Acme United Corp (ACU) 2008 Q1 法說會逐字稿

Good day everyone, and welcome to the Acme United 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 Mr. Walter Johnsen.

Welcome to the first quarter 2008 conference call for Acme United Corporation. I am Walter C. Johnsen, Chairman and CEO. With me is Paul Driscoll, our Chief Financial Officer, who will first read the 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 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. I will turn the call back to Walter.

Acme United reported net sales of $14.2 million for the first quarter of 2008, an increase of 17% over last year. Our net income for the quarter was $753,000 or $0.21 per share, compared to $650,000 and $0.17 per share from last year's first quarter.

Our sales of Westcott and Clauss cutting implements have continued to drive sales. These items, including our Westcott office scissors and shears, Clauss industrial products, and iPoint pencil sharpeners, all moved ahead of last year's volumes.

One particular growth driver was our medications in our first-aid and safety business, which benefited from specially targeted tax time promotions. We continually analyze usage patterns of our sales and products to major customers, and we correlate them with other items purchased for the season. While the result of these studies are proprietary, we are using them to manage our categories carefully and to launch new complementary productlines. The results of this analysis led to the tax time promotion, which was incremental business.

Our gross margins in the first quarter were at 42%, which was below the 43.6% achieved during the first quarter in 2007. About 1% of the margin decline was due to increased sales of medications for the new tax time promotions. While their margins were lower than our average, the sales of the incremental medications business increased our profits.

We showed pressure from increased costs of imported items from China, Taiwan and Italy due to the weak U.S. currency, raw material increases, increased labor expenses, and higher transportation costs. The increased costs were offset in part by selling prices which increased on January 1, 2008. We continue to work with our factories to improve productivity, and to pass along increases only when there are no other alternatives.

The second quarter of this year will benefit from sales of the iPoint Razor pencil sharpeners, and Microban antimicrobial products to major retailers in North America. The iPoint laser pencil sharpener is flawless and less expensive than our award-winning iPoint, and has been placed in broad distribution for this back to school season.

The Microban antimicrobial scissors, rulers and [mask kits] provide a method for teachers and parents to reduce the passage of infections to students. They will replace some of our back to school items, but they have also added to our product and customer [rights]. We expect the iPoint product family and Microban items to drive sales, particularly in the second and third quarters of this year.

We began shipping the SpeedPak utility knife to several retailers in the first quarter. The sell-through has been excellent, but it is still too early to assess. We initiated a full-blown SpeedPak product launch this April, which will continue through the National Hardware Show in May. One large home improvement chain will begin carrying SpeedPak, as well some of our other cutting products in July.

At this stage we believe our new products, new customers, and continued penetration with existing ones will continue to move our revenues and earnings forward for the year. I will now turn the call to Paul.

Acme's net sales for the first quarter were $14.3 million compared to $12.2 million in 2007, a 17% increase, or 13% in constant currency. Net sales for the first quarter in the U.S. segment increased 17%, mainly due to higher sales of the iPoint pencil sharpeners, rotary paper trimmers, and first-aid products. Net sales in Canada increased by 8% in U.S. dollars, but declined by 7% in local currency due to soft demand in the office products channel. Net sales in Europe increased by 18% in U.S. dollars and 4% in local currency. We expect sales growth to improve in both Canada and Europe in the second quarter.

Gross margins were 42% in the first quarter of 2008 versus 43.6% in the first quarter of 2007. The lower margin in 2008 is primarily due to selling a higher proportion of over-the-counter medications, which are lower margin products as compared to other productlines. SG&A expenses for the first quarter of 2008 were $4.9 million or 34.5% of net sales compared with $4.2 million or 34% of net sales for the same period of 2007.

The majority of the increase was due to higher sales commissions and freight costs associated with higher sales and costs associated with the addition of marketing logistic and customer service personnel.

Operating profit was $1.1 million in the first quarter of 2008 compared with $1.2 million in the first quarter of 2007. Operating profit for the U.S. segment decreased by approximately $200,000 due to product mix and investment in personnel. Operating profit in Canada increased by $50,000, and a loss in Europe declined by $50,000.

Pretax income in the first quarter of 2008 was $1.2 million compared to $1.1 million in 2007. Included in pretax income in 2008 was other income of $150,000 related to foreign exchange gains. Net income for the first quarter of 2008 was $753,000 or $0.21 per diluted share, compared to net income of $650,000 or $0.17 per diluted share for the same period of 2007.

The Company's bank debt, less cash, on March 31, 2008 was $7.9 million compared to $7.1 million on March 31, 2007. During the 12 month period the Company repurchased 68,000 shares of Acme United stock for approximately $900,000.

I will now open the call to questions.

(OPERATOR INSTRUCTIONS). Gary Holdsworth, Singular.

Great quarter in a very tough environment. This is your seasonally least important quarter and you still did very well. I'm wondering how you would comment on -- you mentioned a little bit your positioning for back to school, and just where you think you are in relation to the season coming up?

First, we're about on budget for the first quarter. When you deliver a year on budget you deliver good performance. At least, that's how we are set up. So we put one quarter down.

The second quarter is a big quarter for us. It is big because the Microban antimicrobial scissors and rulers and other student items are in major distribution in places like Wal-Mart and Target and Office Depot, and I think at Staples. That is a back to school item. It is second and third quarter. Some of that will cannibalize existing products that we sell, but the bulk of it won't. So that will bulge second and third quarter.

Similarly, the SpeedPak, we may ship a little of that in the second quarter in order for it to be on the shelves at a major home improvement retailer in the third quarter. So some will go in second, some will be in the third. And that is entirely incremental business.

We're also getting some sell-through of the SpeedPak. It is currently at Staples and at Fred Meyer. And as I said in the conference call, we don't have good data yet. Sometimes it has not even been out on the shelves, depending on the store. But what we are seeing is that where it is selling, it is moving quite well. So we are happy with that.

And finally the iPoint Razor, which is the mass market version of our iPoint, it sells at retail at $10, will be incremental business both at Wal-Mart, and I believe it is at Home Depot, and I believe it is also at Target. So that is -- those are some pretty good legs.

We're doing a major promotion of the iPoint Razor at the National Hardware Show, which is in mid-May in Las Vegas. I don't expect sales to happen immediately. It starts to build for the back half of the year, third and fourth quarters, as we take on broader distribution there. So I'm optimistic at this stage, despite kind of a tight environment.

In that optimism you are still expecting roughly -- I mean, I think last call you mentioned $72 million sales for the full year. That has not changed, correct?

I think I gave guidance of $70 million to $72 million, and $4.5 million of net income, and that hasn't changed. What I also said was that as we get further into the year I hope I can provide some upside. At this stage I would like to see second quarter come in.

Sure. One final question on what the second quarter looks like. In your script you mentioned Canada and Europe expecting to improve. I am assuming that is sequentially into the second quarter. Canada in particular, they have a pretty tough bogey. Last second quarter Europe like 23% in U.S. I'm assuming you're obviously going to have a nice lift sequentially, but maybe not year-over-year, or your thinking there?

I think what Paul -- when me work through our numbers we look at local currency. Because really that is where we manage our business. And in local currency Canada and Europe have aggressive budgets, and that is what we're managing on.

We are expecting year-over-year growth.

Yes, there will be.

Quarter over quarter.

(OPERATOR INSTRUCTIONS). Jeff Matthews, Ram Partners.

Walter, could you talk a little bit about the cost situation and any other sourcing initiatives you might be thinking about? Is there any place to go outside China? Is there a need to? Do you think you'll be able to maintain margins over the next few years even with cost increases?

I went through this once before in my career. My old company, Marshall Products, they imported items from Japan and Korea. And we had both currency appreciation and cost increases. That meant that we had to pass through pretty big price increases over time. But we had the leading market share, and very similar to Acme, we had major big-box customers. In that case we were very successful in doing it because we continued to innovate items and place them on the shelves, and repriced the category.

The second thing we did was we weren't alone. And here at Acme that is very much the case. Take Wal-Mart as an example. I've heard they are the largest importer of Chinese goods in the world. And I would guess that is right. Staples and OfficeMax, it is all in the same -- from the same sourcing area. In many, many product categories we're facing the same issues, and our customers are well aware of it, because they also do their own branding and some of their own direct imports.

Here's where I -- so we would expect to be passing through and leading that, given that we are the category -- equivalent of a category captain with many of our customers. Here's where I am concerned. Raising prices means somebody has to buy them at the higher prices, and the U.S. consumer is strapped. So as we look at it, I want to keep driving on the productivity side.

And there are lots of ways you can still save money. An example, some of the packaging that is coming out with Clauss now has half a card and half the plastic instead of a full card. It not only provides greater appeal and flexibility and able to be experienced by the customer, but it saves pennies per package. And that is important.

We're looking at alternatives in materials. We're looking at value-added coatings that help to improve the performance and justify a higher price. And all these things are important.

Relative to sourcing to other countries, China has some big advantages. First it is huge and has a huge population. So by moving inland you occasionally will find savings in products as opposed to the coastal or southern areas of China. Some of our items, particularly rulers, are coming from more inland now.

Secondly, there is a fair amount of automation that can still be done to our product family with our manufacturers. Not comparable to Western levels of automation, but still an improvement in output as well as an improvement in quality.

Finally, when you step outside of China, and Vietnam is an example, we are placing -- or evaluating some production there. But is only 40 million people. It has had over 20% inflation this year. And it really can't absorb China, which is so much bigger and has so much better infrastructure.

We looked at other places. Some places that I'm not going to name because they are kind of proprietary, but they are very off the beaten track. We're getting some quotes right now for the Clauss line.

The bottom line answer to this is that I think we can manage this in an intelligent way. I would guess that we will keep our margins somewhere in the range we're in. There will be price increases, but we have got to get productivity and we're working with our factories to do that.

[Tamara Manucian, Goodwood Investments].

Just this is Tamara Manucian from Greenwood Investments. I apologize, I think that you might have covered this during the call. What was operating income in the U.S. and Europe?

Paul.

Operating income in the U.S. was $1.1 million, and it was minus $130,000 in Europe, which was a $50,000 improvement over the prior quarter, the last year's quarter.

What about Canada?

Canada was $100,000 compared to $50,000 last year.

(OPERATOR INSTRUCTIONS). Gary Holdsworth, Singular Research.

Just to follow-up on -- you have made some small acquisitions. You made some acquisitions in the cutting area. How are those going as far as integrating as well as getting those products through your channels?

Well those two small acquisitions, that was the Camillus Cutlery Company and TigerSharp, are being integrated into the product family, but in a different way then just selling knives. The TigerSharp product has an interchangeable blade that allows you to always have a sharp cutting edge. So when your blade is dull, you would replace a portion of the blade, and now it is sharp again. We're rolling that into a number of products throughout the Clauss line. TigerSharp, as it was when we bought it, will be on the cover of MSC in the the June issue. And MSC is an industrial distributor.

It is beginning to be placed, and will be prominently displayed at the National Hardware Show. So we are does not putting it into the traditional knife business. We're putting it into our customer base and then broadening its applications.

Similarly with Camillus, it was the oldest knife company in America. And it had a great brand. But rather than take their off-the-shelf products, the ones that they made before, we're developing a distinctive family and incorporating that into, again, our regular customer base.

Finally, we have taken the knife business and put some of the products into channels that might surprise you. But we sell chef shears at Sam's Club. And some of those knives can easily fit into that kind of program. We're also selling a lot of scissors into the poultry processing area, again under the Clauss brand, to companies like Pantry Pride and Tyson's and Koch Distributors. Some of the knives, which are used in far greater amounts than scissors, are also now designed and are moving into that channel.

Finally, in the fishing area we announced OHO, which is Old Harbor Outfitters. And we have taken some really nice knives with proprietary designs, and they are now winding up at companies like Gander Mountain and Melton fishing tackle, and we're just beginning shipments.

So they are being integrated. They are being integrated to our kind of customers and adapted to what we sell. And so they are complimentary to our productline. But I'm very, very happy because we hardly paid anything for the businesses.

Is that similar to the kind of companies you would be looking at in the future, or is that a part of your strategy, just because you talked about that, and just for a minute?

They are hard to find companies that have really proprietary brands and proprietary products that are very inexpensive, but we like to buy them when we can. I would envision us continuing to build on our strengths in the cutting area, our titanium coatings and some of these proprietary other coatings that we are working on, and adding them to our new things that we get involved in.

We are looking at some acquisitions in the cutting area. But it is all incremental to the growth set that has primarily been internally driven. And it is very opportunistic.

[David Ratliff, Dusa Asset Management].

Congratulations on a solid quarter. We would like to see that continue of course. On your last call you mentioned you expected in 2008 approximately $9 million in topline contribution from new products. Can you comment on the contribution of your new products to the topline in Q1?

I'm going to take a swag at this. I may be a little bit off. But the iPoint Razor really didn't ship in the first quarter. That is a back to school item. The Microban antimicrobial back to school scissors may have shipped a little bit in March, not much. Again, it is a back to school item. Those are deliveries in April, May, June, July. There's a lot to go through in a narrow period. Than finally the SpeedPak, Paul, help me here, maybe $100,000 of SpeedPak sales?

That's about right.

That's a small number. What drove the quarter was our bread and butter business and increasing our customers, and getting more placement at companies like Wal-Mart, where we cracked open the selling category. Growth at Staples. Remember, they are opening more stores and continuing to strengthen. Even though you hear about same-store sales being down, the chain is growing, and as their newest major supplier, you benefit. But the new products really weren't what drove the first quarter.

That's very promising. That means that it still out there for the remaining 2008.

Right.

My only other question was, percentagewise your SG&A didn't go up considerably, but there's about $700,000, $800,000. You mentioned there was some investment in personnel. Can you comment any more on the increase in SG&A or breakdown?

I'm going to give you a general answer. Our business in Asia, our direct import business in Asia, will double this year. So we're adding people both in supply chain -- a number of people in supply chain, including probably a -- he is not hired yet, but strong supply chain head who would be the direct interface to our U.S. business. We added people in marketing here in the U.S. We added additional quality control people in China. Those are the big ones.

Also, in the $700,000 increase there's about 20% of that it is our variable cost related to commissions and freight. And there's about another 20% that relates to the translation effect of the stronger euro and the stronger Canadian dollar. That actually has an impact on the increase that you see as $700,000. Then there is the part -- and the remainder part of that is the addition of people.

Jeff Matthews, Ram Partners.

I just wonder, Walter, if there's any change in the competitive landscape out there in terms of Fiskars or anybody else. You mentioned that your customers all source products themselves overseas, so it doesn't sound like anybody else is out there trying to private label you out. But I wonder if you can touch on that, and as well as the health of Fiskars and anybody else out there?

First, let me address Fiskars. They are a large Finnish company, publicly traded. It is well-managed, quality product. We pushed them out of the entire office channel -- almost the entire channel. We pushed them pretty much out of the office business at most of the mass market. They are still in the school business. And the Microban is an example of how we're cracking those accounts.

In their strategy they no longer talk about the office business. They really define themselves as craft and outdoor products. We're not really that strong in the craft area at this point. So we're seeing somewhat less of them. On the private label side, that is a benefit to us sometimes. It just depends. We provide in the office channel almost all the private label products that we see in the major retailers. And if our customers want to push their brands then that makes perfect sense.

On the other hand, many of the innovative items that we do are only available from our brands. The goal for the buyers is to grow the categories that they are in charge of. So when we bring in an array of items in, and we put new titanium coatings on and new handle designs, these things are intended to increase sales on the shelf. And we found that most of the buyers really appreciate that.

I guess it was maybe four weeks ago, we had one of the major superstores down with us, and we were laying out what we want to do together over the next couple of years. And that is really a partnership. It was the first time I felt really included.

I think they walked away excited that we can really do some things together in the categories. So private label has a place, and we're supporting it. And to the extent it gives value to customers, it is good for us. But the other side is we're also growing our branded items. That's fine.

Just if I could follow up with one more along this topic. You are unusual in consumer products category among public companies because you're one of the few companies that does not do 20% or more of your sales with Wal-Mart. I wonder if you could talk about how that relationship has developed over the last year or two? I know you hired somebody and opened up a small satellite office down there. I just wonder where that stands today?

The Wal-Mart business has been very good to us. As you point out, it was one of our smaller customers. Today it is in our top 10. We opened a Bentonville office about three years ago. Now we've got people analyze their weekly sales. We've got a -- it is a fully staffed office. The business has about doubled every year. I will tell you that in our buildup of growth we're looking at somewhere in the $3 million to $4 million in growth this year with Wal-Mart. So that is a fine little piece of growth. It has been very successful for us. But there is a long, long way to go with Wal-Mart and Sam's and Target, so we're excited about it.

There are no further questions in the queue at this time.

If there are no further questions, then this call is complete. I would like to thank you for joining us. Goodbye.

That does conclude today's conference. Thank you for your participation. And have a wonderful day.