically.

Yes.

Well, thanks much and good luck.

Thank you.

Our next question is a follow-up from Gary Holdsworth at Singular Research.

Hi. Is the--- on the two acquisitions you paid around 600 grand for, is the latest 12 month revenue for those two acquisitions a number you care to disclose or share with us?

Latest 12 months, you mean what they had before?

Right.

Tiger Sharp did about 400,000 in annual revenues and it was a company that had won a number of knife of the year awards a couple years ago, but it just never had the capital to really expand and get into the major distribution. And so when we bought it we will be working off that base. In the case of Camillus, it was an 18 million dollars company. It went bankrupt last February and stopped shipping to everyone. What we're doing with it right now is working through a product family that we're comfortable with that has innovative items and has somewhat different, it will have a different business model than the one that Camillus went bankrupt with. So Camillus was once $18 million and that was a year ago.

Okay. So you're really cherry picking the products you want out of that catalog and --

Oh, we're cherry picking it, we're looking at the ones we can extend our patent protection, where we can apply some of their patents to our other cutting items, you may know that we sell food processing knives right now into the industrial catalogs and to be able to take some of the Camillus patents and some of the Tiger Sharp replaceable blades, we think they're kind of natural. So there's a fair amount of development we'll do. When we roll it out the good news is we have recognition by the dealers of what Camillus is all about and what frankly Acme is. So we're looking at that to be pretty exciting.

All right, thanks.

Thank you.

(OPERATOR INSTRUCTIONS) We will go next to Rick Fetterman at Fetterman Investments

Good morning everyone. Walter, I had a couple questions regarding the I Point. Have you basically sold out, I mean have you sold all you can or are committed to make for this year, are they sold, are you able to fill orders on a timely basis?

Well, that's a very, very good question. The I Point sold out. And it sold out because the sell through was at a er rate than we or the retailers that we have been selling to expected. And in September we actually had no stock. We had a back order. It would have been nice to be able to ship that, but we didn't have it. So we have got a lot of deliveries coming in right now to fill some back orders. I guess the good news is when I said retailers are getting a 25 to 40% increase in turns over the competitor products the thing is moving off the shelf. And when I was in China I was at the factory that's making them with us and we're producing about as fast as we can right now.

So it's fair to say that the -- well, is it fair to say that the results for that product for this year will be greater than your original expectations or it will be at your expectations because of limitations inability to produce it fast enough?

Rick, I really haven't thought that through to be able to answer properly, because I don't know. What I do know is we have sold millions of dollars of them and our plan was to sell a number of millions of dollars and we still have the fourth quarter to sell more. So it's doing very well for us. And the Razor, which is the smaller one, I think is going to be broadening our distribution substantially. So-- and having just been with buyers at Wal-Mart and Target and CVS and [Poles] in Australia, it strikes me as something that's going to be having legs for us next year.

Did you say that the Razor was going to be available this year for Christmas or not until next year, I missed that.

It's too late for this Christmas.

Okay.

We introduced it in the last several weeks. The reason I hesitated is because if we had an order I'm sure we could make it right now, it's in production. But we're making it for really the first quarter, second quarter of next year.

What did you say the -- you mentioned $9, was that the selling price to the retailers?

That's the retail price.

That's the retail price, okay.

Yeah. And some of the feedback that we have gotten was that the I Point was an expensive product when it was selling in the $30 range. And some other models that are selling as much as $50. So this lower priced one, which has many of the same features and the same look, it's just smaller, we think will substantially broaden our sales in the category.

All right, thank you very much.

Thank you.

And we will go next to a follow-up question from Michael Wasserman at. [Morris Kevin]

Hi, two additional questions, Walter, please. In terms of returns, do we have any experience yet with the smaller I Point for any problems people are experiencing. Is there any reason to believe that there could be a er return rate with the smaller ones than with the larger ones?

Well, we haven't shipped the smaller ones, but the larger ones have proven to be very good out in the marketplace. And you may remember that we put titanium coated blades on the cutting portion of the pencil sharpeners and that's extended the life from around 1800 pencils to close to 5,000. I'm really pleased right now, we're getting a very, very small number of returns from the current I family. The smaller ones are simpler and I don't see any problem with them. But we haven't shipped any in volume yet.

And lastly, is 150 a decent range to be looking for in terms of earnings for 2008?

If we hit the kinds of numbers we think on the top line that follows through. As I pointed out earlier, we have got about $9 million of growth that I feel reasonably comfortable with next year. So if we're coming in somewhere around 63, 64 million this year, which is where I'm thinking we will be, add 9 million to that you're 73, 74, there's a 7 million hole. And that doesn't mean we can't work pretty hard to fill it right now, but I don't have visibility for all of it. We come anywhere near these kind of top lines the $1.50 falls into place.

Okay, thank you.

Thank you.

And with no further questions left in the cue I would like to turn the conference back over to your presenters for any additional or closing remarks.

Well, if there are no further questions, then this call is complete. And I would like to thank you for joining us. Good-bye.

This does conclude today's presentation. We thank everyone for their participation. You may disconnect your lines at any time.