Acme United Corp (ACU) 2008 Q3 法說會逐字稿

Good day, everyone, and welcome to the Acme United third-quarter 2008 earnings call. As a reminder, this call is being recorded. At this time, I would like to turn the call over to Mr. Walter C. Johnsen, Chairman and CEO. Please go ahead.

Good morning. Welcome to the third-quarter 2008 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?

Forward-looking statements in this conference call, including without limitation statements relating 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 under 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.

Thank you, Paul. Acme United had a record third quarter of 2008. We reported quarterly sales of $19.2 million, an increase over last year of 12%. Our net income was $1.35 million or $0.37 a share, 6% higher than the third quarter of 2007.

Our back to school sales were the strongest in the Company's history. We gained share in the mass market and increased our offerings in the office products superstores. The iPoint pencil sharpeners had excellent sales growth. Sales of our antimicrobial scissors and rulers were outstanding.

Not long ago the office products market was our most significant segment with some mass market and international sales. Today we benefit from a much stronger presence in the mass market, drugstores, food chains and industrial accounts. Our Canadian and European businesses have grown. Shipments from Asia to international account for the increase. And we believe this diversification of our customer base has provided the ability to navigate through some tough markets.

Recent ACNielsen data shows that our Westcott brand has now become the leader in scissors for the North American market. This is an excellent platform to continue our growth.

During the third quarter, we began shipping our SpeedPak utility knife to a major do-it-yourself chain in the US, as well as to the largest industrial distributor in North America.

Sales in the quarter to these customers were not large, but we are now vendors. We're hopeful that customers in the hardware industrial markets will eventually carry a broad range of our products and become major growth drivers. Gross margins for the third quarter were 41% compared to 43% last year. Most of the decline was due to lower margin but profitable new business in the back to school families.

While the economy is weak, we continue to sell our products and execute our plans with confidence. Our bank line has substantial excess capacity, and we have over $5 million in cash in our overseas subsidiaries. We believe there may be opportunities to expand due to weakened competitors, and we continue to review potential acquisitions.

I will now turn the call to Paul Driscoll.

Acme's net sales for the third quarter were $19.2 million compared to $17.1 million in 2007, an increase of 12% or 11% in local currency. Sales for the nine months ended September 30, 2008 were $56.1 million compared to $48.3 million in the same period in 2007, an increase of 16% or 14% in local currency. Net sales in the US segment increased by 14% in the third quarter and 19% for the nine months ended September 30. A significant part of the increase was due to higher sales of the iPoint pencil sharpeners, new school scissors, rulers and math kits and market share gains.

Net sales in the third quarter for Canada increased by 1% in US dollars and were flat in local currency. The nine months' sales in Canada increased by 3% in US dollars but decreased by 5% in local currency due to soft demand in the office products channel. Net sales in the third quarter for Europe increased by 8% in US dollars but declined 2% in local currency.

For the nine months, sales in Europe increased by 14% in US dollars and 1% in local currency. Sales in the third quarter were down versus the same period last year due to a large promotion that took place in Q3 of last year, but which will not reoccur until Q4 of this year. The nine months sales were also negatively impacted by an inventory reduction program at a major retailer. We expect sales growth to improve in Canada and Europe in the fourth quarter.

Gross margins were 41.1% in the third quarter of 2008 versus 43.2% in the comparable period last year. For the first time nine months of 2008, gross margins were 40.6% compared to 42.8% 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 on the Chinese currency.

SG&A expenses for the third quarter of 2008 are $5.7 million compared with $5.2 million the same period of 2007. SG&A expenses for the first nine months of 2008 were $16.7 million or 30% of sales compared with $14.8 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 sales and marketing, logistic and customer service personnel, as well as new product development costs.

Operating profit was $2.22 million in the third quarter of 2008 compared with $2.15 million in the third quarter of 2007, a 3% increase. Operating profit for the nine months ended September 30, 2008 was $6.1 million compared to $5.9 million in the same period of 2007, a 4% increase.

Operating profit for the US segment for the nine months ended September 30 increased by approximately $35,000. Operating profit in Canada increased by $200,000 or 35% due to improved gross margins as a result of the better product mix. The European operating loss was $420,000 in the first nine months of 2008 compared to an operating loss of $400,000 in the first nine months of 2007. The results in local currency were slightly better. Net income for the third quarter of 2008 was $1,351,000 or $0.30 per diluted share compared to a net income of $1,305,000 or $0.35 per diluted share for the same period of 2007.

Net income for the first nine months ended September 30, 2008 was $3,833,000 or $1.05 per diluted share compared to $3,476,000 or $0.94 per diluted share in the comparable period last year, a 10% increase in net income and a 12% increase in earnings per share. Interest expense for the nine months has been reduced by approximately 40%, mainly due to lower interest rates.

Other expense for the third quarter increased by approximately $200,000 due to higher foreign exchange transaction losses. The Company's bank debt less cash on September 30, 2008 was $7.5 million compared to $8.7 million on September 30, 2007.

During a 12-month period, the Company generated $3.7 million of cash from operating activities and paid approximately $600,000 in dividends.

Also, during the 12-month period, the Company repurchased 74,000 shares of Acme stock for approximately $1 million. We expect the net debt level to decline to approximately $6 million by the end of the year. Accounts Receivables are constant versus the prior year, and inventory has increased 16% due to anticipated growth and new products.

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

(Operator Instructions). Jeff Matthews, Ram Partners.

(technical difficulty)--. Sorry about that. I had the phone on mute. This is the most upbeat call I have heard all week.

Two questions. One is, you mentioned $5 million in cash and overseas accounts. Is that correct?

Yes.

So that is the bulk of your cash. Does that matter? Do you need to bring it repatriated? Are you comfortable with what you have got? Do you have any liquidity issue at all?

No, the cash is in Hong Kong and in Canada, and both of them are in money market accounts that are secured by the local governments. And as far as liquidity, we have no liquidity issues.

Okay. So it is not a factor in day to day operations?

No, no, no, we've just been building some cash over there in the normal course of business.

And then in terms of where things stand now, as you exited the third quarter at least from what I have heard on a lot of calls, a lot has changed. There seems to be kind of a sudden fear in headlights effect in a lot of different businesses. Anything like that along the lines of what you are seeing?

Well, October is pretty much as we planned, so there is no major issues that I see that way. I just got back from Hong Kong in China, and our suppliers are very concerned in general. They read CNN and MS -- I mean they listen to it every night.

And I think general uncertainty as to what is going forward, we are actively now meeting with our suppliers and vendors taking advantage of this incapacity, and I think it is a terrific opportunity for us.

But the general feeling is just one of uncertainty. However, our current order levels are just normal.

Okay. And then if I could just follow up on that. One other thing I have heard is that costs in Asia are actually starting to go down now. You mentioned capacity. Steel prices are going down. Labor is cheaper, that type of thing. Does that help you at all going forward?

Well, do not assume labor is cheaper because there's a lot of social compliance costs that, of course, we institute but also the Chinese government is.

The labor is actually increasing. Steel prices have dropped but not as much as you might be led to believe. Plastic has dropped. Aluminum has dropped and nickel has. And these things are all working in our favor with some of our costs. But labor continues to be strong, and the Chinese currency while not appreciating in the past four months is still 20% higher than it was two and a half years ago.

One thing that was shocking was the largest toy manufacturer in Guangdong declared bankruptcy while we were there and they laid off 7000 employees, and they were a supplier to Hasbro. And it just sent shockwaves through the manufacturers.

Thanks. Congratulations. Good luck.

Tom Spiro, Spiro Capital.

A couple of questions. Number one, my recollection, Walter, is that our lender, perhaps it is our exclusive lender or our principal lender, was Wachovia Bank. If my recollection is correct, where does that stand today?

Wachovia is our bank, and we've had a number of meetings with them. We have the same $20 million facility we had. We still have the same rate, which is LIBOR plus 7/8. We're actually quite pleased that Security Pacific -- I mean Wells Fargo is taking them over because I understand they were strong.

We have talked to other banks and some pretty strong ones, but at this stage we've got a committed facility, and we have seen no change in our operations at all. So we're staying where we are.

Is Wells Fargo down by the Wachovia commitment?

Yes.

Great. Secondly, my recollection is that we had the plans for price increases effective January 1, '09. Again, if I'm right about that, where do those plans stand?

We still are selectively increasing prices to some other products. Others where we have been able to get some cost savings, our goal is to be the lowest cost supplier to our customers. So in some cases, we were able to pass through some savings.

And thirdly, what is your sense of the inventories of Acme products that our largest customers now have? Are they oversupplied, properly supplied, how does the channel look?

Well, if you're asking me, for example, in Office Depot or Staples supply of our products that they have, they tend to run their inventory tightly, and it is pretty much of a full. So when they need product, we're shipping 98% on-time or 99% on-time the next day.

So there is not a big pipeline in their stocks, and we track that because we know their inventories. We know Wal-Mart's inventories by location. We do have inventory here, and so if over time they were to slow down, then our inventory would slow down. But most of it is just plain branded product that we can move from one channel to the next, and that is what we're doing.

I was particularly curious whether some of our customers might have experienced a sharp slowdown in their sales and thus concluded that they were oversupplied with inventory?

It would not work that way because they are buying so quickly to us.

Thanks very much. Good luck.

Tamara Manoukian, Greenwood Investments.

Nice call. Just a quick question on foreign exchange. Can you help us anticipate foreign exchange effect on the next quarter now that the US dollar is appreciating against all the major currencies?

That is really a very good question. There's two places that it is really impacting us, and that is in Canada and in Europe because there we buy in both cases in US dollars, primarily in China. So those costs would be going up. On the other hand, in those areas where we will be part of general price increases that go forward with everybody in that market.

So we're putting through commensurate price increases in both Canada and Europe. And the other side is we're working through on our costs very aggressively to drop those. But that's a very good question.

So at this point, do you think that your margins are not going to be affected, or do you think that it's going to be slightly affected in Canada and Europe?

Well, between price increases and cost savings, our goal is to be about the same.

Okay. That is all I have got.

(Operator Instructions). Chris Doucet, Doucet Asset Management.

Walter, good morning and congratulations to you and your team on a great quarter. I might have missed a couple of your comments, and I apologize if I did.

You mentioned last quarter about the disruptions with a drugstore chain in Europe. Has that been resolved, and was the third quarter so good because there was a return to normalcy with their order pattern?

Well, the drugstore chain was Schlecker, and Schlecker had purchased another chain in around April. And so during that period, they reduced their purchases to help pay for the acquisition, and it led to some stockouts on their shelves.

So then in June primarily and in July, they reordered to get back into equilibrium. In the current quarter, there was not really much of a catch-up from Schlecker, and the inventories were at normal levels. We did in the call mention that we had a promotion that was delayed from third quarter to fourth quarter in Europe, so that is coming in this quarter, and there are a couple of other promotions in Europe. So it should be an improved quarter at least in the European market in the fourth quarter.

Okay. And I did not hear you say anything about guidance. I think last quarter you said that you gave annual guidance of $72 million and about $1.25 in EPS, which means you're going to have to do about $16 million in sales and $0.18 in EPS in the fourth quarter. Did you comment any on guidance?

I did not comment on guidance. I think I have been saying $1.23. Where we are now is at $1.05 for nine months, and last year we ended at about $1.05. So our goal now is $0.18, $0.19. That number is aggressive but achievable I think.

Now we all listen to what is going on around us and tend to think, well, let's be extra cautious, and that is why I did not give guidance. But, as I said, October is running normally for us.

One last question. Can you tell me how many SpeedPaks you actually shipped in the third quarter as far as the sales were concerned? Can you give us an idea of how much you have already shipped and the large chain that you shipped SpeedPak to, and did that fall in the fourth quarter?

First, year-to-date with SpeedPak, it was somewhere around $400,000. But in the third quarter, we had about $80,000 that went to one of the large do-it-yourself chains, and that was very significant to us because it meant we opened the chain, we are a vendor, and we shipped to them. Substantially more of that will eventually be going out to the chain during the fourth quarter or perhaps the first, but it just depends on their buying pattern. An important step that I wanted to emphasize was that we are now a shipping vendor, and the product is working its way under the shelf.

Jeff Matthews, Ram Partners.

Do you have any feedback on the SpeedPak yet?

It is very preliminary, but on a preliminary basis, it is doing great. But it is so early it has been in some stores for a week, a couple of weeks. But on those early things, it has been good.

Okay. And then in terms of the pencil sharpener, that was a big push this past year. I remember you got into Costco. How does that look for the upcoming holiday season? Is that a product that can grow next year, or has that seen its peak do you think?

Well, I think we are just beginning to see the growth with the pencil sharpener family. This year we will do somewhere around $5 million in the category, and that will be up from about $2.8 million the year before. We have introduced at a number of tradeshows and in Europe and in Hong Kong a number of enhancements on both the iPoint Razor, which is the mass-market product, as well as the electric ones and some mechanical pencil sharpeners. We've had really good reception on those, and I would expect that we would continue the trajectory. So we're looking for increased distribution of the pencil sharpener line segment.

Okay. Good. Thanks very much.

Tom Spiro, Spiro Capital.

Just a question about receivables. Any issues we need to think about, the bad debts, customers in trouble, those kinds of things?

Tom, I was talking to our Accounts Receivable person literally this morning because again, I just want to be on top of that. We don't have any abnormal problems at this point and with the major customers they are paying. So that is the good news. But we're paying really close attention to it.

Yes, we're tightening up on that just monitoring and putting more resources on it to make sure people, customers, pay within their terms.

And lastly, in this environment of financial turmoil, Walter, are you more or less interested in making acquisitions?

I think this is the time of a lifetime. If we can find a suitable acquisition, I think it would be terrific thing to do. But you know our history of acquisitions. We tend to be very careful on valuation and try to be very careful on its [fit]. But if there's ever a candy store, I think it is right now.

I wish you good shopping.

(Operator Instructions). Mr. Johnsen, it appears that we have no further questions at this time. I will turn the call over to you for any closing remarks.

I would like to thank you for joining Acme United for our third-quarter earnings call. It is now complete. Thank you for listening.

And once again, that will conclude today's Acme United Corporations conference call. Thank you all for your participation, and have a wonderful rest of the day.