Acme United Corp (ACU) 2008 Q2 法說會逐字稿

Good day, everyone, and welcome to Acme United's second-quarter 2008 earnings conference 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. Please go ahead, sir.

Good morning. Welcome to the second 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 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. I'll turn the call back to Walter.

Thank you, Paul. Acme United had a strong second quarter of 2008. We reported record quarterly sales of $22.7 million, an increase of 20% over last year. Our net income was $1.7 million or $0.41 per share, 15% higher than the second quarter of 2008. We are exceeding the guidance we provided earlier in the year.

Our back-to-school sales have been excellent. The Wescott family of student sisters, rulers and the math kits has had strong orders from the major office superstores, mass-market retailers and drugstore chains in North America. Our anti-microbial school and office scissors are selling well. The iPoint pencil sharpeners are exceeding expectations.

Acme's sales of office products have been slower in some accounts this year compared to last, but overall business has increased. We attribute this to new product and market share gains. Our Clauss professional line has also continued to grow. We have added new industrial distributors, hardware chains and do-it-yourself accounts which are adding incremental sales. The industrials channel, which is the Clauss core today, is doing well.

We have found the housing-related chains to be slow to execute new product introductions, perhaps because their existing inventory has been slow to sell.

Our customer base has broadened substantially during the past several years. Not long ago, the office products industry was our most significant segment, with some mass-market and international sales. Today, we benefit from a much stronger presence in the mass market, drugstore chains, food chains and industrial accounts. Our Canadian and European businesses have grown. Shipments from Asia to international accounts have also increased.

We believe this diversification of our customer base has provided the platform to continue to execute our growth plans. The SpeedPak utility knife and replaceable cartridges have now been placed in a number of major office superstores, industrial distributors and hardware channels. There was minor growth from this product line during the first half, but we expect it to contribute more significantly during the remainder of the year.

Gross margins declined in the second quarter to 39% from 42%, partly due to cost pressures. But more significantly was the growth in direct import back-to-school sales which were incremental to our business. The margins were lower than our average, but they increased our profitability and built our presence and market shares with our customers.

At the beginning of 2008 we provided guidance of $70 million to $72 million in revenues and $4.5 million in net income. It appears that we will exceed the revenue guidance and that we are at least on track to meet the earnings target. I will now turn the call over to Paul Driscoll.

Acme's net sales for the second quarter were $22.7 million compared to $19 million in 2007, an increase of 20% or 17% on local currency. Sales for the six months ended June 30, 2008 were $37 million compared to $31.2 million in the same period in 2007, an increase of 18% or 15% in local currency. Net sales in the US segment increased by 23% in the quarter and 21% for the six months ended June 30th. A significant part of the increase was due to higher sales of the iPoint pencil sharpeners and new school scissors, rulers and math kits.

Net sales for Canada increased by 4% in the quarter and year-to-date but decreased by 6% in local currency, due to soft demand in the office products channel. Net sales for Europe increased by 19% in the quarter and year-to-date, or 3% in local currency.

Sales were negatively impacted by an inventory reduction program at a major retailer. We expect sales growth to improve in both Canada and Europe in the second half of the year. Gross margins were at 39.3% in the second quarter of 2008 versus 42% in the comparable period last year. For the first six months of 2008 gross margins were 40.3% compared to 42.6% in 2007. The gross margin decline is mainly due to greater sales of back-to-school lower-margin products and also higher product costs as a result of increased raw material and transportation costs and the appreciation of the Chinese currency.

SG&A expenses for the second quarter of 2008 were $6.1 million compared with $5.4 million for the same period of 2007. SG&A expenses for the first six months of 2008 were $11 million or 30% of sales compared with $9.6 million or 31% of 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, logistics and customer service personnel. Operating profit was $2.8 million in the second quarter of 2008 compared with $2.5 million in the second quarter of 2007. Operating profit for the six months ended June 30, 2008 was $3.9 million compared to $3.7 million in the same period of 2007.

Operating profit for the US segment for the six months ended June 30th increased by approximately $50,000. Operating profit in Canada increased by $100,000 or 25%, due to improved gross margins as a result of a better product mix.

The European operating loss was $340,000 in the first six months of 2008 compared to an operating loss of $330,000 in the first six months of 2007. Results in local currency were slightly better. We expect improvement in the second half of the year in Europe as sales pick up.

Net income for the second quarter of 2008 was $1,730,000 or $0.47 per diluted share, compared to a net income of $1,522,000 or $0.41 per diluted share for the same period of 2007. Net income for the first six months ended June 30, 2008 was $2,482,000 or $0.68 per diluted share compared to $2,172,000 or $0.59 per diluted share in the comparable period last year.

Interest expense for the six months has been reduced by approximately 40%, mainly due to lower interest rates. Other income for the six months increased by $150,000, due to higher exchange rate gains.

The Company's bank debt less cash on June 30, 2008 was $11.3 million compared to $9.6 million on June 30, 2007. We expect the net debt level to decline to approximately $6.5 million by the end of the year. During a 12-month period, the Company repurchased 68,000 shares of Acme stock for approximately $900,000. Last month the Company revised its revolving loan agreement with Wachovia. The new two-year facility increases availability from $15 million to $20 million and lowers the interest rate from LIBOR plus 1% to LIBOR plus [0.875%].

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

(OPERATOR INSTRUCTIONS) Gary Holdsworth, Singular Research.

Very good results in an admittedly tough environment. You mentioned that SpeedPak being -- having some distribution added in the quarter, but I believe you said you think growth will accelerate in the back half as you add distribution. Is that correct?

Well, yes. Currently, you can buy SpeedPak at Staples, I think it's at Fred Maier. It's got a couple of locations where you can just go in and buy them. But the volume in the hardware do-it-yourself area and in the industrial accounts will begin to kick in, we believe, in the second half. The major industrial distributors send out their catalogs for 2009 September and October. So they'll be building inventory in preparation for sales in the fall and throughout the year.

And we have one large hardware chain that will be carrying and introducing the product, we believe, sometime in the third quarter. So it will pick up.

On your Microban products, have you been able to get -- achieve a larger price point because of that feature? And is that offsetting the royalty that you have to pay on that product?

Well, the royalty is something that's proprietary, of course. But it's a product that has opened up a big chunk of the school business. And while the margins have been a little bit more (technical difficulty) than in other areas, you will find the Microban in places you haven't seen any of the Acme products in the past. When you go to back-to-school this year, I suggest some of our listeners go to Wal-Mart and Target and Rite Aid and just look at -- and Staples and Office Depot -- look at some of the products that we've got. In the school area, it has cracked open big segments for us.

Any thought about new products that we haven't discussed on the call or at least what your plans are for the next 12 months?

Well, we have a very full calendar of them. We'll be introducing quite a number of new school and office products in the cutting area. There will be some new iPoint razor pencil sharpeners, different designs, different price points. In the Clauss line, there will be a much broader range of cutting implements. You can expect to see some [Camillus] knives coming out of the mass market, a higher price point.

In the safety area we'll see, we believe, some very interesting items for the mass market, would be targeted for companies such as Target and Wal-Mart. So stay tuned; there's a lot coming. And we'll be making more announcements as we introduce these products formally in September and October.

Very good. One question for Paul; this has to do with the inventories. I saw a large build in inventories and wondered if this is just seasonal, or could you talk a little bit about the inventory build?

The inventory increased by 26% over last June, and a big part of that is just the normal sales growth and new products that we're expecting in the third quarter.

Nothing out of the ordinary as far as obsolescence?

No, nothing out of the ordinary. The additional, the extra amount there is new products.

My final question is, on guidance, you mentioned since the start of the year, as we all are aware, we've had a deepening economic melee, so to speak. But you are reaffirming the revenue side, in particular; I'm impressed with that. Since you've got $37 million through the first half, and to get to the high end of your range you're talking $35 million over the next two quarters. That's pretty good compared to your history, where your third and fourth quarters are good but they're your second- and third-best quarters, historically. Could you just comment a little bit on that, why you're confident on your guidance on the revenue side?

Well, first, on the revenue side the back-to-school isn't done. And so, while we have shipped the first wave to fill the stores, the waves that follow to keep the store shelves filled haven't been shipped yet or they're shipping in July and some in August. So we're expecting the second-quarter momentum to continue into the third. And in fact, we are seeing that.

The second is the feedback introductions really haven't shown yet in the first half, but when Paul was talking about new products sitting in inventory, some of it are -- SpeedPaks ready to go. And they will be, we believe, shipping in some volume in the third and fourth quarters.

Finally, we have introduced some items that are targeted for the Christmas season that we didn't have last year. And, given our mass market distribution today that we didn't have several years ago, we're expecting some stronger growth in the fourth quarter than has been historical.

So, if we took our $37 million and doubled it, I think that might be aggressive but achievable. We made $2.5 million in the first half. If we doubled that, it would be $5 million. We're not expecting that because we've had -- some of these products would be lower margin. But the guidance we gave is $4.5 million, and we are expecting to at least do that much, so you can backwards for the second half.

Excellent results, very good. Keep up the good work.

(OPERATOR INSTRUCTIONS) Jeffrey Matthews, Ram Partners.

Two questions from the introduction by Walter and Paul. One is, Walter mentioned that the gross margin was down partially because of rising cost of goods. But you seem to stress another factor which I didn't quite grasp.

Okay, I will address that first. The school market has shown a lot of growth in the second quarter. I mean, the 20% growth over the last year was primarily school products, and they're more competitive. They're also shipped, in part, directly from Asia. So we don't handle the products, and we don't warehouse them domestically.

So, when they have somewhat lower margins they are still quite profitable. And that, frankly, was a bigger chunk of the margin decline than costs, but costs are obviously something we're living with all the time.

While we are on that, I'll jump to my third question, which relates to the manufacturing cost issue. There was a very good article today in the Journal about the movement of manufacturing back to the US in certain cases. Obviously, with what the dollar has done, things have changed a little bit. I wonder if, now that your biggest competitor has completely gotten out of manufacturing in the US and gone to China, is it time to -- is there any place to bring anything back here? Or is there anything else you're doing on the manufacturing side to keep costs lower?

Well, first, regarding bringing manufacturing of at least our product lines back to the US, I don't see that happening for awhile, if ever. It's true that the dollar has depreciated compared to the Chinese currency by about 20% since it started to float, and that's 20% of costs that we've had to absorb in some fashion. But, as we look at the global landscape on our products, there's essentially no manufacturing of our products in Europe, of the kinds of products that we're selling. There's none left in Mexico. There's none left in the US. There's a very, very small amount in Brazil.

So China has proven to be a very good place today and for the last few years to manufacture. The cost advantages we have today compared to when we closed our plants nine years ago continue to be compelling, just plain compelling, compared to even those historical costs. But there are some things that we have to deal with, and when we look at our product design and our packaging and the productivity of our plants and the scrap rate and the automation, there's a long way to go compared to Western standards. And we are working very hard to get our own productivity improved so that our costs are very competitive, and they have historically been.

The reason we have been able to manage big cost increases -- you know, the 20% currency, for example, with minor price increases is because of productivity and we are putting a big emphasis there. We also believe that our competitors may or may not be thinking the same way, but they should be because there are price points out in the marketplace for consumers, and we want to make sure we are staying in the sweet spot for our end user.

Then there was the comment about sales hurt by an inventory reduction program at a major retailer. Was that Europe, specifically?

Yes, that was kind of a silly thing. It was Schlecker, which is the largest drug chain in Europe, and they made an acquisition which would eventually lead to more sales. But in order to pay for it, they cut their working capital, and then they wound up with having quite a number of empty shelves. So now they are scurrying back to get product back on the shelves. It was just a mix-up.

Finally, if I could ask, halfway through this year, which has been kind of a tumultuous year in a lot of regards, given what you've done with your guidance, how are you feeling about Acme's competitive position and product and possibly risk of exposure to slowing sales at Office Depot and those kind of places?

Well, we are gaining market share. Every day we are out there, in one of our new channels, trying to get some account or introduce some new product. And it literally seems to be that way. We feel that we've got a very, very attractive product line today and exciting new product introductions. The slowness, in particular, say, in Office Depot is not alone in the office channel. But they do have some specific issues. From my view, their geographic footprint in California and Florida put them at risk not just with the housing industry but also with the Dollar Stores and the Wal-Marts, which are much more concentrated in areas where people have time and are able to shop and do price comparisons. And Depot has had some, I think, impacts there on their store traffic.

But overall, we're excited about where we are heading. And relative to other companies that may be faltering, this is the time where we'd be very happy to be looking at some small tuck acquisitions.

[Michael Wasserman], Moors & Cabot.

I guess my questions were related a little bit to the last questions you took. But I was wondering if you could comment a little bit on the Chinese currency appreciation and your expectations going forward for that and what the implications for Acme are. And also, if you could comment, please, on the results from Europe, aside from the Schlecker short-term issue relative to your expectations and previous-year experiences.

First, on the Chinese currency, currently it's 6.85 RMB to the dollar. We started the year at just about 7, so there has been about a 3% decline in currency in the first six months -- decline in the US buying power. There, in my view, seems to be a little bit of a delay in continuing that decline, and this is really my view. But there's a lot of factories closing in China right now, and the shifting of demand for some items and that's impacting the Chinese employment, in part because they have already appreciated their currency 20% -- that's a big number -- over the past couple of years.

And from the US perspective, that will be translated in part into increased pricing, and we are seeing it in inflation. And that's factual. I think there's going to be less pressure from the US side to continue to push for devaluing the US currency further. I think that we may see some stabilization there. But that would be good news for us if it happened. We are not running our business that way. That's my personal view.

The way we are running it is, we're locking in our production against our future business, bringing it in as soon as we can to keep our factories running stable. We have more inventory than one might like, but then again, our interest rate is 3.4% today. And it's a very attractive rate and it insulates us somewhat from price increases. It also gives us time to react to give price increases.

Now, relating to the results from Europe, Europe had a tougher quarter in the second one than they've had than we expected. Part of it was the inventory reduction, and that's going back. But I see the results continuing to improve. The strange thing, unfortunately, is that the dollar has fallen quite a bit in the European currency. So when you translate it into US dollars, even though you've made progress, it tends to look a little worse than it actually is, in local currency.

But the second half has started pretty strongly for Europe, and we here are working very, very hard to get that to be an asset, a real asset for the Company.

And you're happy with the changes you've made there in terms of personnel over the past couple of years?

I am, Mike. I think our guys are working the sales side, the cost side, the customer service side very, very well. And up until this last quarter, it has been the fastest-growing part of our business. This quarter was slower, but we are seeing it come back in the third quarter.

(OPERATOR INSTRUCTIONS). Tom Spiro, Spiro Capital Management.

Do you guys have any pricing initiatives underway, or were there any recent pricing changes we should think about?

We've announced a price increase effective January 1st on almost all of our product lines. They're consistent across our customers but they vary between products. And they represent not the full cost of our increases, but rather the full cost of what we think we'll be able to do by the time they get shipped. And I'm fairly comfortable that they'll be more than adequate when they are implemented in January.

You're referring to January 1st of '09 or -- ?

Yes, of '09.

Of '09, okay. Secondly, Walter, you mentioned some of the success we have been having in the industrial channel. Are there any names you can share with us, any particular distributors?

Well, we've got products going into Grainger, and that was a -- it's the largest industrial distributor in North America. And SpeedPak is going to be carried there and a number of our scissors. The MSC and McMaster-Carr are other distributors carrying both SpeedPak and some of our new Clauss products. Northern Tool -- these are really top-shelf and major industrial accounts. So we're excited about those.

And then, as I mentioned, we've got -- we're introducing SpeedPak with a large do-it-yourself chain sometime, we believe, in the third quarter. And we intend, if that happens, to support it with national advertising.

You had a comment in your opening remarks though, Walter -- perhaps I misinterpreted it -- that led me to think that that particular opportunity had been delayed somewhat.

Well, there's a lot of things that go on in accounts, and part of them may have to do with just slow economics and moving product off shelves. Part of it may be shorthanded people. But we're happy whenever these things finally happen.

Okay. And lastly, the expanded credit line -- anything in particular you're thinking about using that for?

No. We could have had a bigger one, but you pay an unused credit fee of -- for us, it was 0.25% annually. But the intention was just to have some dry powder. We've got the ability to write a check, and keep our eyes open.

(OPERATOR INSTRUCTIONS) Chris Doucet, Doucet Asset Management.

Walter, and I know you probably don't want to answer this question, but do you think that Europe is going to be breakeven? Do you think it's going to be slightly profitable? Or, do you think the burn is just going to be reduced in 2008?

Well, it will be reduced, for sure.

Okay. Also, what kind of contribution do you think that SpeedPak will add to the top line in 2008?

Well, that's a tough one because a lot of things depend on the success of the customers when they receive them. Right now, we've had very limited sales in the first half. If I gave you a number, I might be wrong, but I'm going to guess it was somewhere around a couple hundred thousand dollars in the first half. So it wasn't that big.

When we look at other products, it tends to be the first year is maybe $1 million in sales if it's a good product; and the second year, it might be $3 million to $5 million. And then it gets legs, and the family broadens, and it's bigger.

I see probably somewhere between $500,000 and $1 million coming from it in the second half. But again, that's just a quick estimate.

Thanks guys, good luck in the third quarter.

Gentlemen, there are no further questions at this time.

Then this call is complete. I'd like to thank you for joining us. Goodbye.

This will conclude today's conference call. We do thank you for your participation, and you may disconnect at this time.