Acme United Corp (ACU) 2008 Q4 法說會逐字稿

Good day, everyone, and welcome to Acme's United Fourth 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 fourth quarter and year-end 2008 conference call of 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 limitations 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 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 has just completed its seventh year in a row of record sales and earnings. Our sales for 2008 were $68.7 million, compared to $63.2 million last year, an increase of 9%. Net income was $4.5 million compared to $4 million last year, an 11% increase.

Our fourth quarter was soft with sales declining about 15%. We reacted quickly by reducing expenses and positioning the Company to take advantage of the emerging landscape.

Let me give you some examples of cost savings. We went through hundreds of expense items and looked for savings. They may seem minor but we had fax lines that were no longer used. We cancelled subscriptions. We narrowed the product and geographic scope of our patent applications. We released temporary workers. We bid out Federal Express and UPS. We bid out our travel functions. We linked our meeting rooms globally for national and international video conferences. We began using Skype for our long-distance phone calls. We changed our Blackberry service for international data so that there are no additional fees. The list goes on and on.

Our bonus plan is structured so that we pay half in July based on performance and half after the year-end audit. During the fourth quarter, we rolled the second half bonuses into earnings and froze salaries and the team united behind these actions.

We have been working for three years to sell our former manufacturing facility in Bridgeport, Connecticut. We worked with environmental consultants, the Connecticut DEP, the Mayor's office in Bridgeport, and many others. In December 2008, we sold the facility for $2.5 million to a regional beverage distributor that has been expanding. Acme will handle the remediation. We recognized a $165,000 after-tax gain in the fourth quarter from this sale.

The result of our actions in the fourth quarter was net income of $634,000 compared to $546,000 last year. Earnings per share was $0.18 in 2008 compared to $0.15 last year, an increase of 20%.

We believe our balance sheet and liquidity are strong. We had debt at year end of $11.8 million and cash of $5.2 million. Our bank line is $20 million at a rate of one month LIBOR plus seven-eighths. That means our interest rate today is under 1.3% annually. We have an option to expand the line to $25 million at the same rate should an appropriate acquisition opportunity arise.

We believe our costs are aligned with a soft sales environment and that we are very well-positioned. We intend to continue to drive our business forward aggressively. We expect new sales from the hardware and industrial channels. And we continue to look for acquisitions of complementary product lines.

Our customers need innovative products. They need fresh point-of-sales and bright signage. They need great pricing. They need a sense of urgency and complete support. They need leadership and that we view as our job. I'm confident that as we look back at 2009 Acme United will have moved forward in attaining strategic goals faster and in a more meaningful way than we have ever before.

I'll now turn the call to Paul Driscoll.

Acme's net sales for the fourth quarter were $12.6 million, compared to $14.9 million in 2007, a decrease of 15% or 12% in constant currency. Net sales for the year 2008 were $68.7 million compared to $63.2 million in 2007, an increase of 9% or 8% on constant currency.

Net sales in the US segment decreased by 18% in the fourth quarter but increased 10% for the year. Mainly due to new product sales including Microban school scissors, rulers, and math kits and the iPoint electric pencil sharpeners as well as market share gains.

Net sales in the fourth quarter for Canada decreased by 14% in US dollars but increased 5% in local currency. Sales were constant in US dollars for the year but declined 3% in local currency. Net sales for Europe increased by 3% in US dollars or 14% in local currency in the quarter and 12% or 4% in local currency for the year. The sales increase in Europe was mainly due to higher sales of manicure items to a major European retailer and expansion in the office trade channel.

Gross margins were 39% in the fourth quarter 2008 versus 39% in the comparable period last year. For the year ended December 31, 2008 gross margins were 40.2%, compared to 41.9% in 2007. The gross margin decline in 2008 was primarily due to strong growth in the highly competitive school market.

SG&A expenses for the fourth quarter of 2008 were $4.1 million or 32% of sales, compared with $4.9 million or 33% of sales for the same period of 2007. Fourth quarter SG&A expense was lower than last year, mainly due to reduced incentive compensation expense. SG&A expenses for the year 2008 were $20.8 million or 30% of sales compared with $19.7 million or 31% of sales for the same period of 2007.

Operating profit was $795,000 in the fourth quarter of 2008 compared with $880,000 in the fourth quarter of 2007. Operating profit for the year ended December 31, 2008 was $6.9 million compared to $6.7 million in the same period of 2007. The European operating loss was $140,000 in the fourth quarter of 2008, compared to a loss of $300,000 in the same quarter last year. The fourth quarter was helped with strong sales.

The European operating loss was $550,000 in the full year of 2008, compared to a loss of $730,000 in 2007. The decreased operating loss in Europe of approximately $180,000 was mainly due to sales growth and improved gross margins as a result of a better product mix.

Net income for the fourth quarter of 2008 was $634,000 or $0.18 per diluted share, compared to a net income of $546,000 or $0.15 per diluted share for the same period of 2007. Included in other income in the fourth quarter ended December 31, 2008 was a $265,000 gain on the sale of our property in Bridgeport, Connecticut. This amounted to a $164,000 after-tax gain. Excluding this, net income was $470,000. Net income for the year ended December 31, 2008 was $4.5 million or $1.24 per diluted share, compared to $4 million or $1.09 per diluted share in the comparable period last year.

Bank debt less cash on December 31, 2008 was $6.5 million compared to $5.2 million on December 31, 2007, an increase of $1.3 million. This change primarily resulted from share repurchases of $2.5 million and payments of $600,000 for shareholder dividends, which were offset by strong cash flow from operations of $3.3 million.

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

Thank you, sir. The question and answer session will be conducted electronically. (Operator Instructions) And we take our first question from Jeff Matthews with Ram Partners. Please go ahead.

Thank you. Hi, Walter. Hi, Paul.

Hi, Jeff.

Hi, Jeff.

It looks like you were also busy collecting receivables. Your receivables were down pretty significantly quarter to quarter, even more than they were last year. Was that a function of you being more aggressive? Did you write any off? And was it -- do you see any problems down the road from some of the retailers that are in trouble out there?

Well, I'm going to let Paul answer the days outstanding and I'll address the credit risks.

Well, we continue to watch customers closely, especially during these times. But the reason for the decline is actually because the sales declined in the fourth quarter. And there were no write-offs.

And relative to the credit risks, we are watching very carefully a number of the customers. Although I can honestly say that none are significantly behind their terms at this point. And that's a good sign.

Thanks. And then the inventory growth was about in line with last year, even though your sales were down sequentially. So are you -- do you have too much inventory?

Well, I'll answer that, Jeff. It's Walter. I don't think we have too much inventory, but we are working that down. And the goal for 2009 is to generate about $2 million in free cash flow from inventory.

And finally, if I could, just in terms of the -- your credit line is a thing of beauty. How long does it go for?

Well, we met with Wachovia about a week and half ago. And it's got about a two-year line but it's a matter of just renewing it.

But if you renewed it, presumably you wouldn't be able to renew it at that kind of rate, I would think.

Well, the last time we had a rate increase from -- a suggested rate increase from Wachovia, we bid it out. And that's the reason we have the rate.

Right. Okay. Thanks.

(Operator Instructions) We take our next question from Jeremy Hellman with Singular Research. Please go ahead.

Good afternoon, everybody.

Hello.

All right. Gentlemen, I was curious regarding school budgets. Do you -- are you able to get a sense of how those are going? Or do you feel that they are being impacted by their respected municipality budgets being pressured? And is that something that you're seeing affect your business at all?

We know that we've got a pretty full boat of orders looking into the back to school, and we think it's going to be a good one. I have heard from some people in the industry that the recently passed stimulus package will have a significant impact on school budgets favorably. I'm not sure if that will actually occur this year, but we're not seeing issues right now in the potential order rate for back to school.

Okay. Great. Thanks.

And we take our next question from Tom Spiro with Spiro Capital. Please go ahead.

Hello, Walter. Hello, Paul.

Hello, Tom.

Hi. A couple of questions. Number one, Walter, I wonder if you could give us an update on China. For example, our suppliers over there. Are they healthy enough to continue to supply us? Changes in currencies and tax rates; those kinds of things?

Well, we have quite a number of suppliers in China, as some of you may know. And we're very in touch with them both because we have offices in the factories in some cases. We've got engineers and quality control people on the factory floors. We've got people managing, in some cases, the production schedules. So we have a pretty good pulse, I believe, of our factories.

What we don't really know are their P&Ls. And even if they gave them to us, I'm not sure I'd know what they mean. But what I can tell you is that in China in general, exports are down. There is a sense of uncertainty among both suppliers in general and some of the workers.

Taxes, in some cases, are being rolled back. For instance, not with our products but for some others, there was a tax -- an export tax that has been rolled back. But again, not for our products. I would say that our suppliers, in general, are healthy and perhaps hungrier than they have been in the past.

Thanks. And number two, our customers are they themselves overstocked with inventory and thus will limit their purchases from us for some period of time until they draw that down to lower sales levels?

Well, I've learned a lot from the earnings calls that have come out recently. For example, one of our customers, not a major one but a significant one, has reduced its inventory during the fourth quarter by about 28% across the board. And I'm sure some of that was our items. I mean, we were small compared their overall product mix, but I'm sure we were brought down in the inventory levels.

We're not -- we don't believe we've really been impacted in a great way by inventory reductions. One of the things about being an excellent supplier is you allow your retailer to have less inventory than it might otherwise have because they can rely on you for delivery all the time when they need it. And so they tend to have higher turns with our products, which is an advantage. That's also why we have more inventory, perhaps, on our books than some competitors. But I think it's fair to say if they were able to reduce inventory, they've done it. But I can't really quantify that.

Next, I noticed in Q4 that our sales in Europe noticeably perked up. And I was kind of curious what that may portend for '09.

We're experiencing continued growth in Europe over the last year. We're making more progress into the mass market, particularly in Germany. And that's with customers such as -- and I'll just name some mass retailers -- Lidl and ALDI and [CHEVO] and Metro. These are large retailers in central Germany. And I think that we'll continue to see that.

Also, one of our larger customers Schlecker made a significant acquisition mid-year last year. And now that's been integrated into their system. And so we were getting a pick-up in the manicure business. I not only expect but intend to have growth in Europe.

That would be great. That would be great, particularly, in such a difficult year. And lastly, you mentioned in your commentary, Walter, that you felt in 2009 the Company would make progress -- significant progress towards achieving its strategic objectives. I wonder if there are one or two such objectives you'd like to enumerate here.

Well, let me give you an example. As we start to introduce new products into segments, we've got weakened competitors in some cases. And while I don't want to go into specifics on which products, you know that we've got a thrust in the cutting area. And most of you know that.

When we look across the landscape in the office channel, there are a number of competitors that are just very weakened. And these may be opportunities for us, both to acquire product lines or frankly, in some cases, their customers may be sufficiently concerned that they turn to us as a reliable supplier. We're certainly working those avenues.

One that I would like to articulate specifically is in the industrial channel. And that's an area that we've been very clear that we're moving into in a bigger way with the Clauss family. During this past six months, we've opened new accounts with companies such as Grainger, Fastenal, McMaster-Carr, Northern Tool, and Home Depot. And these are just an example of where we get growth outside of, say, the office and school channels and it's very exciting to us. We think some portion of our 2009 revenues will be coming actually in a meaningful way from the Clauss family.

Well, that's real exciting. Thanks and good luck.

Thank you.

And our next question comes from [William Sanders] with [Witherd] Media Group. Please go ahead.

Hello, gentlemen.

Hello, William.

Well, you came in $0.04 above the estimate I had for the full year, so congratulations.

Thank you.

A question that I have is what's the influence of declining commodity prices on Acme United's margins and results?

Well, the commodity prices that are declining don't translate into immediate cost savings for us. Obviously we've got and our suppliers have low material inventory. They've also got other expenses besides just materials. For example, labor and overhead and taxes and so forth. But in general, that's an area that we're clearly going to be benefiting from.

On the other hand, we're also being very aggressive with our customers. And to the extent that we can better equip them to make sales, we want to be their partners. So we get a big savings. In the past, we've passed some of that on.

I have one more question. The last few weeks we've seen the US dollar become stronger against the euro. How does that affect the Company's margins?

Well, the European entities buy in dollars. So to some extent their buying power has declined. And therefore, their costs have gone up. But, in that area, we've increased prices to anticipate a weakness in the euro and in the pound. And so I don't expect to see a major impact.

Okay. Thank you very much, and good luck.

Thank you.

And our next question comes from Tamara Manoukian with Greenwood Investments. Please go ahead.

Hi, Paul, and Walter.

Hi, Tamara.

I have a quick question. Can you please break down sales by US, Canada, and Europe for the fourth quarter?

I will pass to Paul.

Yes. In the fourth quarter, sales in the US segment were $9.5 million, Canada $1.5 million, and Europe $1.6 million.

Okay. Thank you.

You're welcome.

And our next question comes from Jeff Matthews with Ram Partners. Please go ahead.

Hi. Walt, one of the other things you probably heard on the conference calls was that there's a pretty significant move to private label, and a pretty stiff resistance to high-price branded goods. Safeway yesterday actually complained about it and said that they had warned their packaged food guys to get real on pricing. Has that helped you at all?

Well, the private label goods are things that we supply regularly and have for years. And if a customer wants private label then if it's significant volume, of course we'll do that. We haven't seen that as a trend in our company.

But there are some costs to private label that we assumed and among them are the inventory risk. And a company that is buying private label certainly has those risks. There's minimum production quantities, which we can blend into our production. They have to do a special run. There's the ability to consolidate and deliver efficiently in big quantities to their distribution centers, which we do right out of our Asian office.

So if a customer wants private label and it makes sense, we'll do that in a heartbeat. And we do it all the time. But we haven't seen a trend where the customers have been saying, we don't want your innovative products. We don't want your non-stick items. We don't want your titanium. We've seen just the opposite.

And that leads to my next question, which is where does your relationship, your level of business, and your future outlook stand with Wal-Mart, Target, and Costco?

That's a really good question. Last year, Wal-Mart and Target were our single highest growth accounts. And when I said that we knew that we had a good back to school, it wasn't from school districts. It's because we know what we've got placed in those accounts for this year, and it's very good.

Both Target and Wal-Mart have been wonderful places for us to do business. Both because there are many departments that we sell our products and because we're of size now with them that we get real attention.

How about Costco?

Costco is doing a test on a number of our items right now -- new items.

Okay. I was going to say didn't they have the iPoint?

Yes, they did. And that's done very well for them.

Okay. And then finally, are you not giving guidance for '09 at all?

Well, I haven't given guidance for '09. And part of the reason is because I want to exceed whatever I give you. What we see right now is some softness in our markets. But as I hope I pointed out, we've adjusted our costs so that we're positioned for taking advantage of it.

It appears that the fourth quarter softness is -- about 15% decline is where we are running now but that might very easily change as some of the new customers kick in. And frankly, we're not expecting a decline for the year but that's internally.

Understood. Okay. Thanks very much. Good luck.

Thank you.

And our next question comes from Chris Doucet with Doucet Asset Management. Please go ahead.

Hello, gentlemen. This is actually David with Chris Doucet's office.

Hi, David.

I'm encouraged to see the number of callers on this -- on your call. It shows you guys are managing your business in a tough environment and attracting some attention.

My question -- just a couple of questions. Did you mention or give any color on your Speed Pak sales or the progress with that product through the end of the year?

What we've said is that we've shipped about $80,000 of Speed Pak back in the third quarter, and that -- well, I'm sorry, we'll ship substantially more than that --

A few hundred thousand.

A few hundred thousand last year of Speed Paks. But it is getting placement right now in many, many accounts. So as we start to look through one vector for growth, Speed Pak is not only placed but we have it in stock and it's ready to go. And the orders are coming in for them. So that's very exciting for us.

That is exciting. Now did you say there are several hundred -- or a few hundred thousand units or a few hundred thousand dollars worth?

Well, I don't have the specific number. If I were to guess, we did somewhere around $0.5 million last year.

Yes, yes, dollars.

Dollars. So that was out of the box. The second year it should be in the millions.

Right. You don't have to give me a number for this, but at this time last year you had talked about doing $9 million worth of sales in new products in 2008. Would you say you achieved that goal?

When we define new products, it's products that have been introduced in the past 36 months.

Okay.

And typically that runs somewhere around 30% of domestic revenues.

Okay.

So we've probably exceeded the $9 million.

Okay. And last question is we're -- it's March next week. Is there any kind of color you can give us on how Q1 has progressed? We obviously can see what's going on in the macro environment but is the business underperforming your expectations? Or any kind of color you can provide?

Well, I'd first say that it's been somewhat soft. But again, and I hope I've given this guidance regularly. Somewhat soft doesn't mean there's a problem of big magnitude. And we have adjusted our costs to be substantially profitable in a little bit of weakness.

But then there's some upsides that start to come in. And if we ship, say, to some of the retail chains some back to school in March, which may very well happen, or into some of the hardware chains for spring delivery. It starts to look pretty good.

So I'm not sure that's really giving you guidance, but what I am saying very definitively is that there's not any major problems here.

Well, those are all my questions. I congratulate you and your team on flexing your business with the headwinds that are current in our economy.

Thanks, David.

And our next question comes from Michael Wasserman with Moors & Cabot. Please go ahead.

Hi, Walter.

Hi, Mike.

I know this was touched on a little bit earlier but could you elaborate a little bit on how the Chinese currency looks to be affecting things for you? And also how the raw material costs in China are affecting you? And also comment a little bit, please, on your internal progress in the industrial in terms of its -- whether you have met your internal goals thus far.

All right. First on the Chinese currency. It has appreciated about 20% since 2005 when they let it float. But the last meaningful change was about August of last year. And it's been pretty much stable to weakening a little bit. And I think the Chinese government is managing that in a way that keeps jobs in China. And I think they have a very real incentive to do that. So from the cost inflation that we had experienced from the RMD, that seems to have stabilized.

Regarding the commodities, I think it's obvious that steel and plastic have declined in cost, at least in the short term. And we're taking advantage of some of that. So does that mean margins might increase? Perhaps, but I think for your modeling we should assume that margins are where they are. Although, there is the opportunity possibly to get some savings and we're trying for that.

The industrial business is behind our internal projections but not for the lack of innovative product or for attention. In part, it's because the economy has slowed, I believe, and it's been longer in the uptake.

The part that I'm very excited about is that with these major, major distributors now online -- I mean, on board with us and opened and taking stock and orders that we'll start to see the industrial channel become a very important part of the business. And the momentum is tangible and you can feel it.

One last question. In light of business conditions and the new administration's economic policies, which seem to be focusing on increasing union membership and enhancing welfare benefits. How do you view the buyback of stock? And how much cash you should be deploying to that versus protecting the Company in case things were to deteriorate significantly further?

Well, we have the ability to buy back shares. We think that selling at book value -- and I think it's something like 4.1 times EBITDA, that that's pretty inexpensive price. Having said that, our intention right now is to continue to build our liquidity and take advantage of potential acquisitions.

And let me just give you an example of what the liquidity is. If we were to squeeze $2 million of the inventory out this year. Throw off again $3 million or more of cash flow from operations and we look at our $5 million of cash that we currently have. Basically that would mean at year end for a temporary time we would be debt free.

So the ability to internally generate cash we believe is very high. And I think right now that would be a good thing to continue to do. Particularly because something will present itself or we will make happen that is an interesting acquisition for the Company.

Okay. Thank you.

Thank you.

And Mr. Johnsen, at this time there are no other calls -- or no other questions in the queue. I would like to turn the call back over to you for any additional remarks at this time.

I would like to thank you for attending and for your support. This call is now complete. Have a good day. Goodbye.

And that does conclude today's conference call. Have a wonderful weekend.